Venture capitalists are bad at practicing what they preach. They’ll tell their portfolio companies they can’t be all things to all people, they’ve got to know their customer, hone their approach, and focus on value. All the while, their own investments are often all over the map. It’s human nature to go after the next exciting, shiny thing. And the buzz around hot new companies and new markets can make it easy for a herd mentality to kick-in. Plus, VCs are always prone to contracting a bad case of FOMO — fear of missing out — on the next WhatsApp. But chasing after disparate opportunities without a clear focus makes it difficult (if not impossible) to consistently add value to the founders with whom you partner.
Downsides of a Shotgun Approach
Here’s a scenario. I have two investments: one is an early-stage mobile app that’s just an MVP, led by a few badass engineers who just left Facebook. The second, at the other end of the spectrum, is a mature enterprise software company where I make a $50M pre-IPO investment, with a primary objective of hiring a few more sales reps and shoring up the balance sheet before filing an S-1. One of these things is really not like the other. And vice versa. How can I be an expert at advising founders operating in such disparate stages and sectors? Sure, there’s the perennial value of a VC’s network, and basic pattern recognition. But that stuff is only so scalable, replicable, and relevant. While you might like the initial sizzle and sex appeal of a particular firm’s brand or the logos in a particular partner’s track record, that will soon fade. Founders know the pain of working with the wrong VCs at the wrong stage. An early-stage focused VC asking a 10-year old company with $500M revenue a generic question like, “What keeps you up at night?” gets old real quick. Similarly, a career late-stage VC asking an early stage, “heads-down on product” company a question like, “Can you walk me through the add-backs to EBITDA?” is an equally painful ordeal.
The Importance of Having a Focus as a VC
Focus makes for a better VC, all-around. By focusing intently on particular sectors or stages, a VC develops a better lens for investment decisions. VCs have always been about “pattern recognition,” but you want to make sure you’re not squinting too much to see the resemblance. Why does this matter to founders? You don’t want an investor making a decision based on a weak comparison to a successful investment from 5-10 years ago. No, it’s not like the “eHarmony for talent.” Having a focused VC also helps founders after the investment closes. And that’s where it counts. The investment courtship process is typically a few months, but the investor-founder relationship is usually 5-7 years. Focused investors can deliver significant value and help companies overcome the challenges standing in the way of their growth. After all, investors who know a stage or sector cold have more than likely encountered those challenges before. When a founder asks, “Hey, I’m facing this issue. Who can I talk to?” the investor can respond helpfully in a few different ways:
- We’ve “seen this movie before” in prior investments. For example, when someone asks me how to build a sales productivity model for an early sales team, I can say, “Well here’s how we did it for Sprinklr, Catchpoint, and Tealium.”
- We can make intros to the CEOs of those companies who have “been there before.” The more a VC focuses, the more his/her portfolio CEOs have indeed been there before…exactly there.
- We can make intros to the resources that helped our prior companies when we faced a challenge bigger than our own capabilities as a team. When someone asks me how to institutionalize value messaging into their sales team, I can say, “talk to Force Management, they are the best in the business.”
At OpenView, we focus exclusively on B2B software companies at the expansion-stage, and that’s a very deliberate choice. What is the expansion-stage? We think about it less in terms of arbitrary financial metrics, and more in terms of a company’s maturity. Specifically, the main expansion-stage indicator for us is a clearly established product-market fit. That is typically evidenced by a bunch of customers — more than 1, but typically not thousands. Why do we care less about exact revenue numbers? Revenue can be a proxy for product-market fit, but it’s not always accurate. For example, you can have a $3-4M revenue company with 1 really big customer, like Wal-Mart. That’s not product-market fit, that product-Wal-Mart fit. And that’s not very repeatable. On the other hand, you could have a $3-4M revenue company with 100-200 customers, who all found the company organically online. That’s much more repeatable and exciting. Why is this valuable to founders? It means we know how to help. We are a data-driven, research-based organization. Our analysis includes looking at customer acquisition and retention trends, along with in-depth customer interviews. At the expansion-stage, there are enough data points to connect the dots and draw a conclusion on the challenges and opportunities facing a particular company. We can then come up with an effective plan of attack with OpenView Labs (our operational consulting arm) on how best to work with that company. This way, our involvement post-investment isn’t just trial-and-error where we throw ideas and intros against the wall hoping something sticks. It’s targeted, focused, and relevant — and we think that’s valuable. In a world where founders expect VCs to offer “more than just money,” we think it fits the bill in a unique way. Ultimately, there is no right or wrong answer on choosing a capital partner. Some founders raise capital, and some don’t. Some raise early and often, and some raise a big growth round after bootstrapping for years. Different strokes for different folks. If you do raise capital, focus matters in a partner. It can be OpenView or it can be another firm, but one thing’s for sure: you want a VC that practices what they preach. What are your thoughts and experience with VC focus? Do you agree VCs need focus?