Thinking About Thinking

Who Is The Venture Capitalist’s Customer?

Posted in Economy, Philosophy, Venture Capital by larrycheng on September 27, 2009

Venture capitalists always talk to their portfolio companies about how important it is to define your customer, understand their needs, and create a compelling value proposition for them.  Though, if you talk with enough VCs, we have a hard time defining the customer for our own business.  I was having a recent discussion on this topic with some colleagues in the industry and no unified consensus emerged.  It is always a debate between our limited partners (“LPs” – those who invest in VC funds) and entrepreneurs.  We all know that we ultimately get “paid” by LPs.  But, we also know we don’t survive if entrepreneurs don’t want to work with us.  So, who is the venture capitalist’s customer? 

To try and get some feedback, I decided to ask my twitter friends: Who is the VC’s customer?  I specifically asked VCs to respond.  Somewhat surprisingly, no VCs responded, but I got a slew of responses from entrepreneurs.  They were quite aligned:

  • apsinkus: “institutional investors are real customers of VCs (in my opinion).  Entrepreneurs are merely suppliers.  No LPs, no money.”
  • brandonhaskins: “Although not one myself, a VC is ultimately in investment management, so customers are investors – entrepreneurs are products!”
  • muhammadkassim: “VCs’ customers are investors into the fund. Entrepreneurs are VCs’ business partners.”
  • gmsheehan: “their investors”
  • AppStruck: “The VCs customers are the institutional investors you raise money from.”
  • meetthestreet: “LPs…pension funds and endowments are clearly VC customers. In money management the people who give you money are your customers.”
  • CameronHerold: “unfortunately for entrepreneurs the Investors are the VCs customers. The entrepreneur is the VCs product.”
  • EdLoessi: “the VC’s customer are the people who gave them the money the tool is the company invested in and sometimes you break your tools!”

I’d say 85%+ of the respondents said the VC’s sole customer is the LP.  Not a single responder said that the entrepreneur is the VC’s principal customer.  So, in an unexpectedly round about way, I got my answer from entrepreneurs, not from VCs.  If entrepreneurs are the VC’s customer, surely entrepreneurs would know that.  Since they don’t know that – either VCs are doing a terrible job taking care of their customer (which is possible) or in fact the entrepreneur is not the end customer of the VC. 

My personal belief is that the VC’s primary customer is the LP.  There is a clear and constant relationship between VCs and our investors which is consistent with the traditional definition of a vendor/customer relationship – they pay us for providing a product/service to them.  We have to provide a great product/service to our LPs and service them well as our customer or they can take their business elsewhere. 

Then what are entrepreneurs to VCs?  First of all, entrepreneurs should be no less important to VCs than LPs.  Without LPs, VCs are out of business.  Without entrepreneurs, VCs are out of business too.  Entrepreneurs can take their capabilities elsewhere, same as LPs.  So, while entrepreneurs and LPs are equal in importance, it is a different relationship.  I do not have a vendor/customer relationship with the entrepreneurs I work with.  In my mind, the entrepreneur is not the VC’s customer any more than the VC is the entrepreneur’s customer.  Nor do I think describing entrepreneurs as the VC’s product or supplier is accurate.  Neither of these lines of thinking fit for me as the right way to describe the relationship. 

I think the best term to describe the relationship between VCs and entrepreneurs is partners.  The official definition of partner is: “a person who shares or is associated with another in some common action or endeavor”.  I view the entrepreneurs I work with as my partners.  I think they view me as their partner as well.  I am sure that any of my CEO’s will tell you the effort that I put in towards being a value-added partner to them.  We partner together for the common end goal of building great companies and creating value for shareholders.  So entrepreneurs are not customers, suppliers or products for VCs, they are partners.  We work side-by-side as partners at the end of the day.  I wouldn’t have it any other way. 

7 Responses

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  1. Larry,
    Glad to see you have such an outlook towards entrepreneurs you partner with. Unfortunately, you are in a minority, or at least that is the reputation VCs have developed. Every company I have worked for was self-funded (mostly through revenue – sell before you build). Founders of every one of those companies would’ve rather skipped on starting a company, than to deal with a VC. It was not easy running business operations for those companies, it required boostrapping and seemed like I always had to create and hack things out of nothing… but at least sharing those profits seemed a lot sweeter.

  2. nicheVC said, on September 27, 2009 at 2:59 pm

    In keeping things simple … consider that the entrepreneur is the end user, whereas the LP is the customer. You sell to and provide ROI to your customer and market to and serve the end user.

  3. Sean Murphy said, on September 27, 2009 at 5:04 pm

    The best analogy I see is to publishing. Authors are not the customers for a publisher, the public–by way of booksellers and distributors–that buy the books that the author and publisher co-create and market. So I think VC customers are the firms that either acquire their portfolio companies or help them to go public (e.g. underwriters, merchant banks). It’s the acquiring company or the public market that ultimately “pays the VC” so they are the customer. The entrepreneur is a partner and the LP is an (co-)investor.

  4. [...] Who Is The Venture Capitalist’s Customer? « Thinking About Thinking larrycheng.com/2009/09/27/who-is-the-venture-capitalists-customer – view page – cached Posted in Economy, Philosophy, Venture Capital by larrycheng on September 27, 2009 — From the page [...]

  5. Cem Sertoglu said, on September 28, 2009 at 9:48 am

    I think the entrepreneurs are the customers, the LPs are shareholders and the investment & monitoring processes are the services. the VC is a service organization, not very different than a strategy consultancies…

  6. Larry said, on September 28, 2009 at 9:49 am

    Have you gotten any VC responses? (offline, off-twitter etc.)
    I’m interested to hear the other point of view.

    I’m in your boat that the VC’s customer is the LP, it’s true in other private equity business models as well.

  7. Pete said, on September 28, 2009 at 6:45 pm

    The VC’s customer is the LP, just like a stock broker’s customer is the retail client. Both VCs and stock brokers buy stock for their clients. The structures are completely different, but the intent and results are similar.

    If you own it, then it’s not your customer. Customers have to be able to walk away, by definition.

    I agree with you Larry that a VC/entrepreneur relationship is closer to a partnership, but given the preferences and rights in a typical VC deal, it’s a lopsided partnership.

    Pete


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