June 4, 2020
By Modi Rosen – Managing Partner, Amiti
Over the years I have realized the importance of the role of venture investors in adding value to their portfolio companies, especially when it comes to helping make critical business decisions. A VC’s role is to help the CEO steer the company on the right business path – and understand when and where this help is needed.
Events where our advice as VC’s is critical happen occasionally – maybe once or twice a year. We are not and should not be needed on a daily or weekly basis and in my opinion. A“hysterical” VC will see every minor event as a critical one and a “lazy” VC will never get involved. VC’s should never mandate that a founder should or should not do something, but they can add value when decisions need to be made at critical moments or what I like to call “meaningful events”.
Meaningful events come in different shapes and forms and I have put together some various examples from my experience to present my view and treatment of such events.
1. The Critical Customer
A few years ago, one of our more successful companies was in the midst of negotiations with a strategic potential customer. This was a “life changing” customer for the company. The company was at real crossroads – and was unsure how to handle the situation, so after some discussion with the CEO, we collaborated together and we built a model that justified the economics of the deal.
2. Changes, changes
A good relationship between the investor and the entrepreneurs, is essential and the investor can act as a mentor when the company has to deal with major changes. For example, market fit is an essential part of all products, and sometimes when the market changes, companies have to adapt quickly. One of our portfolio companies had worked on a product for two years and when it was launched it was not well received. We worked together with the founders in order to pivot the product and cater to the changes in the market.
In another example, the same company was also experiencing disagreements between the founders, and they felt comfortable turning to us, to help them in the process of separation and redefinition of roles.
3. Strong Financial Backing
In 2011 a portfolio company was in the midst of a round, going though due diligence and toward a term sheet when, to our surprise, a reputable investor decided not to invest. The company had enough cash left for 8 months – you could feel the panic from everyone around the boardroom. I took the leadership role and asked the other investors around the table to commit to a round to help the company through to the next round. They agreed and the company survived and went on to raise $30M six months later.
In 2013 we had seeded a great team; this was not a small investment in seed terms – $5M. The company was doing fine but in 2015 they were unable to raise their next round and asked us to help with an additional $1M in order to help them through until they are able to complete their round. I decided to invest this money, a meaningful moment for both me as an investor and the company’s future. Eventually this company went on to have a very meaningful exit for all of us.
4. Government Incentives
In 2014 we invested $2.5M in a seed round and at the same time the company received an offer from the office of the Chief Scientist for another $2M. The company wanted to decline this offer due to concerns over possible issues in an exit scenario (something that is often portrayed to startup companies). Luckily for me and them, they came for my advice before turning down the offer and I told them that in my experience with previous portfolio companies and 3 large exits – this had never been an issue. The company ended up taking the money and put this money to invest further in R&D. In retrospect, that additional money saved the company.
5. Force Majeure
Of course, one cannot write anything today without the mention of the coronavirus pandemic – an example of a crisis on a global scale. When a portfolio company is hit with a major setback in its business and management due to a force majeure and is slow to realize the magnitude of the adjustment needed, our job as investors is to help raise awareness of what the company needs to do in order to get back on track, restructure and sometimes even downsize the costs.
The examples provided are all “meaningful events” for companies. As I have stated before and as can be seen from my examples – these events do not occur often, and this is where experience is key – to know when to step in and when to let the company lead. If we interfere too often, the company will lose their trust in us and will not appreciate our advice. We want to be a trusted advisor for those critical moments. Our proudest moments are when a young founder matures to be a CEO of fast growing and leading company. We believe that a good venture capitalist can and will provide strategic business advice and step up during these rare meaningful events, but also keep some distance between these events and give space for entrepreneurs to thrive and lead.