Who Is the Main Customer for a VC Manager? An LP or an Entrepreneur?
Here are 2 different approaches to understanding the role and priorities of VC firms.
Many VC managers think their customers are their investors, called LPs (limited partners). But other VCs think that the entrepreneur is the customer and the LP is the shareholder. Who is right or wrong?
LPs as customers
VC firms that see their LPs as customers view their primary responsibility as maximizing returns for their investors. In this model, the LPs are the ones who create the value by providing the capital, therefore, the VC firm must focus on selecting and managing investments that generate the highest possible returns for its LPs.
— Alignment of interests
By prioritizing LP returns, VC firms can align their own incentives with those of their investors. This can help to build trust and long-term relationships with LPs.
— Focus on performance
By measuring success primarily in terms of returns, VC firms can maintain a clear focus on performance and avoid getting distracted by other goals.
— Clarity of mission
By defining their role as serving the needs of their LPs, VC firms can establish a clear mission that guides their decision-making.
Entrepreneurs as customers
VC firms that see entrepreneurs as customers view their primary responsibility as supporting and adding value to the startups they invest in. In this model, the entrepreneurs are the ones who create the value that ultimately generates returns for the LPs. Therefore, the VC firm must focus on selecting and supporting startups that have the greatest potential for success.
— Value-add services
By focusing on supporting entrepreneurs, VC firms can provide value-added services such as mentorship, networking, and strategic guidance that can help startups to succeed.
— Stronger deal flow
By building relationships with entrepreneurs and helping them to succeed, VC firms can attract high-quality deal flow and gain access to the best investment opportunities.
— Reputation building
By being known as a supportive and helpful partner to entrepreneurs, VC firms can build a strong reputation in the industry that can attract LPs who are looking for a value-added investment partner.
Ultimately, the choice between these two perspectives will depend on the goals and priorities of each VC firm. However, it is worth noting that many successful VC firms manage to balance the needs of both their LPs and their portfolio companies, recognizing that the two are ultimately interconnected.
What do you think about these 2 approaches? Which one seems better?
Who is the main customer for a VC: LPs or entrepreneurs? My opinion
The answer is absolutely clear to me — entrepreneurs. Even smart LPs (of which I have some) bring you capital. As Warren Buffett says, you can’t outperform the market, so the 2% management fee that VCs receive from the capital under management (which mostly covers costs for small funds) is a fair payment. But the ultimate goal for any VC should be to multiply the capital!
Capital itself and even investment bankers and other capital managers can’t do it. The only ones who can break through and achieve exponential growth are entrepreneurs.
So, the only role of a successful VC should be to find and serve such entrepreneurs who can accomplish what Warren Buffett considers impossible. VCs are merely derivatives of entrepreneurs.
However, there may be some VCs who disagree with me, especially if they manage multibillion-dollar funds. I’m not sure I want to argue with them, and I’m not sure I want to manage a multibillion-dollar fund right now. Early-stage investing and a cherry-picking strategy are close to my heart as a VC.
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