Success for an early-stage VC firm is defined by the number of unicorns and exits in its portfolio, which is guided by choosing the right management team, and ability to evaluate market potential and the timing of an opportunity. However, VCs can’t merely rely on making the right pre-investment decisions and let the startup run by itself post-investment. Upon investment, most firms will put portfolio management processes in place, working to gather and analyze data to improve the portfolio’s value over time.
When there are cracks in the portfolio management process, the investor is unable to generate more value and, in the worst case, cause the value to decline due to the lack of timely help. Around 29% of startups fail due to insufficient funds, often as a result of poor finance and resource management (CB Insights). This pitfall, among others, could easily be averted if the investor has a proper understanding of the startup’s operations.
Founders choose to partner with venture firms because of the three Cs: capital, connections, and counsel. Apart from injecting capital, having a supportive portfolio management strategy to providing ‘connections’ and ‘counsel’ is imperative to the success of the startup and subsequently, the investor.
The earlier an investor hears of an issue, the faster it can be solved, and the consequences of not actively managing the portfolio are evident. The Ewing Marion Kauffman Foundation found that the average exit multiple from active contact (one to two times a month) is 3.7X, compared to the average exit multiple of 1.3X from passive contact (one to two times a year).
Having spent the past five years in the industry, I’ve seen the SEA startup ecosystem grow from nascency to one of the most attractive startup ecosystems globally. However, SEA founders still face the same challenges around hiring and retaining talent.
An early-stage startup usually has an average three-person founding team with less than 50 employees. Once the startup receives investment, growth becomes critical and hiring becomes the focus, but building a great team is never easy. The startup is competing with tech titans for engineering talent and global brands for sales talent. VCs with their in-house recruitment specialists can, therefore, be extremely valuable in creating a pipeline of candidates interested in joining the startup, and help shortlist candidates faster and at a lower cost.
Another HR-related challenge is establishing a company culture that engages and motivates employees. VCs can advise on best practices, knowing how other portfolio companies have successfully implemented policies in the past, such as drawing up an appropriate Employee Stock Option Plan to keep employees motivated.
VCs have the privilege of meeting people from different backgrounds, and these connections and networks are valuable to startups for business development and fundraising efforts. At Golden Gate Ventures, we are in close contact with a network of multinational corporations, late-stage investors, co-investors, and global and regional tech companies to keep abreast of the demands of these stakeholders and market trends. Thus, we can plug portfolio companies into this ecosystem and help make meaningful connections on a global level.
We commit more than half of our resources to support our portfolio companies, where an experienced team assists with HR, CFO support (e.g., strategic level capital structuring, fundraising, price setting, etc.), and digital growth. We also have a dedicated Slack team with all the portfolio companies, which allows us to be available at all times. The portfolio companies can also use this channel to exchange ideas with each other.
The fruit of our portfolio management success has come in many forms. For example, we’ve helped increase the efficacy of digital marketing for a leading property portal by almost 70%. Also, more than half of our portfolio companies have raised follow-on financing from introductions we’ve made. These wins have translated to success for us when raising capital from LPs as well.
VCs that stay up to date with the performance of their portfolio companies are more aware of the obstacles they face, and are capable of helping them navigate through troubled waters. Portfolio management is an integral part of the venture industry, as collaboration is the formula for long-term success for both investors and startups.
About the Author
In the startup world, a unicorn refers to any startup with a valuation of over US$1 billion. Companies like Airbnb and Netflix fall under the unicorn category. As of 2021, there are 650 unicorns in the world with a cumulative valuation of US$2,173 billion.