A venture capital firm is unlike almost any other business.
Why? I’ve been an expansion stage venture capitalist for 11 years and I still find it difficult to explain to people how being a VC is different from positions at most companies.
As entrepreneur and investor David B. Lerner explains, a great venture capitalist is a lot like Sherlock Holmes. We’re well-traveled risk takers that possess a keen attention to detail, incredibly high standards, innate curiosity, and an extreme passion for helping our customers succeed.
But those things don’t necessarily make us strange. Here are 10 aspects of being an expansion stage venture capitalist that do:
1. Our target customer segment is very small
Whether venture capital firms focus on specific industries or products, they tend to pick one and invest only in companies that fit in that segment. Lately, as Chris Dixon points out at Business Insider, that segmentation has expanded to company stage.
At OpenView, for example, we invest in expansion stage technology companies that have moved beyond the startup stage and need capital to scale their business. Relatively speaking, that target customer segment isn’t very large.
2. We want to meet all the potential customers in our target segment, but we need to turn away most of them
Not every expansion stage technology company is right for our portfolio and we’re not always right for them.
There’s a significant amount of due diligence that’s involved in qualifying a company before they receive a venture capital investment, as Fred Wilson details on his blog. Post investment, there is even more work on behalf of our customers, so the reality is that each of us can only work with a few customers at any given point in time and we need to make sure that each company we invest in is a good fit for the firm and we are a good fit for the company.
3. We only want a few new customers each year
According to the National Venture Capital Association, there were 794 venture capital firms in the United States in 2009. Those firms invested in approximately 2,400 companies that year – an average of about three new customers per firm.
4. We pay our customers a lot of money to start the relationship
Unlike most businesses, we actually pay (through a capital investment) a lot of money to acquire new customers. Granted, that payment comes with a potentially lucrative return, but it may not come until several years after the relationship begins – if it comes at all.
5. We want our customers to grow their business much more than we want to grow our own
Most businesses root for their customers to succeed. But very few root for them more than they do their own business. As venture capitalists, we excel when the smaller expansion stage companies we invest in grow into great, big businesses. As a result, we want them to grow their business much more than we want to grow ours.
6. If our customers don’t grow their businesses, then we will go out of business
As Erick Schonfeld at TechCrunch points out, some venture capitalists consider their portfolio a success even if 20 percent of their customers fail. Other less fortunate VCs may experience failure rates much higher than that. And if the companies they invest in don’t make money and grow, the venture capitalists won’t either. Before long, both enterprises will be out of business.
7. If we’re lucky, our customers pay us a lot of money to end the relationship
A successful relationship with our customers culminates with them writing us a check to end it. And, in that situation, both the venture capitalist and the customer are thrilled that it reached that point. How many other businesses are happy when their customers leave them?
8. Since 100 percent of our customers leave us, we need to constantly rebuild our customer base
Whether our portfolio companies are sold, don’t survive, or buy us out, we’ll lose all of our customers at some point. That reinforces the need to engage every company in our target segment and explore every viable possibility. We must replenish our customer base to stay alive.
9. We want our customers to be taken away by a large company
When a venture capitalist invests in a company, one of its end goals is to experience something similar to Microsoft’s recent acquisition of Skype for $8.5 billion. When that happens, the customer and the VC make money and the relationship ends well for everyone involved.
10. Even better, we want our customers to be taken away by a really large, swarming mob
The more interest in the customer, the better it is for us. We thrive when investment bankers compete to take our companies public and, even better, public shareholders demand a company’s shares so much that the share price skyrockets.
What did I miss?
It’s certainly a unique job that’s not for everyone. If you’ve thought about moving from entrepreneur to venture capitalist, VC vet Matt McCall details some things you should know about the industry before you make the leap.
I’m sure that there are several more strange things about being a VC. Can you think of any others?