Aug 11, 2022

Best strategies for vetting potential vendors for venture capital firms

Today’s business environment challenges vendors, entrepreneurs, and investors daily. The covid-19 pandemic, high inflation, geopolitical tensions, and the supply chain crisis have combined to create a perfect storm for C-suite executives, and everyone involved in the innovation ecosystem. In an era of deep economic uncertainty, identifying the optimal vendors for your business can generate return on investment (ROI), improve customer service, and build a secure platform for growth.

But how does a venture capital (VC) firm know if a vendor is right for one of its portfolio companies? There is a dizzying array of options and providers in the market, ranging from quality turn-key essential services (such as payroll) to bespoke platforms geared to specific companies and industries. Getting vendor management right is a core function of a successful business but often overlooked amid the pressures confronting decision-makers and investors today. Bringing vendor management to the forefront of business operations can mean the difference between success and failure in this volatile market. For their part, vendors need to think about how to approach venture capital firms and how to differentiate their offerings on a crowded field.

How to evaluate a vendor

One common mistake new businesses and private equity investors often make is to see vendor acquisition as a simple transactional relationship, roughly akin to an individual consumer who walks into a big-box store and buys software off-the-shelf. The purchaser focuses mainly on price and usually stays within a narrow range of recognized brands. This strategy might work, briefly, at the idea stage of a new venture when the entrepreneurs are doing all the heavy lifting to grow the business, but it is not conducive to ongoing success.

This approach quickly becomes inefficient and expensive once investors are on board. To scale a business successfully, entrepreneurs and venture capitalists need to shift from thinking about acquisition as passive procurement to building active partnerships with vendors. Quality vendors have in-depth knowledge of their industry and are a valuable source of information and education. Approaching vendors as partners, rather than simply suppliers, establishes a foundation for sustained growth. 

Quality vendors can also raise awareness of new services or platforms that may prove essential as the business expands. Virtually all businesses need high-quality solutions for traditional areas such as payroll, inventory, and customer service. Companies in specialized industries such as healthcare or pharma may also need to invest in expensive, specialized services that require a vendor’s comprehensive knowledge of the options. 

From a technical point of view, there are five vendor evaluation methods than can enhance decision-making: 1) categorical method; 2) weighted-point method; 3) cost ratio method; 4) dimensional analysis method; or 5) the analytical hierarchy process. These systematic frameworks can be particularly useful in complex industries such as oil and gas or pharmaceuticals. However, each of these requires extensive data collection and expensive professional analysts.

For venture capitalists who want to seed promising new startups, a better and more affordable solution is to invest in a high-quality vendor management platform such as Proven. Proven aggregates information from vetted suppliers and provides a seamless digital platform that allows venture capitalists and entrepreneurs to evaluate offers and connect with the best vendors for their needs.

How to approach venture capital as a vendor

Successful vendors need a basic understanding of the five stages of the investment lifecycle for new businesses. The first, or seed money stage, typically involves angel investors who believe they have spotted a promising idea or innovation that can disrupt a market. Angel investors spend their own money to support entrepreneurs in the earliest stages of bringing an idea to a workable prototype. 

Venture capital firms pool and invest the money of other people (and often invest on behalf of entities such as pension funds). These firms are subject to extensive regulation and oversight. Venture capital investment typically becomes important at the second stage of the cycle, when initial start-up money enables the new venture to develop a business plan and begin to access marketing and legal expertise. Vendors become increasingly important now since the company needs to implement core functions such as payroll and record-keeping to continue to grow.

If the company remains viable, the venture capitalist invests a round of second stage capital (stage three). Employee recruitment, advertising, and marketing expand and ongoing relationships with dependable vendors become essential. Stage four continues the expansion process, often with yet more injections of capital. While the company may not be generating a profit, a healthy revenue stream begins to attract significant media attention and outside investor interest.

Venture capitalists begin to exit the company at stage five, the pre-public or bridge stage. The VC firm now provides the start-up with high-level legal and financial expertise to prepare the initial public offering (IPO) and/or navigate the mergers and acquisitions process. If an IPO is successful, the young company’s shares begin to trade on a stock exchange, and it is now a sustainable corporate entity. Vendor management and vendor relationships are now essential to the business. 

Beyond understanding these essential stages, vendors also need to be aware of the context within which venture capitalists work. This is a high-pressure environment in which significant amounts of money are on the line. Venture capitalists need proven solutions to problems and do not have time for hype. Vendors should focus on preparing an evidence-driven, professional pitch for how your goods and/or services can help the business to flourish. 

Inclusion as a supplier in a high-quality vendor management platform such as Proven is another way to ensure that the valuable information you provide will reach investment decision-makers. Most reputable venture capital firms do not accept cold calls and it can be difficult to reach them on a direct basis, particularly if your product or service is new to the market or serves a specific niche. Establishing a relationship with a vendor management platform company means that you will reach the venture capitalist as a vetted supplier and can focus on the quality of your product and offers rather than on securing clients. 

Vendor management strategy for venture capital

Venture capital investment is essential to business growth and innovation. A venture capitalist risks money and time to cultivate the next generation of corporate success stories. Smart investments produce world-leading companies and spin-off benefits in employment, taxation, and healthy communities. 

Thinking about vendor management from the outset as a C-level function for the companies in your portfolio is a strategic approach in this volatile, global market.

Here are five additional recommendations for a vendor management strategy that will optimize your procurement spend and ensure you can focus on nurturing your portfolio companies to success:

- Focus on building partnerships with your vendors rather than on one-off transactions.

- Leverage the knowledge and experience your vendors hold about goods and products that can help your companies succeed.

- Remember that vendor management is an essential process that begins with the initial decision to purchase and continues through to delivery, deployment, and evaluation.

- Ensure that your portfolio companies and vendors adhere to transparent and ethical standards regarding non-disclosure, procurement, sourcing, and competition.

- Invest in a vendor management platform such as Proven that puts vetted vendor information, pricing, and expertise in-house and allows you to focus on growing your companies

GetProven for immediate access to vendors you can trust and the information you need to ensure your portfolio companies are positioned for success.

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