Becoming a VC passenger

It often takes more courage to be a passenger than a driver” (E.L. Konigsburg)

So, why are we talking about being a passenger when it comes to Venture Capital?  Surely all the VCs will tell you how influential they are with their portfolio companies.  Mentoring, board seats, observer status, are all terms thrown about by VCs to assure investors that they are doing their best to look after invested capital.

And this is absolutely right.  We at Vala Capital will tell you that our broad and deep experience – conceptualising, incubating, mentoring and ultimately supporting companies through to exit – is second-to-none and we use that experience in support of our portfolio companies and to protect our client’s investment.

The point is though that quite often in our journey with portfolio companies we, as an early-stage investor, will become a passenger.  It’s the point where a portfolio company is growing and, in advance of the hoped-for exit, it will attract the attention of later-stage investors (what we might call Series A, B, C, etc) in a substantial investment round.  There may well be an opportunity for the early-stage investors to join in but sometimes, in our view, it is perfectly rational to accept that the job of the early-stage investor is done and that now we are just passengers.

It’s reasonable too to suggest it’s a validation of the VC’s investment strategy and selection process and an endorsement of the portfolio company.  And whilst it’s not usually an opportunity to take money off the table, for the earlier investors it will invariably reduce the risk until such an opportunity becomes available.  The other advantage to the VC, and the investors it represents, is that it can free up time and resources to work with the other companies in the portfolio.

Inevitably, in these situations, our position as an investor will become diluted (all being well it is nicely offset by an increase in the share value!) and we might lose our board seat.  It’s not to say we lose all influence, and we may well retain ‘observer status’ on the board, but our relationship with the company has changed.  To introduce another metaphor, it’s akin to watching one’s child grow up and leave home – it’s inevitable, the relationship moves on and ultimately it’s the right thing for the child.

Furthermore, in quite a number of recent growth stories across the Vala portfolios, working closely with the management team we have been an integral part of the process of identifying and introducing strategic investors, knowing full-well that the result will be that we will lose a board seat and our influence will wain accordingly.  Our interests, and those of the investors we represent, are now ostensibly being looked after by the new VCs on the cap table.  We don’t feel hurt or bruised by the process, rather we celebrate that the company is continuing its exciting journey towards further growth, fuelled by the new funding it has received, and we’re just passengers along for the ride.

James Faulkner, Managing Director, Vala Capital


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