Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 1 down vote favorite

I am working hard with lots of start-up clients on their business models. One of the critical issues that we keep coming back to is "who is the customer."

In my model the customer is the person who pays the bills. There might be users, stakeholders, investors -- but the customer is the person who pays the bills.

I find a number of smart business owners that are designing the model of the start up who believe that the business needs only to aggregate users to their product/service-- and that will create a value that will be purchased by a venture capital firm.

They want to run on the fuel of investment from stage to stage, from phase to phase, until they have built enough perceived value that they can secure a significant round of capital at which point they think they have hit the gravey train.

This feels very "1990's bubbley" to me. But my lack of enthusiasm for this model seems to be a significant barrier to my earning their business to do business development marketing. I end up "arguing" with a potential client which never bodes well for sales.

So, my question: Can the VC be the customer?

share|improve this question

2 Answers

up vote 1 down vote accepted

Asked like that, it's virtually the definition of a bubble, that all the cash comes from investors. But it may be that you're asking the wrong question.

I'd break it down like this.

Users/customers can certainly be worth more than their evident income-generating value. And when that's true, it's often the case that there's one or more volume tipping point. Below the tipping point, whatever monetization strategy is pursued, costs are going to outweigh revenues, even ignoring fixed costs. Above that tipping point, it becomes possible to produce profits.

It's evident that in most such situations, risks run high. But if there are investors who have the appetite for the end result, they may be interested. I'm getting mixed messages as to whether this is a case like I've described, but let's assume it is.

In a given investment round, investors buy into that risk. That can be a rational choice if they believe that the proposed activities will ultimately yield high value, regardless of whether that's shown by profit during the life of the round.

However, their risk is increased by two factors. First, a future investment round has to succeed or the business will simply run out of cash. Second, later investors tend to have power over earlier investors, so a successful round doesn't guarantee a return. These risks run higher than the risk in the business itself, so in theory investment money will be relatively expensive.

So the question may actually be,

Can investors be interested in this particular company with no prospect of achieving profitability during the current investment round?

Well, that's a selling question. But 'selling' a pitch to a VC doesn't make the VC the customer. Figurative sales don't produce literal customers.

share|improve this answer
up vote 0 down vote

At first I thought you should treat it like any other exit strategy, but this is how they intend to continually run the business. Maybe it helps you accept the situation if you look at potential VCs as the customer.

share|improve this answer
That was my gut reaction as well-- that is the intended exit strategy. But the more I get into it -- and asked the hard questions about margins, conversion rates, and such -- it is clear that they a debt financing to build a "product" with one potential customer and one potential sale. If there is no margin possible from the users of the service -- meaning the bills aren't being paid by those users -- then the only option is to consider the VC as customers. Now, accepting that -- I am not sure I can yet. LOL. Thank you for answering Jeff. – Joseph Barisonzi May 3 '11 at 20:17
Publicly traded companies have the same issue with customers and shareholders. The ones figure out how to serve both are probably the most successful. – JeffO May 4 '11 at 12:33

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.