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Background David Teten, Koen Bremer, Gyorgy Buslig, and Adham AbdelFattah published the first-ever research study on “The Lower-Risk Startup: How Venture Capitalists Increase the Odds of Startup Success” in The Journal of Private Equity (March 2013), as well as in Techcrunch, peHub, and Betabeat. These slides summarize our findings.
This is a sequel to David Teten’s 2010 research study on “Best Practices in Private Equity and Venture Capital Deal Origination”, with Chris Farmer, Venture Partner, General Catalyst, which was published in Harvard Business Review, Institutional Investor, the Journal of Private Equity, etc.
Highlights of our findings • Most of the funds with well-developed developed Portfolio Operator models
have top-quartile returns (above a 20% IRR in the relevant time periods) . (See caveat at end of presentation.)
• Very little systematic research has been executed in this area. • Investors have conflicting opinions about the role of VCs in supporting portfolio
companies; most VCs fall into the “Mentor” category. • Size does matter; VC firms with a larger number of portfolio companies provide
more services. • Few of the VCs we interviewed charge any of their portfolio companies for
services they provide them. • Most common types of support revolve around recruiting, direct customer
introductions, and introduction to vendors, e.g., PR, legal, and other services. • This pattern in VC is in part modeled on the longstanding growth of operating
groups in PE firms; PE firms could benefit greatly by emulating how VC firms are using technology in portfolio operations and firm-wide operations.
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• David Teten (teten.com) is a Partner with ff Venture Capital (ffvc.com) and Founder and Chairman of Harvard Business School Alumni Angels of Greater New York (HBSAlumniAngels.com/NY). He has previous experience (as a consultant) with the portfolio operations groups of Carl Icahn, the Goldman Sachs Special Situations Group, and others.
• Adham AbdelFattah is the Founder & CEO of CircleVibe, a mobile startup in New York; a consultant on leave from McKinsey & Company in the New York office; and a Columbia Business School MBA.
• Koen Bremer is a consultant with the Boston Consulting Group in the Amsterdam office and a Columbia Business School MBA.
• Gyorgy Buslig is a consultant with McKinsey & Co. in the Hungary office and a Columbia Business School MBA.
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• Early-stage technology venture capital fund • 160 investments in 60 companies since 1999 • 17 employees by March 2013 • First investments typically $50-$400K at valuations of <$5m pre-money • Follow on in later rounds for best-performing startups • Prominent investments include:
Cornerstone OnDemand (IPO); Quigo Technologies (sold to AOL for reported $340m); Klout; 500px; Voxy; ThinkNear
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Harvard Business School Angels of Greater New York (HBSAlumniAngels.com/NY) • Members are Harvard affiliates from all industries. • We invest in companies regardless of any Harvard affiliation. • In last twelve months, $1.8m invested in 8 companies. • $84K mean individual check size per company per round. • Third largest angel group in NY tri-state area by number of paying
members (to our knowledge). • Launched Venture Capital Access Program, focused on helping women
and minority investors raise capital from our network.
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Venture Capital Value Creation Research Objectives Discuss the range of philosophies found among major investors in their approach to working with portfolio entrepreneurs
Understand how venture capitalists (VCs) can systematically help startups increase their odds of success beyond simply investing
Define a blueprint for how investors can assess their strengths in order to meaningfully help portfolio companies succeed through operational (non-financial) support
What investment philosophies exist?
What value-creation opportunities exist?
How can we codify the VC value proposition?
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Sources • Interviews with over 50 venture capital investors, entrepreneurs, startup
incubators and advisory service providers • Proprietary database and survey of VCs’ value creation practices • Wide scan of academic and practitioner publications focused on the
topics of entrepreneurship and venture investing • Authors’ personal experience working in venture capital, early-stage
• The cheapest and sometimes most value-added service that an investor can provide is access to his/her network – Industry network – Funding network – Talent / recruiting network
Case study: Financier Correlation Ventures • Referred to by some as the “Moneyball” of venture capital • Partners never take board seats and maintain only modest operational
involvement despite background as startup entrepreneurs • Offer rapid investment decisions with little hassle • Leverage large investment in predictive analytics • $165 million AUM
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Case study: Mentor Small solo-GP Funds • There has been a surge in such funds over the past few years • Examples: Baseline Ventures, Coastano VC, Cowboy Ventures,
Harrison Metal, K9 Ventures, and PivotNorth • Many would be classified as financiers or mentors, because they
typically have very limited resources to engage substantively with their respective portfolios
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A New VC Structure? • As HBS Prof. Noam Wasserman writes, VCs have long been structured
as “upside-down pyramids” in which GPs outnumber more junior employees • This highly atypical organization likely arose due to the need for
GPs to exchange rich information in the course of pre-investment activities
• Many operators are switching to pyramidal models because they are the most efficient means of systematizing and delivering operational support due to the benefits of leverage, delegation, and specialization. • Decreasing startup costs and increasing growth rates make the
application of these resources all the more valuable Noam Wasserman (2005), Upside-down Venture Capitalists and the Transition Toward Pyramidal Firms: Inevitable Progression, or Failed Experiment?, in Lisa A. Keister (ed.) Entrepreneurship (Research in the Sociology of Work, Volume 15), Emerald Group Publishing Limited, pp.151-208
• The pyramidal model ultimately won out in other, more mature knowledge-intensive-industries, such as law and investment banking
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Caveat: On analyzing returns of VC funds For our study, we wanted to analyze if the Portfolio Operator strategy led to higher returns. Sadly, this is virtually impossible to do rigorously, for several reasons: • This strategy is relatively new, so insufficient data is available for the
small number of funds pursuing this strategy. • Returns data for VCs are difficult to obtain and difficult to compare with
one another across inconsistent fund sizes, check sizes, and strategies. • VCs with higher returns naturally have more cash and feel more self-
confident, and therefore are more likely to invest the money needed for the expensive Portfolio Operator strategy.
We can only say with confidence that most of the funds with well-developed Portfolio Operator strategies tend to have returns in the top quartile (over a 20% IRR) for the time periods during which they have used that strategy.
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ff Venture Capital does not endorse or encourage use of any of the sites or resources discussed herein, and is not responsible for any damages caused by their use. You are encouraged to do your own due diligence and make your own independent decisions as to the appropriateness of these sites and services.
Disclaimer
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• Partner, ff Venture Capital, early-stage technology venture capital fund • Founder and Chairman, Harvard Business School Alumni Angels of Greater New York .
Co-founded Venture Capital Access Program, introducing women and minority entrepreneurs to Harvard-affiliated angels
• Lead author, The Virtual Handshake: Opening Doors and Closing Deals Online (TheVirtualHandshake.com)
• Lead author of first-ever research study on best practices in private equity/venture capital deal origination
• Lead author of first-ever research study on best practices of venture capitalists in increasing portfolio company value
• Board Member (now Observer), Ionic Security* • Harvard MBA 1998, Yale BA • @dteten
* ff VC portfolio company
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