03/02/2011

By Simon Acland

I hate shopping at the best of times. Speciality retail did not do us too badly at Quester - we backed Waterstone's when it had three shops and it turned into the firm's first big success, although the first deal for which I was personally responsible that went bust was a fashion jewellery chain called Bow Bangles. After receivership it became the very successful Claire's Accessories.

And the Christmas and New Year sales are the very worst of times for shopping. But at least it is clear what the products are, even if the frazzled shop assistants may not always manage to make you feel like a customer. Sympathise with them - they are probably graduates or PHD's forced by the skills mismatch in the economy to do jobs for which they are way overqualified.

But who is the customer in the venture capital world? Many VC firms are adept at making entrepreneurs feel like their customers - especially when they are competing for the deal. They talk about adding value and all the transformational benefits they can bring. And of course they tend to charge the entrepreneur deal fees, or director's fees, or monitoring fees, or all three. If they are selling their services, and charging you for them, then surely you must be their customer?

Some entrepreneurs are taken in by all this and do fall into the trap of thinking that they are their VC investor's customer. But of course the VCs' real customers are their own investors, the people who put money into their funds, their funds' shareholders or their limited partners. They are the source of the bulk of the VCs' revenue, the people whom VCs strain to impress and before whom they quake.

So where does that leave the entrepreneur and his company? Well, of course, they are the VCs' product. Most VCs have an extensive product range that they lay out for their investors. The product range overall is the VC firm's track record and the investment return that will determine whether the investors come back for more and put money up for that vital next fund.

And like any product range it is made up of a large number of Stock Keeping Units or SKUs. There will be some products which have cost a lot of money to develop. These may not be the ones with the best margins, but they may have cost so much that they cannot be discontinued. They probably attract close management attention. Or maybe very little has been spent developing a product but it can be sold at an enormous margin. That will be a favourite SKU and will doubtless get a lot of senior attention too.
Maybe it will be put at the front of the shop window - paraded at investor meetings and presentations. On the other hand an SKU that has been cheap to develop but is never going to sell for much more than it cost may be ignored, or even passed down to a junior product manager. And then there are the SKUs which get a lot of attention because the product manager believes that if enough changes are made it might turn into a high margin, best-selling item. Beware of becoming one of those.

VC-backed entrepreneurs may not want to feel like SKUs in the Christmas sales but that is what they are. Understanding that can give valuable insights to some of their investor's behaviour.