– Do VC’s help portfolio Co’s other than with cash? – The MD of a potential investee asked me today. Very good question, I thought. If they did not, than VC money was commodity like bank financing. Go to whoever gives you the most money fastest with the fewest strings.

If we ask the funds, this is not at all the case. First, there are the specialist funds. They claim their specialism works for you, but it serves THEM more. Specialism allows companies in their niche to find them faster. Reading up on an industry helps them make fewer mistakes then their generalist brethren. Then, most funds claim that they help businesses with strategic advice and business contacts. As for advice, it is mostly from a former industry fox hired for the board, who prices up his brains by flying business and sleeping Four Seasons. More often than not his advice is corporate than entrepreneurial (here is how we did it at GE) and his contacts have retired with him.

True, the venture capitalist spend time on the board himself, bringing in consultants, checking monthly figures, brainstorm with the CEO… but only his their core business of investing, exiting and raising funds is done.  I recently heard at a private equity gathering in London, that: “70% of the funds don’t pay out carry”. This means that the funds underperform leaving managers without a bonus, living on their 2% per annum management fees. Therefore:

• The more funds under management the higher this fee, so core biz # 1: Raise Money.
• The way to raise a 2nd fund is to quickly invest the 1^st, so core biz # 2: Invest Money.
• By fund raising no. 3, there must have been exits, so core biz # 3: Exit Investments.
• And for a good fund return you must have 1-2 home runs, so core biz # 4: Nurture Stars… and avoid big failures.
• The way not to have big failures is to intervene when things go wrong, so core biz # 5: Fire Fight!
• Finally core biz # 6: Support portfolio companies.

Do VC’s strategically support?

Yes, when they have nothing better to do. Notably, for 2 years after the financial crisis broke, VCs dared not invest and had ample time to restructure and groom portfolio companies. Now, that the war is over, they  must quickly return to their core businesses of investing, fundraising and exiting… if they don’t want the music to stop and go back to be a banker or hand to mouth consultant.