VC Fund Differentiation *Should* Matter

Brad Feld, one of my VC “true norths,” posted about VC Fund Differentiation the other day. From his post ->

There are words that get overused to the point of not meaning anything. Differentiation is one of them. It’s now part of a cliche, as in “how are you differentiated?” I no longer care about this. I expect you can create a set of slides or a story about your differentiation, but if I dig in and try to understand what you mean, I expect I’ll feel pretty hollow at the end of it.

Why has “differentiation” been so watered down as to be meaningless? Is it overuse? Was it hollow to begin with? I think the problem originates from where a lot of VC industry mistakes start: treating LPs as the customer. Yes, none of us would be in business without our LPs (thank you!!!). But at the same time I try to think of them as valued partners and not our customers, because FOUNDERS need to be our customers in order to deliver the results LPs expect. As Brad mentioned, “differentiation” world slop is often about convincing LPs you’re special, when all that matters is strategy and results.

When we started Homebrew in 2013, Satya and I didn’t ask ourselves “how are we differentiated,” (for better or worse ¯\_(ツ)_/¯ ) but instead “what types of founders/companies are we right for and when would we *not* be their best choice). Founders are your customers and we should be framing every decision we make about how it provides them value.

Differentiation is about giving founders enough information to know whether your fund would or would not be the right VC for them. You cannot be all things to all people. One example of differentiation is risk tolerance and type – VCs should be able to articulate what risks they’re more and less comfortable with. In Brad’s post, he might call this “strategy” more than differentiation. To me, differentiation is the articulation and communication of your strategy.

In order to be truly differentiated as a venture fund you need to be the wrong choice for some set of excellent founders. By definition, if you’re right for all entrepreneurs then you’re a commodity. And that’s a scary place to be.