How do you choose between being a sector specialist or generalist?

1 Sector specialization

Sector specialization, which involves developing a deep knowledge and network in a particular industry or domain, can offer several benefits such as having a clear investment thesis and criteria to evaluate opportunities quickly and accurately, building a reputation as an expert, creating synergies between portfolio companies, and leveraging sector expertise to help portfolio companies grow and exit. However, sector specialization also has some drawbacks that should be considered. These include being exposed to more risk and volatility due to external factors, missing out on opportunities in other sectors that could provide higher returns or diversification benefits, facing more competition and higher valuations as more investors target the same sector, and becoming too narrow or rigid in perspective.

2 Generalist approach

The generalist approach means that you invest in any sector or stage that meets your criteria, and rely on your general skills and experience to identify and evaluate opportunities. This has the potential to provide several benefits, such as having a wider and more diverse deal flow and portfolio which can reduce risk and increase potential returns, as well as the ability to spot emerging trends before they become crowded or expensive. Additionally, it allows for more flexibility and adaptability when adjusting your strategy and criteria according to market conditions. Plus, you can learn from different sectors and stages, applying the best practices and lessons from one to another. However, there are some drawbacks to the generalist approach. These include having a harder time finding quality deals, as you have to compete with more investors and specialists who have more resources and connections in their sectors. There is also a lower signal-to-noise ratio due to having to sift through more deals and information that may not be relevant or reliable for decision making. Furthermore, there is a steeper learning curve with a higher due diligence cost, as you have to understand and assess the nuances and risks of each sector or stage. Lastly, there is a lower value-add and influence since you might not have the same level of expertise or network as specialists in your portfolio companies.

3 Balancing specialization and generalization

The decision of whether you should be a sector specialist or a generalist is not an easy one, as both have their own strengths and weaknesses. Your personal preferences, goals, and resources, as well as the market dynamics and opportunities should be taken into consideration when making this decision. However, you don't have to choose one or the other exclusively; instead, you can find a balance between the two. For example, you can have a core sector that aligns with your investment thesis and vision, but also explore and allocate some capital to other sectors or stages that interest you. It is also beneficial to partner with other investors who have complementary skills and expertise. Additionally, continuously learning new knowledge and expanding your network is important in order to stay up-to-date with the changing market and opportunities. Evaluating your portfolio performance regularly is key in order to adjust your strategy and criteria accordingly. By doing so, you can optimize your venture capital strategy and maximize your impact and returns.

4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?