There was a time in venture capital when generalist funds ruled the day.
But sector-specific vehicles, centered around various tech specialties, are much more common.
Just ask Alberto Yépez, co-founder and managing director of ForgePoint Capital. His firm announced today it has put the wraps on $450 million for its second fund, which is 50 percent larger than its inaugural fund that closed nearly three years ago.
And the team is getting bigger. Yépez says the firm is expanding into a larger office in its building in San Mateo, California, and he anticipates growing to 20 people from the current 12 by next year.
“We’ve seen a big shift in LP attitude in the last five years regarding sector-specific funds,” Yépez tells Venture Capital Journal. “Sector-specific funds used to be a no-no to LPs, but investors now know they can outperform the generalist funds.”
Yépez noted that the firm, which recently promoted to partner William Lin (one of VCJ‘s 40 Rising Stars), is offering a position to a woman to join the investment team at ForgePoint. He did not say who the candidate is or when she might join.
In addition to Yépez, managing directors include Donald R. Dixon and Sean Cunningham.
Without a doubt, sector-focused funds have increased in the last few years. Besides cybersecurity, a number of funds have cropped up to invest in just real estate, proptech, SaaS, fintech, autotech, AI and cybersecurity, to name a few focus areas.
Many of the investors in the specialty areas point to a Cambridge Associates study from 2014 that showed that investments by sector-specialist private equity funds outperformed those made by generalist funds by 4.7 percent.
From 2001 to 2014, the average IRR on investments made by funds focused on a single sector was 22.6 percent, compared with 17.9 percent for investments made by generalists, the research firm found.
Data is not as prevalent for venture funds, but the thinking is the same, that in-depth sector-specific knowledge allows venture capitalists to bring in better deal flow. Typically, entrepreneurs in the sector may seek out a targeted fund for the added value of the firm having industry-contacts and insights to potential partnerships.
Also, with so many emerging managers forming in recent years, a sector-specific focus is a great way for venture firms to differentiate themselves to LPs. Sector specialism may also be preferred by certain LPs since it means the VC firm will stay disciplined to their core target.
For ForgePoint, the new capital comes as the frequency and sophistication of cyber attacks is increasing. CB Insights reported last year that unicorns in the cybersecurity sector are being minted at a faster rate than ever before. Also, the $1 billion-plus valuations are coming through even larger funding rounds, CB Insights reported.
Cybersecurity will likely continue to remain a growing sector as long as internet threats persist.
As far as ForgePoint is concerned, the firm has deep cybersecurity industry expertise, working with its advisory council of industry CEOs, security entrepreneurs, and former government leaders.
The firm is a spinout of Trident Capital, from Palo Alto, which was one of the first VCs investing in cybersecurity, starting in 1998. ForgePoint’s $300 million debut fund was announced in 2017 when the firm was known as Trident Capital Cybersecurity.
ForgePoint Capital’s notable exits include Prevoty, which was acquired by Imperva for $140 million, and Appthority, which was bought by Symantec.
The firm’s second fund has already invested in Cysiv, an enterprise SOC-as-a-Service company; Huntress Labs, a provider of advanced threat detection to managed service providers (MSPs) and value-added resellers (VARs) for medium-sized businesses; and Secure Code Warrior, a secure coding company.