“Please help me understand the value of working with a VC”

Someone recently asked me, “please help me understand the value of working with a VC.” Here’s an elaboration of what I responded:

• Some very large percent* of your company’s success will come from you and your team.
• The rest? Everyone else, including VCs, mentors, advisors, customers, board members, etc.
• What VCs bring much more of than everyone else: money, credibility and pattern-matching.
• All are pretty important!

Speaking of raising money, I see roughly two** types of companies:
A) Growing and have 100% confidence in their approach. They know exactly how money will help them grow faster, through some combination of past experience and empirical evidence.
B) Confident in their idea and team, and have a set of things they’d like to prove out (unknowns, risks, hypotheses). Money will enable them to go off and tackle those things.

Of course in reality every company is a mix of A and B. In my opinion, it’s better to be as much “A” as possible and very little “B.” When you’re “A” you’re in control and others are along for the journey, helping you. With “B”, you’re now working for someone else. This is hyperbole, but directionally correct.

One of the key benefits of working with a VC (a good one, anyway) is that they’ll stick with the investment when things don’t go as planned (which is, unfortunately, the norm). Why? Because good VCs allocate funds for the company well beyond their initial investment and will support the company even when things aren’t going well. Indeed, having a good VC on board is often the difference between going out of business vs. being able to continue forward (towards the possibility of eventual success.) All things equal, additional funding means more time to figure out how to make something succeed.

A good VC will also help you find and recruit key team members, provide warm intros to initial customers and lend a great deal of credibility to make sure those intros are taken seriously. It’s easy to massively under-appreciate the value of this credibility until you’ve benefited from it.

Also, unlike everyone else at the table (including founders, employees, mentors and advisors) a good VC is drawing from orders of magnitude more data and pattern-matching that can help you identify opportunities or avoid pitfalls. It’s easy to underestimate the value of the short-cuts that can surface by having a good VC on your side.

How do you know if a particular VC is a good one or not? Ask them about successful investments they’ve led that had significant ups and down along the way. What happened? Ask about key customers, key hires and key decisions. How did these come about? Ask the founders too.

*In truth what I originally wrote was “98 to 99%” but that’s not fair or correct. There are pivotal moments in the life of a company (initial customers, recruiting, key ideas) and these don’t necessarily come from the founders or people involved with the company on a day to day basis.

**Also, don’t forget about option C: don’t raise any money. Here you usually trade off a lot of convenience, but you keep ownership and control. The problem is that if your company is “A” — and destined to be a big company — that tradeoff is probably worth it. Bigger pie.