Year after year, the investors Specific verticals become increasingly central to the business world.
The American Dynamism practice of Andreessen Horowitz has made a notable mark in the "world of atoms." Paradigm first made a name for itself with bold crypto bets. Numerous funds are currently pivoting to specifically take advantage of the AI gold rush.
It's understandable: as the corporate world becomes increasingly competitive and rich, investors need to build their teams (and brands) to be as targeted and impactful as possible for entrepreneurs. Choosing a vertical makes controlling the capital of LPs (Limited Partners) also easier.
And this strategy has worked. The investors mentioned above are often at the top of founders' fundraising lists. It's no surprise that other firms are feeling increasing pressure to showcase their expertise in various spaces by publishing market maps and investment theses.
Generalist investing has been (and always will be) the primary mode of venture capital.
Is this trend the future? Will every potential startup soon have an “expert” VC to look for in their space? I do not think so; Generalist investing has been (and always will be) the primary mode of VC.
Let's get some prejudices out of the way. “Generalist” investing does not mean lack of technical knowledge. It does not mean a lack of preference for some verticals over others. And it certainly doesn't mean a lack of sophistication in your network.
The eternal relevance of generalism in the company is reduced to two simple and easy to prove facts: (1) the technology companies Revolutionaries are thematically unpredictable, and (2) transcendent founding talent is still needed in even the most fruitful spaces.
Looking empirically at some of the biggest investments of all time, it's hard to see how focusing on one theme would have turned into a winning deal. Google was following several pre-existing search engines. Facebook had already lost to MySpace so no one could predict. UberCab was a small market and shared trips They were not conceived from the beginning. Clearly, historical trends around consumer internet, social media, and the concert and entertainment economy were invisible at the time, even if hindsight seems obvious.
I don't think any current forward-looking trend is anything other than directionally correct. The green technology theses of the 2000s produced almost nothing. The “sharing economy” themes of the 2010s were never fully replicated after Uber/Lyft/Airbnb created the concept. This sets a high burden of proof for any specific vertical investment concept in the 2020s.
Even today, it is unclear which specific vertical firms have capitalized on the emerging winners in the AI space: has OpenAI or Scale led to a return on enterprise (not just return on funds) outcome for a focused investor? in AI as much as it has for general investors?
But of course it's easy to paint an extreme picture. In fact, there are many excellent companies that nail their specialized vertical. In any case, the problem of “founder selection” persists. And it's a pretty challenging problem.
Although some spaces such as medical care or defense may have returns 2x or even 10x greater than other verticals, the best startup within those spaces could have returns 100 times greater than their more common counterparts. He talent of founders and the results of their startups have unimaginably greater variation than any other dimension. Thus the paradox arises: the specialist investor must have the same eagle eye for outliers as the generalist investor, but with a narrower aperture.
And if, as a company, you can cultivate that eye for atypical founders, why not apply that rare skill across the entire opportunity set? The next Google could be somewhere you don't expect.
Now, one may wonder about adding value to founders and winning deals without any specific experience. How can a generalist compete with a specialist when it comes to client presentations or tactical advice?
The answer is simple: you can't, but you don't have to. The specific product and marketing challenges that entrepreneurs face tend to be too specific for an outsider to adequately help them. “Supply chain” introductions are insufficient compared to introductions to “decision makers at roofing supply distributors with revenues of $100 million to $500 million who use Epicor as their system of record,” as one company recently requested portfolio. What VC has a list like that lined up and ready to go?
Ultimately, the job as a VC is to sell a few simple products: cash, a trusted reputation, and access to as much downstream capital as possible. And it can be done as well as anyone investing in AI alone.
To be clear, the venture world is evolving rapidly and niche investors play a valuable role. But I urge generalists to be proud. With a radical focus on outliers wherever they may be, history so far is on the side of these types of broader-minded investors.
