Agglomerators vs. Specialists

From The Next Big Thing by Nikhil Trivedi — read the original.

Notes

• On one side of the venture capital industry are the agglomerator firms. They invest at every stage, across every sector, and many are growing even larger.
• On the other side are the specialist firms, either by sector, or by stage, or both.
• The industry has bifurcated, and there are several implications for its future.
• Chris Dixon described the increasing segmentation by stage, where it had previously been segmented by sector, and the framing of venture capital as a product:
  • Mentorship and angel funding are performed more effectively by specialized firms. Entrepreneurs seem to realize this and prefer these specialized “products.”
• Agglomerators: They invest at every stage, across every sector, and they are becoming larger in fund sizes and in teams. They offer many different products to both founders and limited partners (LPs) under one roof.
• Specialists: either by sector, or by stage, or both. They offer specialized products to founders and to LPs.
• Majority of firms are moving into the multi-sector, multi-stage. What is the Fund Differentiation strategy of the next 10 years?
  • Connect to Sundeep Peechu strategy at Felicis Ventures
    • {{embed: ((((CYHacj64Z))))}}
• How did these firms become Agglomerators? Most started off as specialists but, as they generated strong returns, they had the license to become agglomerators. LPs supported the broadening of their products, with the firms increasing their fund sizes, teams, and investment scopes.
  • Do the Investment Returns data support this move? Does everyone generate better returns by getting bigger and bigger?
• Here are some of the characteristics of Agglomerators: Fund Differentiation
  • Large Fund Sizes: most of the agglomerators have fund sizes north of $1 billion, and certainly have assets under management in the billions (if not tens of billions) of dollars.
    • What does the data on Investment Returns say about fund sizes? Because it’s happening so universally that firms move up market and get larger and larger in both Venture Capital and Private Equity, they must be anchoring to data right?
  • Large Teams: the investment teams of the agglomerators are almost all above 10 people in size, with many of the firms being over 100 employees. The investment teams include sector- and stage-specialist partners.
    • As the role of investing becomes more known and idolized, you have more people who want the job and the supply increases; only makes sense that firms will take advantage of that labor surplus Investing 101 2.0 Wiki
  • Multiple Funds: many of the agglomerators have different funds for different sectors, stages, or geographies. It’s helpful to think of these as products. Agglomerators can offer seed-stage products, early-stage products, growth-stage products, healthcare/crypto/biology products, US/Europe/India/China/ROW products, and more. A few of the firms have one team that spans across multiple funds, but most of the firms have dedicated teams to dedicated funds.
  • Multi-Geography: many of these firms, such as Accel, GGV Capital, Index Ventures, Lightspeed, Mayfield, and Sequoia Capital, invest across geographies, with offices on multiple continents. Some invest across geographies with a single team in a single location, such as Felicis Ventures, Insight Partners, and Thrive Capital.
  • Portfolio Services: most, if not all, of the agglomerators, have a dedicated team focused on helping portfolio companies. Many of the specialists offer these services, too, but it’s almost mandatory for the agglomerators to offer them. These services include support on recruiting, marketing, and business development. The agglomerators can afford to invest in these services because of their scale, and higher annual budgets through management fees on larger funds. VC Platform
  • Zero-Sum: because of their larger fund sizes, and multiple products, it is harder for the agglomerators to be collaborative in the ecosystem. They need as much ownership as possible to generate the highest returns, and they can get that ownership by investing in companies at every stage. Most of the agglomerators are therefore zero-sum players in the ecosystem.
    • Coatue has been able to craft a successful strategy with folks like First Round to respond to this “zero sum” attitude. Sequoia will push down earlier investors as much as possible. We can compete by promising to be much more collaborative (sometimes).
• Here are some of the characteristics of Specialists: Fund Differentiation
  • Stage-Sized Funds: seed-focused specialists mostly have funds that are under $250 million in size, growth-focused specialists have funds that are above $500 million, and the multi-stage sector-specialized funds tend to be on the larger side, with separate funds for separate stages (a similarity with the agglomerators).
  • Small Teams: most of the specialist firms have investment teams that are under 10 people, and firms that are under 50 people.
  • Opportunistic on Geography: most of the specialist firms in the U.S. focus on investing in the U.S., but a few are opportunistic about investing internationally, with the same core team. Multiple geographic funds or separate investment teams for other geographies isn’t a characteristic of specialists.
  • New Firms: most new venture capital firms start out as specialists. Because it’s harder to stand out in today’s industry, and because most first-time funds are hard to raise, it’s almost a necessity for a new firm to have a focus. A recent exception is Addition, the firm founded by Lee Fixel, which raised $1.3 billion for its first fund, and is an agglomerator from day one.
  • Collaborative: though some of the specialist firms are zero-sum (Benchmark and the other specialists at the Series A/B typically lead rounds and leave little room for co-investors), many are collaborative. They are willing to co-lead rounds with other investors, or write supporting checks in financings that fit their specialized thesis. Collaboration becomes harder as fund sizes increase, hence why it is not a characteristic of agglomerators.
  • Focus: the core advantage of the specialists is having a focus. Internally, specialists can focus their teams and processes to best suit the sector or the stage. Externally, the brand of the firm can stand out further in the minds of both founders and LPs by being a specialist and having a focus.
• So many firms have gone from being specialists to agglomerators in the past decade, with larger fund sizes and mandates. It remains to be seen whether these firms, and how many of them, will generate top tier returns. Because larger fund sizes have historically correlated with larger round sizes, higher valuations, and lower multiple returns on the fund, the scrutiny is on the agglomerators in the decade ahead. Investment Returns
• Many Agglomerators Will Look The Same. A firm’s brand matters, and agglomerators have more resources with which to build their brand than the average specialist does. But one of the challenges of being an agglomerator is standing out from the other agglomerators. These firms are already starting to look like one another, and the competition amongst them is fierce (even more so than between the agglomerators and the stage specialists). This has happened in other parts of financial services; for example, it’s hard to distinguish between many of the investment banks. The commodification of agglomerators presents new opportunities for specialists to differentiate. Fund Differentiation
• Will Collaboration Survive? As the number of agglomerators grows, and with a finite number of outsized-return generating companies every year (even though those outcomes are getting bigger!), the industry looks to be becoming more zero-sum. This may not be in the best interest of founders, who can benefit from working with multiple firms if they are willing to collaborate on a financing. Investing 101 2.0 Wiki Roam graph; if we can’t be collaborative in deals, what can we collaborate in?