For the New Generation of Venture Capitalists, Their Advice Is More Valuable Than Their Money
'NewGen VCs' don't come out of finance. It's all about prior entrepreneurial experience.
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If you talk to startup CEOs about raising capital, you get the idea that they won't give up control of their company to just anyone. If entrepreneurs are going to sell a piece of their company, they want "value added" from their investors.
I learned this from the startup CEOs I interviewed for my new book, Hungry Start-up Strategy. There's a new generation of venture capitalists now populating Silicon Valley.
Entrepreneurs have mixed views about venture capital. They have worked so hard to get their startup to the point where it's attractive to investors that the last thing they want is to give up control when they sell shares to outside investors.
Most will do that only if two conditions are satisfied: The investor has good chemistry with them and has the skills and contacts needed to help them grow.
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The new generation of VCs does not come out of finance. It's all about prior entrepreneurial experience. NewGen VCs, as I call them, can help startup CEOs build their companies with capital and advice because they've already done it for their own firms.
OK, the trend isn't exactly new. Don Valentine, a partner at Sequoia Capital, is a case in point. He was a marketing executive at Fairchild Semiconductor before founding Sequoia in 1972.
What is new is that entrepreneurs are becoming wealthy enough to finance companies faster, and their "value added" advice is becoming more specialized.
The result is that the advice that these NewGen VCs offer is often more valuable than their capital. And that advice can take many forms. It may be about raising (more) capital, developing products, finding partners, choosing business models, building the organization, making acquisitions, or getting customers.
Elad Gil is a typical example of a NewGen VC.
Gil went to Silicon Valley after earning a Ph.D. at the Massachusetts Institute of Technology. He worked at a number of startups including Plaxo and Google, where he started its mobile wireless team, helped acquire Android and worked on AdSense. He also worked on his own start-up, Mixer Labs, a service for helping developers build geo-location applications which Twitter acquired in 2009.
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Gil enjoys working with friends on their start-ups. He brings to this process an ethos similar to what motivates programmers to help develop open-source software: a desire to give back to a community that he believes has given him a lot.
Gil tailors his help to the needs of each start-up. Here are five areas he may focus on.
- Hiring and firing. Gil has found that most engineers who start companies don't have experience with hiring and firing, and he helps them do both. Initially, he may be asked to help with the more difficult task of firing an employee. He also helps start-ups establish hiring processes that include testing them for their productivity, checking their references and finding out how they behave in an informal setting.
- Fund raising. He helps start-ups find venture capital, assisting with negotiating terms such as valuation and the rights of investors to appoint board members.
- Product development. He assists start-ups design customer-friendly user interfaces and he monitors the effectiveness of their distribution strategies.
- Organization structure. Gil works with the founder once the company reaches, say, 50 people to help analyze whether the reporting structure should be changed, and if so, how. He also helps start-up CEOs decide, for example, whether to hire a vice president of marketing first and let the VP appoint people to perform, say, public relations, product marketing and advertising, or whether the start-up should hire those lower-level staff first.
- Acquisitions. He has assisted the leaders of a dozen start-ups to find the right acquirer, negotiate pricing and determine the new roles for the founders and employees.
Gil has the most extensive range of advice I've found among NewGen VCs. But each one I've met brings unique operational experience and can give a start-up CEO a big advantage in realizing his or her vision. The challenge for entrepreneurs is to find the best match.