As a VC, who is your customer?

Published on 16 Feb 2025 ⸱ 5 min read ⸱ 23 views

Among other hot topics in the world of VC, one of the age-old debates is "As a VC, who is your customer?".

Most peers believe that as a venture fund and asset manager, your investor or limited partner is your customer.

I disagree with this view. I believe the founder is a VC's customer.

The most common reason people cite while saying that the limited partner is your customer is that the LP provides the capital and whoever provides capital is your customer. You role is to do right by this limited partner and maximise their return.

As capital allocators, it is our "fiduciary duty" to make the best capital allocation decisions ensuring the highest possible returns for the LP.

We are legally and ethically obligated to act in the best interests of the LPs by making sound investment decisions, managing risk effectively, providing transparent reporting, and avoiding conflicts of interest.

The only type of asset manager, IMO, that can call the investor/LP their customer are Hedge Fund managers, public market managers and pension fund managers. Basically any active asset managers. These types of managers have full control over entry and exit decisions along with portfolio management decisions, if any.

To some extent, PE also falls into the above category in cases where they take control positions, i.e. owning a significant enough stake in the company, where they control the board, strategy and operations and have the ability to appoint senior management.

VC's on the other hand, control their entry into a company (decisions to invest in a startup), but have limited to no control over everything else, including exit. This is why partnering with the best founders matters a lot.

Most large VC funds will hold at minimum 10% in a company, hold a board seat, interview senior management, and so on but less than a handful of VCs can truly influence (not control) the outcome of the business being successful or a failure. Re:exit, given how illiquid the holding in a private startup is, the exit is tough to control and is nuanced but never as easy as exiting a public stock.

The part of "ensuring the highest possible return" is where the founder comes into the picture.

Take the analogy of a business. The end user of the business is its customer - not the equity or debt financiers. The founders of the business have a fiduciary duty to the shareholders/lenders but they cannot be optimising the business, based on what the shareholders/lenders want. The business creates products and services that the customer wants and does everything in its power to provide the best experience to the customer.

The better the end user (customer) experience, the more they buy into the businesses product or service, leading to growth in revenue/profitability of the business with the end result being value creation for the shareholders/lenders.

This analogy is exactly applicable to the VC world. The founder is the VC's customer. The better the experience for the founder, better will be the quality of founders that want to take capital from the VC fund, hopefully leading to holding positions in great businesses resulting in value accretion for the fund and therefore the LPs.

This is where some people conflate providing the best founder experience with being founder friendly. The two are not the same. There is merit in swinging to the extreme end of being founder friendly (e.g. Founders Fund or a16z), but you need to be able to attract the absolute best founders to completely defer to them to do what they do best. You cannot be founder friendly to a founder who's a crook or defaulter or fraud or grifter (choose your word).

To me, the definition of being founder friendly starts from a point of trust. If the partnership is built on the foundation of trust, as an investor, you can trust that the founder will do right by their customers and shareholders. Vice versa, the founder can trust that you will have their back in good times or bad but more importantly hold a mirror to their face when needed and they know you're doing it in good faith and with their best outcome in mind.

When I make an investment in a company and maybe not hold a board seat, or a meaningful position in the company or any other control positions, if my partnership with the founder is built on trust, I can potentially be that first point of contact for the founder, even before those on the board or the largest shareholder. That's real power.

This is why, having a great founder experience is crucial. As a VC fund, you cannot control the outcome of the businesses you invest in, but you can control the businesses you invest in. Increasing your surface area to attract the best founders is the best and potentially only way to generate high returns and do your fiduciary duty to your LPs and investors.

If executed well, this becomes the most powerful flywheel for a VC fund. I haven't seen this well executed with any VC fund in India. There are a select few partners at funds who attract great founders, but not at fund level. I aim to change this by being an investor that has a high NPS for founder experience.

I'm keen to hear more views on who you think is a VC Funds customer.

Note: All blogs posts till 2022 were migrated to this platform (react+next+tailwind). While all efforts were made to migrate wihtout any loss, the migration lost some images and broke a bunch of links in old posts. If you spot anything amiss, please notify me?