Reasons Venture Capitalists invest in startups
Venture capitalists (VC) talk to their portfolio companies about how important it is to define the customer, understand their needs, and create a compelling value proposition for them.
Venture capital as a “product” still has a long way to go, as does the philosophy of treating entrepreneurs like customers. While not all venture capital products (like the products of the companies they back) will succeed, it’s great to see firms innovating with the real customer in mind. This innovation provides better choices for the entrepreneur and should result in better long-term returns.
A report showed that customer experience (CX), sometimes, finds it difficult to get full recognition from some VCs, whether in Nigeria or around the world because the nature of the VC business model fosters a perception of VCs being at the top of the food chain.
One may ask why VCs should 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.
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’s 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.
Despite the total investment amount dropping due to COVID, Partech Partner’s 2020 funding report revealed that the number of equity rounds in Africa increased by 63.6 per cent 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 emphasises 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 prioritising customer experience see revenue growth at a rate of 59 per cent versus 40 per cent for companies that don’t. These companies also see higher profits (64 per cent versus 47 per cent).
Happy customers are repeat customers and, most importantly, they make referrals. According to Accenture, 55 per cent 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.
According to the White House Office of Consumer Affairs, dissatisfied customers often tell nine to 15 people about their experience. Attracting top-tier founders is imperative for the success of any futuristic-thinking VC firm.
To Titilayo Oladimeji of Trium Limited, positioning a VC firm as founder-friendly enquires 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.
According to her, some traits startup founders look for in investors include; 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 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 that plans to raise further rounds, having years of investment experience can also be a value-add.
Many modern VCs are evolving to institutionalise 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 to 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.
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