How to evaluate Venture Capital GPs using the GP-Thesis fit model
by John Felix, Allocate Head of Emerging Managers
Introducing “GP-Thesis Fit”
Lately, many LPs have been asking us what we look for when evaluating VC funds, including:
Do we prefer concentrated portfolios, or highly diversified ones?
Do we prefer managers that invest all of their capital in the first check, or those that reserve meaningful capital for follow-ons?
Do we prefer generalists or specialists?
Are there certain sectors we should be focused on?
While all of these are fair questions (and various data sources may demonstrate some level of directional insight), we believe there is a far more important determinant of a manager’s probability of success.
It's commonly acknowledged that investing is both an art and a science. Yet, the predominant focus seems perpetually skewed towards the empirical, the science of it all. What about the art of investing? What about the people who are doing the investing? Here at Allocate, we believe that the art of investing (and the people behind it) is equally as significant, if not more so, than the science. This core belief is why so much of our diligence process revolves around solving for a concept we call “GP-Thesis Fit.”
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What is GP-Thesis Fit?
You’ve probably become familiar with the term “product-market fit,” which is the notion that companies must have a product that fits a definitive market, or as Marc Andreessen says, “being in a good market with a product that can satisfy that market.” You may have also heard VCs talk about “founder-market fit,” a related concept that refers to the alignment between a founder (and their experiences/background/skills/values, etc.) and a particular market solution.
Drawing parallels, GP-Thesis Fit refers to the strength of the alignment between a fund manager team (or individual, in the case of solo-GPs) and the firm’s thesis. “Thesis,” in this case, can mean any number of things including industry, geography, or some type of clear theme. In other words, it’s the business model that defines the firm’s strategy and identity. Additionally, just having a relevant background to a thesis isn’t good enough on its own. You also need to have conviction that the thesis is a good one with a large market opportunity.
What we are looking for in managers is some level of an asymmetric edge that speaks to their ability to source, pick, and win, in a way that is meaningfully advantaged (at least 2 of the 3 elements of sourcing, picking, and winning are critical, in our experience, to show a definable edge). Typically, the stronger the GP-Thesis Fit is, the stronger the manager’s edge is.
The chart below shows how the most powerful examples of GP-Thesis Fit include a strong GP with a relevant background executing a good thesis. This is the quadrant that we believe serves as the strike zone for the most effective managers. This requires strong self-awareness on the part of the GP to pick a lane that they can successfully compete within.
Things like portfolio construction (big or small), reserves, fund size, and team make-up should all map back to the notion of GP-Thesis fit (they are part of the overall business model, but are a function of the manager’s thesis).
An example of GP thesis (or not) would be the following:
Let’s take investor A who is a physician by training, and also an entrepreneur in the biotech space. She had a successful exit to a large pharmaceutical company and raised a small fund in the past with friends and family to invest in biotech companies. After careful consideration of her history and strengths, she decides to launch her own institutional VC fund to invest in early-stage biotech companies.
Investor B is someone that was a Principal at a large Sand Hill firm in the past with a background in investing in all types of startups. As a generalist he has a strong overall track record, but has developed a personal fascination with the biotech industry having done a few deals in the space. Because the firm he works at does not have a dedicated biotech practice, he decides to leave to launch his own VC fund to invest in early-stage biotech companies.
From our perspective, investor A ostensibly would be far more likely to have the elements of stronger GP-Thesis fit (and therefore a better formula for sourcing, picking, winning than investor B). From there, depending on the thesis, we would then start to look at things like portfolio construction, fund size, and service model to determine if those elements align with the investor’s GP-Thesis fit.
The crux of GP-Thesis Fit isn’t about labeling one strategy as superior to another. It’s about aligning the strategy with the investor’s strengths and expertise. This alignment can manifest in an industry specialization, a geographic inclination, or even be rooted in a particular life experience that furnishes the GP with a unique lens to invest in specific themes. We firmly believe that there are multiple winning strategies in VC, and rather than focusing only on the “what,” GP-Thesis Fit is all about focusing on the intersection of the “who” and the “what.” Because, at the end of the day, the best strategy is the one that works in harmony with the GPs executing it.
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