Who is the customer for a venture capitalist?
A simple question with profound implications. You will want to agree with your firm about the answer.
The two most common answers are:
- LP: investors in the VC fund are the ones that pay the fee and carry and so they are the customers. Startups and founders are suppliers.
- Founder: the product is money + support offered to founders. LPs are partners with whom you share profits from serving the customer. Treat LPs with respect and as they are essential but ultimately are not the customers.
If you adopt the LP-as-Customer frame, you are likely to:
- Customer Experience: Emphasize LP experience by providing more one-on-one phone calls and visits.
- Staff to It. Hire an investor relations person before a platform person.
If you adopt the Founder-as-Customer frame, you are likely to:
- Customer Experience: Emphasize founder experience including from what the pitch to portfolio support. You will want to measure customer experience with tools like Net Promoter Score.
- Staff to It: You will tend towards Full Platform and having the team focus more on supporting founders.
Trade-offs with the LP-as-customer frame include:
- Negative Selection: Founders may detect that they are the product and may not like the feeling. Will the best founders want to work with an investor who does not see them as central to the process?
Trade-offs and questions with the Founder-as-Customer frame include:
- Choosing Customers: How do you have selection criteria for customers? Most businesses will accept any customer willing and able to pay who is not too disruptive or demanding. How does that fit in the VC model where you are being selective about your customers? The ultimate test of this frame is getting strong references from founders you turn down.
- Valuing Leads: Often the value of a startup investment is not known for many years. If you apply a B2B sales funnel approach with goals, pace and incentives, you can move through low-quality investments.
My sense is the field has been shifting from viewing the LP as customer to viewing the founder as customer. The growth of Full Platform firms is a related trend. The shift was likely driven by increased competition and positive market sentiment.
What factors could ever shift it back in the other direction?
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