October 4, 2022

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Why Being a Generalist Investor Is Better Than Having a ‘Focus’

Welcome to VC View: a column by venture capitalist Ben Narasin.

  • Ben Narasin, the founder and general partner of Tenacity Venture Capital, is in the top 1% of performers.
  • He says his returns show that investing in a variety of startups is as successful a strategy as being restricted and focused.
  • He says newbie investors pitch a story about focus when they don’t have a track record.
  • This is an opinion column. The thoughts expressed are those of the author. Read previous VC View columns.

These days, I’m living the same life as the founders I invest in. With it comes all the hollow rage I know they suffer — just in a slightly different form. 

I’ve been raising a new fund with — humble brag — great success: 64% subscribed in just three months, meaning I almost instantly raised two-thirds of my goal. Yet I still get some folks that pass on my fund. 

Of course, there are legitimate reasons to pass: You don’t do debut funds, you don’t back solo GPs (a fund run by one person, not a firm), or you don’t like me (fine! although I thought everybody liked me). 

But there’s one reason I’ve been given for rejection that infuriates me: “We want to see our GPs have a focus.” That’s investor jargon for saying a fund should have some kind of predetermined investment thesis. 

The thing is, I have something more important: a proven track record. 

The “focus” reason frustrates me because I can point to my years of experience and a highly consistent performance.

I’m told I’m in the top 1% performance over the past 14 years based on independent data from venture fund research firm Cambridge Associates (I’m not a Cambridge subscriber, but I’ve been told by someone who works there that, while he’d have to double-check explicit vintages, it looked true to him). 

The only thing that makes me more frustrated is when someone, having seen the numbers, says they are “just too busy” to “do the work.” That signals to me someone who is lazy and more worried about their golf game. If they were founders, they would be fired — but amazingly in the fund-of-funds world, they just plod along.

But, I digress. The real reason this idea of focus is infuriating is because I am, by design, a generalist. Sure, I have areas of concentration — like fintech, marketplaces, mobile, and SaaS — and areas I avoid, like medtech or security of core IT infrastructure. 

But my returns indicate that investing in a wide variety of startups is as successful a strategy as being restricted and “focused.” My main focus, an obsession with the founder, has kept me in the top 1% — and if I wanted to be snide, I’d say that my “focus” now is to stay there. Sure, it’d be great to be 0.001 or 0.0001. But I’m pretty proud of what my founders have achieved and allowed me to profit from.

Folks that default to a need for “focus” are relying on two cognitive errors.

  1. They believe optimal portfolio construction requires many sub-focuses within the already narrow focus of earliest-stage seed investing — without any evidence to support that belief. It already requires know-how to pick winners when a company is very young.
  2. They have grown accustomed to other venture funds telling them their focus gives them an edge — again, without evidence. 

The truth is, other investors pitch a story about focus when they don’t have a track record. 

I recently attended a session where a senior member of a top LP with 40 years of history spoke to a group of new funds like mine, and he confirmed my belief, saying that many focused funds under-deliver. 

He referred back to the “Java funds” and “Nanotech funds” of prior eras which were created towards the tail-end of the Web 1.0 bubble, primarily by KPCB. These funds, and others like them, were formed to fund explicitly and only into specific segments. 

His conclusion is the same as mine: An investor actually has a better chance of success with a broader aperture.

His firm doesn’t eschew focused funds altogether, but it invests in far fewer of them. Only about 10% of its fund managers are what could be considered focused, and he said that in general, that segment of managers underperforms compared to the generalist funds. 

Let’s not forget that the best funds in the world — Sequoia, Benchmark, and a handful of others — are generalists. The one exception is crypto, which is experiencing an explosion right now.

Being a generalist doesn’t mean you do everything. It’s still tech — typically software, which is its own broad focus, as is fintech.

I made this comment in a session once, and someone responded, “Benchmark isn’t a generalist. They don’t do bio or hardware.” Oh, come on. Generalist investors are omnivores. Omnivores eat a lot of things, but they don’t eat everything. I don’t love certain types of food so I don’t eat them. (And I don’t know any omnivores that eat rocks, other than salt, so let’s not get too obsessive.)

With someone that does invest in funds for a living telling me the data supports my beliefs and frustrations, I felt it worth it to spread the word. 

As they say on Broadway, you gotta have a gimmick — and for a newbie with no record, that gimmick is a new “focus.” But for those of us that have actually delivered, please just judge us on merit and let us do the job we have shown we are able to do.

Let me assure you: No one will ever get fired, or even questioned, for funding the top 1%.

Ben Narasin is the founder and general partner at Tenacity Venture Capital. His career spans 25 years as an entrepreneur and 10 years as an early-stage investor backing companies like Dropcam, LendingClub, TellApart, Kabbage, and Zenefits.