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Why VCs Matter

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VENTURE CAPITALIST

One of the most contentious and hotly-debated issues in my time as a seed stage investor concerns the concept of the "value-added investor." Almost every founder utters the words "I'm really only interested in raising money from value-added investors" -- at least 99% of the time in my experience. But what exactly does "value-added investors" mean, and even if we agree on the definition, is this really what founders are looking for? And at the end of the day, do investors really matter at all, or is it really just about the money?

My belief is that investors do matter -- a lot. But perhaps not for the reasons many (cynical) founders assume are the reasons a venture capitalist would give, e.g., we're smart, connected, experienced, strategic, etc. Yes, when investors do have these characteristics and apply them well founders and their companies can surely benefit. But it is important to note that there are immense benefits to simply having a deal lead and a board. Heretical? Antithetical to founder ego and ethos? I think not.

Building a successful company is difficult (in fact, building a company that ultimately fails is difficult, too). Especially in the early days, things are chaotic. The founders are multi-tasking like lunatics. Designing, coding, setting up the office, recruiting, getting the needed legal work done, bookkeeping, interacting with early alpha users, collecting feedback, figuring out key metrics, etc. A mishmash of essential product-driven and necessary non-product driven activities. Oh, right, and fund-raising should it move beyond the bootstrap phase. It is hard (but energizing) to take all this on, especially when the founding team hasn't done it all before. There can be tremendous inefficiencies as founders ascend the learning curve, especially in areas that are not necessarily related to or interesting given the founders' backgrounds.

There is no how-to manual that captures the richness of experiences and perspectives of those who founded companies previously, from the most profound product development insights to the most mundane organizational details. There just isn't. Also, there can be a lot of stress-driven myopia given the laser focus on product and the urge to ship. The problem is, however, that much can be lost by not stepping back, taking a deep breath, and really making sure that all that building is for a clear purpose and with a plan.

This is where investors come in and why a board is so valuable. Having investors and a board to report to forces reflection, deep thinking and, well, stopping for a bit to regain some perspective. It is like a train barreling down the tracks, being forced to slow down, refuel, and confirm its course before setting off on its way once again. Besides reporting on product progress, launch strategy, development road map, recruiting and finances, the founders can hopefully find their board a safe forum to share hopes, ideas and fears. This necessarily means that the founders need to have deep trust in their board, even if it is only a 3-person board with two founders and one investor. That investor needs to be someone they trust and respect, but in return they need to be open, honest and disclosing and not treat the investor like a nuisance from whom they really only wanted money, not input and an experienced sounding-board.

Some might speculate that my recommendation is a result of my being a VC, with a voracious appetite for control, but this simply isn't the case. The founders control the board in my scenario. It's just that they set one up early to force the good behaviors that can often get missed in the frenetic activity of the early days of a start-up. Think about it: would having a catalyst for reviewing everything material in the business every few months add some valuable stability and support during difficult and stressful times? I think so. But you, founder, need to want it. If not, may the force be with you. Because even in the best of times, the benefits of reporting, reflecting and refining are incalculable.

This post originally appeared on InformationArbitrage.com