12/03/2020

How an Investment Fund’s Operating Program Should Help You Grow 

Total capital in private markets recently hit an all-time high of $6.5 trillion (yes, with a “T”). We tell founders each day, “There is a ton of money out there, and it is all green.” What is more important than the check your investor writes? The operational resources and expertise they offer.

Many large investment firms ($1B+ AUM) have formalized the sharing of this knowledge with their portfolio through playbooks, advisor programs, and in-house operating partners. Elsewhere has brought this “down-market” to small, founder-owned companies. We call this Transformational Expertise, and it is brought to life by our Operating Advisors (OAs). We only invest when we believe these resources can uniquely help increase and sustain revenue growth.

My colleague Michael wrote recently about the importance of aligning with your investors to ensure your fundraise appropriately matches your anticipated company trajectory. We think it’s equally important to evaluate a firm’s advisory services and approach to ensure they will add the value necessary for your current stage and intended growth.

Make sure supply matches demand

When scouring firm websites and team bios, take a look at the roster of operating partners and advisors. How does it compare to the number of active portfolio companies they have? Ideally, you’d find an operating expert doesn’t have more than a few portfolio companies to advise. But the more common reality is that most firms outgrow their operating capacity.

As a result, operational resources concentrate on the biggest movers—standout performers and largest checks. The other companies—who took the check with the expectation of getting focused expertise and attention with it—well, they are often left on their own. Firms plan for these potential capital losses and hope to offset with billion dollar outcomes from one or two deals.

Elsewhere was built to avoid this mis-incentive and instead plan for pragmatic outcomes for each portfolio company, and play for larger ones as the opportunity arises. Elsewhere’s OA network spans over 100 professionals, C-Suite execs who collectively have scaled SaaS businesses at all stages to successful exits. Their expertise spans functional areas (product, marketing, sales, growth, etc.) and sectors (cybersecurity, infrastructure, etc.).

With a portfolio of nine companies, that means no internal competition for attention, and engagement comes from multiple advisors with the right functional and sector expertise. Two years into an investment, those needs may change, and the OA network can facilitate just-in-time inventory of new advisory as companies scale and face new challenges.

It shouldn’t be one-size-fits-all

Your needs for outside expertise could vary widely from another SaaS company of a similar stage. Similar to sector and function-specific expertise, think through the right advisory role, and beware of funds with a singular approach. Below are configurations we have employed in our portfolio based on our companies’ needs.

Board member

Many firms take a board seat as part of investments and also help to recruit additional board members. Board construction plays an important role in startup success through guiding strategy and connecting companies to potential strategic partners—and ultimately an acquirer.

We typically fill our board seats with operators, not software investors. The highest impact board members have that mix of bandwidth, applicable experience, and relevant industry connections to actually help your company. An executive who has steered a SaaS company to an exit in your sector is likely better for you than someone senior from XYZ Big Tech.

“Boots-on-the-ground” functional leadership

Companies’ needs vary wildly from day one to year two of an investment, and operating advisors should help them grow and evolve over time. We have seen this dynamic particularly in the role of finance. Companies who have bootstrapped and managed their expenses to revenue often lack executive leadership in sales, customer success, and finance.

We have had success both in placing Operating Advisors as full-time and interim functional leaders within our portfolio. As an example, Cam McMartin (long-time software CFO & COO) has been through multiple rounds of financing, large private equity recaps, and IPOs. He coaches teams within our portfolio to help guide the creation of sophisticated financial models, shape the storytelling needed for institutional investors, and develop key relationships.

Similarly, marketing and sales advisors can help companies reshape their growth strategies and accelerate revenue. We recently placed OA Chad Savoy (sales leader at SolarWinds and first sales executive at DataDog) at Airbrake, where he has helped steer their value-led growth strategy (stay tuned for more on this soon!), build the foundational sales processes, and recruit and coach the team.

In both of these cases, once interim leaders establish a framework and build/coach a team around them, they may step out of the day-to-day role but remain close to the company.

This functional leadership can also come in the form of short-term projects, such as helping companies plan a particular initiative or strategy and leaving the company with a roadmap and as-needed support afterward.This was the case with Dan Schoenbaum (profiled in our November OA Spotlight), who has partnered with a number of our portfolio companies, including OpsCompass. He has used his expertise to help them develop freemium product strategies.

New leadership

It’s common that the founders who start a company on day one aren’t necessarily best positioned to lead it through the next stage, nor do they always want to. This passing of the baton often occurs when an investment firm has taken a majority ownership stake. Placing the right operational experts as the next leadership team can save the company time and money, and most importantly, minimize the risk of transition to new leadership who understand the business and its growth levers well.

This was the exact dynamic with our investment in ActivTrak. Rita Selvaggi is a seasoned marketing executive in multiple successful software companies, and she served on the board of another Elsewhere portfolio company. She was instrumental in evaluating the market before our investment (workplace productivity analytics). She was looking for the next phase of her career as well, and took on the CEO role as the prior leader was looking to phase out as part of this next stage. She and team have transformed the “healthy but sub-optimized” business into a new category leader, culminating in a recent follow-on investment in partnership with Sapphire Ventures. The right operational support can both help ease leadership transition, execute a pragmatic growth plan, and identify opportunities to accelerate further.

Take a close look at incentives

Some firms charge management fees to portfolio companies to help pay salaries to operating partners and provide fund-level carry as well. We believe this can reinforce the dynamic we discussed above, where in a resource-constrained scenario operators pick potential winners to double down on, leaving other companies with unequal access to expertise and guidance.

Alignment is the common element across every component of the Elsewhere strategy. We developed a compensation structure to further encourage our Operating Advisors’ engagement and commitment. Depending on their exact roles, advisors receive a mix of equity grant and full-time salary directly from the portfolio company, but most notably, our operating advisors invest alongside us.

In each of our investments, multiple advisors were involved in early sourcing and due diligence, blessed the operating plan, and signaled their high convictions with personal checks into the deal. This creates both meaningful skin in the game to make every effort to help the company be successful and significant exposure to potential upside returns.

There’s more than meets the eye

Understanding a firm’s operational expertise and bandwidth should be a critical part of any startup’s fundraising diligence. After all, you should not simply be pitching to investors, but determining in parallel if they are the right fit for you.

While an A-list operator may catch your eye, pay careful attention to how many companies they already advise, how closely their experience mirrors your company’s growth opportunity, and how they are incentivized to drive that growth — their level of involvement is a big part of the value that comes with a firm’s check and shouldn’t be taken for granted.