Judah Taub is Managing Partner at Hetz Ventures, a top seed stage VC based in Tel Aviv. He lectures on time-management & creative thinking.
At one time, doctors were expected to have expertise in all aspects of the human body and treat every ailment. Nowadays, there is a specialist for every section of our anatomy. We can see a similar contrast in the professional expectations of athletes, then and now: Previously there was a one-size-fits-all conception of the athletic physique—strong, broad, long-limbed. As sports have diversified and victory in each arena relies on such small margins, competitors are determined to retain an edge and embrace diversification.
The lesson is clear: To succeed in an increasingly competitive environment, we must play to our strengths and work to make those strengths even more apparent, meaningful and impactful.
Venture capitals (VCs) are no different. We’ve seen the market mature since its early days, including venture capital’s first heyday in the ’90s. We’ve seen the funds raised by venture capital climb 10 times since 2002. With that maturity comes a fairly newer reckoning: Specialized VC can be a better way forward for both tech company founders and investors.
Many may argue that the toolbox of a good venture capitalist should be transferable from one vertical to another or from stage to stage. They may also claim that the breadth of knowledge acquired across these varied sectors and stages provide them with additional perspectives and advantages, such as knowing what the startup should look like in their next funding round or what approaches have and haven’t worked in other sectors. This may be true. But ask yourself: Would you prefer your heart surgeon to have spent the last 15 years gaining experience in wisdom teeth removal and physiotherapy or mainly focused on heart surgery?
Clearly, there is a balance, and even the best heart surgeons spend time in other disciplines to derive inspiration. But at this point, venture capital is in the process of moving from a “one doctor treats all” attitude to one that is more focused on specific stages, verticals and geographies.
From Focus To Value
As a rule of thumb, venture capitalists often tell the founders in their portfolios to focus on scalable products rather than customized services. But how often do these VCs follow their own advice?
I’ve noticed the most frequent assistance offered by venture firms is access to their networks, which hopefully include potential design partners or paying customers (this is especially true for early-stage startups). As a VC, being able to provide this to your portfolio in a repeatable and successful manner requires an internal operation, typically set up in advance.
But there are challenges to this: It’s extremely hard, if not impossible, to build and maintain such a network without being committed to a limited number of specific investment verticals since it will be harder to know with which specific executive roles at which specific companies you’ll need to develop a strategic relationship with.
Furthermore, without a clear commitment to specific verticals or too wide a spread of sectors, why should contacts in your “targeted network” be interested in speaking with you or your companies when the relevance you bring is relatively infrequent, and you’re not particularly knowledgeable in their field?
Moreover, many startup founders weighing VCs based on their strategic networks don’t realize just how quickly a fairly large VC network shrinks in terms of its relevance. Consider a venture firm that regularly speaks with 100 chief security officers. Let’s say one of their startups asks for introductions to design partners. Very quickly during the conversation, it might transpire that the startup’s product is actually most suited toward B2C cloud-native companies with 500-10,000 employees. Suddenly, the pool of 100 can shrink to 10. The critical mass required to be effective with a network is fairly large and something that is near impossible to maintain across a broad range of industries.
Focus is not only critical for business development. Many of the “value add services” venture capital firms claim to provide their startups can be dramatically more fruitful when offering a narrower but deeper set of relationships. Executive recruiting, marketing services and even introductions to future lead investors are all relevant when it comes to VC specialization. A network of superb VP R&Ds or proven CROs is only relevant within their own field of expertise. Today I am seeing a rise in focused VCs, which are able to create large, vibrant networks in specific domains with dedicated Slack or Discord channels, even with their own very small (but focused) teams.
The Risk Of Being Too Focused
On the flip side, there are venture firms that are starting to feel the challenges of being too narrowly focused, especially when the fund size is big in comparison (i.e., a pre-IPO fund for cybersecurity companies). Aside from putting all eggs in a very narrow basket, they may inevitably begin to see conflicts and competition between portfolio companies in hyper-focused markets.
This can become a nightmare, as founders begin to worry about potential board members who also may also be invested simultaneously in competing companies. In this scenario, investors also have to begin to prioritize among their own portfolios where to invest their sector-specific resources and curated value-added services.
Ultimately, like anything else, it’s important for VCs to keep looking inward and ensuring they live up to the promise of the value they offer founders, whether that’s based on being hyper-focused, specialized or generalist.
Over time, founders will learn to identify those venture firms that are, on the one hand, focused and able to provide real guidance and assistance while, on the other, providing enough breadth to build a portfolio that doesn’t cannibalize but rather benefit each of its companies. There is a place for highly specialized doctors and athletes—and the specialized VC landscape is forging its own.
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