I’ve been spending a lot of time thinking about what differentiates us as an investor. This was triggered from two different directions. The first is the explosion of new venture funds. It seems everyone I talk to is raising a fund these days. The tech media headlines indicate lots of capital looking to be deployed, at all stages. Differentiating your product is necessary to stand out in a crowded market.
The second, and more important consideration is rather from the other side of the table – why would a founding team choose us as an investor in their company? To be clear, it is a founder’s market today. These large amounts of capital looking to be put to work has led to a rise in valuations and we are seeing deals closing faster than ever (at least for the 15 years I’ve been exposed to venture, I was focused elsewhere in the late ’90s – early ’00s).
[As an aside, the above concerns me because it seems that one of two things are behind it. Either investors are making bets (no other word for it) without doing the necessary diligence. Or, investors are backing “cookie-cutter” founders without considering the hidden-potential of diversifying across first-time founders, female founders or minority founders. Others have written at length about these meaningful topics so I will refrain from digging in here, though that should not diminish from the importance of the conversation.]
Coming back to thoughts on differentiating SapirVP as an investor, we always refer to our tagline of: “Mentorship Driven Investing”. Is this really differentiated? – Today it seems that every micro-VC team claims to be “founder friendly” and “value-add” investors. Are statements like these based on the assumption that every other fund is not adding value? Only emerging managers can add value?
Maybe. We have all met investors who were less engaged and less helpful. These are probably not good early-stage start-up investors, or not a good fit for the company. Some advance diligence regarding the investor may have helped the company avoid that experience. Maybe not. Either way, these investors are not the majority and the market forces should be working against bad players so that they don’t stick around for long (though performance cycles in venture are long, so this is all relative). Most investors, even those who have already had great success and have $B AUM, are in this business to add value. As it should be, because: Venture Capital is a service business.
We only have two types of customers: Founders and LPs.
For LPs the service is primarily financial – take their capital, invest it, report on your progress and do your best to return exciting multiples within a reasonable timeframe. Some LPs are looking to create impact, increase diversity or identify potential strategic value. However, for most LPs the transaction is a financial investment at its core. The service elements here seem clear. Good GPs will be transparent and can stand out by offering unique opportunities of value creation for the LP. While popular in all VC pitch decks, I am not sure that a “unique” investment thesis is enough of a differentiation in today’s market. It is probably more important to show “product-market fit” between the fund (team, size, geography, focus) and the strategy.
Founders should also be sure that they are getting a service. The service level should fit the needs of the company. Industry expertise as well as stage expertise. A biotech spin-out from MIT establishing a scientific innovation as a commercial offering needs a different type of “added-value” than a Series A consumer product company looking for hyper-growth. Some founding teams are seeking the “roll up our sleeves” hands-on involvement to navigate the early-stage foundation-forming period, while others are content with taking capital from an investor and then only engaging with them once a year for the annual update (I advise all founders against this, for various additional reasons detailed in a separate post).
Founders should choose carefully which investors they choose to engage. Not all capital is equal.
The most common term thrown around by VCs is that they are “founder friendly”. Like many informal terms, this seems to mean different things to different people. I’ve found that the gap between speaker and audience can be pretty big when it comes to understanding what this term means.
For us this means that we recognize that the founders are the company. The investor is just along for the ride. Our mission is to find the best way to add value during the different stages of the journey. This can vary from team to team and from company to company. This is what we mean by “Mentorship Driven Investing”. It is a tailored experience, based on the core foundations of our mentorship-model, establishing this relationship even before we invest.
I just threw out another vague term…. Let’s unpack this further.
I’ve come to define Mentorship as the combination of Experience and Empathy. Experience is valuable, but it needs to be shared in a way that it can be received and make a difference. Sitting around telling stories of your glory days will provide few practical tools/lessons for a founder. Using a story to illustrate a situation or share a new perspective will create new neural connections and inspire innovative thinking.
Mentorship is showing, not telling. The mentor serves as a personal example and as a guide. But you can’t just do it for someone else, as they will never learn to do it themselves. And you don’t need to have all the answers. Just ask thoughtful and thought-provoking questions.
The mentor should always be there to help pick up the pieces and help make course corrections. Mistakes will be made and **** happens. It is not about you (or your ego), it is about the founders building an amazing company.
Mentorship is not about being a friend. Friendships may (and should) develop. But the mentor need not try to be a friend, especially if it will make it impossible to have the necessary open conversations about what is best for the company. A mentor is also not a teacher, at least not in the sense of making rules, handing out tasks or giving exams. Inspiring creative thinking and continued learning are great.
I think that we embrace the service mentality in a unique way, but we don’t say “founder friendly”. How then should we convey this to the world?
Earlier this week, my friend Shimon – a successful serial founder/CEO – told me that he thinks that we are “Founder Respectful”. He said some very nice things about our approach vs some of the investors he has dealt with. My takeaway from that conversation is that the empathy element we incorporate into these relationships – as mentors, not friends or investors – is where we truly stand out. It makes all the difference to the founder. This in turn gives the company a better chance of success. Said success should result in those multiples of returns we look to provide to our other customers, the LPs.
Creating alignment across the LP-GP-Founder ecosystem. Multitiered value-add. Practicing what everyone preaches: “It is all about the people.“