An interesting study was just released about venture capital. One tool I view that corporate development teams can refine and build upon to execute in-organic growth.
The study essentially notes that venture capitalists are specialists. I believe this. The research paper also notes that performance is much better in the sub-industry VC’s focus on; even moreso when you get deeper, i.e., computer graphics, rather than all of hardware). The research paper also notes that VCs under perform more the further their focus diverts. While this isn’t rocket science and can likely be overlayed to multiple industries, it is a finding that’s worth noting.
The highlights of the paper include:
- Venture capital specialization occurs at the disaggregated industry level.
- Venture capital expertise should be measured at the disaggregated industry level.
- Investments outside of a venture capitalists preferred industry are less successful.
- Success likelihoods are worse the greater the degree of industry difference.
Additionally, while some specialists may have an advantage, venture investing involves fast moving fields. To this, sourcing and networking constraints also disadvantages generalists. I would be confident in saying this could apply over to small and middle market M&A transactions. Think lift-outs and tuck-ins on the companies that don’t reach scale.
This type of information is something that helps teams or individuals focus, but is not an all inclusive stance on how you should develop yourself. For example, the book ‘Range‘ aides a hypothesis that experiencing multiple types of roles and experiences aides in development. This book helped me understand that my eclectic background actually could aide me in my daily role.
And this brings me to what I’ve seen a few times: me thinking I’m a generalist, while others think I’m a specialist. If you look at yourself (or I look at myself), I’d be bucketed into someone who knows corporate development. Someone who has done venture investments, acquisitions, and partnerships. I’d go one step further and say that’s across financial services. Although this could still be viewed as a generalist, but I’d say it’s in the eye of the beholder and I am in fact a specialist. As you don’t want me running your sales department!
Lastly, the research paper above does tie into the below report out of the Kauffman deck, in participation alongside the Angel Capital Education Foundation; where they talk about the positive impact of more diligence on returns, as well the relationships to follow-on investments. I’m unsure if there’s a study out there showcasing the relationship between companies investing into startups which then are acquired by them, but I’d love to know!