The VC's Customer

Mar 2, 2023 11:15 PM

Many of the people I know in the venture capital business think their customers are their investors, called LPs in the industry vernacular. I’ve always thought that was dead wrong.

The entrepreneur is the customer and the LP is the shareholder. That’s the only way to think about the venture capital business that makes sense to me.

What makes this so hard to grok for many in the venture business is that much of the selling we have to do is when we raise money. Once the money is raised, the entrepreneurs are the ones who come into our offices in "sell" mode. And that dynamic warps many VC’s perspective of the business.

I start with the value chain. The entrepreneur creates the value, they are the "raw material" in the venture capital business. If there were no entrepreneurs, there would be no venture capital business. So the VCs who treat the entrepreneur like the customer and invest heavily in customer service will be rewarded with the loyalty of the most important component in the value chain.

Money on the other hand is a commodity, whether its in the hands of the LPs or the VCs. Money flows to the best returns and always will.

So if the VC does a good job of serving his customers well and generates superior returns as a result, the money will always be there as long as the price of his fund is reasonable. That’s why I am convinced that the LPs are the shareholders. That is exactly the same dynamic that exists in company/shareholder relationships.

This "entrepreneur is the customer" mantra gets hard in a couple places in the venture capital process.

The first is the VC deal flow process. Take our firm. We are getting something like 30 new deals a week coming into our office that are generally in our area of interest and are at the stage we like to invest. We will make investments in roughly four of them per year. So we have approximately 1500 potential "customers" walk in our door a year and only take four of them. It’s natural that the other 1496 will leave our office unhappy at some level and may never return. That’s a big customer relations problem. We try really hard to be helpful, candid, and quick in our triage process, but at our best we might only make a third to a half of the rejected entrepreneurs comfortable with our process and eager to come back.

The second area where customer relations gets sorely tested, and where the "entrepreneur is the customer" mantra is the most difficult is when the entrepreneur is not doing a very good job of minding their own store. I believe that once the entrepreneur accepts an investment from the VC, the VC’s customer set expands to include the company, its employees, and its customers. The entrepreneur is still an important customer, probably the most important customer, but the entire stakeholder group in the entrepreneur’s company comes into the equation once the investment closes. When the entrepreneur starts failing this expanded stakeholder group, it becomes the VC’s job to help them by getting them to change or getting them out of the way. Most entrepreneurs don’t view that as help and therein lies the problem.

But in a funny twist, this is exactly where the "entrepreneur is the customer" is the most helpful mantra. If you really view the entrepreneur as your customer, when you walk into their office with the hard news that you aren’t going to keep funding their company if it continues on its current path, or that you want them to step aside and bring in someone better suited to run the company, or that they need to get a coach and start behaving differently if they want to keep their job, you will deliver that news as a friend, a person who honestly cares about them and their dreams, and with compassion and understanding. And that is the only way to get through those really hard discussions with a chance of coming out the other side with a relationship.

Entrepreneurs are really difficult customers to serve well. It takes a significant investment of time, energy, money, and intellect to satisfy them. But if you do it well, you will develop a reputation for great customer service that will keep the best ones lined up at your door.

And that is the best way to deliver exceptional returns that I know of.

Joseph Nocera is writing some of the most interesting business commentary these days. I posted about his column on Wal-Mart last weekend.

This weekend he takes on one of my favorite topics right now – the Times Select program. He does that in the Times itself which is kind of cool. They are allowing their own columnists to write about the TImes’ business.

I didn’t link to Joseph’s column in last week’s post and I am not going to link to his column in this post either. And its not because I am somehow protesting the wall that the Times has put up between their audience and their columnist (although I personally hate it).

I have written before that links are the currency of the Internet. That continues to be lost on the major media. As I browse around the New York Times online this afternoon, I find so few links in the stories. They should look like Wikipedia, not a newspaper. This is the Internet after all.

Links are so fundamental on the Internet. Not using links is like not using commas or periods. If you think about Google, the current king (or at least Starbucks) of the Internet, they have built their whole platform on links. The New York Times doesn’t link out very much. So how do they expect others to want to link back?

I use the Internet like I follow a conversation, I read something, it contains a link, I follow it, I read more, I learn more, and so on and so forth.

The big problem with Times Select and one that Joseph Nocera misses in his otherwise excellent column, is that its a damn wall in the link love that exists online. I’ll be following a conversation and digging and learning and bamm, I hit the frickin wall. Stopped dead in my tracks. Now some percent of the Internet will pay the $50 and the wall will come down for them. But not for most of the people online. And a conversation that is not inclusive is not a conversation I want to be part of.

So I don’t pay the $50 and I don’t join Times Select. And I never will.