The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

CHAPTER 6 Defining Your Fund's Investment Strategy

“I believe many strategies are the same, and rarely do funds have a truly ground-breaking investment strategy.”

—Igor Rozenblit, LP with a multi-billion dollar fund¹

An investment strategy—the very raison d’être of any venture firm—combines fund managers’ skills and expertise with a given market opportunity to generate superior financial returns. Most venture capitalists use emergent strategies, in which the firm adopts a sandbox but also is flexible enough to deal with exceptions. Boundaries are adjusted periodically, and when exceptions occur, partners decide to invest based on the potential for return.

Strategy is important, but limited partners (LPs) are tired of, and somewhat irritated with, the me-too strategies that abound across the board. After all, what general partner (GP) does not want to invest in the next big thing? Chris Douvos, who has been an LP in several leading funds, notes, “In the venture business, we have a lot of smart people but not necessarily differentiated: being smart is necessary, but not a sufficient condition. Partners are often unable to demonstrate resonance between their backgrounds and their investment strategy.”² Adams Street Partners, one of the world's largest funds of funds, seeks to find “the quality of the group's deal flow, with respect to intrinsic quality and competition for opportunities.”³ Chris Rizik, fund manager at Renaissance Venture Capital Fund, a fund of funds (FoF), takes ...