The Human Factors

In many businesses, it can be hard to figure out who your customer really is. On-line media businesses, for example, often are a point of confusion. They bring an audience together with advertisers who want to reach a particular demographic. Even if the subscriber pays a fee, the vast majority of the revenue usually comes from the advertisers; they are the principal customer. The audience is the “product” sold to advertisers, and entrepreneurs building these businesses change content on their site to attract and maintain an audience with different characteristics, depending on what advertisers want and what they are willing to pay.

Free and “freemium” internet software businesses further cloud the issue because what heretofore companies sold for a price (such as Quicken financial software) are now available without charge (Mint.com, for example). While the software didn’t change much, the business model did, and so did the customer from the end user to highly targeted advertisers.

So too, it is with investors and entrepreneurs. Because “customers” are usually the ones offering up the cash, the flow of money makes it appear that the investors are the customers. Entrepreneurs should cater to their needs both in seeking investment and as they grow the business. Typically these come in the form of lengthy diligence requests, indecision or even requirements as to the company’s basic operations such as location. Venture investors have so many requests for money and choices about where to invest that they seem to be the ones holding the value.

There are many businesses, however, where success comes from being highly selective about who your customers are. High-end consultancies and agencies, for example, are known by their customers. Think Hollywood agents and investment banks.

In a similar vein, entrepreneurs are the investors’ customers. Not every entrepreneur–only a few, according to industry statistics, generate most of the returns–but those few that the investors want to back. Investors’ processes need to serve these customers from how communications are handled, to an efficient and effective diligence process, to how value is created in the long run. In the end, the cash flows are supposed to reverse, with the successful entrepreneurial venture paying back many fold the cash that was provided early on. Then, the customer relationship is clear.

You see this on “hot deals” were there are multiple venture investors chasing the same company. I would suggest, however, investors should seek to be equally responsive to all companies. A quick “no, thank you,” is much better than a lack of response or lengthy indecision.

At CommonAngels, we continue to refine our processes to meet the needs of the entrepreneurs we seek to back. We have introduced our new seed program, picked up the deal pace, streamlined meeting formats, continue to improve diligence processes, and are enhancing post-investment communication with all our stakeholders.

No business is perfect, and we’re continuing to seek to improve. We welcome corrections and compliments as well as your further feedback and suggestions.

Tags: Angel Investing, Customers, Entrepreneurship, On-line Media, Venture Capital, Web 2.0