Many of the people I know in the venture capital business think their customers are their investors, called LPs in the industry vernacular. I've always thought that was dead wrong.
The entrepreneur is the customer and the LP is the shareholder. That's the only way to think about the venture capital business that makes sense to me.
...I start with the value chain. The entrepreneur creates the value, they are the "raw material" in the venture capital business. If there were no entrepreneurs, there would be no venture capital business. So the VCs who treat the entrepreneur like the customer and invest heavily in customer service will be rewarded with the loyalty of the most important component in the value chain.
Money on the other hand is a commodity, whether its in the hands of the LPs or the VCs. Money flows to the best returns and always will.
So if the VC does a good job of serving his customers well and generates superior returns as a result, the money will always be there as long as the price of his fund is reasonable. That's why I am convinced that the LPs are the shareholders. That is exactly the same dynamic that exists in company/shareholder relationships.
...Entrepreneurs are really difficult customers to serve well. It takes a significant investment of time, energy, money, and intellect to satisfy them. But if you do it well, you will develop a reputation for great customer service that will keep the best ones lined up at your door.
And that is the best way to deliver exceptional returns that I know of.
At a time when so many new funds are setting up shop in India, I can't think of a better new year message than this. Happy new year!
Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.