Given venture capitalists’ fondness for chasing short-lived hype cycles—looking at you, metaverse—LPs may rightly be wary of overspecialized managers.
But sector expertise is a significant asset in fields like life sciences, where generalist firms may lack the technical knowledge required for deep due diligence. That’s the upshot of recent PitchBook research that examines return performance and exit success rates of generalist and specialist managers.
Healthtech and pharma companies backed by firms with deep expertise were far more likely to record a successful IPO or acquisition than their generalist peers—with exit success rates of 75.5% in healthtech and 82.6% in pharma. Those exits imply better returns for LPs: The median multiple on invested capital for pharma deals led by specialist firms was 1.5x, versus 1.3x for generalists.
Many other verticals, including fintech, SaaS and AI, don’t show a correlation between investor specialization and exits. But that hasn’t stopped funds focused on hot strategies like AI from landing big backers.
Across all sectors, companies were 1.2x more likely to successfully exit if a lead investor in a round had high domain expertise. These outcomes were mostly consistent across deal stages.
LPs finding specialist balance
LPs looking to get the best of both worlds could adopt a version of the core-satellite portfolio construction approach, according to the report.
Under this framework, the core of their VC allocation would go to generalist investors in broad sectors, with satellite funds focused on verticals where they believe expertise will make a difference. One advantage of this approach is simpler due diligence, since LPs wouldn’t need to evaluate large numbers of specialists.
Featured image by Freepik / jowomid
