Investors as market makers – Le Métropreneur
Some startups can be seeded to achieve a similar outcome as a startup backed by investments.
Some startups backed by investments may achieve a positive outcome, such as an acquisition without a reputable investor.
And then there are the startups that need an investor to be a market maker to be successful.
Clubhouse is a prime example of a startup funded and powered by an investor. Andreessen Horowitz not only led Clubhouse fundraising, but actively promoted and engaged with the app. Andreessen Horowitz’s partners and team members actively participated and helped organize other high profile people to use the app. Suppose Andreessen Horowitz believes in the premise, the team and the business of the Clubhouse. Andreessen Horowitz may have invested regardless of his desire or need to get involved to help with awareness and use. But it could also be that Andreessen Horowitz invested knowing that it should help the company increase awareness and use. In both cases, it has helped the company experience near unprecedented growth, even though the app is still only available to iPhone users. Andreessen Horowitz is a Market Maker for Clubhouse.
We will see more and more venture capital (VC) firms, especially the well-known and networked ones, becoming not only investors but also market makers for their investments. Money alone is so much 2019.
The key for a startup is whether it needs a VC as a market maker or whether the company can realize its potential by simply receiving capital from investors. A startup that needs a market maker in addition to capital should focus on a very small group of VCs as there are only a handful that have market maker capability.
So how does a startup know if it should have a VC as a market maker? Here are some traits that I have identified:
- Dependence on network effect – If a startup is dependent on having many people using the product in order for the business model of the company to make sense and the product to be of value.
- Big names like sweepstakes – If there is an influencing effect and a component of the product that makes other people aware and eager to engage.
- FOMO – Will people want to engage, even if they don’t know what value they’re going to get from engagement, all because they don’t want to miss it?
- VC value beyond the $ – If the VC can increase their reputation and strut their stuff by being a market maker for a successful startup and that startup mutually benefits from the influence of the VC.
If your startup doesn’t have these qualities, then they probably don’t need a VC as a market maker. But if it does, then having one that is can be the difference between fighting a long, grueling job in the mud and having a beautiful paved path in front of you.
Will we see more investors acting as market makers for their investments? A little, but I don’t think it will be generalized. Most investors don’t have the ingredients and hide it to be a market maker for the companies in which they have invested. Some investors who are not currently market makers for their portfolio companies will try to become market makers, but unless they scale and become intentional about it, it won’t work. Being a market maker as an investor is not about recommending or pitching a startup to one or two potential clients. It is the extended ability and ability to raise awareness and engage a business in the millions, not in twos or threes.
There is also another type of emerging venture capital market maker that will likely continue to go unnoticed compared to type of market maker Andreessen Horowitz. One of these companies is Heartland Ventures. Heartland’s Limited Partners (LPs) model also being clients of Heartland’s investments is interesting.
Heartland recruits LPs with the intention and expectation that LPs can and will be clients of startups found by Heartland that can troubleshoot their LPs. It’s a win-win. Heartland gets LPs that are invested beyond money. LPs have access to new ways of solving problems in their existing business. Startups have access to investment capital and first clients.
Heartland’s market maker model on the surface seems easier to implement than Andreessen Horowitz’s, but that would underestimate the time, energy, and work required to cultivate LP relationships that aren’t just about the capital. The Heartland model is a two-sided market, each with its own requirements and must be managed and addressed. It is not as easy as it seems to be able to manage both relationships with LPs as clients and investors. Heartland also can’t seem to lean one way or the other and risk being called a favorite. They must constantly balance the needs of LPs and companies, especially as the relationship between the two also becomes a customer relationship.
Most investors do not have the ability or desire to be a market maker for the companies in their portfolio. Investors can help with business development and seek advice on the market in some cases, but they will not create the market for a business.
Startups cannot rely on an investor as a market maker unless a startup and investor have intentionally agreed that the investor will play that role as part of the investment. And even when it is agreed that the investor is a market maker, a startup must do due diligence on whether the investor can actually serve as an effective market maker, as there are very few who can. .
This begs the question, why does an investor decide to be a market maker for a startup? If we take the case of Andreessen Horowitz and Clubhouse, there seem to be a few determining factors that spill over into other similar situations as well.
First, Andreessen Horowitz clearly believes Clubhouse could be big in every way. There is still a lot to understand around the business model, but Clubhouse is positioned and, on a trajectory, to have the potential to attract and engage many users that it will eventually attempt to monetize.
Second, Andreessen Horowitz believes in the underlying Clubhouse premise that social engagement will evolve into audio as much if not more than text and images.
Third, Andreessen Horowitz’s partners and team members were the first users of other social platforms. This seems to be partly because they love the value received from engaging with platforms and what it says about the evolution of communication and social connectivity, but also because their engagement makes them aware of themselves and the company as a leader in promoting new social platforms. and the use.
Andreessen Horowitz has always been active with his own marketing, media and content. In fact, it could be argued that Andreessen Horowitz defined the game of modern venture capitalists by being so visible and intentional about its own marketing and positioning.
An investor as a market maker is because the investor loves what the company does enough to actively and publicly put their name and energy into it. It is a commitment of the investor that he cannot undo. This is why most investors don’t market, even if they could.
If a startup needs millions of users to make the value proposition or economy work, it could likely benefit from a market maker investor. Or, as in the case of Heartland Ventures, a startup can benefit from some high-value early-stage clients that it would otherwise take years to get, if they ever did.
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