9th
VC fund differentiation
Some useful commentary from USV’s @andrewparker on VC differentiation. In addition to technical investment differentiation outlined below, I’ll add that cultural/stylistic differences are also important for entrepreneurs to consider when thinking about the right investor fit. For example, some firms act like banks and some like startups. Cultural differentiation is critically important as it often permeates everything firms do.
VCs have a wide variety of styles, and I don’t know if all of them are obvious to entrepreneurs or not, so I’ll enumerate some of the differences in style here.
When a VC firm goes out and raises a fund, one of the docs that is a minimum requirement is a Private Placement Memorandum (PPM). The PPM is what you distributed to potential Limited Partners to explain to them (amongst other things) your flavor of fund. One element of the PPM is always a description of the fund’s focus. How could this differ? Well…
- Geographic: Some VCs only make investments in a specific geography. For example, the DFJ Network of funds are a group of VC Firms, many of which invest specifically within a defined geography.
- Stage: Some VCs limit their investments to a specific stage. Certain funds will only invest in company with annual revenue greater than $1MM. Other funds, will only invest in seed-early stage opportunities. For example, Accel offers a growth-fund and an early stage fund separately, which differ primarily in stage.
- Sector: Some funds will invest only in specific industries: such as Information Technology, Biotech, Cleantech, etc… Other funds are sector-agnostic, and use partner specializations to focus on specific sectors within the same fund.
- Opportunistic: Some funds deliberately market themselves in their PPM as leveraging a proprietary network of deal flow, from which the investment team can be opportunistic. For example, LPs who invested in the Founders Fund likely gave good thought to the appeal of the PayPal Mafia’s network and proprietary deal flow.
- Quantitative: Some stylistic choices can be very specifically quantified by common financial metrics. For example, I talked to an investor a few years back that was taking a deep dive into the Ad Network sector, and he said, “we won’t invest in any Ad Networks that can’t reliably produce 40% gross margins.”
- Thesis-Driven: Some funds will apply a intellectual framework or thesis to all their prospective investments. A thesis is typically used as a filter; a great team generating high-margin revenue in an attractive market might not meet an investor’s investment criteria if the company is not a fit for the investor’s thesis regarding overall market trends. Here’s an example of a thesis we commonly apply at Union Square Ventures.
- Other LP-related Limitations: Some funds can’t invest in certain industries, such as gambling or alcohol-related revenue because of restrictions in their agreements with their limited partners. This is most common with Sovereign money limited partners, such as Saudi or Chinese sovereign wealth LPs.
The takeaway here if you’re an entrepreneur is you can use this list as a set of questions to ask a prospective VC to see if they are a good fit with your company. Sometimes you don’t even need to ask a VC… their current and past portfolio will speak for itself about what they actually do. Their actions define their style.
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