Today we discussed a data-centric approach to investing. Signal Fire invests broadly, across a range of sectors, attempting to find the areas that have the most return potential. Whether or not you believe in their data engine’s ability to identify opportunity, it’s a returns driven focus. He’ll go anywhere, invest in anything or anyone so long as their approach identifies huge return potential.
A very different strategy, that I’ve come across more and more, is what I call affinity investing. These are investors that adopt a thesis based on an affinity group. And one which lacks a reasonable argument for why that group will outperform everything else. Here the tail wags the dog… the special interests of LPs drive the investment focus. A recent example is a VC that is raising a fund to invest in those whose ancestors hailed from a specific country, regardless of where the founder is currently located. Another was an aspiring fund manager that invests only in founders of a specific religious group. From where I’m sitting, there’s no discernable strategy for how these founder types will outperform all other founders. To go a step further, this approach suggests that dealflow will be extremely limited to only those founders meeting very specific criteria.
As an example, one of the universities I attended approached me ~18 months ago about managing a fund on their behalf. The fund was raised, the capital was ready to deploy. The catch? I could only invest in companies that included alumni on the founding or executive team. Now, I currently receive about 3-4 pitch decks a day and it’s still a challenge to find opportunities, where I can confidently invest my money. With this proposal, I’d likely struggle just to find startups meeting the criteria, forget about their likelihood of success. This offer was one of the easiest passes I’ve ever made. I’m not in this business to manage money, I’m in the business to drive returns.
But there is one major advantage to the affinity investor, and that is raising capital. This approach allows the fund manager to tap into affinity group members; those that feel very strongly about their communities and want to support those in it. Those that trust other members of their group, increasing their willingness to invest. If two people are aligned on a greater cause, the absolute return on investment is subordinate to the cause at hand.
Look, if the goal is philanthropic and one is looking to drive impact… by all means, I applaud the effort. But if the goal is ROI, the thesis should reflect that.
I ask should we be deployment focused or raise focused? Should an emphasis be placed on the ability to drive returns or the ability to attract assets under management? I know where I stand.
Whether startup founder or early investor… does your strategy drive value or is it built to attract capital. While one may have a faster and easier path to raising funds, we all have a responsibility to deploy it wisely.