Ask an Investor: How do investors build their expertise?

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One of the best aspects of being a VC is the constant learning. Every day brings a new pitch, a new company angle, and a new market to get up to speed on. Learning is a necessary condition in a constantly changing industry predicated on innovation. It’s also crucial for a role that sees us selling money, and trying to differentiate. Ultimately, VCs stand out through a combination of knowledge plus network which together form expertise. These two factors form a reinforcing loop – VCs build knowledge from our network and grow our network as we’re able to provide value through our knowledge.

So how do investors build that expertise? There are four main ways—each ranges in both difficulty and depth of knowledge, but investors are typically employing multiple at a time.

Inbound Triaging

The amount of expertise a VC has built in your industry directly impacts the amount of value they can provide you with.

All VCs spend some time working through inbound pitches. Even for companies that don’t make it to a full diligence process, VCs inevitably collect insights and are able to better benchmark for subsequent pitches. With every related company, VCs are able to evaluate it a bit more knowledgeably. Ultimately, a reliance strictly on inbound triaging will have VCs heavily reliant on pattern recognition evaluation of the management team.

This type of expertise building (or lack thereof) is most common among early generalist funds that are making pre-seed bets on the founders themselves, more than clustering their investments within any sector.

Portfolio insights

If VCs are thoughtful about making multiple investments within the same business model (ie. B2B SaaS, marketplaces) or industries (ie. travel or manufacturing), they’re able to reap compounding insights from that portfolio. These insights come through co-investor relationships that become stronger with each subsequent investment, as well as the ability to use portfolio companies as external diligence partners. Independent board observers at one portfolio company might become fund-associated experts who can surface interesting investment opportunities or provide feedback on investment theses.

Lived experience

There’s a reason that some founders express a preference for VCs who’ve built a company in the same space. That first-hand experience often means they understand industry dynamics far deeper, and hold close relationships with key actors.

You want VCs with a blend of value propositions around your company.

The one downside? This method might leave VCs with scars from that experience that cause them to lean out. If there was some hurdle they couldn’t get past or an aspect of the sales cycle that they found incredibly difficult, they may project that onto your business more than a less biased VC.

Outbound work

This is the most systematized approach. At iNovia, we split it into three phases: 1) discovery, 2) exploration, and 3) deep diving.

At any given time, we’re evaluating new markets and business models that are personally interesting and fit within our broader fund investment thesis. We also consider if there’s pre-existing alignment with our network; this helps reduce the “time to expertise,” but is also a practical factor in discovery. Our network influences the conversations that we’re having, which impacts the markets that we consider diving into.

Once we’ve found a thesis that seems like it’s worth pursuing, we move into the exploration phases. While building a list of key startups and incumbents in the space, we build our assumptions on why a market is industry and what enables it now. At the same time, we’re validating these assumptions through conversations with those key players and conducting secondary research.

If early findings indicate that there’s room for category leaders to upend the existing value chain and there’s substantial value to unlock, we move into a prolonged deep dive. We continue talking to startups in the space but also start to construct a network of top industry advisors and co-investors. Then we move into building a community, nurturing our network, and actualizing our expertise into an investment!

Why should you care? The amount of expertise a VC has built in your industry directly impacts the amount of value they can provide you with. It’s also a good indicator of how they evaluate their own impact. A VC that’s spent time doing outbound work and building a thesis likely anticipates being valuable in industry-specific ways. A VC that relies on the lighter knowledge gleaned through inbound triaging probably considers themselves better at industry-agnostic support. Neither is better than the other – but you want VCs with a blend of value propositions around your company, so understanding where each VC you’re talking to lies, helps you choose the best partners.

Sarah Marion

Sarah Marion

Sarah Marion is an Associate at iNovia, a full-stack venture capital firm that partners with audacious founders to build enduring technology companies. iNovia manages $500M across three funds, and holds offices in Montreal, Toronto, San Francisco, and London. For more information, visit inovia.vc