February 3, 2020
When Raising a Round, Not All Capital is Equal
As an entrepreneur, your startup needs more than just cash and your investors should help.
Written by Anne Gherini published on Inc.com on 2/3/2020.
Michael Ovitz is the legendary co-founder of one of the most well know talent agencies, Creative Artists Agency (CAA). Ovitz’s success is a testament to his ability to upend the traditional talent agency model in the 1980s that fixated on representation. How did he accomplish this remarkable feat? Unlike other agencies–most notably, then-incumbent William Morris–Ovitz built a team of resources for CAA’s clients that were far more valuable than traditional talent agency offerings. CAA’s unparalleled value proposition catapulted it to new heights in terms of attracting top talent.
In 2009, two Silicon Valley serial entrepreneurs, Marc Andreessen and Ben Horowitz adopted the model that jolted Ovitz to the top of the talent agency business and applied it to venture capital in order to stand out from the incumbents. Like CAA had done decades before, Andreessen Horowitz (aka “a16z”) became one of the most successful firms in the industry by forging deep understanding and respect for the suite of resources entailed in the entrepreneurial pursuit. “A lot of what we’re trying to do at Andreessen Horowitz is based directly on Michael’s experience building C.A.A.,” explains Marc Andreessen.
Andreessen Horowitz appreciated that a VC firm could be run similar to a talent agency, providing representation, guidance, and crucial access into the most powerful networks. This started the trend of venture capitalists realizing that they could win the big deals by giving more than just capital.
It is about more than cash
The misconception in raising capital is that all money is equal and startups should optimize for the biggest check. According to a study by Wharton management professor David Hsu, when raising capital, less than half of startups accept the best financial offer.
Capital alone doesn’t create venture capital success stories. To establish a competitive advantage, investors must separate themselves from the pack by offering portfolio companies additional value outside of the capital.
Venture Capital Secret Sauce
Over the last few years, VC firms have embraced the mentality that their success in securing top talent is contingent on their ability to offer more than just capital. Today, firms are offering an even richer suite of resources than ever before so as to ensure the best founder experience.
Venture firm, Redpoint, has gone so far as to build out a dedicated team called “Founder’s Experience” to help ensure the best end-to-end experience for portfolio companies. The thinking behind the concept is very similar to the ways in which B2B companies think about the customer lifecycle, wherein closing the deal is only the start of the relationship and the subsequent nurturing can truly help dictate success.
“We believe that treating Founders like Customers, and optimizing each interaction they have with the firm, is the best way to differentiate ourselves in an increasingly crowded environment”, explained Travis Bryant, Partner of Founder Experience at Redpoint Ventures.
Mighty Capital is another firm committed to providing a unique offering for entrepreneurs. At Mighty Capital, partners like SC Moatti previously served as product leaders at some of Silicon Valley’s darlings. Moatti was a product lead at Facebook prior to becoming General Partner at Mighty Capital. This diverse partner expertise is coupled with access to an incredibly influential network of product managers. The firm calls this network, “Products that Count“, and it consists of over 200 thousand product managers. With product management being so crucial to tech startup success, this network is incredibly appealing.
Corporates Gaining Traction
Aside from institutional venture firms, corporate venture capital (CVC) is now also on the rise because of the massive leverage they can provide by tapping into their company’s rich resources. According to a report by CBInsights, in 2018 264 new CVCs invested for the first time, up 35% year-over-year. In total, 773 CVCs placed bets on startups in order to gain a competitive advantage and move to the forefront of technological advancements in their respective industries.
Ford’s associate director of strategy at its research and innovation center, Dennis Liu, spoke at the Global Venture Capital Summit this week with me on stage and highlighted, “investments from corporates are increasingly seen as added value as investors and startups are recognizing that combining the foot speed of entrepreneurs with the deep sector expertise of an institutional player often yield significant strategic synergies.” This makes tremendous sense especially when you think of the complexity entailed in manufacturing.
Accenture Ventures has embraced a new approach in terms of how they work with entrepreneurs: they test prospective products and services before investing. Accenture is able to leverage internal domain leaders who have hands-on technology experience and deep industry knowledge to assist these companies. Industry and technology experts evaluate partners based on the business need and then rapidly test them in the market.
Ladi Greenstreet, Head of European Investments at Accenture Ventures, explains, “Only once a partnership has been proven to deliver business value do we place a strategic minority investment along with a go-to-market investment. This aids the growth and adoption of high-yield partners, ultimately scaling the business impact.”
With cash increasingly up for grabs, great entrepreneurs will continue to be afforded incredible options for who they choose to raise capital with. Firms and corporate arms will continue to diversify their offerings by providing a unique differentiator that sets them apart.
PUBLISHED ON: FEB 3, 2020
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.