The VC Strategy “Goldilocks” Problem: Be innovative - but not TOO innovative? 🐻 I recently wrote about the fundraising challenges of emerging GPs. There was one great point of feedback I received on here (thanks Johannis) as well as privately that I very much agreed with: ❗A lot of VC emerging manager strategies, especially in VC, are simply not differentiated enough to raise a fund. I frequently receive decks from new GPs looking to raise funds - and it’s mostly the same: Focused on B2B SaaS and cleantech. Screening 1000+ deals a year. Offering a great network in the VC ecosystem. Providing LPs with co-investment opportunities. Yada yada yada… To a degree, I guess this “crowding” in VC is driven by how easy it is to start investing in VC, with funds being run by as little as one “Solo GP”. And if you are a truly outstanding individual coming out of a top-tier VC fund with an existing track record, a network-driven, generalist approach might work for you. But for everyone else, things are much more challenging. Take European VC: We have some fantastic early-stage funds, and an increasing presence of the large “Tier 1” US funds. If you launch a “generalist” fund today, how do you think you can compete? You can’t compete on brand (founders will always go for the better brand if terms are comparable) and you can’t compete on fund size (existing funds have much deeper pockets). The only way to compete is through differentiation in strategy. How can that look like? 1️⃣ Domain Expertise: Building highly specialized expertise in more technological matters in order to identify and/or invest into opportunities before they are investable for generalist VCs. (Shout-out to Vsquared Ventures and Possible Ventures.) 2️⃣ Service Differentiation: Offering a degree of services to your portfolio companies that other firms cannot provide - similar to the in-house consulting teams at PE firms. (Project A Ventures comes to mind). 3️⃣ Strategy Differentiation: Investing in opportunities that other VC funds wouldn’t touch, i.e. turnaround situations or companies that might not be the typical VC cases. (I wrote about the “VC Orphans” in the past - definitely an opportunity in my opinion!) However, it would be unfair to point out the challenge of a differentiated strategy. I’ve met some truly outstanding individuals launching funds in those three verticals that are not having an easy time. After all, differentiated usually means new - and LPs (just like GPs) are reluctant to try out new strategies as they are being established. Nevertheless, if you hang in there as an GP and manage to raise your fund in such a niche, I am quite certain that you’re better positioned for the long-term. So don’t just raise another B2B SaaS fund - go for something new. 🙂 #venturecapital #privateequity #assetallocation Cape May Wealth
#VC innovation should be done by #EmergingManagers, but can only be done by Established Managers. The showstoppers are LPs, as they prefer to stick to what they know and understand. "New is not always better". The #Paradox: VCs demand startups to be innovative and disruptive, while being extraordinary rigid when it comes to VC innovation themselves 🤷🏻♂️
We are convinced that specialization is fundamental to our success. In a given fund we want to invest in thirty companies who believe we are the VC that can most help them build something remarkable. It is specialization that let’s us find them in the first place.
Another point that comes to my mind is the problem of choosing a fund that has a strategy of making money from investors as a service provider. From my point of view, the wrong starting point. Look for a GP who has a great investment idea, but whose own money is not enough to realize it (skin in the game!) and who is therefore looking for co-investors. Avoid funds that want to live on growing capital commitments.
As always on point, Jan. Many emerging managers, in addition to a clear strategy, lack one more element. It is proving that within this strategy, they can win top deals. It is possible if you can offer the founders something that no one else can give them. We've managed to do this many times, and we've often been the fund that touched deals that no one else in the region had access to. Thanks to our value creation playbook, we were also able to outbid other funds that were able to offer founders higher valuations. Founders often need help understanding the game's rules of developing a company with external capital. If you can navigate them and give support from seed to exit, you will become the fund of first choice.
Thanks for sharing! I would love all LPs to think like you Jan! :) cc: Masawa & Joshua Haynes 1️⃣ #mentalhealth #mentalillness #socialdeterminantsofhealth 2️⃣ #nurturecapital 3️⃣ #socialimpact #impactinvesting
Point 1 and 2 go along very well. If you have real domain expertise, you can offer highly valuable intros in the industry.
From "yada yada yada" offerings to "Did you really say that?!" offerings… 😄
You nailed it, Jan Voss! Let's not forget the magic a diverse team can sprinkle on a VC strategy!
Investor | Strategic Advisor | Board Member | Partnering with visionary entrepreneurs with hustle | X: @NetalieNadivi
1yThis is very much analogous to VCs investment approach in start-ups following herd mentality vs. contrarian, out-of-the box investing. Many LPs want to fit a VC into a very specific, tightly defined allocation box - e.g., specific industry or geography or diversity or business model (B2C/B2B/B2G etc.). I assume this is why so many funds sound 'same same' - they are trying to fit neatly into an LP box that will remove some friction in the process. Later, many of those same GPs will invest 20% or even more of their fund off-thesis. When a VC tries to do something even a little different from day one, this probably means more diligence for the LP and more internal convincing that the LP needs to do. For example, fintech for healthcare does that fit into our 'fintech' allocation or 'healthcare' allocation. It's either both or neither because it may be easier not to decide. What if it's just something fresh and new altogether - a new way to look at old problems? Shouldn't LPs also have an allocation for the undefined that has been well defined by a GP?