ACTIVIST VC BLOG
In our two decades of Venture Capital, Nexit has adopted a set of six key operating principles. We call them the Activist VC Method and will share them with you now.
In Venture Capital, things don’t always go as planned – in fact, they rarely go. Early stage companies are pivoting while searching for a scalable business and even in later stage there is need to rebuild the strategy and strengthen the management. The Activist VC Method is about making these complex and difficult changes with high precision but still fast and early enough.
We believe our track record supports the claim that our method works – in the latest fund we are expecting to be successful with half of our portfolio companies and returning over 5 times the funds invested in these companies.
But before I jump in, let me state something obvious: all methods aside, the most important success factor is the management team of the company – not the VC.
1. Go for a focused and selective portfolio
For Nexit, a focused portfolio means investing in areas we understand deeply and can add value – i.e. the individual partners have relevant experience, skill set, and network. Our investments share typically the following characteristics:
- technologies and business models for digital disruption
- companies heading from the Nordics to the US for growth & exit
- development of an IPR and R&D heavy SW platform
Being selective is a very basic VC strategy shared by all investors: “We invest only in the very best deals”. But as an Activist VC, we have an added twist here: our investments can have significant issues but in areas where they can be fixed. This approach sometimes opens investment opportunities overseen by others.
2. Reserve time and resources to dig deep
Each business is different. High growth opportunities are global, full of complex variables and fast-developing technologies. It takes a lot of time and effort to get a deep enough view of the gaps and opportunities of each business. And each team is different. To be able to truly support the management, the partner in charge of the investment needs to know the strengths and weaknesses of the team members and other key people. This requires a lot time and dedication.
We have a relatively small portfolio, only 2-3 active investments for each partner. Therefore, we can invest a substantial amount of time and effort in each company. And we add even more depth to the most potential companies by using two partners with complementary skills and perspectives. The combination of deep understanding and having enough time and resources can make a huge difference in adding value.
But a word of warning is needed here: relying on a smaller portfolio size is not a viable option, if the fund focus is in a very high risk areas like seed funding where success ratio is well below one out of ten. In our latest fund the success ratio is expected to be around 50% or above.
3. Monitor constantly and react early
Understanding the business, technology and team is not enough. Reacting early is the next step. That’s why we constantly monitor the progress of the company and help make changes if things do not go where they should. Having two partners helping the company is certainly valuable here – four eyes and ears are more than two. For an in-depth discussion of this process, look for an upcoming series of blog postings on how Nexit monitors and adds value to the portfolio companies.
4. Tell the bad news first
Typical VC firms are made of independent alfa males (or females) – partners who compete for their place within the fund. They might not be willing to share the full ugly picture of their companies to each other. Sometimes a company is managed by an inexperienced partner who does not have the courage to bring up the problems either with the company or within the VC team. Or the VC firm might be raising a new fund and does not want to rock the boat with bad news. Whatever the reasons, the bad news are quite often not brought up early enough.
On the other hand, VC is very much about acting early in problematic situations like making radical changes to the strategies and business models, solving management crises, or closing down lemon investment. At Nexit, we encourage the culture of sharing – especially sharing the bad news and potential problems as early as possible. Our internal incentives and processes are also designed to foster an open culture and drive team success. And we use the dual partner approach to have more balanced view on most potential companies.
5. Have the power to execute the changes
This is a simple but important thing for Activist VC. Having a smaller portfolio means that we can have a bit larger holding in each portfolio company. And being a lead investor fits well with the Activist VC principles: we have enough power to drive and speed up the decisions making process.
Wide syndication could lead to inability to agree on and execute big changes early enough. We are syndication-friendly, but we prefer smaller syndicates that are agile and able to make difficult decisions.
6. Be hands-on and hands-off, as necessary
As mentioned, in Venture Capital things don’t always go as planned. We have an experienced team that is capable to go temporarily highly operational. VCs are not in the business of running companies but when operational support is needed, we can provide that.
This ability to be hands-on helps companies move fast when necessary. Sometimes hiring a new key person just takes too long: we can jump in fast and keep the speed up meanwhile the search for a permanent solution goes on. Apart from jumping in personally, we use our extensive contact base to find the right people to do the heavy lifting.
However, we do not have any illusions about our hands-on participation: it is the management team that makes companies fly, not us. A competent Activist VC must have the sense (and faith) to keep his hands off when the business is on the right track. During smooth sailing, an Activist VC is happy to just monitor progress without taxing the management team too much, only providing timely targeted support where needed.
Why Being an Activist VC Matters
While we firmly believe in these principles and in the value they create, we are not arrogant enough to claim they are the only way a VC firm can be successful: there are also many other ways of creating value – an efficient entrepreneurial ecosystem needs a wide variety of complementary and competing actors. But there is strong academic support for the Activist VC approach: a recent study called The Impact of Venture Capital Monitoring published in the Journal of Finance shows that a VC’s on-site involvement with their portfolio companies leads to an increase in both innovation and the likelihood of a successful exit.
We believe these principles make a lot of sense for focused funds and teams like Nexit. Our team members have launched and developed several successful high-tech companies and worked for world-class corporations. Based on our strong operational background and what we have learned in our two decades of VC investing, we believe that being an Activist VC allows us to help our portfolio companies grow faster and safer and thereby generate higher returns to our investors.