VC Platform Overview & Strategy
The Untapped Potential of VC Platforms in Modern Venture Capital
Overview
Venture Capital (VC) Platform teams began to gain prominence in the early 2000s, and more than two decades later, people are still asking, “What is VC Platform?”
If you pull anyone off the street, odds are they have a basic understanding of what it means to be an investor at a venture fund. The same cannot be said for VC Platform.
I believe the lack of understanding and awareness is twofold. First, there are only a few thousand people in this role. The number of VC firms is dwarfed compared to the total players in other industries. Second, there isn’t enough common vernacular. If you ask 10 different VC Platform leaders to define “Platform,” you’ll likely get 10 different answers. Too often, the answer to “What is VC Platform?” reflects a long list of disconnected to-dos instead of a strategic overview of the function.
For the first edition of Platform Shift, I’m exploring the historical development of the VC Platform model, defining the role today, and how folks can get started. My hope is that these simple definitions and frameworks can help established Platform leaders examine and improve their strategy and provide a foundation for those looking to break in.
Evolution of Venture Capital
The formal venture capital industry began to take shape in the post-World War II era. One of the pioneering firms was American Research and Development Corporation (ARDC), founded in 1946 by Georges Doriot, a Harvard Business School professor. ARDC was among the first to raise money from sources other than wealthy families, institutions, and insurers, and to provide capital to technology companies. ARDC alumni went on to start firms like Greyfield, and the 1960s-70s saw the rise of Silicon Valley as a tech innovation hub and the birth of firms like Kleiner Perkins and Sequoia Capital.
The origin of VC Platform teams can be attributed to a few pioneering firms that recognized the value of providing comprehensive support to their investments to foster growth and success. One of the earliest and most notable proponents of this model was Andreessen Horowitz (a16z), which was founded in 2009. They launched with the idea of a professionalized service model that offered extensive operational support to their portfolio companies. This approach differentiated them from other firms that focused solely on financial investment.
The success seen by firms like Andreessen Horowitz encouraged other VC firms to adopt and develop their own Platform services. This trend was driven by the competitive advantage gained through such value-added services, helping portfolio companies succeed, which in turn, improved the investment outcomes for the firms.
Today, Platform is table stakes for most VC firms. The VC Platform Community analyzed 850 venture capital (VC) firms between 2020-2022 and found that, “52.8% of venture firms have Moderate or Significant Platform teams, double the proportion of firms that had Platform teams in 2000.” Most founders are looking for some sort of strategic or value-add support beyond capital.
The Platform Strategy
VC firms were certainly not the first to develop impact services or a platform strategy. Companies like Apple, Google, and Amazon all utilize a platform strategy. They create a base technology/system that other products, services, or applications can be built upon. This base, or platform, is designed to be a foundational component that third parties can use to develop their own complementary services, enhancing the platform's value and ecosystem.
I define VC Platform as the foundation supporting the core functions of a fund. Before we dive into those areas, I want to give a quick refresher on the business model of venture.
Managing Partners go out and raise money from Limited Partners (LPs). These LPs might be high-net-worth individuals, family offices, funds, endowments, pensions, etc. A Limited Partner Agreement (LPA) is signed, which outlines things like the term of the fund, investment period, management fee, etc.
In the short term, VC firms bring in operating capital via management fees (generally 2% per year during the investment period). For example, if a firm raises a $20M fund, the management fees would amount to $400k per year. If the fund does well, and delivers strong returns, the big bucks come from carried interest. Carried interest is the percentage of profits that a fund manager receives as compensation. Profits come when a portfolio company experiences a liquidation event (i.e., Acquisition, IPO, etc.) and capital is returned to investors.
At most funds, the carried interest pool is 20%, which is then divided up among the employees. Before any carry is collected, the LPs first have to make back the initial amount of capital they invested in the fund. Once that initial investment is paid out, every subsequent dollar of profit is divided out across the LPs (80 cents) and GPs/Fund (20 cents).
Now, let's break down how Platform might support in each of the 4 key areas. These examples will not be all-encompassing but are aimed to spark ideas!
Find Great Companies to Invest In
Outside of decision-making, I’d argue that one of the primary roles of an investor is to source and meet great founders and companies. Platform teams can also play a huge role here. There are a number of different strategies and tactics that can impact sourcing. Your job is to determine which strategies and tactics will be most effective based on your fund and your team’s skill set.
Here are a few questions to ask:
Do the founders you're looking to invest in know who your firm is?
Are your partners getting high-quality inbound pitches?
Is it easy for founders to pitch your firm? Do you have accessible inbound channels?
What makes your firm unique or different?
For the founders you’re looking to invest in, where do they spend time IRL & online? What types of questions are they asking? What types of problems are they trying to solve?
Here are a few thought-starter tactics you might deploy:
Marketing & Content: What starts with branding and positioning that resonates with your target audience can extend out into many other tactics. Perhaps your team has a unique perspective on healthcare. Creating thought-leadership may lead more healthcare founders to find your firm. Maybe you’re a team of ex-operators and can create playbooks that answer some of the FAQs founders at your stage are asking.
For example, Forum recently launched a report on The New Landscape of Healthcare - What Healthcare Startups Need to Know to Win. Healthcare is one of Forum’s thesis areas, so we spend a lot of time talking to leaders at health systems, payers, and hospitals. By compiling these conversations in a report, we were able to deliver value for founders building in healthcare and also connect with new companies to invest in.
Community & Events: Relationships are an essential part of venture, and external community building and events are an awesome way to build meaningful relationships. While some funds still do big, broad happy hours, I’m seeing a shift to more targeted and impactful events, where the audience is hyper-specific. For example, Primary Ventures launched a new series called Working On the Business, which brings together VP-level and C-suite women leaders for a crash course on how to work ON the business, not just IN the business. Primary knows these women will go on to become great founders, great talent, board members, angel investors, etc.
Product Creation: Over the last 5 years, VC has become more data-driven. In the current age of AI, this trend will only accelerate. While some firms, like 645 Ventures, are actually developing in-house products to help with sourcing (check out what Lexi Quirk is building with Voyager), external products (e.g., NfX’s BriefLink) are also a great way to attract founders. While many of these products will require engineering resources, which I believe more firms will continue to invest in, every platform leader should look to become fluent in no-code products. Some of my favorites are: Zapier, Softr, Webflow, Airtable, etc.
Decide & Win the Right to Invest
Choosing the right companies to invest in is as crucial as finding them. In this competitive landscape, it’s not just about deciding which startups fit your investment criteria, but also winning the right to invest in them. Platform teams can significantly influence this process by showcasing the unique value and support the fund offers.
Here are a few questions to get you started:
Why does a founder choose to work with your firm?
What would allow your team to make better investment decisions?
Are there knowledge or skill set gaps within your existing team?
Outside of capital, what makes your firm compelling?
Why are you currently losing out on deals?
How much time does your investment process take?
Here are a few thought-starter tactics you might deploy:
Operations: Even if the investment process feels foreign, start by asking questions and identifying areas where you can improve overall processes (and ideally outcomes). Maybe you’re losing out on deals because the firm is not moving quickly enough. Or maybe you can’t even answer this question because you don’t have a CRM set-up that works well. Tackling some of these operational and data challenges can not only make the investment decision process easier but even more effective.
Expert & Customer Network: There will likely be times during diligence where your firm wants an outside perspective. Things like expert or customer networks are a great way to get deep industry expertise.
Accelerate Portfolio Growth & Success
Once an investment is made, the real work begins to ensure the success and growth of portfolio companies. This section will explore the various support structures and initiatives that can be employed to accelerate portfolio development. From providing hands-on operational support to facilitating access to key resources and networks, the support is pivotal. Effective engagement with portfolio companies through targeted programs, such as mentorship networks, founder retreats, and strategic advisory, not only drives growth but also helps these companies navigate the challenges of scaling up.
Here are a few questions to get you started:
At the stage where you’re investing, what is most important to healthy company growth?
What unique experiences and skill sets does your team bring to the table?
Is the firm currently measuring founder NPS? What’s the current score?
What company mistakes do you see made across your portfolio?
What are the FAQs your team receives from your portfolio?
What does your portfolio love about how you currently engage? Where do they wish you’d help?
Here are a few thought-starter tactics you might deploy:
Hands-On Support: Based on your team’s experiences and skill sets, there may be a certain functional business area you’re best poised to support. Perhaps it’s finding and hiring great engineering leaders, maybe it’s enterprise sales, maybe it’s marketing and thought-leaders (thought leadership). Building a startup is incredibly hard, so any hands-on support you can provide across the key business areas goes a long way.
Resources & Programming: Pick up on the themes of questions/asks you get from founders. Are you seeing consistent patterns around pricing strategies? Maybe every founder is asking you for an SOW template. Leverage these themes to inform the resources you aggregate and potential programming. Allie Mullen, Director of Platform at Wireframe Ventures, built out a custom founder portal leveraging Airtable (as the back-end) and Softr (as the front-end). Her founders are able to access highly relevant, on-demand resources without needing to ask the Wireframe team.
Mentor Network: Curate a network of experienced entrepreneurs, industry experts, and corporate leaders who can provide guidance, strategic insights, and coaching to the founders. Mentors can be matched with companies based on specific needs and challenges, offering invaluable advice drawn from years of experience to help navigate critical growth phases. First Round’s Fast Track is a great example here.
Founder Community & Retreats: You might identify that peer-to-peer collaboration and connection is the biggest unlock you can offer for your founders. Build a vibrant founder community by organizing retreats, meetups, and online forums where entrepreneurs can share experiences, challenges, and strategies. These gatherings not only foster a sense of belonging and mutual support among the portfolio companies but also encourage collaboration.
Prioritization & Where to Start
As we've explored, the role of VC platform teams is multifaceted and can dramatically influence both the sourcing of new opportunities and the success of existing investments. However, if you're leading a platform team on your own or just starting to build this function, it's critical to recognize that you cannot—and should not—try to tackle everything simultaneously. The breadth of responsibilities detailed in many Head of Platform job descriptions is vast, and attempting to address all areas without a prioritized approach is neither feasible nor effective.
Building a robust platform function takes time, and it begins with strategic prioritization. Here's how you can start:
Identify High-Opportunity Areas: Engage with your firm’s leaders, team members, and founders to pinpoint pressing needs and opportunities. Understanding these priorities is crucial in determining where your efforts will be most impactful.
Leverage Your Strengths: Match the identified firm priorities with your personal expertise and passions. Starting with projects where you can leverage your strengths will not only lead to better outcomes but also sustain your motivation and commitment.
Phase Your Initiatives: Once you establish a solid foundation in one area, you can gradually expand your focus. This phased approach helps maintain quality and impact, ensuring that each new initiative builds on the success of the last.
Looking Ahead
In future editions of Platform Shift, we'll delve deeper into specific KPIs for measuring the success of your platform initiatives. We'll explore how to align these metrics with your firm's broader goals to ensure that your efforts are not just busywork but strategic, impactful contributions to your firm’s success.
Whether you're a seasoned platform leader or a newcomer to this field, I hope this exploration inspires you to think strategically about how you can enhance your role and the success of your firm
Stay tuned for more insights and strategies in upcoming editions of Platform Shift.