Micro VC investors with less than $20M capital management are often challenged with managing their time in monitoring large set of portfolio companies. Venture capital investors plan and decide their time involvement to each portfolio company at the following four phases. 1) Analyzing the investment 2) Negotiating the investment terms 3) Growth phase 4) Exit phase where the investment is realized. A good distribution of capital into many companies is required to make good returns.
As an emerging manager, I have been observing patterns from established VC firms like KPC&B and learnings from board observers to my current angel investment portfolio. An active board member position with RepairStorm(www.repairstorm.com), a SaaS start-up, also helped in recognizing the importance of time management to monitor an entrepreneur post investment. Many factors help in making the investment monitoring decision and maintain good relationship between entrepreneur and a VC Investor. I have listed a few here. 1) The company’s need for assistance 2) Venture capital investor’s expertise relative to the company needs 3) Percentage of total fund invested 4) Length of time to profitability 5) Entrepreneur or start-up management’s willingness to take advice 6) Competence of co-investors.
Each investment into a start-up needs a different monitoring approach and some of the above mentioned factors weigh in the decision making process. We are discussing three different VC approaches to have great investment success while maintaining good relationship with the entreprenuer.
Observe from outside : In this approach, investors rely on monitoring through management reports and periodic office visits. Occasionally, VC investors take this approach when the percentage of capital invested in a start-up is very small and when they see other investor board members that are competent. This one reduces the work load for VC investors but less investment success.
Extremely Involved : VC team invests significant portion of the capital and joins the entrepreneur as working partners to grow the company until it’s exited. Micro VC investors are understaffed to dedicate partners committing to one start-up for long time. This approach also reduces higher investment distribution.
Significantly Involved : A middle path of significant involvement gives a greater investment success. Involvement is advisory yet intense in nature with technology decisions, corporate connections, financing contacts, foreign marketing expertise and product line diversifications. This allows VC investors to keep up with pace of the company, intimate familiarity with investments that help in later financings and mergers. Entrepreneur might see this as intrusion of authority. Once trust is established involvement is mutually satisfying things start working and result to higher yield. KPC&B team used this approach in monitoring Sun Microsystems Investment.
Most VC investors take the approach of working hard compared to hiring more staff in handling complex venture investment decisions.