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Many of the people we know in the venture capital business think their customers are the LPs (the investors in venture capital funds).

We've always thought that was 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 us.

What makes this so hard to grok for many in the venture business is that much of the selling we have to do is when we raise money. Once the money is raised, the entrepreneurs are the ones who come into our offices in "sell" mode. And that dynamic warps many VC's perspective of the business.

We 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 we are convinced that the LPs are the shareholders. That is exactly the same dynamic that exists in company/shareholder relationships.

This "entrepreneur is the customer" mantra gets hard in a couple places in the venture capital process.

The first is the VC deal flow process. We are getting something like 30 new deals a week coming into our office that are generally in our area of interest and are at the stage we like to invest. We will make investments in roughly four of them per year. So we have approximately 1500 potential "customers" walk in our door a year and only take four of them. It's natural that the other 1496 will leave our office unhappy at some level and may never return. That's a big customer relations problem. We try really hard to be helpful, candid, and quick in our triage process, but at our best we might only make a third to a half of the rejected entrepreneurs comfortable with our process and eager to come back.

The second area where customer relations gets sorely tested, and where the "entrepreneur is the customer" mantra is the most difficult is when the entrepreneur is not doing a very good job of minding their own store. We believe that once the entrepreneur accepts an investment from the VC, the VC's customer set expands to include the company, its employees, and its customers. The entrepreneur is still an important customer, probably the most important customer, but the entire stakeholder group in the entrepreneur's company comes into the equation once the investment closes. When the entrepreneur starts failing this expanded stakeholder group, it becomes the VC's job to help them by getting them to change or getting them out of the way. Most entrepreneurs don't view that as help and therein lies the problem.

But in a funny twist, this is exactly where the "entrepreneur is the customer" is the most helpful mantra. If you really view the entrepreneur as your customer, when you walk into their office with the hard news that you aren't going to keep funding their company if it continues on its current path, or that you want them to step aside and bring in someone better suited to run the company, or that they need to get a coach and start behaving differently if they want to keep their job, you will deliver that news as a friend, a person who honestly cares about them and their dreams, and with compassion and understanding. And that is the only way to get through those really hard discussions with a chance of coming out the other side with a relationship.

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.

Union Square Ventures would not exist if it were not for an exceptional group of LPs who we think of as our shareholders. We are working to deliver them exception returns in return and we know that focusing on them instead of the entrepreneur is the last thing they'd want us to do.

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