I just read an insightful blog entry over at GigaOM on the Impact of Diversification on humans – namely that it leads to mediocrity. In a world, where people are increasingly focus limited, we end up either honing our focus on a specific investment or work, or we simply toss seeds wide because they can’t focus enough to know where the fertile ground is.
Oddly, there is another aspect of this that applies to VC’s namely it doesn’t pay to be wildly above the mean (sure you make great returns, but with few big bets, if you’re wrong, you’re never going to close a second fund). This is why investors tend to flock together. They want to be close to average, but they also want to have their own secret sauce that pushes them just a little ahead of their peers. If they can be just a little better, they are more likely to secure follow on funding from their LP’s. Apparently, they too use their friends as a filter.
At any rate, I highly recommend reading the post above.