How Does Venture Capital Look In Practice: The Credo Ventures Case Study

I think I’ve read enough about the theory of fundraising and venture investing. But how do the venture capitalists really work? How do they decide which investment to make, and what is the logic behind their thinking?

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This is the final post of the mini series focusing on the startup investment cycle and its specifics in the CEE – the kind of investors there are in our region and the valuations and investment sizes you can expect from them. The goal of this piece is to shed some light on what is going on at the other side: how the investors make investment decisions and what their investment rationale is. Since my firsthand knowledge is limited to the one fund I am part of, you can consider it as its case study.  Based on what I have seen and heard elsewhere, it should be well applicable to other funds out there. Without further ado, the case study of Credo Ventures.

The team: what are its roles internally

You can read the basics on our website, the goal of this post is to provide more insight and context to that information. Let’s start with the team. Credo has three partners, two associates, typically an intern (if you are interested in our 3-month internship program, get in touch) and a growing rank of venture partners. In some larger funds there is a position between a partner and an associate, typically called a principal, whose responsibilities overlap with those of a partner and an associate, which are described below.

Partners are the big guys who call the shots. They decide which opportunities Credo will invest in and then take board seats in the portfolio companies.  Try to get to know the partner who will be leading the investment in your company as well as you can prior to investment. Make sure you have good chemistry with him, because you will spend a lot of time with that person, in good times and bad (and both will almost certainly come). Some people describe taking an investment as entering a marriage. Based on that analogy, the partner who sits at your board is your spouse. Get used to polygamy if your company makes it to Series A or beyond.

Associates support the partners wherever needed. They might have different roles at different firms. I have borrowed this list from Mark Suster since it accurately describes the roles at Credo as well:

  • Deal sourcing for partners
  • Deal screening
  • Deal support / analysis / quant / legal for deals a partner is seriously considering
  • Portfolio company support & analysis
  • Portfolio community building
  • Industry reviews
  • VC firm admin
  • VC firm policy or fund analysis
  • Helping be the VC “presence” at key events
  • Alumni activities

The role of venture partners at Credo Ventures is to bring the specific know-how that could be needed for an investment. Venture partners tend to have industry and functional-specific expertise that our portfolio can leverage. They are not full-time employees, but close colleagues with whom we are in touch frequently.  Our advisory board fulfills a similar role, but from a higher perspective: a couple of times per year, we invite selected investment opportunities and all portfolio companies to meet with the board that is comprised of world class investors, such as Esther Dyson, Reshma Sohoni or Stuart Chapman, who provide their feedback, mentorship and industry contacts.

External roles: how does the team help its portfolio companies?

How will you add value to my company? One of the most frequent questions I get, and a good one. The answer to this question should be one of the major decision factors when choosing your investor.

With that being said, the question is very hard to answer without sliding into cliché or generic statements. That’s because the most value the investor brings lies in the fact that he is simply there for the founders. The value of having the right partner by your side is often underestimated, especially by first time founders. Being a CEO is a very lonely job: you always have to be enthusiastic and optimistic in front of your employees. You must appear to have all the answers and strategy figured out. The truth is that very often you just don’t have the answers or may find yourself at the bottom of the emotional rollercoaster that the startup constantly rides on. If you have an experienced investor who has done this a few times before, you have a partner with whom you can discuss all questions and fears you might have at any time you desire. This is a big benefit that tends to get undervalued, unless you have walked down that path before. I recommend asking the partner who should be potentially leading the investment on how engaged he plans to be with the firm.

And then there are the more obvious ways an investor should add value, definitely try to cover all these topics with your suitors:

  • Opening doors to customers. Having 30+ private investors comprised of the most successful firms in the region such as AVG Technologies, Avast or Linet allows Credo to open doors to a lot of customers. Add on top the network of our team and the advisory board, and you get a whole lot of doors. Recent example: on the day we signed the Excalibur investment, we arranged for the team to present their partnership pitch to the CTO as well as the head of corporate development at AVG.
  • Sourcing employees. Startups are always in need of technical and sales talent. Cognitive Security needed to expand its senior sales team, so we sourced their VP of Sales and Sales Director for Western Europe.
  • Finding complementary investors. No investor knows it/them all. If they tell you they do or behave like it, they are lying – both to you and themselves. Credo had a co-investment partner that brought valuable know-how to each of our 2013 investments, including Index Ventures, Flybridge Capital Partners, Baseline Ventures, Y Soft VC, Kima Ventures, XG Ventures or Seedcamp
  • Providing operational support. Just read the list of associate’s responsibilities

How can you check whether the investor can in fact provide all the value he promises? Just ask his portfolio companies. Seriously. It is quite common to ask for references.

How do we look at investment opportunities?

Attempting to rationally explain a process that is inherently full of judgment calls and gut feelings is very difficult. Of course we have a strategy on paper that we like to follow. And of course we make exceptions to that strategy. That’s because at the end of the day, the key criterion that influences our investment decision is a very subjective one: the team and its ability to execute. Nevertheless, here is an excerpt from Credo’s investment strategy document:

[table id=1 /]

I recommend looking at that table in the context of the startup investment cycle explained in my previous posts. The thing to remember is that any strategy put on paper is just an indication. If an investor likes the entrepreneur and his vision, he will either invest himself or help find the appropriate investor. And if he doesn’t do so, then at least you can cross such an investor off your list of potential sources of funding, because he either doesn’t like you or is not a good investor.

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