Bill Burnham has a great post on the importance of investment thesis-driven venture capital over relying on deal flow. He says that the increased competition in the VC world means that no longer can VCs sit around and wait for the next big thing to land in their laps. No, instead, they must come up with an investment thesis that clearly states what they are looking for and then proactively hunt these deals. Makes sense, but detractors to the investment thesis approach argue that the risk is significantly raised with this approach: you are betting that your investment strategy is correct and then betting that your deals properly fit the pre-defined strategy.
Now I'm new to the world of venture fundraising, but it seems to me that a pure investment thesis is largely marketing. That is, it goes into an investment memorandum that's shopped to the LPs and funds-of-funds. And as a marketing tool, it needs to be taken with a grain of salt. The thesis should be used to show investors to the fund, that the general partners have thought their strategy through and are looking somewhere for deals, following certain spaces, but any sophisticated investor knows, and hopefully expects, their venture funds to have a degree of opportunistic behaviour...that is, they aren't going to pass on a great deal just because it doesn't fit their pre-defined thesis. And that's where the good marketing comes in again...should an investment thesis be written such that it's open to interpretation, and opportunistic deals be squeezed in down the road? As I said, I'm too new to this world, so I don't know.
Anyway, Bill is striking too strong a divide between the deal flow camp and the investment thesis camp. Personally, I think these are just two tools by which funds are differentiating themselves in this world of increased competition. Some funds focus on locking in universities' IP and commercializing it, or churning out ideas via an entrepreneur-in-resident programme. Others focus on specific stages that they feel they're experienced at (seed, early stage, expansion stage, etc.) Others still focus on a particular geography, or try to leverage their brand or the GP's credentials. And then, there are some funds that focus on certain types of deals (e.g. end-user experience, tech-enabled services, etc.) within their sectors. But all the funds are doing is differentiating themselves based on their experience, expertise, track record, and environment. At the end of the day, they are all still going to compete for the same deals, aren't they?
1 comment:
Opportunistic - maybe, but unless they want a bunch of bothered LPs, the fund better not stray far from what they've communicated while raising money.
For the LPs, the thesis allows them to build an manage their own diversified portfolio of investments. If the thesis states late stage tech, LPs don't want to see seed stage investments in your porfolio. If they like that stage, they're probably exposed to it through another investment and your porfolio's cross-over would over-expose them.
Also, the investment thesis connects the GPs and fund size. There is a correlation between the three based on how much money each partner can deploy per investment type. By default, oversubscribed funds are going to need to modify their investment thesis in order to deploy all the capital.
And lastly, all the venture firms are trying to bring value beyond writing big checks. The investment thesis reveals where the partners think their greatest added value lies. If entrepreneurs are looking for more than the cash, they should be wary of funds investing outside of the stated thesis.
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