Everything You Need to Know About Venture Services
Venture Capital is a critical component of the entrepreneurial ecosystem to help entrepreneurs, startups, and small businesses go to market and scale. However, there is a new investment model that is becoming an increasingly popular option for those that require much-needed assistance going to market and scaling but lack the cash to do so.
If you happen to be an entrepreneur, startup team, or small business owner yourself, you’ve probably at some point felt the need for additional capital to invest in your business and there are a few ways of doing so. Depending on your unique circumstances, you would likely seek capital from a bank or credit union in the form of a loan, you could source capital from an Angel Investor or Venture Capital firm in return for giving them a percentage of equity in your company, or you can self-fund from your savings or by selling off personal assets. Once you’ve received that capital, you could use it to purchase additional inventory, invest in real estate, marketing expenses, or even hire additional staff to do specific tasks. No matter what you spend that capital on specifically, the chances are, you will use it to grow your business or reduce costs to improve profitability in some way or another. If you are in a similar situation but can’t source capital from traditional means, you should seriously consider Venture Services. Here, we’ll take a deeper dive and explore what Venture Services is and answer some frequently asked questions on the subject.
What is it and how do Venture Capital & Venture Services Differ?
Venture Services function similar to Venture Capital firms except that, as the name suggests, they invest their services instead of capital in return for a percentage of equity in a company. It is becoming increasingly popular in tech hubs around the world as an alternative to traditional Venture Capital investment. Besides investing services instead of capital, there are other ways the two business models differ.
How Easy is it to Obtain Venture Services Investment?
It is slightly easier to source Venture Services because the risk to firms that offer those services can be lower, depending on the size of the firm. For example, if a Venture Services firm invests in a startup that eventually goes out of business, the firms lose some of the time they invest, instead of losing money as a Venture Capital would. Sure, time is money, but losing hundred thousand or even millions of dollars is much more painful to a Venture Capital firm than a Venture Services firm losing 10-20 more or fewer hours per week on a project over a few months. The latter can write the loss of time down and reallocate their time to other projects, whereas the former has investors to report losses to.
How Competitive is it to Receive Venture Services Investment?
The application process for sourcing Venture Services isn’t currently as complicated or competitive as it is for Venture Capital. The main reason is that Venture Services isn’t currently as common and there just aren’t a lot of firms offering services in return for equity in startups. Don’t get me wrong, there are still deals like this done in private, but in very far off instances and this offering usually isn’t outwardly advertised. There are simply a lot fewer applicants applying for Venture Services, so the competition against other startups for selection isn’t as intense. This is, of course, assuming the startup is feasible and has attractive growth prospects.
When does Venture Services Investment Not Make Sense?
There are some things only money can buy, so if entrepreneurs need capital to buy certain products or services that a Venture Services firm cannot provide, such as inventory, real estate, or a full time hire for a certain role, then, of course, seeking capital investment is the only option (absent a barter agreement, but that’s different). But if a startup requires specialized services to streamline operations or scale, a Venture Services firm may be a worthwhile consideration because of the added value they can offer in those respective fields.
What’s the value?
Another way of looking at Venture Services is to call it Management Consulting for the smaller business. As we wrote about in our article, “Everything You Need to Know About Management Consulting,” Management Consultants are specialized help that can bring immense value to an organization, helping them solve complex problems, achieve growth goals, or streamline operations to reduce costs. Many large firms around the world hire Management Consultants for these reasons, among others. Consulting is a $250 billion dollar industry as of 2019, and the value Management Consultants bring to an organization is evident. Unfortunately, early-stage businesses lack the capital to hire Management Consultants, because consulting projects can cost anywhere from a few thousand to millions of dollars. Even if startups could afford to hire Management Consultants, at the early stages their capital would be much better spent on essentials (product/service development, inventory, hiring, marketing, etc) to get the business operational and producing revenue. Nevertheless, Venture Services firms allow startups and early-stage businesses access to Management Consulting services that would have otherwise only been accessible to larger firms with larger budgets.
But What If I Don’t Want to Give Up Equity, What Are My Alternatives?
If a startup gets to that point where they start running into strategy and operational issues that require specialized assistance, they certainly have options, which include attempting to do it themselves, seek mentors, or outsource for specific tasks.
Doing it themselves seems like the most cost and time effective, but it really isn’t when you consider that most entrepreneurs and their teams are already spread thin, multitasking to build the business. Adding even more tasks is to an extensive “to-do” list as an entrepreneur is just not an option to some. If those same tasks are extremely complicated or time-consuming and require sophisticated problem-solving skills, then doing it themselves is out of the question.
Another option is to seek help from mentors as many startups do. This help could come in the form of donated time from mentors or from the startup’s Board of Directors. There are a few issues with this structure though. Mentors are great, but they generally provide free advice, and free advice is worth exactly what you paid for it. I’m not saying all mentors advice is worthless, far from it. But mentors don’t always have a vested interest as much as a business owner does. To better incentivize interest, some entrepreneurs give mentors warrants or a percentage of equity in return for their advice, but this also has a major drawback. Most mentors just provide advice and don’t actually implement their suggestions. Most startup mentors either have other full-time jobs and are more than happy to give their advice in return for a percentage of equity in a company, but when it comes time to “roll up their sleeves” and put that advice to work, that’s where their services end. Mentors provide advice, but if they’re too busy to put that advice into action, what is an entrepreneur to do?
Is Venture Services Better Than Just Outsourcing For Specialized Help?
The most common option is for startup entrepreneurs to seek specialized help is to hire someone full time or to outsource it as we spoke about in this article “Who You Gonna Call? Options for Urgent Talent Sourcing.” To do either, you’ll need capital. Sourcing capital to hire additional help and then doing your research on which help to hire, are both incredibly time-consuming. If you’re operating as a true entrepreneur should: light, lean, and fast, then this option simply will not do.
Venture Services, on the other hand, can be far more effective when a startup needs advanced skills for a project but doesn’t have the time or money to hire that help. For virtually no out of pocket expense to them, entrepreneurs have access to some of the most specialized business development and operational improvement services that are usually sought by the largest multinational firms. Keep in mind though, Venture Services are not “free,” because they will still require a percentage of equity in a company in exchange for services. This arrangement basically makes both parties partners, because there is a mutual interest in the startup succeeding. This is also an added point of value, a Venture Services team is going to be much more involved in a startup long term, than temporary or outsourced help, because they want to maximize the value of their time investment.
How Is a Venture Services Investment Structured?
A Venture Services partnership can be structured primarily in two different ways. In a values-based arrangement, a Venture Services firm receives equity in a client correlated to the value of the services they provide. For example, if a Venture Services firm values their services a $50,000 over a 6 month period, for a company valued at $500,000 they would claim 10% of the firm’s equity in return for their services over that timeframe. Another Venture Services arrangement may entail a performance-based model, whereby services are provided to achieve predetermined goals or milestones, which unlock equity ownership for the Venture Services firm. For example, if a Venture Services firm grows sales 20% or helps to acquire 50 new customers over 6 month period, either achievement will unlock 10% of equity ownership in the startup. Both examples of values-based or performance-based venture services are meant to be basic demonstrations, and each of these variables will vary depending on the services sought and the firm they are provided by.
How Do I get Started
Sourcing Venture Capital firms are much like sourcing venture capital. You will need a comprehensive, professional business plan and pitch book, and depending on the firm, an application for their services. As you would do when searching for a Venture Capital firm, do your research on the Venture Services firms and be on the lookout for certain warning signs. Check to make sure they are a credible business, offer the specific services you are looking for, and have an active portfolio. Most importantly, ensure they have a track record of growing businesses successfully. The last thing you want is to work with a firm that doesn’t fulfill their promises and ends up taking much larger ownership of your company than you really feel comfortable with giving up.
I’ll come out and say it plainly, Venture Services may not be for everyone. It’s a specific service for an even more specific need. If you’re concerned about giving up equity in your company for whatever reason, then Venture Services shouldn’t and won't even be a consideration of yours. However, if your purely concerned about the risk, it is actually quite minimal if you employ a performance or milestone-based arrangement. That way, there are tangible, measurable results that are achieved in return for a percentage of equity in the company. That, in effect, makes Venture Services firms and their client's partners, and that can be a powerful team assuming their goals are in alignment.