VK has changed Ever since I stomped the sidewalk on Sand Hill Road as a young entrepreneur in the late 90s.
Capital was hard to come by and the founders had to beg for venture capitalists to back their company. Our funding options were limited to a handful of first-class firms and a network of successful business angels. Two decades later, more money is coming in from more sources than ever before, and stocks have become a commodity.
In today’s market, there is often a sense that venture capitalists have to work to sell their money. We now live in an age of “value-added venture capital” where investors must show founders that they can do more than just write them a check. This is a power shift, and the VCs are promising the founders that they will be true partners, supporting them every step of the way.
All too often, founders find that these extras have a short lifespan.
When we surveyed the founders in our portfolio, we found that even the best-intentioned investors rarely add more value in the 90 days before signing the terms. At this stage, the participation of investors is limited to their presence at the quarterly meeting of the board of directors – the main investor.
Although many venture capitalists consider themselves financiers, they end up providing services to their founders.
Many other members pay no additional cost beyond their checks, except for casual acquaintance. Based on what our founders told us, 20% of the competent contributors don’t even help their founders build strategic relationships. They throw their money into the bank and disappear.
In a world where investor money flows freely, venture capitalists, who offer little to no added value, are dead weight. However, when it comes time to start a new round, they always invoke their contractual proportional rights. Its mere presence on the capital chart deters other venture capitalists from working hard for their founders.
After all, why should they do more for their founders than their peers when they are both guaranteed to sit down at the table?
“It’s always been that way” is not a good excuse. It is time for founders to demand high standards from their investors and insist that they provide ongoing support to grow their business. It’s time to do away with traditional proportional rights.
In the list of conditions, the proportion clause guarantees the investor the right to retain (or increase) his stake in the company by investing in future rounds. There are no obligations, no KPIs that an investor must fulfill to their founders. Proportional rights are only part of the deal.
In fact, proportionality is a huge perk that venture capitalists take lightly. Now that capital is a commodity, founders can and should require that the right to invest in future rounds is conditional on demonstrating added value. Think of it as a “performance ratio,” a new type of pro rata given only to investors who have invested more than equity in the partnership.