Value-added services: A modern approach to PE investing

Between 2009 and 2017, the amount of global venture capital fundraising nearly doubled from $28 billion to $55 billion. [1] At the same time, dry powder – that is, the amount of capital committed to a VC fund that has not yet been invested – has continued to build, signaling that fund managers may be struggling to find attractive investment opportunities.

With more capital searching for investments, competition for good deals is becoming the industry norm. A recent survey noted that approximately 50% of VC fund managers reported increased competition for investments; only 8% – 13% reported less competition. [2] Fund managers are looking for new ways to attract the attention of top founders and entrepreneurs, and one approach is providing value added services (VAS) to speed their companies up the learning curve.

Far from the  incubators that provided shared infrastructure and the accelerators that offered mentorship and funding, VCs have started offering a host of ancillary services. These include human resources expertise, legal services, international networking opportunities, and customized marketing support, among others.

One modern example of these initiatives comes from Andreessen Horowitz, a US VC firm founded in 2009 that provides its portfolio companies with a host of consulting services from operational experts in fields such as technical recruiting, marketing, and business development. Other groups—most specifically top tier firms—have followed suit.

While VAS initiatives are generally seen positively within the industry, there is some debate about whether or not VAS actually add value to portfolio companies. Furthermore these teams of experts do not come without cost. But the cost of not providing VAS may be even greater.

Anecdotally, some partners believe VAS programs are worth their cost; without them the firm may lose deals to other groups that actively market their VAS capabilities. Indeed, it may be that VCs who provide VAS will attract high-quality startups, but the question remains of whether these high-quality startups would perform well independent of these additional services. Regardless of the effectiveness of VAS programs, the cost of providing these services must be weighed against the opportunity cost of possibly losing top deals.

Yet the provision of VAS by VC firms is not new. At the peak of the dot-com bubble, top tier VC firms recruited specialists to support their portfolio companies. Before the results of these interventions could be observed, however, the NASDAQ crash created a cataclysm that not the best VAS team could withstand, and most of these efforts were quietly shuttered.

Despite questions about the efficacy of such initiatives, VAS programs are becoming ubiquitous in the industry. Based on an internal analysis, 16 of the top 20 North American VC firms provide some type of VAS offering. [4] And to keep pace with these leaders, other VCs may need to provide similar services to remain competitive in today’s frothy market. In the words of one fund manager, “It’s a classic prisoner’s dilemma – if one group offers VAS, all the others have to as well.”

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[1] 2018 Preqin Global Private Equity and Venture Capital Report.

[2] Note that the remaining respondents reported no change in competition levels over the last year. Sourced from the Preqin Fund Manager Survey conducted in November 2017, as reported in the 2018 Preqin Global Private Equity and Venture Capital Report, p. 45.

[3] Teten, David, Adham Abdelfattah, Koen Bremer, and Gyorgy Buslig. 2013. The lower-risk startup: How venture capitalists increase the odds of startup success. The Journal of Private Equity

[4] VCs firms ranked based on aggregate fundraising over the past 10 years, as reported by Preqin.