Startups – The Hidden Value of Investors
My last two decades have been filled with software startups, where I’ve helped founders, presidents, and CEOs grow their products in highly competitive, emerging markets.
These people and companies have taught me many lessons throughout — some of them from positive experiences (wins) and others from painfully difficult and challenging experiences (losses). In either case, my personal goal has always been to grow.
Reflecting on my growth, these lessons — be it a good or bad experience that taught them — have shaped my worldview today. They even underpin one of my personal mantras, which I regularly remind my children, Brazilian Jiu-Jitsu students, or my teams at work:
“Either we WIN, or we LEARN.”
In the spirit of reflection, I’ll be publishing a series of short blogs over the next few months to share some of these lessons. I hope to create a dialogue and, if I’m lucky, provide some knowledge to take on your journey along the way.
To kick off this series, I’m starting with:
The Hidden Value of a Startup’s Backers
For Startups, Backers Matter!
“Who” the investors and advisors of a startup are is important from a number of perspectives and will matter for different reasons, whether you are a prospective employee, customer, or partner.
All of these have significant considerations in “choosing” to have a relationship with a new company (especially in earlier-phase startups), and they shouldn’t get lost in the buzz of excitement associated with an emerging technology space.
I’ll never forget talking shop at lunch with my friend Adrian Tarquinio when I was considering a position at a new company. “Tarq” had left a comfortable position as a top performer at an established software company in favor of a new, venture-backed startup to lead a team at AppDynamics.
He was enjoying the experience, and the company was excelling, so I asked for his advice.
He suggested I answer these three questions before potentially joining a new startup:
- Who are the investors and backers, and what firms or advisors are involved?
- What series of investments has the company raised to date?
- Who is the competition backed by?
He proceeded to explain why these things mattered — like the value-added an investment firm provides to startups — and why this matters regardless of whether you are a prospective employee, customer, or partner.
Little did I know then how important these things are in choosing to work for a startup, and in the likelihood of a company’s success in an evolving technology landscape. This lesson resonates with me to this day.
Growth Capital and Startups
In the world of startup investments, hundreds of firms provide access to growth and operating capital to startups around the world. Most of these raise money for their funds, with each one having specific investment goals. These firms are all working to place “bets” on finding the next “unicorn” that will yield a windfall return on those investments.
The number of total investments will vary depending on the fund’s maturity, size, and focus, but these firms’ general investment model is that one out of every X investments should yield a unicorn return.
There are two main funds that back startups, each with their own strategy:
Venture capital (VC) – Typically focused on investing in early startups that are often not fully established. There is more risk, but massive upside for investors.
Private equity (PE) – Typically focused on investments in mature, often underperforming businesses, that can be optimized with changes in strategy and improved execution. Usually less risky, but less upside on returns.
Comparatively, the VC funding model is popular among technology startups and has gained momentum in the past few decades. These firms provide funds focused on driving innovative ideas forward to enable them to flourish via access to capital early in their journey.
On the other hand, the PE funding approach is typically less about making a gamble on unproven technology companies and more about optimizing a company’s performance over time.
If you are an early-phase startup, it’s more likely that you’ll find capital from VC funds versus PE, whereas a more mature business has a better shot of working with PE firms.
The VC landscape has grown significantly since 2008 when there were roughly 1000 or so firms with this business model. For context, at the end of 2023, there were approximately 3,400 venture capital (VC) firms in the United States operating with over $1.2 trillion under management. Today, there are approximately 55,000 venture-backed companies in the US and 2% of the VC firms account for 95% of the returns in the market.
The Best Backers
Regardless of business model (PE or VC), the best investment firms for startups are those that have shown consistent success in their investment strategies over long periods of time. They continually return value and impact to their investors via strong financial gains, typically within specific funds. These gains come in the form of exits along the way — in some cases, it may be a unicorn exiting via a strong IPO, but in other cases, it comes as an acquisition or merger.
Due to their track record of success, these firms are able to create new funds and continually secure capital for new investments. Many of them also build out teams to provide “value add” to their PortCos. Some of them even hire former operators as full-time employees to advise on best practices and provide knowledge and insight to young companies.
These firms have reputations for knowing how to evaluate potential investments and having high rates of return for their funds. Startups looking to maximize their impact in a market are eager to align with these firms, and these firms have “the pick of the litter” when choosing which startups in an emerging technology space to invest in.
Ultimately, if you are a potential customer, employee, or partner of a startup, understanding who its backers are will tell you a lot about its potential and whether or not it is considered “top tier” in its market.
Rohirrim and our Backers
Thinking back to my lunch with Tarq, I knew what questions to ask when the opportunity to join a startup company presented itself — which, at the time, was Rohirrim in its infancy. While I was friends with the founder, it was critical that Steve had great backers to ensure a path to long-term success.
Since that day, we’ve added investments from Bessemer Venture Partners, Insight Partners, and IBM Ventures. It’s truly incredible to see the breadth of support that these backers provide. Insight Partners, for example, has a deep reach and many resources to help us expedite our success, and also validate ideas as we plan for the future. They provide ongoing opportunities for collaboration, like Insight Onsite, which allow us to connect with peers and colleagues as well as experts in their respective fields (Marketing, RevOps, Operations, Sales, Product Management etc..) and also find talent. With their help, we’ve added amazing talent to our team and capitalized on our backers’ expertise to fuel growth at Rohirrim.
I’ve won and I’ve learned throughout my time at tech startups, and either way, I’ve grown. Being a part of Rohirrim thus far has been another great chapter for me, and I’m excited for the future!
