Specialization in Venture
Venture capital (VC) has undergone significant evolution over the past decades, transitioning from a niche industry to an ecosystem with many players with billions deployed.
Similar to what happened in Private Equity, this has given rise to specialization, where new VC firms are increasingly focused on specific sectors or stages. In PE, this happened across sizes (small-cap, mid-cap, large-cap), sectors (energy, healthcare, software, consumer, etc.), and the rise of mega funds.
Specialization Across Sectors or Stages:
Many newer firms now concentrate on specific sectors or stages.
New pre-seed/seed VCs are now compelled to be more specialized (eg. infra only, fintech only, SaaS only, etc) as the seed ecosystem already has several generalist mega-funds.
Funds that focus on specific domains across multiple stages can be pulled off by GPs with longstanding brand and track records in their space.
The Emergence of Micro-Funds:
The vast number of new sub-$20M+ funds in the early-stage ecosystem has created an “asset class within an asset class” situation. A fraction of these new emerging managers will scale up fund sizes in the future.
Longstanding venture LPs are now figuring out what their micro-VC strategy is.
Rise / Reset of Mega-Funds:
Over the past 10+ years, we saw the rise of mega VC funds. A majority of the capital raised by these funds went to late-stage, pre-IPO companies. Because this stage is correlated to the financial markets (and not innovation markets), a big reset is happening - these funds are now downsizing. I don’t expect the mega-funds to go away entirely given tech’s outsized outcomes and demand. Their sizes will probably be inversely correlated to interest rates.
Away from Everything-Anything Funds:
The era of a single/solo VC investing "opportunistically" across multiple sectors and stages from seed to pre-IPO is waning. This was a ZIRP-era phenomenon.
Firms’ Refocusing:
Many firms that have a multi-stage or geographic presence (seed, venture, growth, pre-IPO, secondaries, global, etc) are reevaluating this strategy and are narrowing the focus.
Potential Increase in Performance:
More specialization should intuitively lead to decreased loss ratios. This focus allows funds to identify narrower opportunities, develop specialized networks, and provide targeted support to portfolio companies, potentially enhancing overall performance.
Increased LP Sophistication:
Venture LPs need to consider fund construction across not only stages (eg. micro, early, late, pre-IPO) but also across domains to build a well-diversified portfolio aligned with their investment objectives and risk appetite.