Venture Capital as Service (NAMCE #1)

Some VCs pursue a business model that includes writing a check and then leaving the entrepreneur alone. That’s the way business has been done for a long time. That’s still the optimal model in many situations. More and more, however, VCs believe that they are a service organization and when they provide capital to a startup they are also committing to add value in other ways such as services.

I started a series of discussions at the NYU-Poly incubator (in DUMBO of course) earlier this week called “Not All Money Is Created Equal” to explore which models are right for which situations. I’m adding a series of blog posts with my current thinking on the topic.

Todays post is a short and sweet on ‘why’ the shift in the VC business model to a more services driven offering is occurring.

Everybody knows that the odds of a startup being successful are long and the odds of being really successful are even longer. I saw some research recently suggesting that in any given year 15 companies will create 97% of all the value. This research wasn’t suggesting that entrepreneurs can’t have a good life/career/bank account, but rather that there aren’t that many Lear Jet guys being minted annually. It’s a well-documented long shot. By proxy, if there are not too many ultra-successful companies, than proportionally there cannot be too many super successful VCs.

Obvious solution from the VC perspective: in addition to capital, provide services to entrepreneurs that will give them a greater chance to succeed. Change that distribution.  Minimize an entrepreneur’s weaknesses and let her/him concentrate on what they do best.

Okay. Who are the best folks to provide operations help to a startup? Entrepreneurs that have successfully built businesses in the past! Right. So let’s bring in some of those guys.

That’s exactly what’s happening. The realization has occurred within the venture community that any number of people can run a financial model to gauge the probability of a startups success. So that function is being minimized. Proven entrepreneurs that can 1) better understand the technology 2) relate to the challenges of people on the other side of the table and 3) actually help if the situation gets tough, are the people that are coming to the forefront. Think Mark Suster, Marc Andreessen, Brad Feld and Kirill Sheynkman… these guys built (multiple) businesses. They are driving the shift toward venture capital as service platform.

Side point: isn’t an accelerator or incubator really a services platform? Isn’t it an organization helpful in filling in the missing elements of a company along with capital that give a startup a better chance of being successful? It’s the same model at an earlier stage.

In future posts in this series I’ll cover:

  • What the services are
  • What entrepreneurs should look for when interviewing a VC
  • What are the situations when the more classical VC model still works better
  • How entrepreneurs seem to like this evolved model
  • What this model means in terms of VC investment specialization
  • Etc.

Stay tunned!