How VC and private equity funds can launch portfolio-acceleration platforms

I’ve recently advised a number of emerging venture capital funds that are struggling to determine the most effective steps they can take to support their portfolio companies.

Almost every private equity and venture capital investor now advertises that they have a platform to support their portfolio companies. The popularity of the model can be judged by the fact that the U.S. VC Platform community has grown approximately 120% in the last three years. Similarly, its European counterpart, the EU VC Platform, has tripled in the same period.

The ability to answer quickly and confidently when your business model is having holes poked in it during diligence is really powerful.

However, most of us don’t have the budget of an Andreessen Horowitz to support almost every major need of emerging companies. You could spend an unlimited budget on all possible company-building resources. “You can’t pick a platform strategy that’s unique, but you can pick a platform strategy that your firm can uniquely execute,” noted Maria Palma of REE Ventures.

I propose here a framework for prioritizing your platform buildout. Once you have assembled the right core team, I recommend prioritizing as follows:

First, meet with your portfolio company management. As an agenda for each meeting, I suggest:

  • How can we most add value, in addition to helping with financing? (This is an open-ended query and the most important question.)
  • What are your fundraising goals?
  • What is the profile of people whom you are most interested in meeting?
  • From which service providers have you received the most value?

In a presentation at the 4th Annual VC Platform Summit, Nick Kim, Crosscut Ventures’ head of platform, shared their platform development methodology, which he viewed as an exercise in product development.

“Firms should match services to the stage-specific needs of companies,” Dan Kozikowski, partner and head of platform for FirstMark Capital, told me. “For example, recruiting writ large is useful at all stages of development. But things like vendor introductions are only needle-movers at the earliest stages. Similarly, customer introductions are invaluable in the early days, but become less valuable once a company has a fully formed go-to-market function.”

Then, pluck the low-hanging fruit: easy, low-cost and highly scalable infrastructure. This typically includes:

  • Relationships with relevant service providers in your vertical, often with pre-negotiated discounts: coaches, lawyers, accountants, common software vendors, consultants. Generally, I suggest exploring BuiltFirst, Clutch, FundedBuy, Rocketplace and/or SpotSource. For negotiation with providers, consider Buyer. Alpaca VC shares their Master Agency List.
  • A well-organized library of best practices for founders in your vertical, which you can share as appropriate. First Search, Startup School and OneValley Passport are examples of comprehensive founder resources from investors. Ask Anything aggregates resources from all the VCs. I have developed a founder curriculum on my blog.
  • Relationships with venture partners, entrepreneurs in residence and other nonsalaried personnel who can help your companies. Explore a roadmap of your options in working with outside talent.
  • Organize events in your vertical. Particularly when events are all virtual, this is an easy and low-cost way to build trusted relationships with the leaders in your space.

I recommend building a strong internal tech stack to handle the deluge of requests for help you’ll get from companies as you scale. “The biggest investment of resources with our tech platform relates to the capturing and maintenance of data on our huge portfolio of 1,100-plus evolving tech companies,” Jeff Pomeranz, partner at Right Side Capital, said.

“For instance, tracking ‘months of runway’ combined with the month-over-month change to that metric allows us to rapidly identify companies that may be distressed. Adding full lifecycle data and industry exposure tags to that, across such a large number of companies, often enables us to see trends ahead of the market, such as retail decimation a few years ago.” Investigate ways to use technology and analytics to make better investments.

Beyond these steps, I suggest you apply a two-part test:

  • Does the service gain impact by being on your platform? For example, I suggest it doesn’t make a lot of sense to hire a full-time team member who’s an SEO consultant. An SEO consultant is going to provide the same quality of service whether they are working for the investor or directly for a company. And of course, if they work directly with a company, then the company bears the full cost, and the investor doesn’t. Recruiting is a great counterfactual: Recruiters working for a VC firm get a much more positive response from talent than independent recruiters.
  • Is the service scalable? You might hire a really amazing designer, and perhaps even charge companies for their service for cost recovery purposes. However, the designer is a nonscalable service; you’ll have to hire more people like them as your portfolio grows.

Here are a few other examples of services that meet these two tests:

  • Bootcamp. Two easy ways to enable scalability: encourage founders to learn from one another and share information simultaneously with many. Real Ventures, an early-stage Canadian fund, runs a two-day founder camp every six months. All founders who have received initial funding from Real in the previous six months attend the camp. “We established Founder Camp as a scalable way for all of our founders, early in our relationship, to understand what we consider to be best practices in scaling a venture-backed company,” Janet Bannister, managing partner at Real Ventures, said. “All content is developed and delivered by the Real Ventures partners. The camp also enables our founders to quickly get to know other portfolio founders and all members of the Real team.”
  • Fundraising. First Round Capital has built an entire function just focused on helping companies refine their pitch and fundraise. I’ve written about marketing your portfolio companies to other investors, formatting financial models that investors will want to read, and following a checklist before pitching to a venture capitalist.
  • Recruiting. Numerous investors have built out recruiting teams. They often have much more success in soliciting candidates than in-house recruiters because investors often have much better-known brands than the companies in which they invest. In addition, recruiters within VC firms have insider knowledge to help them move talent around the portfolio as companies shut down/reorganize. Lastly, as a model of what’s possible, an investor can market to talent that they offer a career path throughout the firm’s portfolio. Welsh, Carson, Anderson & Stowe advertises that “60% of WCAS XII portfolio companies benefit from repeat management.” Follow best practices when recruiting high performers.
  • Customer development. A VC can build out relations with the innovation groups at the Global 2,000, which turn into lead-gen for portfolio companies selling to the Global 2,000. A well-developed model is Andreessen Horowitz’s Executive Briefing Center. FirstMark Platform’s 100+ annual events and 50,000+ members are also extensive customer opportunities for their portfolio companies.
  • Celebrity relationships. Several VCs market close relationships with celebrities, who can use their social media presence to promote their companies.

How can you deliver domain expertise you don’t (yet) have in-house?

Almost every VC firm markets their domain expertise in certain industries and/or functions. But inevitably, founders will need expertise in areas that the firm does not have in-house. In descending order of cost, I see four main ways to support companies with domain expertise:

Example Advantages Disadvantages
In-house, brand-name guru John Maeda, former design partner, KPCB and former president, Rhode Island School of Design A true industry luminary will help in deal flow and differentiation. These folks are rare, expensive and often have multiple side obligations (book deals, speaking engagements, etc.).
In-house functional specialists A former marketing executive from a portfolio company Proprietary resource Significant compensation cost. Not very scalable.

Inherently a generalist, not a tightly designed fit for a particular company’s needs.

Sign up as a client for an expert network and offer your companies access to their network. Numerous VCs. Note this model amounts to lead-generation for the expert network, so you may be able to negotiate a lower rate than normal. User experience will typically be extremely good, because the expert network can find people with exactly the right profile for your situation. Neither proprietary nor marketable.

Marginal hourly cost for engaging each expert.

Build a network of on-call domain experts who will have short conversations with portfolio management, typically at no cost.  Primary Venture Partners’ Primary Expert Network; Goldman Sachs’ Chambers Street Executive Network Minimal cost.

Extends network dramatically.

Experts can turn into consultants, board members, interim execs, etc., if needed.

May be difficult to negotiate an exclusive relationship.
Requires ongoing management to keep community members engaged.

“We were formerly an in-house team at ff Venture Capital, where we realized that early-stage startups universally struggled with their finance and accounting function — so we decided to help them by doing it ourselves,” Paul Bianco, CEO of Graphite Financial said.

“The topic became less boring to founders when it directly correlated to fundability. We found that the ability to storytell around vision and growth was far more powerful when founders had a really solid understanding of their numbers.

The ability to answer quickly and confidently when your business model is having holes poked in it during diligence is really powerful. An added bonus is having more comfort and control around your business even when NOT fundraising!

“Ultimately we decided to spin our team within the fund out into a separate company, which is now Graphite. While there are several reasons, a primary consideration for a fund building a team internally is the inherent ceiling on the breadth and depth of what you can offer with a finite universe of companies to support.”

As you consider other options, explore my seven-part framework for how you can support companies. Cory Bolotsky, co-chair of the VC Platform Global Community, shares a 10-component framework to comprehensively cover a VC fund’s platform strategy.

These functions cover everything from sourcing new investments to accelerating portfolio companies. Lerer Hippeau lists the talent and technology required to efficiently run the platform function at your VC.

Lastly, I know some VCs that market that they can help their companies identify buyers. On an ad-hoc basis, this absolutely can and does happen. But I’m a bit skeptical that a VC can systematically do it. The best VC-backed exits are bought, not sold. Even the most connected VC has limited ability to influence the M&A roadmap of the large acquirers, not to mention a VC is obviously conflicted in promoting the acquisition of its own companies.

There’s also a huge amount of luck in timing and amount of exits, so it’s also hard to compensate an internal “M&A investment banker” fairly for expediting an exit, given they may deserve zero credit.

Thanks to Prabhat Gusain for research help.

Disclosures: David Teten has been an adviser to Real Ventures and Right Side Capital, and was formerly a partner at ff Venture Capital. As a consultant to Goldman Sachs’ Americas Special Situations Group, he helped build Chambers Street Executive Network. He built the platform function at both ffVC and HOF Capital.