One of the VCs on a panel yesterday here at Techcrunch Disrupt said that “The days of the generalist investment banker or lawyer VC are over.” a statement I couldn’t agree more with. There are two dimensions to the focus, one we are all familiar with, and one that is perhaps a bit newer.
The familiar one of course is that good VCs need to have a deep understanding of the companies they invest in, and that means focusing (or specialising) in an area. Consumer internet, adtech, fintech and cleantech are common choices for focus areas right now. This specialisation makes sense because it is better for the VC and better for the entrepreneur – the VC makes better decisions because she is investing in things she understands (Warren Buffet describes this as investing within your circle of competence) and the entrepreneur gets an investor who is better able to add value post investment.
The new one is that VCs are getting more focused by stage of investment. On the panel yesterday James Slavet of Greylock said that the number of firms that are investing all the way from early stage to late stage is decreasing – or to put it in the positive, the number of VC funds that is focusing on either late or early stage is increasing.
One of the big trends within venture capital, particularly within software and internet investing, is that the period of maximum value creation is shifting from the middle of spectrum, the Series A/Series B, to the ends of the spectrum, very early stage and very late stage. This bifurcation of value creation explains the rise of the micro-VC and later stage funds like DST. Traditional venture funds have responded with seed programmes (Menlo announced a new one yesterday) and by raising larger funds to invest at multi-billion valuations in companies like Twitter, Zynga, Dropbox etc.
Most VCs find it very hard to manage small and large investments in a single fund, the passions and skill sets required for operating at the different ends of the spectrum are very different and the differing weight of money creates compensation pressures within the partnership.
Hence we are now seeing specialisation by stage of investment alongside specialisation by industry sector.
There is a write up of the panel on Techcrunch.