Many startup investors begin with a portfolio theory approach in which one makes a few investments across a broad range of sectors. I often hear, “My strategy is to invest in good deals.” This is easier said than done. A broad-based investing approach requires the investor to come up to speed in every sector. That’s a lot of homework for an investment in one or two deals.
Some investors focus on a few key domains and become experts in those areas. By diving deep, one can understand the trends, challenges, and factors that drive company success. There’s a risk that if you have too many companies in a sector, you are at risk for major disruptions.
If the sector is broad enough, you can move to new areas within the space as it matures.
How to find deals in a Sector
You can search Crunchbase for sector-specific reports to find deals in a sector. Pitchbook produces funded reports by sector by subscribing to their daily newsletter. To meet with startups, conferences are a great place to find personal introductions. Also, venture capital is now evolving into service models in which they fund the companies and help with operations such as sales, CFO, etc. It’s not hard to find a list of VC firms focused on a sector.
Understanding the Challenges in the Sector
By focusing on a sector, one can learn the challenges in that sector and look for companies that are solving those challenges in new and unique ways. By talking with startups about how their product/service works, the investor learns the key issues in that industry sector.
Identifying the Risks to Overcome
Every sector comes with its risks, such as regulations. Also, disruption from new technologies is an ever-present risk in the industry. Spending time with startups and investors in the space makes it clear where the risks come from and what one can do to mitigate them.
Tracking the Trends in a Sector
With the increase in newsletters, podcasts, meetups, and more, one can track the trends in a sector. Some aggregator tools, such as Feedly, let you build lists of sites and find updates as new information arises. By reviewing conference agendas for sector-specific shows, one can learn the topics that are top of mind for those in the sector.
Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies