Who Is Your Customer?

I ventured outside the home office yesterday to have lunch with an out-of-town VC, at the picnic-tabled Barking Crab on Fan Pier in Boston. Be forewarned that if you ever go out to lunch with me, that’s probably where you’ll end up. Great place, but the shoulder-to-shoulder lunch crowd wasn’t terribly conducive for sharing gossip. So instead we got into issues of investor responsibility that basically boiled down to a question worth posing to the larger peHUB audience: “Who is your primary customer?”

Specifically, is your customer the company in which you invest? Or is it the limited partner who invests in your fund? This might seem most relevant for VCs who often form tight bonds with early-stage entrepreneurs, but I think it’s also salient for the buyout crowd.

My lunch-mate went for the company, arguing that such a focus is the best way to produce returns that will satisfy the limited partner. He used the metaphor of Starbucks, in that the customer is the one buying the coffee – and that customer satisfaction leads to added revenue that leads to increases in shareholder value. I countered by pointing out that Starbucks coffee is priced higher than that of its competitors, largely because of its employee benefits package. If Starbucks is most concerned with its coffee-buyers, wouldn’t it lower the cup price by cutting some benefits? He replied something about happier employees leading to a better store environment that leads to happier customers, and around we went…

My initial reaction was that the primary customer is the limited partner, because without the LP there is no capital to invest in the company. Lunch-mate replied that it may be easier to find another LP than another good company, which I’d term as the “easier to find another coffee farmer…” argument. Works for a veteran firm in an era of excess LP liquidity, but seems a bit short-sighted to me. Plus, LP agreements are often quite explicit about which side wins out in case of a severe conflict. Pick the company, and violate your contract.

Like all black-or-white arguments, the real answer here is a shade of gray. Something like: Your primary customer is the company, but your ultimate responsibility is to the limited partner. But let’s pretend we’re political pundits on a cable screamfest, and take sides. I’m still sticking with LPs unless convinced otherwise.

So I ask you: Who is your customer?