Who Is The Venture Capitalist’s Customer?
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.