Do VC's Actually Add Value? 🧐

The 10X Capital Newsletter

Welcome to the 10X Capital newsletter.

We interview the world’s top Venture Capitalists and their Limited Partners.

📋 Today’s agenda:

  • What is VC Value-Add? 🧐

  • Stepstone’s Hunter Somerville and Redpoint’s Logan Bartlett joins the pod. 🎤

  • Taking a look at the empirical data underpinning down rounds.🤓 

And more! Let’s get started.

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🎙 NEW PODCASTS 

Emerging Manager Alpha At Scale with Michael Downing

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How Jordan Nel Spots Winning Venture Funds

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Redpoint Ventures and Stepstone Group on VC Deployment, M&A, and Google's AI Strategy

Listen to this episode on Apple Podcasts or Spotify.

📖 DEEP DIVE

DO VC’s Add Value? 🧐

Venture Funding

Venture Capitalists play a significant role within the startup ecosystem.  If you look at the 5 most valuable companies in the United States by market cap: Microsoft, Apple, Google (Alphabet), NVIDIA, and Amazon, not a single one would have existed without VC funding.

While Venture Capital undoubtedly plays an important role in the startup ecosystem, one question that is up for debate is whether or not VC’s provide value-add above and beyond merely capital. 

The Majority of Investors

When you look at the startup ecosystem today, or at an individual startup’s cap table, you will quickly find that the majority of investors do not actually add value.  Michael Seibel, former President of Y Combinator, famously said that an investor who puts in capital into a startup and simply waits for a liquidity event (without reaching out to the founder) is an A- investor, meaning that there is a lot of room for VC’s below this A- line and not a lot of room above.

This can be attributed to both a founder’s inability to extract value from their cap table as well as investor’ inability to provide value-add. It is indeed a rare trait for a founder to be able to leverage his or her cap table members’ expertise, network, and resources in order to help the startup grow. Conversely, it is also a rare trait of an investor that proactively reaches out to a founder in order to help.

It is therefore both the founder and VC’s responsibility to communicate better so that the investor can provide the value-add that is most valuable for the founder and startup.


Stage of the Company

The value add that an entrepreneur seeks depends on the stage of the company.  At the very earliest stage, entrepreneurs should be seeking investors who have the most expertise in navigating “the first 100 problems”.

At the Series A stage, signaling provides the highest level of value-add to a company.  Being able to signal to customers, employees, and other stakeholders that their company is backed by a top VC is a significant differentiator and value-add that a VC can provide.

As the company matures and enters the pre-IPO stage, this is when startup founders look to secure long term investors that will stay with the startup way past the IPO and as the startup becomes a public company.

Other Forms of Value Add

Advice, brand affiliation, and long term capital are just several forms of value-add a VC can provide. 

Other forms of value-add includes:

  • Portfolio Services: Many VC firms offer access to resources such as marketing, PR, or recruiting.

  • Help with Biz Dev and Distribution: VCs with established networks can connect startups with buyers at large corporation and distribution channels that include celebrities and influencers.

VC’s Who Destroy Enterprise Value

Not all VCs are created equal. Some VC’s can actually hinder a startup's progress. This can happen through bad advice and short term thinking such as pressuring the founder to sell the company too early.

Alignment with Founder Needs: A Crucial Factor

Ultimately, the most valuable VC for a startup is the one that aligns most closely with the founder's vision and priorities.  Founders should carefully consider their specific needs: is brand recognition paramount or is access to new distribution channels more critical?  Identifying these needs is essential in selecting the right VC partner.

VCs Can Be Valuable Partners – But Choose Wisely

The question of whether VCs add value is not a binary one.  The answer depends on the specific VC firm, the stage of the startup, and the unique needs of the founder.  It is important for every founder to think about what value-add exactly he or she is looking for from their investors. By identifying a VC that complements their goals and offers strategic support, founders can leverage VC’s in order to accomplish their goals.

Until then 🫡

✍️ DAVID’S BOOKMARKS

📈 CHART OF THE WEEK

🛠️ VC MANAGER TOOLS

Reach out to Chris at [email protected].

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