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Launching a Portfolio Acceleration Platform at a Venture Capital or Private Equity Fund

I’ve recently advised a number of emerging private equity and VC funds who are wrestling with the question: What are the highest impact steps they can take to support their portfolio companies? 

Almost every private equity and venture capital investor now advertises that they have a platform to support their portfolio companies. The popularity of the model can be judged by the fact that the U.S. VC Platform community has grown approximately 120% in the last 3 years. Similarly, its European counterpart, the EU VC Platform, has tripled in the same period. 

However, most of us don’t have the budget of an Andreessen Horowitz to support almost every major need of emerging companies. You could spend an unlimited budget on all possible company-building resources.  Maria Palmer of RRE summarizes: “You can’t pick a platform strategy that’s unique, but you can pick a platform strategy that your firm can uniquely execute.” 

I propose here a framework for prioritizing your platform buildout. Once you have assembled the right core team, I recommend prioritizing as follows:

First, meet with your portfolio company management. As an agenda for each meeting, I suggest:

– How can we most add value, in addition to helping with financing? (This is an open-ended query and the most important question.)

– What are your fundraising goals?

– What is the profile of people whom you are most interested in meeting?  

– From which service providers have you received the most value?

Nick Kim, Crosscut’s Head of Platform, in his presentation at the 4th Annual VC Platform Summit, shared their Platform development methodology, which he viewed as an exercise in product development. Dan Kozikowski, Partner and Head of Platform, First Mark Capital, said to me, “Firms should match services to the stage-specific needs of companies. For example, recruiting writ large is useful at all stages of development. But things like vendor introductions are only needle-movers at the earliest stages. Similarly, customer introductions are invaluable in the early days, but become less valuable once a company has a fully-formed go to market function.”

Then, pluck the low-hanging fruit: easy, low-cost, and highly scalable infrastructure. This typically includes:

I recommend building a strong internal tech stack, to handle the deluge of requests for help you’ll get from companies as you scale. Jeff Pomeranz, Partner at Right Side Capital, said, “The biggest investment of resources with our tech platform relates to the capturing and maintenance of data on our huge portfolio of 1100+ evolving tech companies.  For instance, tracking ‘months-of-runway’ combined with the month-over-month change to that metric allows us to rapidly identify companies that may be distressed.  Adding full lifecycle data and industry exposure tags to that, across such a large number of companies, often enables us to see trends ahead of the market, such as retail decimation a few years ago.” For technology vendors and models, see Venture capitalists eating our own dog food: Using technology and analytics to make better investments

Beyond these steps, I suggest you apply a two-part test:

  • Does the service gain impact by being on your platform? For example, I suggest it doesn’t make a lot of sense to hire a full-time team member who’s an SEO consultant. A SEO consultant is going to provide the same quality of service whether she is working for the investor, or directly for a company. And of course, if she works directly with a company, then the company bears the full cost, and the investor doesn’t. Recruiting is a great counterfactual, an example of a service which gains more impact when it’s on an investor platform; recruiters working for a VC firm get a much more positive response from talent than independent recruiters.
  • Is the service scaleable? You might hire a really amazing designer, and perhaps even charge companies for their service for cost recovery purposes. However, the designer is a non-scaleable service; you’ll have to hire more people like her as your portfolio grows. 

Here are a few other examples of services which do meet these two tests:

  • Bootcamp. Two easy ways to enable scaleability: encourage founders to learn from one another, and share information simultaneously with many.  Real Ventures, an early-stage, Canadian-based fund, runs a two-day Founder Camp every six months. All founders who have received initial funding from Real in the previous six months attend the camp. Janet Bannister, Managing Partner at Real Ventures, said, “We established Founder Camp as a scalable way for all of our founders, early in our relationship, to understand what we consider to be best practices in scaling a venture-backed company. All content is developed and delivered by the Real Ventures partners. The Camp also enables our founders to quickly get to know other portfolio founders and all members of the Real team.”   
  • Fundraising. First Round Capital has built an entire function just focused on helping companies refine their pitch and fundraise. For more, see Marketing Your Portfolio Companies to Other Investors; Please don’t pitch a venture capitalist without this checklist; and How to Format Financial Models that Investors Want to Read.
  • Recruiting. Numerous investors have built out recruiting teams. They often have much more success in soliciting candidates than in-house recruiters, because investors often have much better-known brands than the companies in which they invest. In addition, recruiters within VC firms have insider knowledge to help them move talent around the portfolio as companies shut down/reorganize. Lastly, as a model of what’s possible, an investor can market to talent that they offer a career path throughout the firm’s portfolio. Welsh, Carson, Anderson, and Stowe advertises that “60% of WCAS XII portfolio companies benefit from repeat management.” For more, see Recruiting Hacks: Best Practices in Wooing and Winning the High Performers.
  • Customer Development. A VC can build out relations with the innovation groups at the Global 2,000, which turn into lead-gen for portfolio companies selling to the Global 2,000. A well-developed model is Andreessen Horowitz’s Executive Briefing Center. FirstMark Platform’s 100+ annual events and 50,000+ members are also extensive customer opportunities for their portcos.
  • Celebrity Relationships. Several VCs market close relationships with celebrities who can use their social media presence to promote their companies.

 

How can you deliver domain expertise you don’t (yet) have in-house?

Almost every VC firm markets their domain expertise in certain industries and/or functions. But inevitably, founders will need expertise in areas that the firm does not have in-house. In descending order of cost, I see four main ways to support companies with domain expertise:

Example Advantages Disadvantages
In-house, brand-name guru John Maeda, formerly Design Partner, KPCB; formerly President of Rhode Island School of Design A true industry luminary will help in deal flow & differentiation  These folks are rare, expensive, and often have multiple side obligations (book deals, speaking engagements, etc.).
In-house functional specialists A former marketing executive from a portfolio company  Proprietary resource Significant compensation cost. Not very scaleable.

Inherently a generalist, not a tightly designed fit for a particular company’s needs.

Sign up as a client for an expert network, and offer your companies access to their network. Numerous VCs. Note this model amounts to lead-generation for the expert network, so you may be able to negotiate a lower rate than normal User experience will typically be extremely good, because the expert network can find people with exactly the right profile for your situation Neither proprietary nor marketable.

Marginal hourly cost for engaging each expert.

Build a network of on-call domain experts, who will have short conversations with portfolio management, typically at no cost.  Primary Venture Partners’ Primary Expert Network; Goldman Sachs Chambers Street Executive Network  Minimal cost. 

Extends network dramatically.

Experts can turn into consultants, board members, interim execs, etc., if needed

May be difficult to negotiate an exclusive relationship.
Requires ongoing management to keep community members engaged. 

Paul Bianco, CEO of Graphite Financial said, “We were formerly an in-house team at ff Venture Capital, where we realized that early stage startups universally struggled with their finance & accounting function – so we decided to help them by doing it ourselves. The topic became less boring to founders when it directly correlated to fundability. We found that the ability to storytell around vision and growth was far more powerful when founders had a really solid understanding of their numbers. The ability to answer quickly and confidently when your business model is having holes poked in it during diligence is really powerful. An added bonus is having more comfort and control around your business even when NOT fundraising!  

“Ultimately we decided to spin our team within the fund out into a separate company, which is now Graphite. While there are several reasons, a primary consideration for a fund building a team internally is the inherent ceiling on the breadth and depth of what you can offer with a finite universe of companies to support.”

As you consider other options, I propose a 7-part framework for how you can support companies in How Private Equity and Venture Capital Investors Accelerate Portfolio Company Success. Cory Bolotsky, Co-Chair of the VC Platform Global Community shares a ten-component framework to comprehensively cover a VC fund’s Platform Strategy. These functions cover everything from sourcing new investments to accelerating portfolio companies. Lerer Hippeau lists the talent and technology required to efficiently run the Platform function at your VC.

Lastly, I know some VCs who market that they can help their companies identify buyers. On an ad-hoc basis, this absolutely can and does happen. But I’m a bit skeptical that a VC can systematically do it. The best VC-backed exits are bought, not sold. Even the most connected VC has limited ability to influence the M&A roadmap of the large acquirers, not to mention a VC is obviously conflicted in promoting the acquisition of their own companies. There’s also a huge amount of luck in timing and amount of exits, so it’s also hard to compensate an internal “M&A investment banker” fairly for expediting an exit, given they may deserve zero credit. 

Further reading:

Thanks to Prabhat Gusain for research help.

Disclosures: David Teten is a past Advisor to Real Ventures and Right Side Capital, and was formerly a Partner at ff Venture Capital. As a consultant to Goldman Sachs Americas Special Situations Group, he helped build Chambers Street Executive Network. He built the platform function at both ffVC and HOF Capital.

Previously published in Techcrunch.

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