A Response to Dan Primack: Yes, LPs are a VC’s #1 Customer
Dan Primack seems to have a knack for asking seemingly simple but poignant and pointed questions that stir one to respond (hence my first blog post in quite some time).
Today in Dan’s Term Sheet email, he wondered who venture investors’ perceive to be their primary customer. His question was in the context of Peter Thiel and the venture firm Andreesen Horowitz selling a significant amount of stock in portfolio companies that are now publicly traded. Dan’s hunch is that LPs are VC’s primary customer. He is right. My response to Dan is below:
You’re 100% correct. As investors of (primarily) other people’s money, our LPs are our #1 priority. They are the reason we are in business and we have not only given them our word, but are also legally bound as fiduciaries to be stewards of their capital and grow it as efficiently and ethically as we think possible given our firm’s investment strategy. That said, at OpenView we deeply believe that we can drive the greatest returns for our investors by focusing almost all of our activities around helping our portfolio companies grow by providing them as much operational support (and capital) as we can muster/they need. For us, making money for our LPs and doing what’s best for a portfolio company are directly correlated. The cases that you describe with Groupon and Facebook are atypical in that Monsieurs Thiel and Andreesen invested in companies that are (or were to become) multi-billion dollar publicly traded companies.
Generally speaking, these investors should be perceived as having already done everything they could do to make their portfolio companies successful as, by all measures, Groupon and Facebook are wildly successful venture-backed businesses. Those are six-sigma outliers in the venture business (sad but true), and for them not to realize any of their investments for their LPs would have been imprudent. I understand that most of the shares Mr. Thiel sold recently were held by him personally, and I believe that he has every right to realize his own personal investments. However, Mr. Thiel is now a director of a publicly-traded company and is thus a steward of many other people’s capital. As such, he likely did not act in all of the public equity holders’ interests by selling his stake. That was his prerogative and I don’t begrudge him at all. He should probably step down from the board — he has served Facebook and Facebook has served him quite well, but their interests are no longer as aligned as they once were. That’s just my two cents.
What spurred me to action to write this note however, is that a certain sub-segment of our industry portray themselves as maverick do-gooders who have no need for money, but rather their greatest goal is to change the world by investing in transformative businesses. Now, there’s nothing wrong with that sentiment if you’re investing your own personal capital. Heck, I wish there were more wealthy individuals in the world who still had such idealistic and lofty goals. Unfortunately though, as institutional investors we are stewards of (mostly) other people’s capital and our #1 priority is to provide exceptional returns to our limited partners. Full stop. Any institutional investor that advertises themselves as something different is full of it and their LPs should take note.