Every VC firm claims to have a specific focus, but most of the time it’s so broad that it becomes useless.
Most firms would say: we focus on internet, mobile, consumer and enterprise. Well thanks.
The reality is that most firms will invest in anything that has the chance of scaling to a multi-billion dollar valuation, from coffee and liquid meals to spaceships and Facebook.
That’s totally fine, and a great diversification approach. There are just a number of companies that will go public or get acquired for $1b+ every year, and they’re in different verticals. Sprinkling bets around gives you more chances to actually be in one of those.
Some firms think otherwise though.
- Many have developed specific focuses for different reasons, but are still very horizontal. For example, Founders Fund and DFJ are known for investing in world-changing, crazy-sounding ideas in energy, space and advanced sciences, but they will still invest in consumer internet companies.
- Side funds are also not new, famously fbFund from Founders Fund and Accel, managed by Dave McClure and focused on apps built on top of the then emerging Facebook platform. Accel also recently launched two Big Data funds.
- Corporate venture funds are also traditionally focused on the mothership’s market (Citi -> fintech, Vodafone -> mobile and infrastructure, Rakuten -> ecommerce).
- Some industries, like life science and med-tech, have traditionally seen very focused funds, given the different life-cycles of those companies.
But then there are some new, truly vertical VC firms.
These firms believe that by concentrating all of their bets in a specific vertical, which they believe will either massively grow in the coming years or is ripe for disruption, they can produce better returns for their LPs.
The most successful example in my opinion is Ribbit Capital. It was founded in 2012 by Micky Malka and focuses exclusively on Fintech. It raised a first $100M fund and is now closing a second one.
Micky was the founder of Lemon, a mobile wallet app and firmly believed that there are more opportunities in fintech than he could pursue by himself.
In less than 2 years, he was able to get into the most interesting and hot fintech deals, including Wealthfront, Credit Karma, Coinbase, Funding Circle, Fuze Network, etc.
That would probably have been impossible should they not have a very specific focus.
Here are the thematic funds I’m aware of:
- Fintech: Ribbit Capital, Centralway Ventures, Nyca Partners, Boost.vc (Bitcoin), Bitcoin Opportunity Corp, Life.sreda (Russia)
- Commerce: Forerunner Ventures, Commerce Ventures
- Big Data: Data Collective, KPMG Capital (corporate but very focused)
- Edtech: Learn Capital, NewSchools Venture Fund, Follett Knowledge Fund
(I might be forgetting a bunch, please add notes and I’ll add them).
So why do thematic funds make so much sense?
Much clearer and easier marketing of the firm
By appearing in an industry’s specific publications and events, it’s much easier to build brand awareness for a new firm in a niche or vertical.
Partners will soon be regarded as experts in the field and the exposure compounds.
Much easier to get into deals
Getting into really hot deals will be much easier for a vertical fund, as every company in the space will want to get that firm even if for a small amount thanks to the connections and expertise it can bring.
Lighter dealflow, less bullshit
Big firms spend A TON of time looking at really crappy deals. By shrinking the firm’s focus the team will have much more time to evaluate deals.
Specific value add
Generally the partners will have had some previous success in the field, gaining very focused expertise and a huge network.
That’s immensely valuable for founders who haven’t been exposed to a specific industry before.
Partnerships and knowledge sharing between portfolio companies is also much more valuable than in a horizontal firm.
But by investing in a single specific niche, some problems tend to arise:
Portfolio theory problem
Modern portfolio theory states that diversifying a portfolio into multiple assets, geographies, currencies, sectors, etc. produces the best risk-adjusted expected returns.
MPT has been challenged by behavioral finance recently, but even before that, venture firms need to produce the highest returns, and sometimes that means assuming the most risk. If a VC firmly believes in a specific vertical, it might make sense to put all its eggs in that basket.
If you only invest in a specific vertical, there will be high chances that you’ll end up investing in competing companies.
If you don’t take board seats these might be fine, but it will be really hard in the value-add phase.
Small company pool
As I said previously, the pool of companies to look at will obviously be much smaller than other VCs.
This might be a good thing but might also limit the ability to deploy capital at the ideal pace.
In general, I think the opportunities outweigh the risks, and that we’ll see stellar results from current vertical firms as well as a lot of new ones launched in the coming months and years.
You should follow me on Twitter here.