Investors as market makers – The Metropreneur

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Some startups can be seeded to achieve a result similar to an investment-backed startup.

Some investment-backed startups may achieve a positive outcome such as an acquisition without a brand investor(s).

And then there are the startups that need an investor to be a market maker to be successful.

Clubhouse is a great example of a startup that was funded and propelled by an investor. Andreessen Horowitz not only led funding for Clubhouse, but actively promoted and engaged with the app. Partners and team members from Andreessen Horowitz actively participated and helped organize other high-level people to use the app. Let’s assume Andreessen Horowitz believes in the Clubhouse’s premise, team, and business. Andreessen Horowitz may have invested regardless of his desire or need to get involved to help raise awareness and use. But it could also be that Andreessen Horowitz invested knowing that it should help the company increase awareness and usage. Either way, it’s 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 venture capitalists (VCs), especially well-known and networked ones, become not only investors, but also market makers for their investments. Money alone is so 2019.

The key for a startup is whether it needs a VC as a market maker or if the company can fulfill 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.

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So how does a startup know if it should have a VC as a market maker? Here are some traits I identified:

  • Network Effect Dependency – If a startup depends on a large number of people using the product for the company’s business model to make sense and the product to have value.
  • Big Names as Prints – If there is an influencer effect and component in the product that raises awareness and makes others want to engage.
  • FOMO – Will people want to engage, even if they don’t know what value they’ll get from the engagement, all because they don’t want to miss out?
  • Value of VC beyond the $ – If the VC can increase its reputation and swagger by being a market maker for a successful startup and the startup mutually benefits from the influence of the VC.

If your startup doesn’t have these qualities, it probably doesn’t need a VC as a market maker. But if so, having one that is can be the difference between battling a long, hard slog in the mud and having a nice paved path ahead 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 the cache to become a market maker for the companies in which they have invested. Some investors who aren’t currently market makers for their portfolio companies will try to be, but unless they scale up 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’s about the expanded capability and ability to drive awareness and engagement of a multi-million company, not two or three.

There is also another type of venture capital market maker that will likely continue to fly under the radar compared to the Andreessen Horowitz type of market maker. One such company is Heartland Ventures. Interesting is Heartland’s model that limited partners (LPs) are also clients of Heartland’s investments.

Heartland recruits LPs with the intent and expectation that LPs can and will be clients of startups Heartland finds that can solve its LPs’ problems. It’s a win-win-win. Heartland gets LP which is invested beyond money. LPs have access to new ways to solve problems in their existing business. Startups have access to investment capital and early customers.

Heartland’s market maker model seems at first glance easier to achieve than Andreessen Horowitz’s, but that would underestimate the time, energy and work required to cultivate LP relationships that are not just about capital. . The Heartland model is a two-sided market, each with its own requirements, which must be managed and taken into account. It’s not as simple as it sounds to be able to manage relationships with LPs as both clients and investors at the same time. Heartland also can’t seem to be leaning one way or the other and risk being labeled a favorite. They must constantly balance the needs of LPs and businesses, especially since the relationship between the two also becomes a client relationship.

Most investors do not have the ability or desire to be a market maker for their portfolio companies. Investors can help with business development and seek market advice 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 an investor have intentionally agreed that the investor will perform that role in connection with the investment. And even when the investor being a market maker is agreed upon, a startup must do due diligence on whether the investor can actually serve as an effective market maker, because 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 driving factors that also affect other similar situations.

First, Andreessen Horowitz clearly believes Clubhouse could be big in every way. Much remains to be understood around the business model, but Clubhouse is positioned and on a trajectory to have the potential to attract and engage with many users that it will eventually try to monetize.

Second, Andreessen Horowitz believes in the underlying premise of Clubhouse that social engagement will evolve into audio as much if not more than text and images.

Third, partners and team members of Andreessen Horowitz were early adopters of other social platforms. This appears to be partly because they like the value received from engaging with the platforms and what it says about the evolution of communication and social connectedness, 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, one could argue that Andreessen Horowitz defined the modern venture capital game by being so visible and intentional about his 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 make a market even if they could.

If a startup needs millions of users to run the value proposition or the economy, it could probably benefit from a market maker investor. Or, in the case of Heartland Ventures, a startup can benefit from some high-value early customers that it would otherwise take them years to get, if they ever did.

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