This this the key question that any entrepreneur should ask himself when he gets a VC/Angel term-sheet. And doing it ahead of time might actually land him a term-sheet earlier.
Fact is, any VC financing you get will be an expensive one. A VC has to have an IRR of 30%+, therefore its money is more expensive. That said, don’t miss-understand me and think that entrepreneurs should not seek venture financing. What I want to say is that the entrepreneur needs to have perfectly clear to himself how the investor will add value in order to make the expensive cash well worth it.
At the Warehouse, we have perfectly clear what is our value proposition. I’ll go over our value prop to help entrepreneurs understand how an investor can add value and to do a little bit of advertising 😉
1 – We can absorb your company’s back office – This has 2 key benefits to the entrepreneur.
Gives you more time to actually run your business rather than manage the bureaucracy. If you are a salesman, go sell, if you a programer, go program and let us to the boring admin work for you.
And gives you confidence that you are receiving top quality support. Did you ever check your accountants books? Are you absolutely confident that when your company makes it big you wont have labor or fiscal liabilities holding it back?
This might be less of an issue in US where the burocreacy is much simpler and the suport services better quality but having been entrepenuers in Brazil, we at Warehouse are completely convinced that this adds a lot to the entrepreneurs.
2- We help create a governance – This helps you to keep an objective perspective on the business and stick to the plan. When an entrepreneur is in a startup, passions, frustrations and emotions often blur his/her vision and make him/her detour unnecessarily.
We will help you set a structure that is appropriate to help you think through the issues and problem-solve with you what is the best course of action. To do that, we will set up a board with smart, knowledgeable people that can accelerate your growth. We will also create committies do discuss specific themes such as:
Compensation and People: Who are the key people in the company? What are the positions that need to be filled? Who is the ideal candidate? How do we motivate them? What should your stock option pool be? Who gets what? These are all questions that we can help you decide. We can also help you find the right people to bring onto the team.
Budget: Lets think ahead and plan the revenues and expenses that will get us to our goals. What are the specific targets we have to hit and when in order to secure our progress?
Funding: How much money will you need? how will we raise that money? who are the investors we want to bring on board?
We are not know-it-alls, but having multiple investments allows us to gather a lot of experience quickly and put it to use to accelerate the growth of our portfolio companies.
3-We Leverage our Network
We network with our investors, we network with possible entrepreneurs, we network with specialists during the due diligence’s, we network with other investors, we network with possible buyers of our portfolio companies, we network with our portfolio clients and more. This immense amount of networking multiplied by the number of companies we invest in makes our contact list grow exponentially.
Knowing how to tap into this extensive network to support the portfolio companies is a key value add for any VC. We can help you get clients, partners and specialists. However, don’t expect your VC to immediately open up ALL his/her network. VCs are zealous of their networks and don’t want to over use it and risk wear out.
So, at the same time we use the network, we try to give back to it. When you need to use the network, don’t be surprised if you are asked to give something back to it.
4- We have Domain Knowledge – Having a VC that understands your market will add an enormous value to your company and prevent lots of pain.
An investor that knows your market will have the network to make the appropriate introductions but he will also be able to support you in structuring your offer and also think how to format your company for a possible buyer.
Lets say you are a mobile TV platform company. You can go many ways. You can provide the service yourself, you can provide the platform for others to provide the service, you can focus on providing one to one advertising over the platform.
You can, therefore, charge for service, for installation, for add, for click through, include in the monthly subscription of the cell phone, or in the monthly subscription of the cable TV company.
These choices will also make your likely buyer to be : a VAS provider, a network company like Nokia or Google, a network operator or a Cable company.
Having someone that knows the industry to discuss such key points with you and help you decide is priceless.
At the Warehouse, we are specially knowledgeable in the media, consumer internet and green tech.
5-We Bring an Strategic View – Having someone that is not as immersed in the business as you and helps you think it through is incredibly powerful. At the Warehouse, we have 3 former consultants guys… I know I know I know.. Despite of all downsides of McKinsey guys, we can help you step back from the day to day of your company and take a higher level view. This is not an everyday thing but done every so often, helps you ensure that you are moving in the right direction and that you take market changes into consideration in order to adapt.
For all those reasons, VCs are much happier to discuss with entrepreneurs how they will help take the business from $7M valuation to $50M than to discuss whether it is a 30%,40% or 50% ownership.
If the company doesn’t make it big, the ownership difference won’t save us.
VCs do their valuation on a base case. Therefore, it is unlikely that valuations will change significantly among the different VCs. On the other hand, the future value of the company might change significantly depending on who you partner with.
The other day, a very interesting entrepreneur visited us. He came with a pitch of $1.2M for 30% of the company and it made perfect sense to any other VC. But when he came to us, he create a second business plan showing that we could help him make to company worth at least 200% more, based on our industry connections.
I clearly wouldn’t take the same approach as he was telling me how much I was worth to him, but I think it is important for the entrepreneurs to do this calculation.
Obviously if I were an entrepreneur, would much rather have 20% of a Billion dollar company than 100% of a $10M outfit. Not necessarily the VC that takes a bigger share of you company is the worst deal, if the value-add is there.