The Customer is King in Venture Capital: Truth or Myth

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Thursday, June 24, 2021 / 08:00AM / By Titilayo Oladimeji & Oluwatoyin Ashipa, trium / Header Image Credit:trium 

 

Customer experience (CX) is not something you'll hear often in Venture Capital circles - whether in Nigeria or around the world. The nature of the VC business model fosters a perception of VCs being at the top of the food chain. You may ask why should VCs care about customers? Who even is a VC's customer? Can't VC's just give founders money and be on their merry way? These are all valid questions that have been raised about the relationships of VCs to their perceived customers.

 

Before proceeding any further, let's pause a little to discuss an important term-the VC customer.

 

The VC business model makes it quite complicated to find the primary customers.  Ask a random group of VCs who their customers are and the answers you get will be either the Limited Partners (LPs) or the Founders.

 

On the LP side of the debate, the argument is that generating "above market returns" is the VCs product-which LPs invest towards. If you can keep the LPs happy, they will keep investing in future funds and paying the carry.

 

The Founder argument posits that "money and support" offered by the VC is the product. The LPs help to provide the resources needed to serve the customers (founders).

 

However, putting aside subtle nuances like "primary," VCs begin to see that both answers are indeed valid.

 

LPs provide the funds necessary for VCs to make investments, and founders provide the innovation and entrepreneurship needed to make the VCs an attractive option for LPs.

 

Traditionally, VC funds are optimized to serve LPs as customers. Of course, optimizing the customer experience for LPs is much easier. Generate good returns, hire relationship managers to place regular calls, send monthly/quarterly portfolio reports, organize strategic dinner parties and your LPs should be happy.

 

The downside, however, is that most VCs (perhaps unknowingly) end up treating founders like products. And of course, no one like being treated like a product. Considering that founders are the final decision-makers on whether VCs can invest in a project or not, it is integral to also optimize their experience.  Smart VCs have already begun to improve their relationships and interactions with founders. Heightened competition has made it a necessity.

 

Although the demand for startup funding will continue to exceed venture capital for the foreseeable future, more money and more players are coming into VC every year.

 

Despite the total investment amount dropping due to Covid, Partech Partner's 2020 funding report, reveal that the number of equity rounds in Africa increased by 63.6% to 359.

 

Increasing competition means that founders, especially great founders, have more options to choose from. The venture capitalists of the future must therefore look beyond cutting checks to position themselves as an attractive option for these founders. After all, in the words of Jules Maltz, GP at IVP and Slack investor, "a venture capitalist is only as good as his or her ability to convince the next great entrepreneur to accept an investment".

 

The expression "Customer is King" is common parlance in business circles. It emphasizes the importance of customers to the survival of businesses.

 

Customer experience is usually described as a customer's holistic perception of your business or brand. Great customer experience has long been regarded as a way for companies to differentiate themselves from the competition. 

 

According to the Economist Intelligence Unit, companies prioritizing customer experience see revenue growth at a rate of 59% versus 40% for companies that don't. These companies also see higher profits (64% versus 47%).

 

Happy customers are repeat customers and, most importantly, they make referrals. According to Accenture, 55% of customers showcase loyalty to brands by referring the companies they love to people around them. While there are no matching studies for the role of customer experience in venture capital, the nature of the industry makes it an increasingly crucial factor in the success of funds.

 

Referrals are a huge part of how deals are done in Venture Capital. According to an article in Harvard Business Review, 30% of deals come from leads from the venture capitalist's former colleagues or work acquaintances. 20% come from referrals by other investors, and 8% from referrals by existing portfolio companies. Only 10% of deals result from cold email pitches by company management. However, almost 30% are generated by venture capitalists initiating contact with entrepreneurs.

 

That is 58% of the deals coming from referrals alone!

 

Outside of direct referrals, the reputation of a VC can also impact whether founders will make a deal with them.

 

Information always gets around in the VC-startup ecosystem. One negative review could mean missing out on a top founder or project either because they never send a pitch, or they are negatively biased against the VC when they finally speak with them. Unfortunately, negative reviews spread fast and wide. According to the White House Office of Consumer Affairs, dissatisfied customers often tell 9 - 15 people about their experience.

 

Attracting top-tier founders is imperative for the success of any futuristic-thinking VC firm. Considering that top founders often have the luxury of options to choose from, it is important to differentiate one's fund.

 

Money flows like water to top-tier founders. Brand - only when backed up with a great proposition - is a way for VC's to cut through and win top-tier founders.  "A strong brand is what can take you from being known to liked, to perhaps even being loved," says Jasel Mehta, partner at Forward Partners, a London-based early-stage venture fund and startup studio.

 

The question then is, how can VCs improve Customer Experience for founders?

 

Positioning a VC firm as founder-friendly requires improving the customer experience for all the founders it encounters-whether they receive funding or not.

 

To position themselves as a great option, VCs need to become excellent at becoming known, articulating why they are different, building trust, and proving how their partnership will drive results. Today's VCs must show that they are more than just access to capital. They must show the extra value-add they bring to startups.

 

 

Proshare Nigeria Pvt. Ltd.

 

As a pointer, here are some traits startup founders look for in investors:


Believe in their team and vision

Investing in an early-stage start-up oftentimes means investing in the team. At the early stage, much of the hypothesis is untested and the team is likely to pivot after receiving investment. Believing in the team also means letting them do their work! Most founders loathe working with an overbearing interference from investors.


Deep understanding of the industry

One of the most significant advantages you can bring to the table as a VC is recent domain experience in the field of the founder. Having domain experience means that the VC can fully understand the vision of the startup and provide insightful feedback on key decisions.


Ability to provide value-add

The ability to provide value-add is a critical one for founders. You should be able to offer more than just funding and industry expertise. For instance, an investor skilled at scaling companies would be a great value-add to most startups. Additionally, for a startup who plans to raise further rounds, having years of investment experience can also be a value-add.

 

Many modern VCs are evolving to institutionalize their value-add as part of their offering. A16z offers startups access to top marketing and sales professionals in addition to funding. Trium is more hands-on by adopting the venture builder model - incubating startups and allowing them to grow sustainably by providing professional and technical support as well as facilitating partnerships that help founders grow from an idea to a funded enterprise.


Ability to give honest and empathetic feedback:

As a VC, it is important to know that customer experience starts from the first encounter with you. Founders appreciate honest feedback on their projects regardless of if you invest in them or not.

 

It is quite possible to reject a founder and still have them like you. Founders recognize that VCs might have more insight and want to know that they have at least read their pitch. Sending a personalized rejection email with honest feedback on why you are not investing (market size, traction, lack of domain expertise, etc), will separate you from hundreds of VCs who barely reply their emails.

 

Improving customer experience for founders, is not just a profit-driven endeavour. It reflects a growing recognition of the role founders play in the VC ecosystem.

 

Trium , a venture builder and venture capital firm in Lagos Nigeria, constantly seeks new and innovative ways to create an enabling environment for founders and start-ups alike. Our tilt toward the venture builder model approach means we offer more than just money to start-ups. In the few years of our operations, this has been a key differentiator, and we are committed to continuously improving the experiences of founders. This is not to say we have got it all right, but we are definitely on the way; and with you - innovative founders and start-ups driving positive transformation with your ideas; we will take not only your companies but also our continent to greater heights.

 

Find out more about us here, you can also connect with us on LinkedIn and Twitter.

 

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 Proshare Nigeria Pvt. Ltd.


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