Will the VC Add Value or Mistreat and Abandon Us?
Scott Frazier, Managing Partner of The Frazier Group, addresses a common question entrepreneurs often ask: Do VCs add value, or could they harm a startup?
Startup 101
Lehi, Utah, September 23, 2024
By Scott Frazier
With declining liquidity events and reduced valuations, we’ve observed occasional bad-faith actions by desperate VCs and angel investors. For instance, one VC recently exercised its veto power over the sale of a company—not to block an unwise deal, but rather to extract a larger share of the proceeds. In another case, a VC delayed funding for months on a previously agreed-upon deal. Luckily, the company performed well during the delay, but if it hadn’t, the consequences could have been severe. Another example involves an angel investor threatening legal action to delay a company sale unless paid an unearned consulting fee.
While bad actors are rare, even in tough times, their actions can take a significant emotional and financial toll. Discovering that someone you thought was in your corner isn’t, can be a painful and costly experience.
How to Avoid Bad Actors
One of the best safeguards is to perform reference checks. Both serial entrepreneurs and other VCs are usually willing to share their experiences with different funding partners. All it takes is a few phone calls.
In my experience, the value provided by funding sources can be visualized as a bell curve. A few bad actors occupy the left tail, while the majority of funding partners fall into the middle, being competent and well-intentioned. On the far right, you’ll find a handful of exceptional partners who can truly transform a company.
Partnering with a subpar VC or angel may damage your venture, but collaborating with an exemplary firm can bring lasting, game-changing benefits.
Last year, one of our portfolio companies sold substantial equity to a highly recommended private equity (PE) firm. The subsequent traction has been remarkable. The PE firm brought in a new CEO to replace the retiring founder, hired top-notch consultants to address weak areas, and consistently maintained the right balance of hands-on involvement while allowing autonomy. As a result, I’ve introduced this PE firm to other enterprise SaaS companies in the Frazier Group portfolio.
Another example, though a few years old, remains relevant today. Our healthcare product company was facing challenges after a founder retired, and a regulatory change throttled our ability to market. We didn’t need the cash from a new funding partner, but their contribution transformed our business. They brought in two critical hires and a lobbyist who had previously led the regulatory agency in our sector, effectively solving our problem.
What You Can Expect from Most VCs
Having looked at the extremes—from bad actors to extraordinary partners—the reality is that most of the time, you’ll work with VCs in the middle. They are typically competent, well-intentioned, and supportive, though they may be constrained by time and resources.
Your VC will likely contribute sporadically with key introductions and recruiting efforts. On the board, they’ll advise on strategy, governance, and help keep the team aligned. When you’re ready for the next raise or sale, they’ll guide the process, recommend terms, and bring in bankers or advisors as needed.
The more successful your company becomes, the more attention and capital you’ll receive. However, VCs typically cannot devote significant time or resources to ventures that are struggling to gain traction. A VC specializing in your sector will likely provide more value, and a firm early in its fund’s life will have more capital for follow-on investments. A senior VC partner on your board will usually be more valuable than an associate, and a firm that’s the right size for your company—neither too small nor too large—will be the best fit. All things being equal, a local VC will often provide more attention.
From time to time, spell out your challenges and opportunities and ask your VC how they can help. They can make client introductions, source potential hires, and recommend marketing and sales strategies that have been successful within their portfolio.
Vet Your VC Like They Vet You
Never hesitate to conduct thorough due diligence on potential financial partners. Be as rigorous in your questioning as they are in theirs. Assess their ability to provide follow-on funding and request the board member you feel will be the best fit for your company.
Actionable Takeaways
- Make reference calls to both entrepreneurs and VCs to assess a funding partner’s reputation.
- Consider the size and stage of the VC’s fund to ensure they can provide follow-on funding.
- Ask how the VC can add value beyond capital, including making introductions and sourcing hires.
- Request a board member that aligns with your company’s needs.
Scott Frazier is a Managing Partner of The Frazier Group, a family-operated Venture Capital Fund based in Lehi. With a BA in Economics from BYU and an MBA from Harvard, Scott has served as CEO of Achieve, Co-Founder of TruHearing, President of TruVision, and CEO of ThinkSubscription. He co-founded the UtahAngels and built the Frazier Group portfolio of private Utah businesses.
See TechBuzz News' previous Investor Mindset article about The Frazier Group. Contact tips@techbuzz.news should you have interested in contributing a guest article to TechBuzz as a subject matter expert.