Venture capital has shifted toward businesses that spend heavily on building a customer base, according to October research examining why investors finance some young companies and pass over others.
Martin Aragoneses, Young Soo Jang and Amir Sufi report the pattern in an NBER working paper. The research is preliminary and has not been peer-reviewed.
Their evidence links venture backing with a greater emphasis on sales and marketing staff and trademark applications. It combines US business records for 2010 to 2022, companies listing in 2010 to 2023, and private-investment returns.
The authors describe a shift since the 1990s toward customer capital: the business asset created by attracting and retaining buyers. Knowledge capital, including research and technical expertise, remains part of the picture.
A product and a market require different spending
Developing something customers could buy is one spending task. Finding those customers, explaining the product and persuading them to switch from an existing supplier is another.
A software company may need engineers before it has a product and salespeople before it has enough paying users. A consumer brand may need distribution relationships as well as a finished item. In both cases, commercial expansion can require money before the resulting sales arrive.
Customer capital is not a cash balance or a machine that can be sold to repay a lender. Its worth depends on whether customers continue buying and whether the business can serve them profitably.
The US Securities and Exchange Commission’s explanation of early-stage investors describes venture funds as investors in rapidly growing companies, generally taking equity, or ownership interests. Returns usually depend on a later transaction, such as an acquisition or public listing, rather than regular loan repayments.
That arrangement allows time for a business to expand. It also means founders are sharing future ownership and, frequently, decisions about how the company is run.
More customers do not automatically mean better economics
Revenue growth and a successful customer-acquisition strategy are different measures. Discounts can generate initial orders, while advertising can produce visits that never become purchases.
For a business evaluating expansion, the relevant calculation includes the cost of reaching a buyer, the margin earned on the sale and the likelihood of repeat purchases. Counting new accounts alone leaves out how much it costs to obtain and serve them.
A sales campaign can also bring cash in later than its costs fall due. Employees and advertising suppliers may need paying before a new customer has completed its purchasing process.
Our earlier coverage of Europe’s startup and scaleup financing gap examined the money needed to turn an invention into an expanding business. Customer acquisition is one reason commercial expansion can remain expensive after the technical work succeeds.
The new research identifies financing patterns, not a guarantee that raising a marketing budget will attract investors. Its measures are proxies for customer-building activity, and investment selection makes a simple causal interpretation difficult.
The investor’s time horizon affects the business
The SEC notes that venture investors often take board or advisory roles and contribute operating guidance, introductions and hiring assistance. A financing offer can therefore affect how a company expands as well as how much it can spend.
A founder comparing sources of capital needs to distinguish a loan that requires scheduled repayment from an investor seeking a much larger future company. The same sales plan can create different pressures under those arrangements.
For customers, a heavily financed launch can make a new supplier visible quickly. For the supplier, the harder measurement comes afterward: whether those buyers stay, pay and generate enough margin to sustain the operation when the launch budget ends.
