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I recently read a post on TechCrunch from NextView’s Jay Acunzo about how “Director of Platform” is the hot new title in VC and why, going forward, it will allow investors to differentiate their value beyond capital. I agree with Jay’s core point, and I wholeheartedly welcome any VC embracing this approach — but I’d also suggest this “new” trend isn’t all that new. It’s been around for years.

In this post, I’d like to share the story of how and why we built OpenView Labs and explain why, whether VCs call it “platform” or “value-add,” the real differentiator is focus.

Truth #1: VC Value-Add Isn’t a New Concept

When I arrived at Insight Venture Partners in 2000, the startup and VC environment was frothy. The tech bubble hadn’t burst yet, valuations and cash burn were insanely high, and growth capital was, for the most part, readily accessible. For smart entrepreneurs with truly game changing ideas, that was a good thing. For VCs trying to win the best deals, it was not.

Competition was fierce. Most great companies had several top VCs fighting for their business and all of those investors offered the same financial “product.” For founders, this made differentiating between term sheets pretty difficult, which subsequently led them to start looking at the fringes of offers from VCs. What value could they derive from an investment partner beyond the capital that showed up in their bank account? And how exactly could that value-add help the business scale faster and smarter?

Frankly, I first noticed this trend when I was the managing director for Putnam Investments from 1997 to 2000, but it became more acute after I joined Insight. After working several deals, it was glaringly obvious that entrepreneurs were only partly interested in the money we could offer. Outside of that, they also wanted VCs to answer a very simple question: Why you?

If your answer revolved only around money, you were toast.

Building Out a True Value-Add Infrastructure

By mid-2000, I began the process of defining the functional areas that would best help Insight’s target investments grow more efficiently. I started by hiring some management consultants (that was my background, having started my career with McKinsey and Company) and I slowly began to build out a roster of functional specialists who would work in-house as part of Insight’s value-add team (what might today be called a “platform,” “onsite value creation,” or “operational support”).

Notice I used the word specialists. From experience, I knew the last thing founders needed was a team of uninvested generalists. Instead, these founders and their companies needed very specific, actionable insight and strategic advice that could help them solve their problems as quickly as possible.

The process I followed to do that involved three key steps:

  1. Understanding Insight’s focal point (investment stage, sector, strategy, etc.)
  2. Identifying the opportunities to add value within that focal point
  3. Building a team with the unique skills to deliver on those opportunities

Ultimately, that led to the assembly of a super talented group of individuals with deep experience in the various areas that mattered most to Insight’s target investments: M&A, R&D, lead generation, market analysis, and more.

Tweaking the Model at OpenView

When I founded OpenView, the rest of the VC world had started to catch on. Many other VCs had begun building out value-add functions within their firms and when they delivered a term sheet they often promised to do some of the things Insight was already doing. Some firms actually followed through. Others offered little more than generic consulting work that did very little to move the needle.

I knew the latter wasn’t an option at OpenView, so I again set out to build a team that aligned with the needs of our target investments — expansion-stage B2B technology companies ready to hit the accelerator and dramatically scale. To clarify, these companies are generally characterized by reasonable product-market fit, a solid unit economic model, and a basic understanding of the operating levers that can be pulled to drive efficient growth. These businesses are typically on the verge of dramatic customer and employee expansion, and may also be in the process of developing  many new capabilities — particularly in the areas of product, go-to-market, customer success, and management systems.

Naturally, that focus led my team to build OpenView’s value-add infrastructure around three universal pain points expansion-stage B2B companies face:

  • Hiring better talent
  • Acquiring more customers
  • Developing greater operational expertise

Those opportunities might seem obvious, but addressing them isn’t so simple.

The truth is, actually creating a structure that provides value in those areas — without disrupting, distracting, or annoying a growing company — is difficult. It requires significant time, investment, expertise, and focus, which is why many VCs either choose not to do it or fail trying.

Truth #2: If a VC is Really Going to Add Value, Sector and Stage Focus is Critical

I can’t overstate how important sector and stage focus are to a VC’s ability to actually deliver operational value to its portfolio. The reason is simple: The needs and opportunities to add value will be very different for an early-stage consumer startup than a growth-stage B2B business ready to scale. Operational challenges will be different. Market opportunities will be different. Expertise gaps will be different.

At OpenView, our focus is on expansion-stage B2B software companies. As a result, that focus has allowed us to build and tailor OpenView Labs — our “value-add” operational support team — specifically to impact the unique opportunities and challenges those companies face. We’ve aligned our processes, strategies, and team to focus solely on them. Our reason for doing this was twofold:

  1. By sharply focusing on a specific sector and stage, it allows us to always deliver relevant insights, ideas, and advice
  2. By building our reputation in that specific sector and stage, it allows us to develop a network of outside experts who can help us, our portfolio, and the greater B2B software market as a whole

A big component of the second objective is OpenView’s Labs website, a content platform exclusively focused on ideas and inspiration for expansion-stage B2B software companies. We use the site to further our mission to gather, develop, and disseminate the best company-building ideas and practices not just with our portfolio, but with the broader tech community, as well.

OpenView Labs isn’t just an editorial site, however. In addition to producing a regular flow of relevant content, our team helps the portfolio in two other key ways:

  • Experimentation and implementation of ideas: In addition to curating ideas, we also spend considerable time testing them, determining which are the most impactful, and discovering the best practical approaches for putting them into practice. In that sense, we often serve as “guinea pigs” for our portfolio companies and work hand-in-hand to help them implement tactics once they’ve been validated.
  • Acting as an extension of their growing team: We have found our primary areas of impact are helping our portfolio companies grow their talent and grow their customers, and we’ve cultivated our internal capabilities accordingly. In addition to a team of talent specialists who help the portfolio companies meet their recruiting needs, we also have teams designed to help them with market research, customer acquisition, and sales and marketing optimization. Eventually, most companies hire those roles in-house. But early in the expansion-stage, businesses often lack the capacity or resources to hire for those specific functions.

Of course, there are many other capabilities that portfolio companies need to develop during the expansion stage. Our approach to the other needs is to try to help those businesses connect with other members of our network, each other, and with the best outside experts in those areas. Our workshops and forums, in particular, serve as a great catalyst for introducing implementable ideas and connections that can help.

All of that said, we’re never really done building our capabilities. We get new ideas and requests from portfolio companies daily, and we spend a good amount of time trying to figure out the best way to service those requests. For example, we are just now launching a business development program for our portfolio companies. It’s a capability that I put in place at Insight over a decade ago and it’s a capability that we are ready to add to our list now that our portfolio is large enough to warrant it.

Which Race Are You Trying to Win?

If I said you were entering a race and you could choose any car you wanted, you’d probably pick the fastest sports car you could think of. But what if I told you the race was actually a drag race? Or the 24 Hours of Le Mans? Or something off-road in rough terrain? Each of those races would require a unique vehicle and a driver with a unique skill set.

My point, if it isn’t already obvious, is that delivering real value as a VC (and creating differentiation in the process) isn’t as simple as choosing the fastest, biggest, or strongest car, or re-branding value-add as something that sounds new and fresh. Doing that might drum up attention initially, but unless the VC’s value creation strategy is explicitly designed to handle the specific needs and opportunities of a specific type of company, then it will fail to deliver real results.

So, whether we call value creation services “platform” or “value-add” or something else entirely, the goal for VCs must still be to deliver highly relevant, meaningful value to the companies they invest in. To do that, investment firms must follow the three-step process I described above (with one additional step if the firm has a broad focus on companies in various stages and sectors):

  1. Find a focal point within a specific investment sector and stage
  2. Identify the opportunities within that focal point
  3. Build a team capable of delivering on those opportunities
  4. Rinse and repeat for other investment segments

Overall, if that’s the direction the VC world is heading in, I’m genuinely thrilled about it (even if it does mean the VC environment will be a little more competitive for us). Here’s why: With better access to relevant, actionable insights and ideas, more founders will build better companies, more investors will experience successful exits, and the tech world as a whole will be much better off as a result.

Photo by: supercake

As the founder of OpenView, Scott focuses on distinctive business models and products that uniquely address a meaningful market pain point. This includes a broad interest in application and infrastructure companies, and businesses that are addressing the next generation of technology, including SaaS, cloud computing, mobile platforms, storage, networking, IT tools, and development tools.

  • http://www.theequitykicker.com brisbourne

    Hey Scott – great post. Thank you. Like you I entered the venture industry in early 2000 and like you I founded a venture firm that is sector and stage focused (very early stage ecommerce) and seeks to win by being better at helping companies than other investors. So same strategy as OpenView but different sector, stage, and geography. We’re called Forward Partners, and we’ve only been going two years, but it’s starting to come together – good team, wide appreciation that we make a real difference to our partners, and a decent number of investments that look like they’re on the right path.

    Your post helped clarify my thinking and made clear something that has been nagging at me for a while, namely that we need a better statement of our key areas of impact, i.e. an equivalent to your “helping our portfolio companies grow their talent and grow their customers”.

    I’d be interested to connect and share stories. You are further down the path than us, but it seems to me that we are both on a similar mission and likely face similar challenges.

    • http://www.openviewpartners.com Scott Maxwell

      Nic,

      Thanks for your comment. Let’s connect on LinkedIn to get together and compare notes.

      Scott

  • http://limk.com/ Oguz Serdar

    Steve — This post helped me to learn about OpenView’s Labs (website), and I passed some pieces from there to my sales / product teams. Thanks for doing this, much appreciated!

    PS: Would you be interested in sharing the entire content as a downloadable PDF like the Lead Generation book?

  • http://pennantep.com Sam Foster

    Hey Scott, Excellent post and I could not agree more. I entered the VC industry toward the end of the 90s with a tiny seed fund but we were focused and very early. Our second fund was a little larger, a little later but more generalist and in the maturing VC market, too small and general to really compete for the best entrepreneurs and opportunities. One observation I’ll share, clarified in those days by our always being the small investor in the room, is the importance of alignment and roles of both investors and Board members. Bringing a new company to high achieving execution is hard enough. As you say, investors need more than just capital to be successful today, they need to be focused, organized and bring value. And..they need to be aligned; in vision, patience, skills and capital/terms/staying power. If the Boards and investors are not organized, focused and actively working in unison to the same goals, chances of success are greatly reduced. I’ve often said that in my experience I saw as many Boards help kill companies as I saw them really help them succeed. Thanks for sharing your thoughts and vision.

    • http://www.openviewpartners.com Scott Maxwell

      Couldn’t agree more, Sam. Thanks for the comment.

  • IJFK

    Hi Scott. Interesting post – as always. Thanks to you and your team for the helpful posts on this blog, I really enjoyed reading & following over the last few years. Ingmar Koecher.

    • http://www.openviewpartners.com Scott Maxwell

      Thanks, Ingmar. Glad we could help.

  • http://dohertyassoc.com Mike Doherty

    Great post. It serve as a reminder of basic business tenets. 1) Identify an unmet need in the marketplace – clearly money is not an unmet need these days. 2) Offer a differentiated solution to meet the unmet need. 3) Clearly, define your value proposition.

    • http://www.openviewpartners.com Scott Maxwell

      Right on the mark, Mike. Thanks for sharing!

  • George Knox

    Scott, Great post as usual. As someone who is involved predominantly in the European Tech sector so much of your thesis for starting Openview rings true today. In my experience money is only 25% of the problem when expanding your business. You are absolutely correct in saying that people, getting to market and operational excellence are fundamental levers.
    When I get a call from a European VC they typically are not specialist and come from a corporate finance background with no real world grasp of the issues in getting a software service or product to to market. They usually ask three questions about the business and jump straight into there comfort zone of cashflow, EBITA and balance sheet.
    The Openview model hits the mark and is exactly what is required. The European tech market is incredibly exciting at the moment, but the VC’s need to provide much more business value than they currently do.
    Think I know what my next business venture might be :)

    George

    • http://www.openviewpartners.com Scott Maxwell

      All great points, George. There are some big differences in how European and US investors do things, but I think this concept of adding value in a really focused/aligned way is universal. Thanks for the comment.

  • http://www.seal-software.com Mark Williams

    I was CFO of a UK company searching for capital on the west coast in 2002. With my CEO, we visited a larger, tier 1 firm who spent a great part of their presentation explaining that their money was far higher quality – ivy league college pension funds and the like – than the poor quality (presumably soiled) dollar bills coming from other firms. We didn’t use them!