Are VC's customers the entrepreneur? I believe they should be. But here's perhaps an even more radical idea-
That entrepreneurs are the VC's customer only in the context of the entrepreneur being the one to find and nurture actual Paying Customers in the long term.
VC's are after returns at the end of the day. So why wouldn't they focus more on what actually creates those returns? Entrepreneurs who find ways to create Paying Customers...
And....
Finding and understanding Paying Customers, who they are, and where these mysterious and elusive creatures come from (and how to get them).
This is assuming that Paying Customers/Revenues lead to consistent cash returns which can lead to Higher Valuations... and then some Exit Events.
I don't have much experience around how and what VC's have to do to raise their funds and please LP's, but it sounds like a version of a 'chicken & egg' situation.
Thinking long term, I'm always a 'chicken' kind of guy myself- create real value and let is demonstrate itself with good old fashioned sales and revenues. (then investors, LP's, whatever will come) But I've never been saddled with trying to raise a fund, so what do I know.
Aside from LPs, I want to get back to the question of Entrepreneurs and who the VC's customers are...
When it comes to businesses that are highly focused on 'product', as you often see with technology businesses, the entrepreneur seems to make much much more sense as the customer- often because many of the bets have to be big ones on the part of the VC's.
When you have a nascent business/market that no one 'fully' understands in terms of how to effectively drive users/customers/revenue and achieve growth and profit... it's the entrepreneur who is tasked with testing and finding the way to create the magic of paying customers and a sustainable model.
VC's can help in the highest value way by being mentors/resources to speed up and improve the entrepreneurs thinking, and help create "short cuts" - connections, people, relationships, data, etc.
But you still have to have to ask- why aren't the Paying Customers some of the VC's customers? Again, with technology businesses, the actual "use cases" for a product or service, and the identity/profile of Who the paying customers are, is usually something that has to evolve and take on a life of it's own- even with great products and good marketing from smart entrepreneurs.
So... it goes in more complex/new businesses that the highest value the VC can provide is to make the entrepreneur the best he can be as he drives forward in his process.
Finding Paying Customers and a profitable model in environments that are NOT well defined doesn't look like a VC's job or highest value. I believe that it's the entrepreneur who should know, or be on his way to finding out and knowing (by using testing and data). The VC's can help- often by teaching and adding value to the entrepreneur and his efforts and process around this.
Andreessen is a good example of this kind of customer/entrepreneur- the kind that a VC would want to treat like a customer. He creates big new ideas and big 'products' that aren't just another 'me too' business or model. One could argu he even creates new kinds of customers with his new products - so trying to take a 'formulaic' approach as a VC with him and tell him how to find customers isn't the right way to go about it.
However, I do believe that there is a TON of value in VC's getting even closer to the Paying Customer and understanding more and more about them as the lifeblood of their business/fund.
ShanaC
· 5 months ago
So question- do you think there is a skew of the kinds of companies chosen for a fund because VC are not typical customers by any stretch of the imagination.
I wrote a whole blog post about it- http://www.shanacarp.com/essays/the-atypical-cu... - but basically all of these fact you list about why VC's need to get close to the paying customer makes me wonder how they model what is appropriate. You need to choose something that is far reaching yet grounded in the here and now. A tough call- since a far reaching future is not the here and now by any stretch.
Chance Barnett
· 5 months ago
I haven't been exposed to a wide enough array of VC's to know if there's a skew. From what I see, VC's and firms come in a few flavors:
* Those who specialize in areas and sectors - could be more likely to be 'typical' users, or understand these users and paying customers more intimately.
* Those who specialize in broader sectors, but generally with a focus on companies in various Stages or Deal Sizes (Seed, Early, Late, etc.) - across the board in terms of being a typical customer or understanding customers. But perhaps the Seed and Early stage guys have more hands on understanding or a desire to get their hands dirty with how to get paying customers
* Those who do a variety of things and bet more on potentially big markets and future valuation
It's a good point you bring up, how do VC's model acquisition of customers/revenue and what helps them understand what is appropriate?
I'll just answer this by saying that it would be FASCINATING to see the Projected Sales in business plans that get funded by VC's compared with the ACTUAL SALES post funding.
Now that would take the debate somewhere interesting, driven by data and stats.
ShanaC
· 5 months ago
(same person as above- having technical problems...eh)
I've never met one in person. I was reading, and someone made an excellent point to me, webpages, ect, are personal outward focusing bling.
The toys I see implemented here and at other VC/Tech blogs are very different than say, friends' blogs. Or twitter, or whatever.
And it would be totally fascinating, I agree, to see the comparisons. What would also be fascinating, beyond the Zemata post, about why certain companies are chosen.
At the end of the day, its not just about the business model- it's about how well the product works with the user in conjunction with the business model. So it is just one of those questions that seem to discretely hang over this process...
paulkatchings
· 5 months ago
Wow! Chance it looks like I stumbled up on a location where we have qualified thinkers!
Here I will attempt to extend your questions/observations of:
• Those who do a variety of things and bet more on potentially big markets and future valuation
• It's a good point you bring up, how do VC's model acquisition of customers/revenue and what helps them understand what is appropriate?
• I'll just answer this by saying that it would be FASCINATING to see the Projected Sales in business plans that get funded by VC's compared with the ACTUAL SALES post funding.
• Now that would take the debate somewhere interesting, driven by data and stats.
I get these 4 points!
Now what If we agree that an equation must always balance and we are looking for a simple, very simple, outrageously simple model where the customers, revenue, and stock price could be predicted before the IPO process for ANY product or service.
And this equation is x=(a*b)/c were X is stock price, A is revenue, B is earnings as a percentage of earnings, and C is an rate of return and 1 share is outstanding.
Now lets say that we have this $1 widget needed by 14 million preassembled people salivating for this $1 widget because from every new IPO they get 2 shares free just for purchasing this $1 widget.
$14 million times .63 divided by 61 million shares divided by a .03 rate of return is a stock price of $4.82.
Now the reason that these 14 million are salivating is because their $1 purchase gives them two values, the utility value of the $1 Widget and the 2-share value of $9.64. Yes this is a 9.64 to 1 ratio on a $1 product with these fundamentals.
Market forces at work here, I think. When the big name players start moving away from early stage and moving into private equity type investments, new players emerge to fill the gap. Will be interesting to see some of the investments they make.
Curious though about the amount they've raised ($300M?!) and their ability to put that kind of capital to work. Thoughts Fred?
fredwilson
· 5 months ago
it's a lot of money
they'll have to follow their winners aggressively and do some of those $50mm late stage investments
i like Marc's comment that there are only 15 companies per year "that matter"
they clearly intend to try to get into the ones that matter at some point, even if they don't get into them at the start
we've talked about that strategy at our firm as well but have not put that strategy in place yet
fred
egoboss
· 5 months ago
Wonderfully refreshing transparency. Let's hope such values become more prevalent.
Jonathan Deamer
· 5 months ago
Presumably though, the adage that "the customer is always right" does not apply here?! ;-)
fredwilson
· 5 months ago
well at some level it does.
particularly once we make an investment
Mark Essel
· 5 months ago
Fantastic way to characterize the role of VCs. There is so much that a VC can do for a startup that has little to do with money, and everything to do with mentoring, networking, and supporting. While the VCs aren't actually founders, their stake gives them a vested interest with a focus on financial long term success.
rajjr_tx
· 5 months ago
Very exciting news about the Andreesen Horowitz firm. It looks like many firms are migrating to the model to invest smaller sums EARLY in the process and shepherd the new team through the product release and susequent funding rounds.
Now, with that kind of model, and the capital that exists in the VC industry, it seems like the VCs are going to need to get busy distributing the funds in order to get a return for their investors.
Is that what you're seeing/thinking as well?
fredwilson
· 5 months ago
there is plenty of activity in the VC sector. i don't think we've really seen that much of a downturn in the IT sector, particularly in software, services, and internet
fnazeeri
· 5 months ago
I'm reminded of a post I wrote a while ago about a HBS paper titled, "Strategies for Two-Sided Markets." Essentially venture capital is a two-sided market between LPs and entrepreneurs. So who's the customer? Both, naturally. Who's more important? Well, that's what the paper delves into. The answer is the one that is "harder to get" and that's usually not the one with the money (e.g. candidates in the case of Monster.com, searchers in the case of Google, etc.). By that definition, I definitely agree that the customer of VCs is the entrepreneur.
fredwilson
· 5 months ago
that's basically the argument i made in my post four years ago
the entrepreneur is the scarce commodity, not the money
Simon Brocklehurst
· 5 months ago
For my money, I'm not sure how useful the concept of "the VC's customer is the entrepreneur" really is. If the entrepreneur is the VC's customer - then presumably the VC is the entrepreneur's supplier. I wonder - in what proportion of customer-supplier relationships can the supplier: fire the customer's management team; sell the customer's company; close the customer's company down? I'd submit that the proportion is rather small; perhaps so small that the description of the relationship in those terms could be misleading to many.
Surely, just as the LP is a shareholder in the VC; the VC is a shareholder in the entrepreneur's company. Simple, clear... and accurate. Maybe I'm missing something - perfectly prepared to accept that I am - but I'm not seeing the need to invoke the word "customer" to describe any part of the LP-VC-Entrepreneur ecosystem.
fredwilson
· 5 months ago
the VC is a shareholder, for sure
but you get invited to be a shareholder in VC deals
it's not like the public markets
so the entrepreneur gets to pick who the supplier of capital is
and that's where the customer relationship plays out
the whole "fire the management team, sell the company, close the company" stuff is overblown
it happens, but not nearly as much as people think
fred
Simon Brocklehurst
· 5 months ago
Sure - for hot deals, the entrepreneur gets to choose their shareholders; and the VC has some relationship-building to do to get in on the hottest deals. That's just the way these particular investments get made. And yes, the way the VC- entrepreneur relationship that plays out at this stage is absolutely affected by the fact that the entrepreneur is the one that "chooses".
However, using the word "customer" in this context seems to me to complicate things. The point is - a customer is someone that buys something (goods or services). Now, of course, one can always choose to re-invent the meanings of words; but I'd suggest my definition is rather widely held and it's one that most people would recognize.
So - in the VC-entrepreneur relationship - who is doing the buying? Surely, the *VC* is the one doing the buying i.e. spending money; and the entrepreneur is the one doing the selling i.e. selling shares. Doesn't that makes the VC the *entrepreneur's* customer? Yes, the entrepreneur gets to choose their customer in this context (lucky them!); but the fact they choose their customer doesn't make their customer any less of a customer.
I'm not saying it isn't possible to argue the opposite of the above (as you've done). I'm simply trying to say that there are complications in using the word "customer" in this situation; and that it's easier to just say things as they actually are - that the VC is the shareholder.
As for the whole "fire, sell" thing often being overblown. Depends what you mean. As you've said yourself on this blog, entrepreneurs in VC-backed companies make money perhaps 1/3 of the time; whereas VCs make money perhaps 2/3 of the time (with no-one making any money in the remaining third). That surely says something about where, in the end, the balance of power lies?
Just my two cents!
bombtune
· 5 months ago
Thanks for clarification.
paulkatchings
· 5 months ago
No Simon you are not missing anything; in fact you are on the right tract to carrying this VC entrepreneur observation to its logical conclusion, which is the cash paying customers. I believe that what we are missing is that the VC and the entrepreneur do not understand the math behind the value creation process for publicly traded companies. Because if they understood this math then the revenue variable can clearly be predicted before the IPO process by identify a precise number of customers and then giving them an exact percentage of free shares that are always greater in equity value by 3, 11, 20 or even 40 times their purchases.
Lets elevate this discussion to included the real customers, the customers.
Who determines, or what is the current formula used in given free shares, free stock options to management, employees, charities etc? Was it not the cash paying customers who started the value creation process in the first place? Does not a portion of the cash paying customers cash go to dividends? Can I go to an accounting text and find this formula for the amount of equity that is directly attributed to the customers?
You see from a scientific point of view and the path of least resistance, why should the customer be making investment decisions in common stock when they are ill equipped to do so as evidence by the VC and the entrepreneur inability to count, or predict a certain exact number of customers before the IPO process?
The math and the multiple value creation formula for public companies say find the ratios, give the free shares, and the investment decision is made for the customer as far as common stocks are concerned by each of their purchases.
Simon you are on the right tract of asking questions that it seems that many are either afraid to ask or do not know how to ask. I am not saying that you agree with my assessments of VC and entrepreneurs math abilities just written. They are leaving too much money on the table by not having the correct value-creating math and leaving out the predictable customers where we all lose value.
here's the real argument why the VC industry in the USA is broken:
1. capitalism is dead, we live in a fascist country. maybe venture fascism is a bull market, but venture capitalism is increasingly on the way out. 2. the dollar is dying, if the dollar goes all dollar-denominated assets go. 3. capital markets are broken, fred you have talked about this and about secondary markets as a solution, however i don't see how a solution is going to be reached when we cannot have honest conversations
to bring venture capitalism back, we simply need
1. massive government reform, it needs to be downsized and the phony economics that justifies all this banker bailout nonsense needs to be ended. 2. solve the dollar problem. as virtually all economists who saw this crisis coming agree, the cause is the federal reserve system and monetary policy. when monetary stability is reached, we can all go back to business as usual and doing our part to make great stuff that benefits all. 3. new capital markets. liquid ones. now.
lucky for venture capitalists everywhere your good buddy kid mercury has been working on solutions for all of these issues since before it became hip and trendy to put the smackdown on the VC industry. (fred i'll email you about it in the coming weeks when i have some microfinance stuff to show you). of course any real solution starts with the truth, as only the truth can set us free.
Dale Dietrich
· 5 months ago
Oh come now .... there is still no greater engine for growth and entrepreneur support in the world than America and its VCs. It may not be perfect, but capitalism certainly isn't dead. It might me napping ;)
kidmercury
· 5 months ago
at this point the only thing saving america's sorry ass is the dollar's status as world reserve currency and the willingness of foreigners to continue buying US treasury bonds. both of these crutches are in the process of collapsing, as the american government is abusing them far too much and the american people are by and large too immature and irresponsible to understand it is up to them to fix their government.
i prefer to look at things from a historical perspective, and in history empires collapse when they lose the ability to finance themselves, a point the american empire is very close to reaching. the emperors feed their people the bread and circuses of the day (i.e. gladiators in the roman empire, stuff like american idol and michael jackson's death dominating the media when important cap and trade legislation that will wound many honest american businesses for no reason is being passed) while the people are fed propaganda about how much better they are than everyone else (i.e. hitler's racial superiority strategy, america's "we're the greatest nation it's our job to police the world" strategy).
of course i could go on and on about the economic and historical arguments for why we're in deep doo doo, and have done so many times here on avc.com, always here to rain on the parade by countering fred's upbeat spirit with some doom and gloom. but the simple argument is that 9/11 is an inside job and that is still taboo to say that in america. any society willing to tolerate a government that perpetrates massive crimes like 9/11 against its own people cannot last for long. as was the case with the economic crisis this may seem far-fetched and impossible now but it will seem obvious in hindsight.
Dale Dietrich
· 5 months ago
ok
- '9/11 is an inside job'
now that I understand the type of person I'm talking too here ...
... moving along ...
kidmercury
· 5 months ago
please note that the 9/11 truth movement consists of a wide variety of government officials, architects and engineers, respected journalists, and more, so when you imply that 9/11 truthers are mentally deficient in some way, you are implying that many accomplished and successful people, as well as those with decades of experience in science, journalism, history, and government, are deficient as well. for a comprehensive list of impressive people who support the 9/11 truth movement please visit www.patriotsquestion911.com. once you understand 9/11 truth you will understand how silly and irresponsible it is to go around acting like everything is okay while refusing to talk about 9/11 truth. it is also the best indication of how corrupt the media is and how uninformed most people are. fortunately, we have the internet, which is here to give us the grand opportunity in this crisis.
i am always happy to discuss 9/11 truth, so if you have any questions about the matter, do not hesitate to contact me, preferably in public so as to educate as many people as possible. my statements regarding 9/11 are not made casually; i have studied the matter in great detail, have talked face to face with to victims' family members, have addressed this matter with the NYPD (i lived in NYC for 10 years), many of whom are closet truthers. as any rational person who studies 9/11 truth with an open mind can tell you, it is obvious when you look at the evidence. and of course, there is no evidence to support the government's hypothesis that a guy in a cave did it.
vcbrazil
· 5 months ago
"there is no evidence to support the government's hypothesis that a guy in a cave did it" except for the unsolicited confession by the guy in the cave that indeed he did do it. In most systems of jurisprudence that tends to constitute "evidence". (I know, I know, Osama was in cahoots with the CIA, Bush, whatever, and they got him to admit to it. Or created a video and dubbed him in etc. To which I reply, "That which can be asserted without proof can be dismissed without proof." (Thank you Christopher Hitchens.))
kidmercury
· 5 months ago
oh schnap....regular AVC readers, can ya'll believe this.....obviously our friend vcbrazil is not a regular reader of comments here at AVC, as AVC comment readers are well aware of how kid mercury has dropped a bazillion facts on 9/11 truth time and time again.
but as the truth is to be celebrated, let us drop another truth bomb starting now:
1. the osama confession is dubious for a number of reasons, but my preferred counter-argument is that osama denied 9/11 as well. clearly, in one instance he is not telling the truth.
2. numerous peer-reviewed papers by scientists prove that the official story, which is that two planes crashed into two buildings to cause THREE buildings to fall at near free fall speed, is scientifically impossible from the perspective of physics.
3. intuitively, we should be suspicious of how two planes crashed into two buildings to cause THREE buildings to fall at near free fall speed. we should also ask ourselves WTF is going on when we consider that the third building, WTC 7, fell late in the day. and how a 9/11 first responder is on record as saying he heard a countdown. in fact, the whole story of WTC 7 is so ridiculous, that alone is enough to cause a five year old to question the official story. which illustrates just how broken mainstream media is, because most people don't even know about WTC 7.
6. i am just scratching the surface here, there is so much evidence of an inside job it is ridiculous. i literally could go on and one for days. the most compelling evidence, in my opinion, comes from all the people in government who are pretty much saying it's an inside job. check it out. it's also consistent from a historical perspective and what we are seeing in today's world geopolitically.
9/11 truth is the reality, let's start being responsible citizens and living in the appropriate context. that is how we solve all problems. while this obviously sounds unpleasant, i assure you the alternative of ignorance will end up being far more unfortunate.
vcbrazil
· 5 months ago
My own opinion is that our federal government can't find its a#$ with both hands and thus successful conspiracies are extremely unlikely. If it was a conspiracy, however, I sincerely wish you success in exposing it.
Most people believe what they want to believe, about themselves and their world, then they look for facts that support those beliefs.
kidmercury
· 5 months ago
well i'm going to have to dismiss everything you just said in your last comment. after all, as a wise man once said, "That which can be asserted without proof can be dismissed without proof." :)
vcbrazil
· 5 months ago
I'm not sure what I said in my second comment mandates dismissing what I said in my first. Anyway, since conspiracy theories can never really be proven or disproven, they are basically an entertaining exercise in speculation, serving a psychological of those participating (including me, at the moment). That need has been sufficiently served for the day :).
kidmercury
· 5 months ago
you can dismiss it as a conspiracy theory all you want, all that reveals is that you have been affected by propaganda. after all, saying a guy in a cave and 12 hijackers got past the world's most powerful military to crash two planes into two buildings to cause THREE buildings to fall at near free fall speed is a conspiracy theory. and not a very credible one.
you are of course free to behave as you wish, know however that it is not in your interests to disobey and ignore the truth. also know that mocking the truth makes it harder for those who do want to be socially responsible to do so, as it creates a stigma associated with telling the truth.
fredwilson
· 5 months ago
Kid's got some out there ideas, particularly about 9/11 but don't dismiss him. He always pushes me to think about stuff I'd prefer not to think about
paulkatchings
· 5 months ago
Dale I agree capitalism is not dead, napping may be the right word for it…
Fred, great post. Countless times we have seen Managers pitching themselves as the primary creators of value, not entrepreneurs.
msuster
· 5 months ago
As a former CEO and now as a VC I agree completely. I'm seeing the Dave Winer meme that it should be about the user and about the company. He's got it wrong. In supporting the vision of the CEO (the primary job of the VC) sometimes it means enabling their vision and sometimes it means challenging it (but not making final decisions for them). If the VC feels that the product isn't complete or doesn't solve enough of a customer problem then the VC should debate the topic with the CEO to be sure that he/she has a strong enough vision.
If a VC picks a CEO that doesn't know how to lead a company then you backed the wrong horse in the first place. Interpersonal skills are some of the most important attributes of a successful entrepreneur. So in the end, it's all about the CEO. Thanks for your post.
fredwilson
· 5 months ago
Dave Winer has a point. Users are a critical stakeholder. But the person who dreams up the idea, turns it into reality, and drives the vision is the most critical piece of the startup equation
msuster
· 5 months ago
Dave's comment on Twitter, "If Fred were an investor in my (fictitious) company, I'd insist he represent the interest of both users and the company and put me last."
I like to quote the founder of Southwest Airlines, Herb Kelleher, who said (I'm paraphrasing) that, "Everyone in the industry says put customers first. I think that's wrong. I put employees first and customers second. By hiring the best customers and treating them accordingly I ensure that they are the people who provide the best customer service in the industry."
And so it goes in VC. I try to back the best CEO's (and founders) who are people that I feel understand the need to serve users through great products and lead teams and treat them with respect. In doing so I serve the needs of users and the company. But my customer is still the CEO (and co-founders).
fredwilson
· 5 months ago
Hmm. Sounds like dave wrote something about me and twitter today. I guess I'd better go see what he wrote
Thanks
Dale Dietrich
· 5 months ago
Good article. Typo alert:
"A few years AGO ..."(in opening sentence)
Cheers
fredwilson
· 5 months ago
Thanks for picking them up
valto
· 5 months ago
Great to see the transformation happening at the later stages as well. Fred, not sure if you have had time to visit, but we are now open as private beta. Here is one of the latest posts about that http://www.opengardensblog.futuretext.com/
fredwilson
· 5 months ago
Thanks. I'll check it out
Mark Solon
· 5 months ago
Fred,
While there's good points on both sides of our industry to say whether the LP or entrepreneur is the customer (I happen to believe it's the entrepreneur), there's no doubt that our job is to support the entrepreneur. Good post!
I love the 'portfolio is like a family' thinking. I share that view and use it all the time
Tim Roberts
· 5 months ago
'entrepreneur as customer' concept is a metaphor. and like all metaphors, doesn't work perfectly if you try to apply it literally. i believe the main point here is that effective vc's should spend time understanding and supporting the entrepreneur's needs instead of the other way around. How many vc backed ceo's have had to redo board meeting slides a zillion times till the vc liked it. that's not a customer like focus. a vc that says 'lets make sure we minimize time prep for board meetings, but maximize output' is one who is taking a customer like focus. just one example.
fredwilson
· 5 months ago
Right on. Its a metaphor or a mantra
GL
· 5 months ago
Amen! Hope the "flush" of broken participants is sooner rather than later.
Nick
· 5 months ago
I think I am with Tim on the metaphor front. As a Limited Partner, who actually pays for the services of VCs, the idea that I am not a customer of the VC is an interesting idea but stretching it a bit. Technically, the VC's funds, which we invest in, are customers of the VCs, who charge for management and take a share of the profits. Due to the imbalance of available capital relative to the number of high quality VCs, which has been extreme for the last decade, it has become easy for VCs to think of LPs as passive providers of capital. I have even heard them described as some form of ATM. This world is no longer. In case anyone has not already realized the imbalance has shifted a long way back again over the last twelve months.
Characterizing LPs as shareholders of the VC firm itself is wrong. The shareholders of the VC are the Partners themselves both technically and in reality as they control the actions of the VC and own the economics of the firm. Masking this disguises the degree of self interest under which VCs operate. VC firms are themselves highly entrepreneurial ventures, which will become more and more apparent as firms fail over the next few years.
The LPs are in effect shareholders of the VC fund, not the VC and have rights relating to the fund similar to those of a minority shareholder. For instance the larger the share of the fund, the more significant the influence. In another example, LPs collectively, can sack the VC firm either for cause or in some cases for no reason at all .
Looking at the relationship between the VC and the entrepreneur, you can argue that both are customers. The entrepreneur is buying capital of the most expensive kind available in the markets. The VC is buying stock in the company and to some extent control.
The reality is that the various players around the VC are all stakeholders with an interest in them not screwing it up. Trying to put them in boxes like "customers" or "shareholders" beyond this is in the end a matter of semantics. Their relationships and reputation will stem from how they treat those stakeholders in the course of success or failure.
With all due respect to Fred and the constructive way he builds relationships with his stakeholders, no one is well served by misunderstanding where everyone stands.
I am a firm believer in alignment of interest, which is why I am prepared to bear the VC incentive structure, when I invest. I would venture that it is just as important, if not more so, for entrepreneurs to understand how their interests align with their VCs.
The reason this is important is that the downside of a misalignment of interests is often much greater for the Entrepreneur with his one business than the VC, who has a portfolio of investments. VCs like any investor are looking for market inefficiencies. The challenge for entrepreneurs is to avoid being on other side of this process.
fredwilson
· 5 months ago
Excellent points Nick. And it is a metaphor (or even a mantra as I said in another reply)
The reason I've staked out this position is that I have seen too many VCs who are good at raising money but terrible at working with entrepreneurs. Those VCs treat the LPs as their customer. They wine them, they dine them, they do fancy boondoggle annual meetings, and they raise big funds that don't do very well
And then there are VCs who don't work very hard on LP relations but work very hard for their entrepreneurs
I think the latter group is where you want to invest. And that's why I made this assertion and why I was so happy to see Marc and Ben agree with it
Charlie Crystle
· 5 months ago
I'm with Nick here--and I'll repeat what I said 4 years ago to your original post: the VC's customer is the LP. But you've added something here (or Marc has articulated it): your job is to support the entrepreneur, but I'll add that this of course is limited by the job of serving your LP. Your LP's goal is liquidity with an ROI, and doesn't particularly care about how you get there.
And at times, that job is in conflict with your other job, which is to deliver good returns to your LPs.
The comments in the original post are interesting; it's also interesting that you didn't respond directly in the comments back then. I like the high level of interaction you've evolved here.
fredwilson
· 5 months ago
That interaction is directly linked to the implementation of disqus on the blog
I don't spend much time on the web during the day and during the evening. The web is a 5am to 7am experience for me
Disqus brings the discussion to my blackberry (where I am writing this right now)
Mobile computing ftw!
Charlie Crystle
· 5 months ago
i hear it's gonna be big
ShanaC
· 5 months ago
Really? Interesting to note... I find the interaction level extraordinary.
vcbrazil
· 5 months ago
I was going to weigh in that the LP is the customer but, analogizing the situation to other businesses, this is wrong. The LPs are management, the VCs are the employees and the entreprenuers are customers.
Following the money: 1. The LPs run a business: managing money for ROI. 2. They have "hired" various people (like Fred/Union Square) to achieve the business's goal of maximizing ROI. 3. The employees (VCs') job is to attract the customers (entrepreneurs) most likely to boost ROI.
Its analogous to a software company (LPs) hiring a salesman (VCs) to develop business. Like the software salesman, the VC has to a) sell to the customer (entrepreneur) and b) follow up with a lot of high-touch interaction to make sure that the customer is successful and lasts. Also, like the software salesman, most of VCs' comp is based on commission.
Btw, The thought that VCs do not have to sell/market themselves to good entrepreneurs is dead wrong. Even the best have to hustle hard to get into the best deals.
i know what you mean. but, on some level, if someone is paying us, we are their employee (despite MY psyche's wish to create an illusion of independence).
Anon
· 5 months ago
Fred, someone just contested your thesis on TheFunded... Worth a read:
To become VC's customer, entrepreneur have to sell his vision to VC first. That is why for me VC stands for Visionary Capital and VCs are in business of buying and selling entrepreneur's vision
pfreet
· 5 months ago
Interesting idea, except I don't think it true. If anything, the entrepreneur/startup is your product. The eventual acquirer is your customer. To suggest otherwise is a gross misrepresentation to entrepreneurs.
A VC takes money from LPs, buys stock in companies, sells that stock at a profit to an acquirer and pockets a percentage. A simple but great business model. But how you can suggest the startup is your customer? That's boggling.
bombtune
· 5 months ago
Is the value in VCs just making the investments in these startups to help them get launched?
Live private equity I don't think there's much value contribution other than pumping $ in, a support role.
paramendra
· 5 months ago
You mean there are VCs who don't think of entrepreneurs as customers!?
Speed Venture Summit
· 5 months ago
Marc and Ben are correct. Together with the VCs and Angel investors, Speed Venture Summit is committed to matching capital and business more effectively and efficiently in order to help them build great companies around their technologies and ideas.
All Comments
That entrepreneurs are the VC's customer only in the context of the entrepreneur being the one to find and nurture actual Paying Customers in the long term.
VC's are after returns at the end of the day. So why wouldn't they focus more on what actually creates those returns? Entrepreneurs who find ways to create Paying Customers...
And....
Finding and understanding Paying Customers, who they are, and where these mysterious and elusive creatures come from (and how to get them).
This is assuming that Paying Customers/Revenues lead to consistent cash returns which can lead to Higher Valuations... and then some Exit Events.
I don't have much experience around how and what VC's have to do to raise their funds and please LP's, but it sounds like a version of a 'chicken & egg' situation.
Thinking long term, I'm always a 'chicken' kind of guy myself- create real value and let is demonstrate itself with good old fashioned sales and revenues. (then investors, LP's, whatever will come) But I've never been saddled with trying to raise a fund, so what do I know.
Aside from LPs, I want to get back to the question of Entrepreneurs and who the VC's customers are...
When it comes to businesses that are highly focused on 'product', as you often see with technology businesses, the entrepreneur seems to make much much more sense as the customer- often because many of the bets have to be big ones on the part of the VC's.
When you have a nascent business/market that no one 'fully' understands in terms of how to effectively drive users/customers/revenue and achieve growth and profit... it's the entrepreneur who is tasked with testing and finding the way to create the magic of paying customers and a sustainable model.
VC's can help in the highest value way by being mentors/resources to speed up and improve the entrepreneurs thinking, and help create "short cuts" - connections, people, relationships, data, etc.
But you still have to have to ask- why aren't the Paying Customers some of the VC's customers? Again, with technology businesses, the actual "use cases" for a product or service, and the identity/profile of Who the paying customers are, is usually something that has to evolve and take on a life of it's own- even with great products and good marketing from smart entrepreneurs.
So... it goes in more complex/new businesses that the highest value the VC can provide is to make the entrepreneur the best he can be as he drives forward in his process.
Finding Paying Customers and a profitable model in environments that are NOT well defined doesn't look like a VC's job or highest value. I believe that it's the entrepreneur who should know, or be on his way to finding out and knowing (by using testing and data). The VC's can help- often by teaching and adding value to the entrepreneur and his efforts and process around this.
Andreessen is a good example of this kind of customer/entrepreneur- the kind that a VC would want to treat like a customer. He creates big new ideas and big 'products' that aren't just another 'me too' business or model. One could argu he even creates new kinds of customers with his new products - so trying to take a 'formulaic' approach as a VC with him and tell him how to find customers isn't the right way to go about it.
However, I do believe that there is a TON of value in VC's getting even closer to the Paying Customer and understanding more and more about them as the lifeblood of their business/fund.
I wrote a whole blog post about it-
http://www.shanacarp.com/essays/the-atypical-cu...
- but basically all of these fact you list about why VC's need to get close to the paying customer makes me wonder how they model what is appropriate. You need to choose something that is far reaching yet grounded in the here and now. A tough call- since a far reaching future is not the here and now by any stretch.
* Those who specialize in areas and sectors - could be more likely to be 'typical' users, or understand these users and paying customers more intimately.
* Those who specialize in broader sectors, but generally with a focus on companies in various Stages or Deal Sizes (Seed, Early, Late, etc.) - across the board in terms of being a typical customer or understanding customers. But perhaps the Seed and Early stage guys have more hands on understanding or a desire to get their hands dirty with how to get paying customers
* Those who do a variety of things and bet more on potentially big markets and future valuation
It's a good point you bring up, how do VC's model acquisition of customers/revenue and what helps them understand what is appropriate?
I'll just answer this by saying that it would be FASCINATING to see the Projected Sales in business plans that get funded by VC's compared with the ACTUAL SALES post funding.
Now that would take the debate somewhere interesting, driven by data and stats.
I've never met one in person. I was reading, and someone made an excellent point to me, webpages, ect, are personal outward focusing bling.
The toys I see implemented here and at other VC/Tech blogs are very different than say, friends' blogs. Or twitter, or whatever.
And it would be totally fascinating, I agree, to see the comparisons. What would also be fascinating, beyond the Zemata post, about why certain companies are chosen.
At the end of the day, its not just about the business model- it's about how well the product works with the user in conjunction with the business model. So it is just one of those questions that seem to discretely hang over this process...
Here I will attempt to extend your questions/observations of:
• Those who do a variety of things and bet more on potentially big markets and future valuation
• It's a good point you bring up, how do VC's model acquisition of customers/revenue and what helps them understand what is appropriate?
• I'll just answer this by saying that it would be FASCINATING to see the Projected Sales in business plans that get funded by VC's compared with the ACTUAL SALES post funding.
• Now that would take the debate somewhere interesting, driven by data and stats.
I get these 4 points!
Now what If we agree that an equation must always balance and we are looking for a simple, very simple, outrageously simple model where the customers, revenue, and stock price could be predicted before the IPO process for ANY product or service.
And this equation is x=(a*b)/c were X is stock price, A is revenue, B is earnings as a percentage of earnings, and C is an rate of return and 1 share is outstanding.
Now lets say that we have this $1 widget needed by 14 million preassembled people salivating for this $1 widget because from every new IPO they get 2 shares free just for purchasing this $1 widget.
$14 million times .63 divided by 61 million shares divided by a .03 rate of return is a stock price of $4.82.
Now the reason that these 14 million are salivating is because their $1 purchase gives them two values, the utility value of the $1 Widget and the 2-share value of $9.64. Yes this is a 9.64 to 1 ratio on a $1 product with these fundamentals.
What we have now is the ability to replace credit, debt, interest, and employment with Product Equity Value©.
Would you buy a $30 product to have $600 worth of free tradable shares in an IPO?
http://www.productequityvalue.info/index.php?op...
The death of credit, debt, boon-bust cycles and unemployment
http://www.productequityvalue.info/index.php?op...
Curious though about the amount they've raised ($300M?!) and their ability to put that kind of capital to work. Thoughts Fred?
they'll have to follow their winners aggressively and do some of those $50mm
late stage investments
i like Marc's comment that there are only 15 companies per year "that
matter"
they clearly intend to try to get into the ones that matter at some point,
even if they don't get into them at the start
we've talked about that strategy at our firm as well but have not put that
strategy in place yet
fred
particularly once we make an investment
Now, with that kind of model, and the capital that exists in the VC industry, it seems like the VCs are going to need to get busy distributing the funds in order to get a return for their investors.
Is that what you're seeing/thinking as well?
seen that much of a downturn in the IT sector, particularly in software,
services, and internet
the entrepreneur is the scarce commodity, not the money
Surely, just as the LP is a shareholder in the VC; the VC is a shareholder in the entrepreneur's company. Simple, clear... and accurate. Maybe I'm missing something - perfectly prepared to accept that I am - but I'm not seeing the need to invoke the word "customer" to describe any part of the LP-VC-Entrepreneur ecosystem.
but you get invited to be a shareholder in VC deals
it's not like the public markets
so the entrepreneur gets to pick who the supplier of capital is
and that's where the customer relationship plays out
the whole "fire the management team, sell the company, close the company"
stuff is overblown
it happens, but not nearly as much as people think
fred
However, using the word "customer" in this context seems to me to complicate things. The point is - a customer is someone that buys something (goods or services). Now, of course, one can always choose to re-invent the meanings of words; but I'd suggest my definition is rather widely held and it's one that most people would recognize.
So - in the VC-entrepreneur relationship - who is doing the buying? Surely, the *VC* is the one doing the buying i.e. spending money; and the entrepreneur is the one doing the selling i.e. selling shares. Doesn't that makes the VC the *entrepreneur's* customer? Yes, the entrepreneur gets to choose their customer in this context (lucky them!); but the fact they choose their customer doesn't make their customer any less of a customer.
I'm not saying it isn't possible to argue the opposite of the above (as you've done). I'm simply trying to say that there are complications in using the word "customer" in this situation; and that it's easier to just say things as they actually are - that the VC is the shareholder.
As for the whole "fire, sell" thing often being overblown. Depends what you mean. As you've said yourself on this blog, entrepreneurs in VC-backed companies make money perhaps 1/3 of the time; whereas VCs make money perhaps 2/3 of the time (with no-one making any money in the remaining third). That surely says something about where, in the end, the balance of power lies?
Just my two cents!
Lets elevate this discussion to included the real customers, the customers.
Who determines, or what is the current formula used in given free shares, free stock options to management, employees, charities etc? Was it not the cash paying customers who started the value creation process in the first place? Does not a portion of the cash paying customers cash go to dividends? Can I go to an accounting text and find this formula for the amount of equity that is directly attributed to the customers?
You see from a scientific point of view and the path of least resistance, why should the customer be making investment decisions in common stock when they are ill equipped to do so as evidence by the VC and the entrepreneur inability to count, or predict a certain exact number of customers before the IPO process?
The math and the multiple value creation formula for public companies say find the ratios, give the free shares, and the investment decision is made for the customer as far as common stocks are concerned by each of their purchases.
Simon you are on the right tract of asking questions that it seems that many are either afraid to ask or do not know how to ask. I am not saying that you agree with my assessments of VC and entrepreneurs math abilities just written. They are leaving too much money on the table by not having the correct value-creating math and leaving out the predictable customers where we all lose value.
What is missing is the thinking process that makes a VC a VC and an entrepreneur and entrepreneur. I mean a complete thinking process. To be sure it was difficult to introduce Product Equity Value© before the personal computer, Internet and in just 10 short years 3.6 billion people with cell phones.
But now there is no excuse and one serious VC- entrepreneur can help to make Product Equity Value© happen!
1. capitalism is dead, we live in a fascist country. maybe venture fascism is a bull market, but venture capitalism is increasingly on the way out.
2. the dollar is dying, if the dollar goes all dollar-denominated assets go.
3. capital markets are broken, fred you have talked about this and about secondary markets as a solution, however i don't see how a solution is going to be reached when we cannot have honest conversations
to bring venture capitalism back, we simply need
1. massive government reform, it needs to be downsized and the phony economics that justifies all this banker bailout nonsense needs to be ended.
2. solve the dollar problem. as virtually all economists who saw this crisis coming agree, the cause is the federal reserve system and monetary policy. when monetary stability is reached, we can all go back to business as usual and doing our part to make great stuff that benefits all.
3. new capital markets. liquid ones. now.
lucky for venture capitalists everywhere your good buddy kid mercury has been working on solutions for all of these issues since before it became hip and trendy to put the smackdown on the VC industry. (fred i'll email you about it in the coming weeks when i have some microfinance stuff to show you). of course any real solution starts with the truth, as only the truth can set us free.
i prefer to look at things from a historical perspective, and in history empires collapse when they lose the ability to finance themselves, a point the american empire is very close to reaching. the emperors feed their people the bread and circuses of the day (i.e. gladiators in the roman empire, stuff like american idol and michael jackson's death dominating the media when important cap and trade legislation that will wound many honest american businesses for no reason is being passed) while the people are fed propaganda about how much better they are than everyone else (i.e. hitler's racial superiority strategy, america's "we're the greatest nation it's our job to police the world" strategy).
of course i could go on and on about the economic and historical arguments for why we're in deep doo doo, and have done so many times here on avc.com, always here to rain on the parade by countering fred's upbeat spirit with some doom and gloom. but the simple argument is that 9/11 is an inside job and that is still taboo to say that in america. any society willing to tolerate a government that perpetrates massive crimes like 9/11 against its own people cannot last for long. as was the case with the economic crisis this may seem far-fetched and impossible now but it will seem obvious in hindsight.
- '9/11 is an inside job'
now that I understand the type of person I'm talking too here ...
... moving along ...
i am always happy to discuss 9/11 truth, so if you have any questions about the matter, do not hesitate to contact me, preferably in public so as to educate as many people as possible. my statements regarding 9/11 are not made casually; i have studied the matter in great detail, have talked face to face with to victims' family members, have addressed this matter with the NYPD (i lived in NYC for 10 years), many of whom are closet truthers. as any rational person who studies 9/11 truth with an open mind can tell you, it is obvious when you look at the evidence. and of course, there is no evidence to support the government's hypothesis that a guy in a cave did it.
(I know, I know, Osama was in cahoots with the CIA, Bush, whatever, and they got him to admit to it. Or created a video and dubbed him in etc. To which I reply, "That which can be asserted without proof can be dismissed without proof." (Thank you Christopher Hitchens.))
but as the truth is to be celebrated, let us drop another truth bomb starting now:
1. the osama confession is dubious for a number of reasons, but my preferred counter-argument is that osama denied 9/11 as well. clearly, in one instance he is not telling the truth.
2. numerous peer-reviewed papers by scientists prove that the official story, which is that two planes crashed into two buildings to cause THREE buildings to fall at near free fall speed, is scientifically impossible from the perspective of physics.
3. intuitively, we should be suspicious of how two planes crashed into two buildings to cause THREE buildings to fall at near free fall speed. we should also ask ourselves WTF is going on when we consider that the third building, WTC 7, fell late in the day. and how a 9/11 first responder is on record as saying he heard a countdown. in fact, the whole story of WTC 7 is so ridiculous, that alone is enough to cause a five year old to question the official story. which illustrates just how broken mainstream media is, because most people don't even know about WTC 7.
4. 9/11 hijackers are still alive.
5. even if the hijackers did do it, they were trained at US military bases.
6. i am just scratching the surface here, there is so much evidence of an inside job it is ridiculous. i literally could go on and one for days. the most compelling evidence, in my opinion, comes from all the people in government who are pretty much saying it's an inside job. check it out. it's also consistent from a historical perspective and what we are seeing in today's world geopolitically.
9/11 truth is the reality, let's start being responsible citizens and living in the appropriate context. that is how we solve all problems. while this obviously sounds unpleasant, i assure you the alternative of ignorance will end up being far more unfortunate.
Most people believe what they want to believe, about themselves and their world, then they look for facts that support those beliefs.
Anyway, since conspiracy theories can never really be proven or disproven, they are basically an entertaining exercise in speculation, serving a psychological of those participating (including me, at the moment). That need has been sufficiently served for the day :).
you are of course free to behave as you wish, know however that it is not in your interests to disobey and ignore the truth. also know that mocking the truth makes it harder for those who do want to be socially responsible to do so, as it creates a stigma associated with telling the truth.
Why the Capitalist Theory is no longer fundamentally flawed
http://www.productequityvalue.info/index.php?op...
If a VC picks a CEO that doesn't know how to lead a company then you backed the wrong horse in the first place. Interpersonal skills are some of the most important attributes of a successful entrepreneur. So in the end, it's all about the CEO. Thanks for your post.
I like to quote the founder of Southwest Airlines, Herb Kelleher, who said (I'm paraphrasing) that, "Everyone in the industry says put customers first. I think that's wrong. I put employees first and customers second. By hiring the best customers and treating them accordingly I ensure that they are the people who provide the best customer service in the industry."
And so it goes in VC. I try to back the best CEO's (and founders) who are people that I feel understand the need to serve users through great products and lead teams and treat them with respect. In doing so I serve the needs of users and the company. But my customer is still the CEO (and co-founders).
Thanks
"A few years AGO ..."(in opening sentence)
Cheers
While there's good points on both sides of our industry to say whether the LP or entrepreneur is the customer (I happen to believe it's the entrepreneur), there's no doubt that our job is to support the entrepreneur. Good post!
Here's my blog on the subject from just last week http://highway12ventures.com/2009/06/30/treat-y...
Hope the "flush" of broken participants is sooner rather than later.
Characterizing LPs as shareholders of the VC firm itself is wrong. The shareholders of the VC are the Partners themselves both technically and in reality as they control the actions of the VC and own the economics of the firm. Masking this disguises the degree of self interest under which VCs operate. VC firms are themselves highly entrepreneurial ventures, which will become more and more apparent as firms fail over the next few years.
The LPs are in effect shareholders of the VC fund, not the VC and have rights relating to the fund similar to those of a minority shareholder. For instance the larger the share of the fund, the more significant the influence. In another example, LPs collectively, can sack the VC firm either for cause or in some cases for no reason at all .
Looking at the relationship between the VC and the entrepreneur, you can argue that both are customers. The entrepreneur is buying capital of the most expensive kind available in the markets. The VC is buying stock in the company and to some extent control.
The reality is that the various players around the VC are all stakeholders with an interest in them not screwing it up. Trying to put them in boxes like "customers" or "shareholders" beyond this is in the end a matter of semantics. Their relationships and reputation will stem from how they treat those stakeholders in the course of success or failure.
With all due respect to Fred and the constructive way he builds relationships with his stakeholders, no one is well served by misunderstanding where everyone stands.
I am a firm believer in alignment of interest, which is why I am prepared to bear the VC incentive structure, when I invest. I would venture that it is just as important, if not more so, for entrepreneurs to understand how their interests align with their VCs.
The reason this is important is that the downside of a misalignment of interests is often much greater for the Entrepreneur with his one business than the VC, who has a portfolio of investments. VCs like any investor are looking for market inefficiencies. The challenge for entrepreneurs is to avoid being on other side of this process.
The reason I've staked out this position is that I have seen too many VCs who are good at raising money but terrible at working with entrepreneurs. Those VCs treat the LPs as their customer. They wine them, they dine them, they do fancy boondoggle annual meetings, and they raise big funds that don't do very well
And then there are VCs who don't work very hard on LP relations but work very hard for their entrepreneurs
I think the latter group is where you want to invest. And that's why I made this assertion and why I was so happy to see Marc and Ben agree with it
And at times, that job is in conflict with your other job, which is to deliver good returns to your LPs.
The comments in the original post are interesting; it's also interesting that you didn't respond directly in the comments back then. I like the high level of interaction you've evolved here.
I don't spend much time on the web during the day and during the evening. The web is a 5am to 7am experience for me
Disqus brings the discussion to my blackberry (where I am writing this right now)
Mobile computing ftw!
Following the money:
1. The LPs run a business: managing money for ROI.
2. They have "hired" various people (like Fred/Union Square) to achieve the business's goal of maximizing ROI.
3. The employees (VCs') job is to attract the customers (entrepreneurs) most likely to boost ROI.
Its analogous to a software company (LPs) hiring a salesman (VCs) to develop business.
Like the software salesman, the VC has to a) sell to the customer (entrepreneur) and b) follow up with a lot of high-touch interaction to make sure that the customer is successful and lasts. Also, like the software salesman, most of VCs' comp is based on commission.
Btw, The thought that VCs do not have to sell/market themselves to good entrepreneurs is dead wrong. Even the best have to hustle hard to get into the best deals.
www.vc-brazil.com
but, on some level, if someone is paying us, we are their employee (despite MY psyche's wish to create an illusion of independence).
http://www.thefunded.com/funds/item/5723
That is why for me VC stands for Visionary Capital and VCs are in business of buying and selling entrepreneur's vision
A VC takes money from LPs, buys stock in companies, sells that stock at a profit to an acquirer and pockets a percentage. A simple but great business model. But how you can suggest the startup is your customer? That's boggling.
Live private equity I don't think there's much value contribution other than pumping $ in, a support role.