Double-sided Service Business

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Essays

Venture capital occupies a strange space in finance, where *real* financial services people don’t consider it finance, largely because a lot of the diligence, assessment, and dealmaking is substantively less quantitative than you might see in middle markets private equity, or mezzanine debt. And that is right, but I don’t think that’s why venture capital is so different. After all, there are plenty of venture capitalists who bring substantive quantitative assessment to their work, even at the seed stage, where we invest. Venture capital is different, in my view, because of ‘client services’. Most buy-side investment management firms have one set of clients (the LPs), and one set of assets (the portfolio). Venture capital, on the other hand, has two sets of clients – the LPs *and* the portfolio.

In public, on Twitter, and in pitch meetings, many venture capitalists speak eloquently and boldly about “serving the entrepreneur” and how we sell them our capital as a business model, and thus need to keep our customers happy. This is eminently true, and there are many venture capitalists whose reputations have been built, and kept intact, simply on the basis of their ability to put entrepreneurs first, and to treat them well. After all, the entrepreneurs are the ones actually building the companies; putting their careers and the livelihoods of their colleagues behind the outcome of one great effort to change the world. But without the Limited Partnership – those institutional investors who believe in general partners’ ability to deliver returns – venture capital doesn’t exist. And LPs look for, and judge partners on the basis of, venture returns. To that end, a curious aspect of venture capital reputation that I have been wrestling with lately is the fact that there are a number of very successful venture capitalists, whose reputations are thoroughly intact, who are also known for being notoriously founder *unfriendly*. That means, in moments of conflict, they are known for putting the protection and control of the financial security ahead of the relationship with the founder, or the management, in the name of fiduciary responsibility.

One way to think about it: success (or luck) investing in the right brands / driving early returns creates a snowball effect where someone’s dealflow has dramatically more to do with their past success than it has to do with their current actions, and may not correlate with being ‘founder friendly’… Another way to think about it: in the transparent, low barrier, entrepreneur-friendly environment that we are living in, and where I have been learning this business, the going mantra is ‘put the entrepreneur first and everything else will follow’, and frankly that being ‘founder unfriendly’ is a legacy, anachronistic approach to venture capital that will phase out in time.

It’s my view that the most sophisticated CEOs understand that venture capitalists serve multiple customers, and must keep a balance between their needs as they deploy capital and manage their portfolio. Indeed, without LPs, there is no venture capital. But without great innovators, there is also no venture capital, so neither can exist without the other. As such, the best venture capitalists strike a delicate balance, twisting the knobs on either end of the marketplace to drive the best outcomes over time.

The answer is likely that both of these views have truth to them, and a good mix of the two will represent the next generation of VC leaders. The ‘nice guy finishes first’ angle, however, seems to be both new and gaining momentum.

This is a good thing!

What do you think?

As with everything, I’m not sure.

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