‘Me Too’ Investing Eats Returns • TechCrunch

for the original A category that has to reinvent itself all the time, it is surprising to see how resistant some venture capital funds are to change.

As a partner in a fund of funds, I attend a lot of annual meetings, talk to a lot of mutual fund general partners and review a lot of investor groups.

What particularly surprised me was the number of funds that tell the exact same story and invest in the exact same areas: B2B SaaS, cybersecurity, cloud infrastructure technology, e-commerce brands, and crypto/fintech.

As I’ve written many times before, the adventure is all about elephant hunting. Large funds have at least one, and ideally a few, highly successful investments that return the money. Ownership and letting big companies “roam” (and not sell them early) is critical to getting huge returns.

But huge returns only come from market leaders in massive markets. The company in second place, and sometimes, the company in third place can also win, but of course it will not be too big. But companies that end up at #300, #99, or even #20 in a market do not end up as good investments.

I was thinking about this recently when I looked at a map of martech SaaS companies that Chiefmartec and MartechTribe made recently. Surprisingly how many SaaS marketing companies are still getting funded:

Image credits: Scott Brinker of Chiefmartec and MartechTribe

Although it is not as bad as marketing technology, we are seeing a massive bulge in the number of cybersecurity and fintech companies as well.

A comment I increasingly hear in my conversations with CISOs, for example, is that they are not looking so much for new point solutions as for a broader platform that will replace the dozens of cybersecurity applications that exist in their systems. In a market where raising capital is increasingly difficult, many thousands of “me too” cybersecurity companies will find themselves increasingly “insecure.”

The same is true for some areas of fintech. How many payment companies can be created? How many e-commerce finance companies can survive and thrive?

Mark Andreessen once said that “software is eating up the world”. Unfortunately, investing also eats up returns.

So, what should venture capital funds do?

As an early stage venture capital firm, it is not important to invest in what is hot today, but to invest in what will be hot in five to 10 years from now. Venture capital that invests in leaders tomorrow It will be the markets that generate huge returns.

This does not mean that one has to stop investing in SaaS, cybersecurity or fintech. There will always be companies idling in those sectors, but the balance needs to shift to huge markets that are primed to be disrupted by underfunded technologies.

In my view, there are four regions that are relatively underfunded that could generate big winners over the next 10 years:

Originally published at San Jose News Bulletin