What is the focus of a venture capital fund?
A venture capital fund will normally focus on three areas: a specific (1) stage, (2) geography, and (3) industry or market.
For example, "seed-stage SaaS startups in Vietnam."
For most venture capital funds, very clearly defining at least two out of the three areas above is important. However, for new venture capital fund managers, the fund focus typically starts a bit more vague in order to provide maximum flexibility in securing initial capital and doing deals.
Why is it important to be specific with the focus of a fund?
The focus of a fund is the centerpiece of your Investment Thesis, which you will use extensively to attract like-minded Limited Partners. Without a clear focus, a venture capital firm is essentially asking Limited Partners to invest in the idea that the General Partner (or Partners) will make money on a blind pool of random deals, which is a big leap of faith with a new and unproven VC firm.
With a focus, Limited Partners are instead investing in the General Partner’s ability to execute on a clear strategy to generate returns by investing in specific types of companies.
A good focus also provides the ability for the General Partners to use analysis and data to justify projected returns. For example, using the aforementioned “seed-stage SaaS startups in Vietnam” example, you should be able to find data supporting the growth and potential for returns in this area, such as “according to Cambridge Associates, seed stage investing has generated the highest returns in venture capital in the last decade, and SaaS startups in Vietnam have had four of the five largest exits in the last five years.”
In reality, most Limited Partners have specific investment criteria, and you will go through an iterative process to create a defined focus that aligns with this investment criteria. This process typically takes several months.
Is it common for a venture capital fund to change the focus?
The focus of a new VC firm normally changes significantly in the first few months as the General Partner or Partners pitch the fund to various Limited Partners and implement market feedback.
Each of the three areas of focus typically change in different ways.
- The Stage (and Fund Size) Focus will change often, as the General Partner or Partners gauge demand from friendly Limited Partners, and then set reaslitic parameters for the fund.
- The Geography Focus of a fund is established early in the fund formation process, so it usually does not change much.
- The Industry or Market Focus is often fine-tuned throughout the pitching process, as market circumstances may change or different Limited Partners commit money to invest in specific industries or markets.
(Are you trying to start a venture capital firm? If so, be sure to review our How to Start a Venture Capital Firm Guide)
Do venture capital funds invest in deals that are not in their focus?
Venture capital funds often invest in deals that are not in their focus, but, commonly, these deals are related or close to their focus. For example, it common for Seed Funds to do a Series A deal, but you will rarely see them doing a Series B deal.
In the case where a fund wants to invest in a deal that is completely unrelated to their focus, they will normally set up a special purpose vehicle ("SPV"), and then ask any Limited Partners that are interested in the opportunity to invest directly through the SPV.
Can a fund focus on multiple stages?
The majority of funds focus on one single stage, but many funds will focus on two adjacent stages because it gives them to opportunity to "double down" on their most promising investments.
Outside of this scenario, however, it is rare to see a multi-stage fund, since the return profiles, deal types and support structures vary widely by stage. In addition, most Limited Partners invest by stage, so a multi-stage fund often makes the fund less compelling to most Limited Partners (especially when considering a new fund manager).
Does a fund need to focus on one geography?
There are many strategic reasons to set your fund focus on a specific geography, including access to dealflow, understanding of value-add, familiarity with legal compliances, alignment with Limited Partner criteria, and more.
The majority of funds focus on a limited geography or region, but it is common for venture capital firms to occasionally make strategic investments outside of their geographic focus.
Should a fund have a broad set of industries or markets to focus on?
Most funds choose a wide set of industries or markets to focus on, since investment trends will change over time. However, it is very common to see small to medium-sized funds with a laser focus on a specific sector such as gaming or crypto, due to their obvious synergies with Limited Partner interests.
What are some best practices for setting a fund focus?
To analyze and determine your fund focus, we recommend you follow this structured process:
This is just one part of the first steps to starting a venture capital firm, which include: