What VCs and the “World’s Greatest Athlete” have in common

In September 2018 the city of Talence hosted the 36th edition of the Decastar, one of the athletics meetings that make up for the international decathlon & heptathlon championships. On this occasion, French athlete Kevin Mayer scored a total of 9,126 points: an absolute record. As such, and according to a long lasting tradition, he was awarded the title of the World’s Best Athlete.

What does it have to do with VCs? In decathlon, the gold medal goes to the competitor with the most points in all disciplines combined. There’s no point in being the fastest runner or the strongest jumper alone if you can’t excel in the other fields.

We have a traditional question in our industry: should a VC be generalist or expert? At XAnge, we believe that to truly perform, professional VCs must do so with regularity and on the long run, and that they reach such performance by excelling in multiple fields, tech & industries. This requires us to broaden our scope of expertise as much as possible.

As it thrived over the last decade, the European VC industry has become increasingly competitive. The landscape grew from 100 funds in 2015* to 230 in 2019. 63 VC new funds were announced since january 2020 alone, despite the global lockdown and economic uncertainties. Our industry gained in maturity and expertise over these years. One fund raised after another, deal after deal, exit after exit, VCs got stronger at setting their standard. They refined their strategy, positioning and expertise in search for an edge — i.e performance.

This might have led experts in specific fields to launch tech and industry-focused funds, like the ones dedicated to robotics or blockchain. It’s a straightforward and effective way to stand out (and good marketing too, for LPs and entrepreneurs). But it’s not for us. The best VCs are multi-experts. Here’s why.

1. VC IS A GAME OF VOLUME

Here’s an essential thing to keep in mind: VC is a business of volume. You’re going to have to see a lot of startups before putting your money on the right spot. For each deal we close, we meet an average of 150 entrepreneurs. Some US funds we work with even claim to meet 500 founders before making their move.

The logic is that the more startups you meet, the better you get at setting your own standard. An investor needs to multiply contacts to find founders that are qualified for the VC ride. The 100th founder was pretty appealing ? It’s n°150 that you’re really looking for.

This is why you need a deal flow that’s as wide as possible. By definition, an investor that is focused on a single sector, or that is too “thin” on a geography will narrow its dealflow. And logically land outside of the market’s standards of selectivity. The job becomes much more difficult.

2. INNOVATIONS COME IN WAVES

Another pitfall of hyper-specialization is that market trends evolve quickly, while VCs work on a rather long timescale — say between 3 and 5 years for a fund.

If you pick a sector that is too specific before your fundraising, and you have to stick to it, you may find yourself in very shallow waters in the middle of your investment period. Once the trend has passed, you’re dry on opportunities. Here are 2 very different examples:

• IoT and connected objects. There’s been a window of opportunity, when it was truly interesting to invest. Then the wave passed, the market consolidated, and the volume of good startups plummeted.
• The opposite is also true. The healthcare sector became very obvious for XAnge only 1 year after we closed our last fund. Innovation in hospitals, new social security regulations, entrepreneurs exiting programs with health-related projects in mind… all this allowed for a new generation of quality projects and founders to emerge. We took advantage of it, knowing that this pool could dry up at any time.

It’s not easy however to be on all fronts. To remain opportunistic, we have to be multi-experts rather than generalists. This means there’s a lot groundwork, digging and searching do be done. It’s hard work!

3. FASTER INVESTMENTS, HIGHER PERFORMANCE

Being there first to invest in the first good companies of a rising sector is key to maximising performance. But when you know it takes at least 3 or 4 years for a tech topic to emerge, and for specialized funds to get organised and raise their funds… nurturing multi-expertise clearly gives an edge over 100% focused funds.

Take fintechs, for example. It’s because we had cash to invest, and because the team was so reactive, that we were able to make the first good deals in the sector: Fidor in Germany, the first crowdfundings with KissKissBankBank, Lydia, Shine, etc.

Being multi-specialists allowed us to act quick and to maximise value — which is what an investor does.

4. GREAT ENTREPRENEURS ARE GREAT REGARDLESS THE SECTOR

Here’s a quick overview of the industries we have ventured in over the recent years:

• Healthcare: Gleamer, Implicity, Sunacare, Synapse & Treefrog
• New space: Aeospacelab
• Data protection: Misakey, Sarus, Sweagle
• And a the long tail: flower delivery, strawberries produced in containers, etc.

Every single time, we went for the team rather than the industry. Because it’s all about choosing the best people for the job. They are the ones who set the pace. They determine which industry will heat up. It’s also because they stick to the best entrepreneurs that top US funds like A16Z or Union Square try to broaden their scope to the maximum.

5. PROXIMITY (REALLY) MATTERS

The more specialized you are, the more global your coverage needs to be. Funds specialized in quantum computing can’t limit themselves to France, let alone the USA. They need to multiply their effort and fragment their teams — with a direct impact on performance. It’s not an easy equation.

It’s also absolutely crucial to build a cultural fit with entrepreneurs. Culture is essential to founders. A VC has to let them feel they follow the same analytical grid. And this is hard to do from a distance. Even the large American firms felt the need to open funds in Europe or in Shanghai.

6. FOR LPs: DIRECT & CLEAR ACCESS TO EMERGING TECHS

The first signals of an emerging trend come from the startups themselves, who reach out to VCs and send their decks in search for seed money.

Once a trend is identified, we build mappings and meet as many startups as possible (few of them are closed to a discussion with a VC). We learn about market elements, technology structure, differentiation, SWOT and positioning. And we complete this work more research and due diligence among corporates / key clients.

For LPs, we are a window on next techs and market trends. We allow them to quickly identify sectors that are moving, at a level that is hardly possible internally: their environment is too noisy, the stakes are too high and there’s too much money involved. We’re standing one step below them, and two ahead.

7. THERE ARE A GREAT EXCEPTIONS

Don’t get us wrong: there are funds that are super specialized and still manage to find great performance. I can think of Robolution, who overperformed thanks to the Aldebaran exit and a beautiful sense of timing. But in most cases this performance is an epiphenomenon.

There’s also a real know-how with some teams that stick to a main theme while remaining super broad. These are the AI or Data funds that have emerged recently. Some will get beautiful performance. But look closer: their scope is as broad as it gets!

8. WHAT IT TAKES TO BE A MULTI-EXPERT

Here are a few things we cultivate at XAnge to live up to our long term strategy. I can say (without any risk!) that it applies to all the great multi-expert VCs that we work with:

• We recruit ex-entrepreneurs, such as Alban
• We promote scientific curiosity and a constant learning culture, reading as much as possible, meeting with amazing experts (for example in quantum computing space), building mappings to deep-dive in market structures (take a look at our space tech, disabilities tech, and meat alternative mappings)

Mostly, we cultivate curiosity, passion and subspecialization. You won’t find a designated champion for Saas or Marketplaces at XAnge. You’ll find deep expertise, such as Nicolas on Travel and Data, or Cyril on Blockchain & Cryptocurrencies. On any given deal, this means there’s always an interesting point of view emerging from the team. Debates are deep, rich and lively. It forces us to stay open at all times, and to protect performance.

*Based on Crunchbase extracts. In addition to pure VC, they include micro-VCs, incubators, accelerators & angel groups, which participate also in the financing of startups on a European scale.