VC Lab Pre-Curriculum 3: Five steps to identify the optimal focus of your venture capital fund.
In addition to creating your Investment Thesis and venture capital fund size, one of the most important and difficult things for a new venture firm manager to do is to select the focus of the fund.
What is the focus of a venture capital fund?
A venture capital fund will normally focus on three areas: (1) stage, (2) geography, and (3) industry or market. Some examples include:
Seed stage SaaS startups in Vietnam
Angel AgriTech startups in East Africa
Pre-seed HealthTech companies in Germany
As a general rule, the goal is to be as specific as possible with each of the focus areas while also ensuring that there are enough startups and capital for the fund to succeed. So, “Seed” is better than either “Early Stage” or “Pre-seed and Seed”.
Why is it important to be specific with the focus of a fund?
The majority of limited partners prefer focused funds, referred to as specialists versus generalists. There are many reasons for this. Most importantly, limited partners generally prefer funds focused on one stage. Limited partners also prefer a contained geography, such as Eastern Europe or the US. There are legal, tax, and accounting issues that limited partners, as well as the managers, need to deal with when investing across multiple countries.
Do venture capital funds invest in deals that are not in their focus?
It is generally accepted that a small number of deals will be outside of the fund Thesis. Managers can selectively choose deals that they believe the limited partners will appreciate that are related to the Thesis. For example, Seed funds occasionally invest in select Series A deals, and they rarely invest in Series B deals.
Is it common for a venture capital fund to change the focus?
Managers commonly adjust the focus before the first close based on feedback from limited partners. The goal is to get to a viable fund focus as quickly as possible. When the viable fund focus is found, managers secure signed fund commitments by just sharing the Thesis. The purpose of a fund is to validate the Thesis, so, once the fund is closed, the focus does not change.
Crafting a Fund Focus
To analyze and determine your fund focus, we recommend you follow this structured process:
First, write a bulleted list of potential stages (e.g., Seed, Pre-seed) where you have portfolio company deal flow, and use the stage where you have the most opportunity.
Next, pick the geographical area where the managers live as a country or region, such as France or Western Europe.
Then, write a bulleted list of industries or market segments where the managers have experience using common terminology, such as Marketplaces, FinTech, BioTech, or Saas, and choose the one where the managers have the best track record.
Lastly, put the stage, geography, and market together, and reflect if there is enough startups avai;lability and limited partner demand to build a fund, and adjust the focus as necessary to have a large enough opportunity.
What are the remaining steps in starting a VC firm?
This is just one part of the first steps to starting a venture capital firm, which include:
Adeo Ressi is CEO of Decile Group, powering the next generation of venture capital firms worldwide with an integrated offering of training, tools, support, and funding. Decile Group is the parent of the VC Lab venture capital accelerator, which helped to launch nearly 50% of all new manager firms in 2022. Adeo is also Executive Chairman at the Founder Institute, a pre-seed accelerator with chapters in over 250 cities worldwide and over 5,000 portfolio companies.
Adeo has launched 14 venture capital funds and founded 11 startups, having nearly $2 billion in exits before 30. Adeo previously served on the Board of the X Prize foundation to pursue his interests in space exploration. He studied architecture and spent time living on a commune to explore his interests in designing better ways to live. Adeo is passionate about inspiring people to achieve their potential.
