The best help venture funds can give is to stay out of the way. Do you agree?
Startup founders and CEOs constantly ask me what kind of help, besides money, your venture fund can offer. I hope this article helps to clarify what we mean by “Smart Money” and what kind of real support their tech company can get.
I'm sure more experienced VCs will have more to add to this list. However, less experienced VCs may find something new to learn from our story.
In my experience, first time founders or founders who have not previously raised venture capital may benefit more from having such a partner than others.
Human Resources Management
During the Due Diligence (DD) stage, we audit the startup team. Regardless of whether the startup is in science-intensive technology, information technology, or another industry, we aim to identify key areas of responsibility within the team of each company we are considering for investment. Key competencies include strategy, operations, product, sales, marketing, and HR. Depending on the stage of development (life cycle) of the company, one person may be responsible for a number of competencies within the company. However, if one person is responsible for more than 3 competencies, this often begins to cause problems. As the company grows, these problems can quickly snowball.
Our task as a venture investor is to create an HR map of the company, identify and notify the founder about the weaknesses of the startup's HR policy and in the future help the company in selecting strong, experienced specialists in specific areas of knowledge and competencies. It is for this purpose that we have an HR department in the fund, which can also help create a motivation system for our portfolio companies.
Industry Insights
Since we invest in technology companies, one of our core competencies and an important part of the fund’s DNA is conducting technology Due Diligence. DD results include industry analytics, customer, competitor and expert opinions, market analysis, and other valuable insights. We share this information with portfolio companies after the investment transaction has been completed.
In addition, we update DD on each follow-on round. We use this data to monitor industries and provide our portfolio companies with valuable information.
Advisory Board
We systematically develop our network of contacts in the industries that interest us, which allows us to quickly find highly qualified professionals in the field both for DD tasks and to help our portfolio companies. This competence allows us to solve one of the most important tasks for a company at an early stage of development – the creation of an Advisory Board (AB), using Western vocabulary. AB is not photos and short biographies for a fundraising presentation. An effective AB is a group of experienced and motivated professionals who are relevant to the company in terms of a set of competencies, connections and industry specifics, ready to share their experience with the founders in order to reduce the number of errors and accelerate the company's growth. We have helped create AB for dozens of our portfolio companies.
Board of Directors
An equally important aspect of a technology company's work is the Board of Directors (BOD). In his article, Baz Banai provides a comprehensive and detailed overview of the principles of effective work and targets of the Board of Directors. We prefer to invest in the company at an early stage, as the first institutional investor. We help the company to create a functioning and useful Board of Directors, which means organizing the appropriate processes. We strive to strengthen the Board of Directors with independent directors with strong industry competencies, which will help companies strengthen the strategic function and get an unbiased second opinion of an experienced professional.
Skill set of founders
As I work with founders and get to know them better, I always take note of their strengths and weaknesses. My job is to give honest feedback and offer help in upgrading or “leveling up” a founder or a top manager of a tech company. In our inner circle, there is a team of proven professionals who can level up a founder’s skills, such as: fundraising, sales, soft skills and much more. This is especially true for tech founders.
Knowledge sharing
We are implementing a practice of sharing experience and knowledge between the fund and our portfolio companies, which includes providing our portfolio companies with useful content. The information includes templates of legal documents, analytical and expert materials on industries, templates and examples of financial documents, investment presentations, business plans and much more.
Entering the global market
One of the most sought-after areas of our work is consulting on entering global markets. The MENA region (Middle East and North Africa) is a prime example of how we help companies in this matter. Our Dubai office oversees cooperation in the industrial, energy and robotics sectors, covering countries such as Oman, Saudi Arabia, Bahrain, Egypt and others. Thanks to this, our team can effectively establish connections between industrial and investment groups, as well as provide advice on the specifics of intercultural communications and doing business in the countries of the region.
Due to economic and cultural differences, entering a new market often requires adapting existing strategies. If it would be useful for the founders, we are ready to join the discussions in strategic sessions or brainstorming sessions. We usually focus on the following key questions:
HR strategy. Expanding into a new region is almost impossible without a local team or specialists with a deep understanding of the business and connections in the region. Depending on the specifics of the market, we help companies determine the optimal team composition, calculate the budget and develop an effective hiring plan.
Production and operational strategy. Regional characteristics, including industry specifics, climate conditions and environmental factors, can have a significant impact on product quality. It is also worth considering cultural and religious characteristics, which can vary not only from country to country, but also from province to province.
Sales and Marketing Strategy. We help test marketing models by assessing the effectiveness of sales funnels and various channels. Our team conducts detailed analytics and can set up analytical processes for companies if they have not done so already. Marketing analytics is a key tool for assessing the effectiveness of acquisition channels, geographic activity, and the impact of marketing efforts on key metrics such as LTV, conversions, ROI, customer retention, and CAC.
We can also engage in strategy development and help implement specific tools for our portfolio companies in key areas such as PR, intellectual property protection and legal support.
Accelerator
We help startups get into top accelerators around the world, which is a great springboard for entering new markets. Based on my experience, acceleration programs are not just a tool for growth, but also a powerful driver that changes the founders' “business” thinking for the better. Plus, accelerators provide an opportunity to expand the network of international contacts and gain a deeper understanding of the nuances of the investment attraction process, improving its dynamics.
Fundraising Strategy
Many founders, especially at the start, do not fully understand how the fundraising process works and how to attract funding correctly. This applies even to those who have experience in high-level positions in large corporations. Therefore, requests for help in developing an investment attraction strategy are among the most popular among startups at the early stages. As experts in this field, we are happy to join this process. The basis of any successful strategy is a clear and reasonable plan: when to raise a round, what the funds will be used for, and how much capital is needed. An important role is played by the personal qualities and mindset of the founder, which can influence the tactics and approaches to fundraising. No less important are tools such as a pitch, investor presentation, and financial model, which we can also help with by assessing and improving these elements of the strategy.
Non-dilutive financing
We actively help startups attract grants for research and development, especially those working with science-intensive technologies. Over the past five years, we have had at least 15 successful cases in this area. However, recently, more and more companies are turning to us for support in attracting credit lines, which are necessary for the creation and expansion of production capacities or large service centers for equipment. This trend indicates a growing interest in larger and more large-scale projects, which requires a competent approach to financing.
Establishment of production
Consulting on setting up production. Although this is not a typical competence for venture investors, we have been directly involved in the creation of five production sites for equipment in our portfolio companies over the past 5 years. This experience has allowed us to accumulate significant expertise, which we are happy to share with founders. We consult on key issues such as: developing an organizational structure and forming a team, optimizing production processes and implementing control systems, as well as compliance with labor protection standards and technical regulations.
Networking
Don’t think that I forgot about networking – I just decided to save this most obvious, but no less important aspect for the final part of the article. I especially like the phrase “VCs are networking machines”, and based on my experience, this is true in most cases. Much of our thinking and action is focused on helping our portfolio companies establish profitable business relationships through connections with:
potential clients
opinion leaders and industry experts
promising employees
legal, accounting and audit firms
other venture funds (which may participate in future investment rounds)
Community
One of the formats of networking and business cooperation in which we actively participate is the creation of micro communities. We create them by gathering representatives of portfolio companies and industry experts in one online or offline channel for communication.
Sale of business (exit)
We can also help founders with exit timing and strategy. Our support in this process includes introductions to corporate development specialists, IB firms, and strategic advice during sale negotiations. Advice may cover deal terms, pricing, and earn-out structure, among other key considerations.
MIPT
“Phystech” is a slang name for the Moscow Institute of Physics and Technology. Most of our team and the fund's investors are MIPT graduates. The university has produced 10 Nobel Prize laureates, primarily in physics. Our connections with MIPT allow us to establish cooperation with laboratories in the field of R&D and engineering developments, create new laboratories at MIPT, and help attract talent and organize internships for students and postgraduates in portfolio companies.
Investments
And of course, in addition to the above assistance, we invest cash. In addition, we are happy to invite our LPs (investors), other specialized venture funds or angel investors to future investment rounds.
Instead of a conclusion. Because we do not practice a “spray and pray” strategy, but prefer to make measured and thoughtful investment decisions on a targeted basis, we do not invest in a huge number of companies. We typically close 4-8 deals per year, which allows us to devote significant time and resources to providing the above set of services to our portfolio companies.
P.S. Hands-off. The fundamental principle is not to run a business instead of management. We believe that it is worth limiting ourselves to recommendations, advice, consultations and acquaintances. This is explained by the fact that the development and accumulation of experience and competencies of founders and key employees is crucial for creating the value of the company.
