By Divyang
T HIS ADAGE HAD been the prevalent way of thinking for entrepreneurs and investors alike till a few years ago.Venture capital firms tended to back the most capable and driven entrepreneurs and were content to sit back or follow an active hands-off approach in order to let them succeed. This is now changing. With capital becoming more abundant,investors are trying to differentiate themselves by offering operational and other support services in order to get access to the best entrepreneurs.
Andreessen Horowitz (a16z)made“VC 2.0”apart of mainstream discussion in the VC world through their services model. Soon enough,other VC firms followed suit and, now most offer in-house support services to portfolio companies. Similarly, in private equity, as generating returns through leverage and financial engineering has become table stakes ,almost every large mega-fund has created a portfolio support group. According to a McKinsey study titled Private equity operating
groups and the pursuit of portfolio alpha, each of the top 25 funds has an internal operating group.
The focus now is not on the investor but the entrepreneur. As avenues of support increase to aid the process of natural selection, there has never been an easier time to be an entrepreneur even when you are yet to form an idea or team. For entrepreneurs still exploring their specific idea, there are three specific avenues they can take based on their personality type and goals. These are Entrepreneur-In-Residence(EiR),Venture Studio (also known as startup studio) and Entrepreneurship through Acquisi tion(EtA).In thisarticle,we will discuss the EiR route.
EiR is a position at a VC firm where the entrepreneur could develop their next idea. You were either a seasoned industry executive, an early employee of a high-growth startup or a founder with a successful exit looking to start your next venture. The VC firm could benefit from the EiR’s experience in various ways: relevant support for their portfolio companies, help in evaluating specific aspects of deals and / or sourcing new ones. In return, the EiR’s got access to resources from the VC firm: offices pace, access to the firms’ network, help with key hires for the founding team, a salary in some cases and a potential seed invest ment for their venture.
It was a win-win situation for both sides. Entrepreneurs got a great landing spot to figure out their venture while gaining access to resources,expertise and capital of atop VC firm. Firms got first dibs at potential investments without having to source them in a competitive setting.They could even use the EiR’s expertise and network for their current portfolio and future sourcing,respectively.
As clamour for entrepreneurially minded people has increased and there is sustained pressure on firms to be“innovative”, the EiR position is increasingly acquiring a life of its own. Now, companies, universities and even government agen ies are offering some version of the EiR role. Dell,Harvard & MIT and the US Citizenship and Immigration Services(USCIS) are live examples. The role can range from being an “intrapreneur” at a traditional company to helping a university work on cutting-edge internal innovations. At its core, it allows entrepreneurially-minded people to work in a more structured and less resource-constrained setting than starting a business from scratch.
An EiR role offers a huge amount of flexibility. Ideally, the EiR has a desire for entrepreneurship but needs time to put the pieces together. But the role providers are increasingly ready to design it in vari ous capacities based onmutual needs.
A friend was an EiR at a small liberal arts university for about nine months before launching his company. He received a small stipend and office space and, in return, mentored students at the varsity’s entrepreneurship lab. He was neither a senior industry executive nor a repeat founder but was able to pitch his skills to craft a role for himself.
The biggest benefit of EiR is the time it provides the entrepreneur to put their thoughts together and subsequently stitch their idea and team.The exposure for the entrepreneur in terms of industry trends and how investors analyse potential investments can prove invaluable. Lastly, the support ecosystem allows the entrepreneur time to experiment with various ideas, test them out, develop MVPs and iterate multiple times on all these steps.
On the flip side,if the entrepreneur is unable to obtain seed funding from the sponsoring EiR entity(assumingit has an investing focus),it could have an adverse signalling effect for the market. Though rare, since the entrepreneur is vetted before the position is offered, there is the chance that the industry focus is way out of the sponsoring entities’ wheelhouse or they are less sure about the rest of the founding team.
There is also an unsaid pressure on the entrepreneur to develop an idea within the ~1-year EiR period since they have already signalled their intent towards entrepreneurship.Failure to do so may sign a lack of commitment. Lastly, the entrepreneur may get diluted to a larger degree in the seed round in return for receiving the EiR benefits than they would have otherwise.
The real beauty of the EiR position lies inits flexibility.It can be tailored based on the needs of the participants. For entre preneurs coming from diverse back grounds,it can be a great way to dip their toes in the entrepreneurial world without having to assemble the proverbial plane while jumping off a cliff. The more relevant experience or risk appetite the entrepreneur has, the more leverage they may have to customise the position for them selves to suit their needs. As entrepreneur ship becomes a “mainstream” occupation, we are seeing the institutionalisation of the support infrastructure needed to support entrepreneurs. There will only be more of it going forward.
The author is US-based impact investor who has worked with many entrepreneurs