Why So Many VC Firms Invest in the Same Companies How to understand venture capital's herd mentality.

I was asked recently why venture capital firms all appear to invest in the same "stuff." Take a scan of the VC sphere, and you'll see the reason for the query. A number of firms seem to be playing in the same sandbox--software, life sciences, healthcare, digital media, etc. Why does this happen? The answers are simple, and they also underscore the inherent roadblocks to funding that many startups face.

Opportunity, scalability, margins
A common thread across most venture-backed industries is the ability to get big rapidly--and I mean really, really big. Everyone's looking to cash in on the next Facebook or Google, where an investment of several million dollars turns into $1 billion within 10 years. But growing big requires a product that can scale quickly, delivers good margins and is out to capture a sizable market--such as the entire planet, in the case of Google, or the trillions of dollars spent annually on healthcare.

The problem is that there aren't a lot of industries that are primed for this kind of frenzied growth. Software stays on the VC radar because it's easy to distribute; healthcare products are mainstays because they command premium prices. Mature industries such as automobiles? Not so much.