The Business of Venture Capital, 3rd Edition

11Defining Your Fund's Investment Strategy

An investment strategy — the raison d'être of any venture firm — combines fund managers' skills and expertise with a given market opportunity. Most venture capitalists use emergent strategies, in which the firm adopts a sandbox but remains flexible enough to deal with exceptions. Boundaries are adjusted periodically, and when exceptions occur, they are driven by the potential for return.

A well-established strategy blends macro-trends data with the fund managers' expertise, relationships, insights, and analysis. Synthesizing this information, a fund manager points to the future, where opportunities may grow and generate significant returns.

MARKET OPPORTUNITY

Certain sectors show promise as underlying technologies evolve, while others run out of favor. As the bulky mainframe computer transitioned to the ubiquitous desktop, the ecosystem of hardware and software opportunities emerged. In the late 1970s and early 1980s, the first computing wave attracted eager investors, who backed over a hundred hardware startups that focused on disk drives, desktop computers, and allied products. Apple, Intel, Tandem Computers, LSI Logic, and others were amongst the first venture-backed winners. As the networking wave emerged, investors found companies like Cisco, Juniper Networks, Bay Networks, 3Com, and others. Soon thereafter, the internet boom (and bust) occurred followed by the disruptive forces of cloud computing, and mobile innovations, and ...