Venture Capital and Customer Capital

Martin Aragoneses, Young Soo Jang and Amir Sufi

No 35919, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Venture capital specializes in the financing of customer capital intensive firms—firms with higher sales and marketing expense to revenue ratios, a higher wage bill for sales and marketing employees, and a higher tendency to apply for trademarks—and they do so more than other financial intermediaries. Venture capitalists target high customer capital industries with low knowledge capital but avoid high knowledge capital industries that lack customer capital. Firms tilt investment toward customer capital leading up to the initial venture capital investment, after which their scale accelerates rapidly. Venture capitalists focus on financing customer capital because such investments require tolerance for substantial risks of failure in pursuit of extreme upside potential, as characterized by power law returns. This return profile fits customer capital investments more closely than investments in knowledge capital. Venture capitalists that sprinkle small investments across a large number of firms, colloquially referred to as the “spray and pray” strategy, target customer capital industries for investment, whereas venture capitalists that commit larger amounts to a small number of firms target knowledge capital industries. The venture capital focus on customer capital reflects a shift away from its traditional focus on knowledge capital intensive firms over the past 30 years.

JEL-codes: G2 G24 G3 G32 (search for similar items in EconPapers)
Date: 2026-10
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