Investors – Who’s the Customer?

Although it was posted quite some time ago, I have long been intrigued by Fred Wilson’s post regarding who is a VC’s customer. I don’t believe most folks take a step back periodically to do a philosophical review of what they do for a living. I’ve thought Fred’s answer was a rational one, and I think I agree with it. A quick review of the comments he received on this post though would suggest his might be a minority opinion.

Before the holidays I had the good fortune of enjoying coffee with Lucinda Linde, a very sharp entrpreneur and investor who is currently running Walnut Ventures. Walnut is a Boston-area angel group that has been around for quite a while and is enjoying a resurgence. I am no expert in the ways of angel groups. I have never raised money from them. I have never invested along with nor as part of one. However, we had an interesting and frank discussion about what angel groups might (and might not) be able to do for early-stage entrepreneurs in today’s fundraising environment. But I’m not sure I know who the customers are of angel groups are, since they are their own LPs. Lucinda believes the groups’ customers are both the entrpreneurs and the angels.

This morning I had coffee with the inimitable Nabeel Hyatt, who is currently an EIR at Prism VentureWorks (I’m a reasonable guy, so I don’t hold that against him). I posed the question to him now that he is, at least temporarily, inside the belly of the beast. His feeling as well was that VCs serve two masters and that both entrepreneurs and LPs are the customers.

Linda and Nabeel’s answers don’t entirely work for me. Though perhaps it’s just the geek in me over-analyzing to find a more elegant answer.

One thing that investors will (rationally) lean on startups for is having multiple, disparate sales channels. Sales channels tend to require distinctive sales DNA. The sales DNA required to sell six-figure software systems into Fortune 500 companies is different than the sales DNA required to sell subscription-based online games to consumers.

So do VCs sell to two disparate sales channels?

Nabeel and I had an interesting exchange about market efficiencies. I assert that in theory all markets should tend towards efficiency. If there is an inefficency in a given process – for example, the organization requires two disaparate sets of sales DNA – that will create a friction. In theory frictions like that are sub-optimal and should either require a fix or present a market opportunity. But nobody has materially changed the LP model in recent memory and nobody has stepped in (have they?) to address such frictions.

So if efficiency is a natural market goal and this inefficiency has not been addressed, is it in fact an inefficiency? Is it somehow a beneficial friction instead? Or is the market, as Nabeel asserts, inefficient due simply to human nature as it concerns managing money (obviously a non-trivial subject for everybody and anybody)?

No good answers at this juncture. Would love to hear opinions.

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