How talent gives venture capital firms a competitive edge

Mar 11st, 2018

Raul San N.H.

Sendgrid went public last year, raising $131M.

In the last eight years Sendgrid has been invested in by firms like Techstars, Foundry Group, Bessemer Venture Partners and Bain Capital Ventures. These investors provided not only their money but also their networks, helping Sendgrid hire professionals that became key players in the growth of the company, including a CEO.

The extent to which investment firms involve themselves in talent varies. Sendgrid’s investors are among those that help their companies with their hiring efforts and, by doing this, gain a competitive edge that helps them attract good deals. Investors that don’t help their portfolio with hiring run the risk of not differentiating themselves enough against new forms of investment, and other investors.

Last year,

CBInsights partnered with the New York Times to rank VCs⁠

. They asked Venture Capital firms to rate each other as if they were LPs, asking which firms they would invest in. Not surprisingly, all top-10 VCs have someone at the firm dedicated to helping their portfolio hire.

Helping with talent is a best practice in the industry, but not all firms can afford to have a full-time HR manager on staff. Some smaller VCs approach this challenge by using software that maximizes their efforts and minimizes repetitive tasks, like

Thrive⁠

Totem⁠

, or

Monday⁠

What is clear is that in today’s ecosystem, adding value with money alone is not enough to attract the best deals. VCs need to add value to their portfolio companies with not only their money but also their network in order to differentiate themselves from new forms of investment, like crowdfunding and ICOs.

With new forms of investment including crowdfunding and token sales, VCs need to add value to their portfolio companies with their network in order to differentiate themselves from these new forms of investment.

Great Venture Capital firms are here to stay. This is how they create a competitive edge:

The best venture capital firms retain high performers in their network

These firms retain and engage high performers because they know an A-Player working in one of their portfolio companies might become the next C-Level executive or first engineer at one of their new invested companies.

After Isaac Saldana, Sendgrid’s founder, went through Techstars, he knew he didn’t want to be the CEO. Isaac was strong technically but wanted someone who would help him take the company to the next level. Thanks to Techstars’ network, Isaac connected with Jim Franklin, who became Sendgrid’s CEO and took it from three to 250 employees.

For good or bad, the Venture Capital world is a relationship-based industry. Firms are people magnets and the best ones use it to their advantage.

A self-reinforcing cycle: success attracts better deals. Better deals attract success.

At the beginning of their life-cycle, VCs have a chicken-and-egg problem. They need both funds and deals but they need one before the other.

As in most marketplaces, it is common practice to start with the demand side. Once a firm is established, they need to keep attracting good deals.

Success acts as a magnet for good entrepreneurs, and VCs know it. They want to make sure each company they invest in is being run by the best talent. The real hack for top VCs is to actively play a part in attracting great builders and place them into leadership roles at portfolio companies.

Great investors know their investment in talent results in great ROI, which at the same time results in great investments, creating a self-reinforcing cycle.

Reduce Network Turnover

It’s a well-known fact that

employee turnover costs billions of dollars to US businesses⁠

. What is not so well understood is the cost of “network turnover.”

Network turnover is what happens when a professional working at company that is part of a network leaves. When a great professional leaves a company in the network of a VC, it costs the VC money. If the professional leaves to start working at a company in the network of a different VC, they are working for the competition. It’s similar to when an executive

leaves Google to work for Facebook⁠

If Jim Franklin had left the Techstars network before becoming the CEO of Sendgrid, perhaps today Sendgrid would be an average company and Franklin would have helped a different company become a success instead.

The Venture Capital market is well established and so are their best practices for building high-performing companies and attracting the best deals. Helping portfolio companies hire and avoiding network turnover are ways that VCs can maintain their competitive edge.

In an ideal world, every VC would have an in-house team hand-picking the best talent for their invested companies, but when that isn’t possible there are a number of great alternatives that can help them find the right people and stay in the game.

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