Leading Funding Rounds Now Requires More Thematic Focus To See, Pick, Win & Service Startups

I’m going to make the case that early stage venture *firms* who want to lead seed/A Rounds can be generalists (in the sense they have a set of GPs who cover a broad set of areas collectively), but that as a VC you, now more than ever, need some degree of focus. This doesn’t mean every partner is so narrow as to invest in just a single type of startup. But it does mean that if you cannot articulate the handful of spaces you are trying to dominate (from an investment returns perspective), you are probably not going to succeed ongoing.

Why do I believe this is now a reality (and I didn’t necessarily when we started Homebrew a decade ago)?

• “Software eating the world” (or my take, “software enabling the world”) means the breadth of problems startups are solving, the range of markets they’re participating in, and specifics of what they’re trying to accomplish during their first few years of operations, are so diverse that you cannot credibly hold evaluative criteria in your head for all startups. You might invest as a generalist but I don’t believe your returns will outperform.
• Similarly, founders of these companies are looking for lead investors who can de-risk their path forward. Being a pure generalist VC makes it very difficult to convince savvy founders that you have the industry relationships, relevant pattern-matching, and density of experience to be their best lead investor. I think this remains true no matter how large your firm’s Operations team is, or how much of a celebrity VC you might be (although both of those can be selling points).
• We’re back in a phase where alpha seems to be coming from technical innovation (crypto, climate, biology, AI) and not just business model application (XYZ but a marketplace!). It’s not just that it takes time to understand these technologies but each of them bring their own new networks and talent to the forefront. You have to be *in* these networks to see the best early stage opportunity, not just wait for intros to land in your inbox.

I’m not the only one noticing this change. Look at First Round Capital’s recent announcement of hiring investment specialists in Health Care and AI.

while we’ve tended to apply a generalist lens to early-stage investing, when you take a step back, you don’t have to squint to see that our investments tend to cluster around a few key areas … we’ve approached the age-old question of whether to be specialists and generalists as a balancing act … But there’s no denying the value in specialized knowledge.

and finally the FRC transformation

we’ve naturally moved a few ticks closer to a more specialized approach over the last five years — especially as we’ve grown as a firm and added to our partnership.

So if you don’t believe me, at least listen to one of the firms that started seed VC 🙂