A value add investor refers to the additional value that investors bring to the companies they invest in beyond just providing financial resources. This can include industry expertise, strategic guidance, networking opportunities, and other forms of support that can help companies grow and succeed. A value add investor can help companies achieve their goals more effectively, expand their market reach, and build relationships that can support their long-term growth. In this article, we explore the concept of a value add investor, why they are important, how they can add value and the benefits and limits of a value add investor. We will also provide some examples of high and low value add investors, and offer some insights on how to become a high value add investor.
Investor value add is important because it can help companies achieve their goals more effectively, expand their market reach, and build relationships that can support their long-term growth. A few example reasons are considered below.
Investors can provide financial resources, contacts, industry expertise, and strategic guidance that can help companies expand operations, develop new products and services, and improve operational efficiency.
Investors can hold start-ups accountable for achieving their goals through governance mechanisms such as board meetings and investor updates. This can help ensure that companies are focused on creating long-term value for shareholders.
The involvement of experienced and successful investors can help validate a company's business model and strategy, which can increase the company's credibility and attractiveness to potential customers, partners, and investors.
Investors can add value by providing financial resources, industry expertise, and strategic guidance to support innovation and long-term value creation. Specific ways investors can add value include:
Investors provide financial resources that enable companies to expand operations, hire new employees, and invest in research and development (R&D). This can fuel company growth and expand their reach.
Investors who have experience in the same industry as the company they are investing in can provide valuable insights and guidance. They can help the company navigate challenges, identify trends, weakness in competition, and identify opportunities for growth.
Investors can offer strategic guidance on issues such as market positioning, product development, and expansion plans. They can help companies develop long-term growth strategies that align with their goals.
Investors often have extensive networks of industry contacts and can introduce companies to potential partners, customers, and investors.
Investors can serve on the board of directors or provide guidance on governance issues, such as ESG commitments, executive compensation, and shareholder rights.
A few examples of high value add investors include Peter Thiel, Warren Buffet, Marc Andreessen, Mary Meeker and Bill Gurley. They are renowned for offering strategic guidance, industry expertise, and access to their network of contacts across their respective domains.
In addition to the different ways investors can add value, start-ups also value:
Start-ups value guidance on specific projects and initiatives that help unlock productivity and help prioritize focus on the high value add activities.
Investors with a strong reputation and track record of success are invaluable, as this can help attract additional investment and talent.
The commitment to work with them over the long term, and who are willing to provide ongoing support and guidance as needed.
Other than the company that receives the investment, the investors and customers also benefit.
By adding value or having other investors add value, there is a greater opportunity to generate higher returns on investment. Through the opportunity to work closely with the company, investors may also gain access to valuable industry insights and networking opportunities, which can help them build their reputation and identify new investment opportunities.
They may gain access to new and innovative products and services, as companies that receive value add are more likely to invest in research and development. They may also benefit from improved operational efficiency and customer service, as these companies tend to focus more on meeting customer needs and expectations.
In general, there are no major disadvantages to investor value add. However, some stakeholders may not benefit as much from investor value add as others. Examples include:
Investors may prioritize short-term financial returns over employee well-being or long-term career development.
Small shareholders may not always have the same level of access to investors as larger shareholders or institutional investors. As a result, they may not benefit as much from investor value add, such as access to industry expertise, strategic guidance, or networking opportunities.
Investors may prioritize short-term financial returns over meeting customer needs and expectations. For example, investors may pressure companies to cut costs or raise prices in ways that negatively impact customer satisfaction.
A high value add investor can determine where to add value by taking a structured approach to their investment process. We recently wrote an in-depth article here sharing the perspectives of GPs and Angels on their investing process.
Broadly, this requires due diligence to understand the company's business model, market position, financials, and growth potential to identify areas where they can add value. Second, it requires an understanding of key challenges and opportunities. This may involve focusing on areas such as product development, customer acquisition, or operational efficiency.
The appropriate metrics depend on the goals of the company and the specific contributions of the investors. However, the challenge is in isolating the investor’s impact against many other confounding factors including the start-ups’ efforts and the broader market conditions. Some examples to consider include:
This can be measured by metrics such as revenue growth, profit margin, return on investment (ROI), and shareholder returns for initiatives that were sponsored or guided by an investor.
These include customer acquisition, customer retention, and market share metrics for any new markets the investor introduced or brand recognition campaigns they supported.
This can be measured by metrics such as cost savings, process improvements, and employee productivity for initiatives driven by the investor.
Investors can help the company develop new products, services, or processes. This can be measured by metrics such as patents filed, new product launches, and R&D spending.
The type of investors that provide the most value add depends on the needs and stage of the company.
For example, at pre-seed or seed stages, angel investors with experience in the same industry as the start-up can guide on business strategy, marketing, and fundraising.
As they progress to Series funding, venture capitalists can help by leveraging their experience in building and scaling companies, and support with strategic guidance, networking, and operational guidance.
Impact investors are another group of investors that can be either angels or venture capitalists who seek to generate both financial returns and social or environmental impact. They often work with companies that have a social or environmental mission and can provide guidance on impact measurement, stakeholder engagement, and sustainability.
While there is no one type of investor that provides the least value add, there are considerations that may decrease the value add that an investor provides:
While they may provide financial resources and this may be the only contribution the start-up seeks, they may not be as helpful in providing guidance, industry insights, or operational support.
Investors who have conflicting interests or priorities may not be as effective in providing value add. For example, an investor who is focused solely on short-term financial returns may not be as helpful in supporting the company's long-term growth strategy.
Investors who try to micromanage the company or exert too much control over its operations may hinder the company's ability to innovate and grow.
As covered above, a high value add investor provides more than just financial resources, they also require a range of skills and expertise that can help their investments grow and succeed.
A strong relationship with the management team of the start-up is required as the trust is foundational to adding any type of value. As the trust equation shows, it is a function of an investor’s credibility, reliability and intimacy. It is reduced by the degree of the investor’s self-orientation - lowering this improves trustworthiness.
One of the most important ways to add value is to have deep knowledge and expertise in the industries they operate in. This can involve keeping up with industry trends and developments, attending conferences and events, and building relationships with industry experts and thought leaders.
This may involve introducing the company to key industry contacts, helping fill role vacancies at the start-up, offering strategic guidance on business strategy, or providing operational support on specific projects.
This means regularly communicating with management teams, attending board meetings, and providing ongoing support and guidance as the company grows and evolves.
A high value add investor should measure the impact of their efforts over time. This can involve setting clear goals and metrics for success, and tracking progress against those metrics to ensure that the company is on track to achieve its objectives.
A value add investor provides more than just financial support to the start-ups they invest in. They offer strategic guidance, operational expertise, industry knowledge, and access to networks and resources that can help companies achieve their goals and maximize their potential. If you are an investor or are considering investing in a start-up, reflect on how you can provide value beyond just financial support. Consider the qualities and skills that your investments would value most, and seek to develop and strengthen those qualities in yourself. By doing so, you can become a valuable partner and advisor to the companies you invest in, and help support the growth and success of the broader entrepreneurial ecosystem.