A new model for VCs?

There’s been an ongoing conversation in Silicon Valley about what value VCs actually bring to entrepreneurs. About a year ago leading cleantech investor Vinod Khosla penned a piece in which he took to task VCs about what they really knew or understood about building a company. At the time he wrote:

A lot of VCs, especially those from the more financially oriented firms, do more harm to startups than good when they get themselves on company boards without ever having built a company themselves, or seeing one from the inside. What value can a VC as board member add to a company? We constantly ask our young guys…. “What have you done to earn the right to advise entrepreneurs?” I don’t want entrepreneurs to get inexperienced advice on important matters.

Apparently Khosla isn’t the only one thinking about this issue. Last week VC firm General Catalyst, which closed a $675 million round at the end of last year, announced that it was bringing former Zipcar CEO Scott Griffith into its executive in resident (XIR) program. He joins former Unica CEO Yuchun Lee and ex-Akamai CEO Paul Sagan as XIRs at General Catalyst.
So what’s an XIR? XIRs are former executives that provide mentorship and operational expertise to founders. The idea is for the XIR to become chairman of the board of the company and for General Catalyst to then make an investment. XIRs invest alongside General Catalyst, giving them skin in the game and fundamentally changing the relationship as a board member who’s not just a VC representing a firm but an investor with their personal capital at risk.
It’s an interesting model for a VC firm because prior to making an investment, the firm gets to place an executive at the company. Said executive can glean critical information on the daily operations of the company, quality of the management, how much traction a product is getting, etc. It also gives the VC firm some assurance that the founders are being guided by someone they trust. In many ways, the XIR program from General Catalyst is a direct response to complaints that inexperienced VCs are advising startups.
From the perspective of former executives, they get to play a dual role as investor and advisor, and get exposure to more than one company (executives can take on more than one company), which can keep things interesting for them.
Griffith went through a lot in his decade at Zipcar, and probably has many valuable lessons to offer growth focused companies. It may seem like a distant memory now but not so long ago Zipcar remained a major focus of the share economy, as it inched toward profitability. It was going to be the proof that sharing would trump ownership, and that profitable business models could be built around choosing access over ownership.
But then suddenly Avis swooped in, and acquired Zipcar for $500 million, a valuation that had many crying fowl while others complained that Zipcar hadn’t been given the proper time to come into its own as a mature company trying to crack new markets.
At the helm of Zipcar had been Griffith, who previously had held senior positions at Boeing and consulting firm Parthenon. Griffith had a lot on his plate, pressure for topline growth from Wall Street, well capitalized entrants into car sharing like Hertz, and stubbornly high customer acquisition costs. In many ways, the acquisition saved him and he exited Zipcar shortly after the acquisition was complete.
It’s reported that Griffith is interested in companies focused on digital marketplaces and the connected car. The connected car space would be a good fit post Zipcar. So much of car sharing is coming down to the ability to use mobile apps to easily located vehicles, schedule, and communicate with the car. While the emphasis on car sharing was around shared resources, the implementation is increasingly about making that car smart and connected.
Could the XIR program at General Catalyst be part of a larger trend for VCs in which founders expect VCs that join their boards to offer operational experience? That’s unlikely if for the most basic reason that finding large numbers of VCs that have finance, investing and operational experience could prove tricky. But there’s certainly an argument for specialized roles at VC firms where key personelle can play these roles.