Follow me @samirkaji for my random, sometimes relevant thoughts on the world of early stage venture and start-ups. It’s clear through the first half of 2018 that the pace of new Micro-VC firm formations hasn’t slowed (and in fact appears slightly ahead of 2017’s record pace). Understandably, sophisticated LPs that allocate to emerging managers are laser focused on finding managers that can demonstrate meaningful differentiation prior to committing. Most new venture managers appreciate that some competitive edge is needed, but often miss on what it means to be meaningfully differentiated. Since selling LPs solely on the premise of being a better picker of companies is next to impossible, it’s best for managers to focus on strategies that demonstrate clear advantages when it comes to sourcing, winning, and post-investment activity. As an aside, I think it takes ~10 years of consistent performance before a case can be made that someone is a good picker and advisor of companies (luck and limited sample sizes make measurement of skill impossible in the early years). With that backdrop, let’s examine the key components necessary for a meaningfully differentiated model. All of these should be present within a firm that exhibits true differentiation. It’s tangible and durable Fledging firms should have some type of “moat” that gives them some degree of an advantage versus peers that play within a similar investment thesis. This moat should be very difficult for others to replicate, and be very clear for founders to understand. This moat could be simple as superior domain expertise or network, but needs to be extremely specific in nature (i.e. “rolling up my sleeves and hustling” or having an “awesome network” with no specificity are not examples of moats). Additionally, any moat should reasonably stand the test of time. As a result, a core primary differentiator for a firm can’t be simply be running a geographically or stage focused firm. In these cases, market forces tend to ultimately converge and create atrophy in any advantages that might have been initially present. It’s systematized When I review strategies with managers, I generally look for an “operating methodology” that demonstrates some sort of definitive framework on how the firm invests, picks, and adds value to portfolio companies. Having this type of framework allows for a few things: 1/ It allows for consistency of approach, a key driver of repeatable performance across funds. 2/ Creating a framework enables performance measurement around processes, which is particularly important as the feedback loop for relevant investment performance is incredibly and painfully protracted. 3/ It provides clarity and transparency for founders and LP’s into your culture, value add, and method of conducting business. Creating something systematized doesn’t need to be overly complex, but needs to be something that...

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