How can you build a VC portfolio that outperforms the market? (2024)

Create a BRAND. Being a successful emerging manager is all about creating a great brand.How do entrepreneurs know about you? Why do they want to work with you when they do know about you?Do later stage investors follow your deal flow? Do later stage funds want to be on your cap table? Is your opinion highly regarded in your given vertical?Be known for a given segment and nail it.

A concise investment thesis is essential for VCs looking to outperform the market. Identifying their unique advantage is key to attracting LPs and engaging portfolio companies. Leveraging deep industry knowledge, extensive networks and market access provides a competitive advantage that is critical in high cost of capital scenarios. Offering more than capital, such as strategic advice and networking, can significantly improve business performance. A nimble yet focused thesis allows for quick adaptation to market changes, preparing VCs for challenges and opportunities. Such adaptability, rooted in distinct strengths, ensures a resilient portfolio capable of delivering superior returns and driving innovation in the midst of economic change.

Investment strategies in both VC and PE space are today representing a "plein vanilla" approach. A lot of high value investement strategies are missed: one of them is the cross border strategies whcih are ehancing the competitive advantage of two complementary markets or geographical areas. This still remains an inexplored space which will represent a key innovation in the AM space for the years to come.Asset managers reamins quite conservatives and a few of them have successfully invested in innovative investment strategies.

Domain expertize is the secret to a top performing fund.In the days of internet, consumer and game startups, then solid business financials were all the VCs needed. These days there is a resurgence of technical or science based startups and having a solid understanding of both the technology and the potential market areas is essential for selecting a successful VC portfolio.Too many investors just 'follow the money'.

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Innovation in your investment thesis. The market is stagnated with copycat ideas. If the last 2 years have demonstrated anything it is the need for higher level of financial discipline and prudent business strategy.LPs and Portfolio guys are now asking more meaningful questions on strategy and tactical field experience within the industries your fund is active in. They are seeking innovative ideas, tactical knowledge base to help companies succeed and grow. Your thesis is your brand that differentiates. Now it’s not enough to showcase a smart thesis but to show how will you perform and why.

Absolutely NOT! If you are an LP looking to invest in venture capital, then of course it makes sense to back a couple of Fund of Funds and a portfolio of venture funds across different geographies, sectors and stages to access the top underlying companies across different cycles and sectors.However, if you are building a venture portfolio at your own VC, you want to be specific and have a defined thesis. Unless you are a major brand like Sequoia, which amassed both billions in AUM and reputation over decades, you can't be good at everything.VC is a game of market prediction, thesis predictions based on that, access to the top deals, capacity to pick them/win them, and good portfolio construction.Pick your game and be the best at it.

Effective VC portfolio diversification balances risk without diluting focus. While avoiding over-concentration, VCs should capitalise on their expertise in specific sectors, stages and geographies. Spreading investments across a minimum of 15 companies is prudent, but a targeted strategy based on deep industry knowledge is paramount. As a climate tech investor in construction and real estate, I advocate a focused investment approach that emphasises sector and stage specificity to mitigate risk and capitalise on unique opportunities. This strategy ensures portfolio success through expertise-driven investments, skilfully navigating market fluctuations and capitalising on emerging trends in line with our core competencies.

While an average player may illustrate diversification and risk management in traditional investments, I don't believe this portfolio strategy is effective in startup investing. The key lies in allocating all your asset into the best available market and the best available team. Don't chase after general theories of success. Venture capitalists should focus on mastering a limited set of principles that work well in specific contexts rather than relying on universally applied rules. Highly focused industries like finance, technology, biotech, and SaaS tend to offer better returns than benchmark(S&P500). Avoid low-return markets and jurisdictions. Avoid biases based on your current location :country, region, or industry.

To excel in the health tech VC sector, blending diversification with focus is essential. Leveraging in-depth expertise in health tech's varied niches, stages, and regions, while avoiding overconcentration, is key. Aiming for investments in at least 15 companies, a strategic focus on sector-specific opportunities enables risk mitigation and capitalization on innovation. This targeted strategy, emphasizing development stage and sector precision, boosts portfolio performance by navigating market shifts and emerging trends effectively. It ensures a competitive edge in the fast-evolving health tech landscape, optimizing returns and enhancing market outperformance through expertise-driven investments.

Arabella, the savvy shark of venture capital, swam by a unique philosophy: diversification. She didn't just chase after the flashy, fast fish; she spread her bets across various species and reefs. Arabella invested in early-stage minnows and established tuna alike, across different coral ecosystems. This strategy helped her balance the risks and rewards of the unpredictable ocean market. When a sudden storm hit one sector, her diverse portfolio kept her afloat. The takeaway? Diversification, much like Arabella's wide net, is key in VC investing. It's not just about betting on the fastest fish, but ensuring a variety in your catch. Spread Shark Love #divineintervention #gabenfreude

This feels like I’m reading about private banking or asset management rather than VC. No matter what stage you’re in, it is not only about allocating money to the right founders, but mainly about helping them to build that success that all stakeholders want. Give them actual expertise and real tangible help. That will yield way more than portfolio allocation and will lead to significantly more winners in that portfolio. That’s what drives performance

At Startup Wise Guys we follow this allocation strategy. The startups who are selected for investment goes through our accelerator program. Each startup receives 100K in funding. After the completion of the accelerator, based on the performance we select a few startups to do a follow on round. So far this strategy seems to be working.

Arabella, the shrewd venture shark, swam the investment seas with a keen eye on allocation optimization. She knew not all fish in the reef were equal; some were destined to swim faster and grow bigger. Arabella allocated her resources accordingly, investing more in the most promising and swift-moving fish, while cautiously nurturing the smaller ones. She adhered to the power law of the ocean: a few investments would yield the most fish. By balancing her bets and not overfeeding any single opportunity, Arabella maximized her returns, ensuring a diverse catch. The moral? Smart allocation, like Arabella’s selective feeding, is crucial in VC investing. It's about nurturing potential winners while maintaining a balanced ecosystem. #gabenfreude

Allocate your funds strategically across your investments. This involves deciding how much to invest in each company and adjusting these amounts over time based on performance and market conditions.

It is often beneficial for the investor as well as the startup to syndicate and have multiple investors come in. This increases the network effect the startup can benefit from while investors can achieve a higher level of diversification with the same amount of capital. It is also important to try to allocate to deals were the investor has superior insight and/or can add an unfair advantage to the portfolio company.

Motivate thinks about helping our companies using our 4C framework: Capital, Customers, Candidates, and Connections.We help match our companies with great capital partners.We introduce our companies to potential customers.We help portcos source ideal candidates.We make connections like subject matter experts, vendors, or partners to our portfolio.It's not always easy to see the results in real-time but when one looks back, the impact is breathtaking.

I found a very effective approach is to have a senior partner with relevant knowledge become a strategic advisor to the portfolio company. The regular advisory calls add value to the startup, feel less like being "policed" as the frame is focused on advice not reporting. At the same time advisory discussions often provide way more insight into what actually goes on than a formal report would.

Being "on the ground" with the founders, letting them see you going above and beyond the financial support (when needed or asked for), helps you reinforce your VC's image as an entrepreneur-friendly one.VCs rely on a mix of efforts to build and enhance their deal flows, and introductions are quite a significant component in this mix. Founders who are content with your support (past and present) are more likely to engage in WOM, bringing other startups with significant growth opportunities.

Give realSupport, which we see always falls short. We created our own value creation department to cover it and don’t underestimate the work required. Through this you do see the product market fit from up close and even more so strengths and weaknesses of the team

Active engagement with portfolio companies is essential for VCs to optimise returns. Balancing trust with the need for insight, VCs must closely monitor performance to ensure they add value beyond capital. A strategic focus, underpinned by deep sector knowledge, positions VCs as invaluable allies, offering access to networks, strategic guidance and product enhancement support. This approach requires a team with deep industry roots, capable of providing comprehensive support and driving growth. Regular dialogue with founders and close monitoring of progress are essential. Such engagement drives companies towards their goals, and significantly increases their chances of success, and marks the VC as a critical partner in their journey.

Always keep deal memos on why you invested and what you expect to see from the company going forward. Revisiting these and identifying what you are doing well/not so well can be a key contributor as you evolve and refine your approach.

Constant two-way education is critical to success. Your fund managers or founders will look to you as an investor for guidance, and you should also take lessons from these investments to inform your own behavior in the future. Once you believe 'you've arrived' and you stop learning and teaching, your likelihood for success starts to diminish.

I have seen "learn from your mistakes" many times when it comes to evaluating portfolio investments. The jury is out. Many practitioners tell you to learn from the mistakes while such august investors like Peter Theil say there is no advantage in analyzing investment mistakes as there are numerous reasons for failure of which you may not correctly assess.My thoughts are to simply look for commonality, if any, with your losers and winners. If you are able to discern something valuable, note it, if not, move on to the next investment.

Learning as an organization is a superpower in VC. How can you consolidate knowledge among your team across vintages and even across different GP generations?

Arabella, the reflective venture shark, didn't just swim forward; she often glanced back to learn from her journey. She analyzed her portfolio's performance, dissecting ROI and IRR with a keen eye. Arabella conducted post-mortems on both successful ventures and those that slipped through her fins. These reflections were more than mere hindsight; they were lessons that sharpened her future strategies. By continuously evaluating and learning, Arabella refined her investment instincts. This practice, akin to a shark's keen sense of its surroundings, is crucial for evolving a VC portfolio. Spread Shark Love #divineintervention #gabenfreude

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1) Being a VC is about predicting the future: by definition it is ok to have a divergent / contrarian point of view.2) More time on assessing the TEAM. This is a key factor which is often overlooked. Team assessment deserves the same amount of research as Product evaluation and Market sizing.3) Invest EARLY and follow on the best performing deals.4) Keep a small team and stay close to the entrepreneurs (they should have more of your time than your LPs).5) Build a strong reputation / brand.

Always be nice, thoughtful and provide genuine advice. Don’t hesitate to invest in two similar startups - one can fail while the other becomes a unicorn. And consider being lucky - that always helps!

Let me tell you about true venture enlightenment from someone who's danced on the margins of investing trends, dabbled in financial voodoo, and sprinkled generosity here and there. It's not enough to wager on hot sectors, stages, or regions. It's for amateurs. Real game-changer? Investment in firms operated by AI-enhanced superhumans or those that can psychically sense market trends. Because in my own experience, it's about teleporting to success, not minimizing risks. Instead of ROI or IRR, I assess success in giggles per dollar invested. Because if you're not having fun changing the investment world, why invest? Let's rebuild VCism with irony and an impossible future, not only for the sake of improving our VC portfolio.

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1. Pay a lot of attention, I mean it, really a lot of attention to the team, the profiles of the entrepreneurs. Ask them to tell stories about how they've done or would do xyz, listen, look for inconsistencies, look for a spark, and reflect if they (i) have the psychological profiles that are needed to be in the startup world and make a newco GROW and (ii) complement themselves. 2. Be honest, trustworthy and frank, always. Don't be afraid of being blunt.3. Know your s... Study the industries in which you are investing, get to know industry folks and other investors in the same space, build networks.4. Keep an entrepreneurial mindset. Don't overspend in fancy and irrelevant things. Be nimble, agile.

Why would a founder pick you ... and take your money?Ultimately that's what it comes down to when you're trying to win an allocation in a competitive deal. You could have the greatest investment thesis in the world but if the founders that match that thesis won't work with you, it's all for naught.