The Outsize Opportunity for Specialist Funds Led by Founder CEOs

For years, success in venture capital required being a generalist.  

Funds deployed capital across a range of industries, maintaining a diverse portfolio that increased the chances of investing in a company that would make a market, while dispersing risk.

But the high performance of a growing group of funds who take a different approach is demonstrating that taking a different path presents a new opportunity.

A new crop of specialist funds is combining deep expertise and network effects to identify outsize opportunities in targeted markets. Today, many of these funds are operating at the seed stage, where an early commitment provides high potential for outsize returns. By acting with a higher degree of conviction than is typical of early stage investing, these funds are matching market opportunities with promising founders, and outperforming generalists in the process. Specialist funds expand their capacity to increase velocity and manage risk when they are led by fund managers who previously served as founder CEOs, enabling investors to go beyond strategic oversight to provide direct operational support and serve as connectors. Like the successful entrepreneurs they nurture, specialist funds balance vision and focus to unlock new value, while raising the ceiling for venture capital in the process.

The Evidence is Mounting: Specialists Outperform Generalists

A growing body of data provides evidence that specialist VC funds outperform generalist funds on a variety of key metrics.

A Pitchbook study named specialist funds the “clear winner” for funds under $250 million, both in Total Value to Paid-In (TVPI) and Internal Rate of Return (IRR). Meanwhile, Cambridge Associates found that sector specialists outperformed generalists in both Multiple on Invested Capital, and IRR. When it comes to distributions of called-up capital to LPs, Preqin found that sector specialists outperformed generalists, having delivered a distribution to paid-in (DPI) ratio that is 7.4 percentage points higher.

These results are owed to particular advantages enjoyed by specialist funds at all levels of the investment process, from sourcing and conviction to introductions and exit. In particular, specialization has these three qualities:

Focus‍

Specialist funds have a combination of expertise and experience in well-defined market segments. These funds are immersed in the dynamics that shape an industry, and positioned close to the highly specialized intelligence that signals coming shifts. At Grit Capital Partners, our focus and experience building category-defining companies in media, martech, commerce, and fintech led to a recognition that Applied AI will disrupt experiences and transactions repeatedly. Our domain knowledge enables us to act with a high degree of conviction as we identify companies at the seed stage.

Depth‍

By concentrating in a specific vertical, investors are well-positioned to build early and authentic relationships with promising founders that are moving where the market is heading, and provide companies access to networks and talent that will enable them to move quickly and decisively to create new categories. Grit Capital Partners’ team of founder-CEOs and seasoned executives are natural and longtime conveners in the industries we helped to build over years. As a result, the network that we bring to bear today is a key source of market intelligence and introductions, which in turn nurtures dealflow, hiring, post-investment support, and future investment rounds.  

Discipline‍

Buoyed by strong conviction and an expansive network, specialist funds can build a portfolio that is focused on the opportunities that will truly change markets, while deploying capital in a concentrated manner. Grit Capital Partners leads investment rounds, while seeking companies with 10x potential. This ensures that we are leading from the front to support companies that will reshape markets. Our team lives up to that commitment by playing an in-depth role as both a steward of capital and a guide for founders on the path to market creation.

Founder CEOs and The Value-Add After the Check

If an investor has experience in a market, they are uniquely equipped to help founders lead it.

Following this logic, founder CEOs who become investors have a further advantage. If a VC has experience starting and leading a company, they are uniquely equipped to support founders as they build it.

This experience provides an advantage over other investors. In a working paper for the National Bureau of Economic Research (NBER), Paul A. Gompers and Vladimir Mukharlyamov found that successful founder-investors outperformed their non-founder counterparts by 6.5 percentage points.

In particular, Founder CEOs leverage their experience in these key areas:

Sourcing‍

The Founder CEO is one of the most unique roles in the business world. These leaders devised a vision for how to bring massive change to a market, birthed a company to make that vision a reality, raised the money to fund it, operated the company through each of its stages, and usually served as both the face and deal closer. Alongside a host of different skillsets, this requires a blend of tenacity and gravitas. The combination is difficult to quantify, and spotting it is highly dependent on experience. Yet it is critical at the seed stage, where investors are more often investing based on the person and the problem, as opposed to the track record. Founder CEOs who become investors are more likely to recognize the very traits that they possess in other founder CEOs, and evaluate whether they have the right combination to build a generational company.

Post-Investment Support‍

Founder CEOs have experience as operators, so those who become investors inherently understand what is required to run an early-stage company on a granular level. As a result, founder CEOs are more likely to maintain high levels of connectivity with portfolio companies after providing investment, and roll up their sleeves to provide help. They not only assist founders in making a plan to reach milestones, but also provide direct resources and assist in completing action steps to help them achieve it. They don’t just take a call when a company is in danger of running out of money, they walk through the scenarios and execute the steps that can bring a company to a new raise or exit in three months. They don’t just offer advice on hiring, they source talent directly from their network and orchestrate the hire, all the way to onboarding. Our team at Grit Capital Partners includes Founder CEOs who have led companies from birth to IPO, and created markets along the way. We are committed to providing founder CEOs with the level of support that we sought as founders, and actively partner in their success.

Where Specialist Meets Founder CEO

Specialists have market expertise. Experience as a Founder CEO provides company-building expertise. Put these two together, and it accelerates the considerable advantage that specialist funds already possess.

Combine a specialist’s view of the market with an entrepreneur’s ability to create value, and you can speed a product roadmap. A specialist’s expertise provides insight into not just what technology is advancing, but the use cases that will emerge from this innovation. Those with knowledge of AI knew that it would eventually disrupt financial markets, and indeed saw how early examples of tools such as algorithmic trading could unlock new value. With experience as a founder CEO, a fund manager can identify the use cases that are next, and locate the entrepreneurs who will build them.

When it comes to time to exit, a specialist’s knowledge of market dynamics and a founder CEO’s knack for timing the market are valuable assets. Layer on the ability to facilitate introductions to buyers through a vast network, and the ideal conditions for an exit are beginning to form.

Specialization and Risk

One argument in favor of generalist funds is that diversification across industries allows room to manage risk, especially when a downturn impacts a single market. However, specialist funds proved to be a redoubt for LPs during a pullback in 2022-2023. When managed by founder CEOs, specialist funds have both the knowledge to know when bumpier waters might be coming, and the experience to navigate through the difficult times. When the storm clouds part, these investors know that the companies best prepared to seize the opportunity have a massive head-start, and will ensure founders they support are ready.

Specialists and Applied AI

Another argument for generalist funds posits that specialists might miss out on megatrends that reshape multiple markets. In practice, specialists who have lived through multiple eras have unique insight to understand how megatrends will reshape their markets.

In Grit Capital Partners’ focus areas of commerce, martech, media, and fintech, our team has been at the forefront of creating new markets across the cloud, social, and mobile eras.

As artificial intelligence advanced rapidly, our experience leveraging agentic tools and our understanding of how to create value helped us to quickly recognize that AI is a 100-year technology transformation, and there is a bigger opportunity at the applied layer than in any of the previous eras. We also identified that the industries we helped to build as founder CEOs will be the most fertile ground for Applied AI due to how they are organized, their vast amount of data, and their high variable costs. Now, we can act with conviction that Applied AI will disrupt these industries repeatedly.

These are insights that result from years spent building these markets, and deploying AI over two decades. Backed by strong conviction, we can pattern-match between problem sets and founders.

That’s how specialists led by founder CEOs are positioned to win, repeatedly.