Unpacking Alpha in Venture Capital — Chapter 1: Setting the Context
Pretty interesting deep dive into thoughts around VC.
Tend to agree heavily with 2, 4, 6, 7, & 8.
Here is the top 10:
- VC is a cottage industry but done scrupulously and systematically it can deliver strong, uncorrelated returns. Alpha generation is very poorly attributed.
- Dollars should be focused into capacity constrained strategies that are attacking the early stages. VC does not scale.
- I see no obvious warning signs that this is a poor time to enter the asset class. Technology-led innovation is pervasive and cumulative.
- Whilst Silicon Valley has undoubtedly been the epicentre of technology innovation, other hubs of ideation, innovation and global problem solving are developing fast.
- VC is a human capital business, driven by prescient GPs and outlier founders. There is limited evidence to support long-term consistent firm-level performance, in fact persistence of performance is declining.
- Investing with more metrics = less alpha. The best investors are comfortable investing at the edges but do so on the basis of a scientific and rigorous process that appreciate the risk. A quick summary of a rigorous methodology is inspired by a recent book from P. Tetlock (Superforecasting).
- The best early stage investors are foxes — they are curious polymaths, with broad peripheral vision. LPs should test for and allocate to investors with the optimal attributes versus making their own editorial about where the tech next wave will come from.
- Technology KPIs have evolved but I believe most public market investors still don’t understand the pervasiveness of technology. Every listed asset is potentially impaired.
- LPs have not challenged their GPs to innovate nor gone deeper on GP level data. I consider the industry must mature faster and both sides must do better.
- Most early stage investors waste the informational alpha generated by VC — it provides a lens into what will work in the future but in nearly every scenario tells you what is not working within the incumbents. Cross-pollinate this information to unlock more alpha in you public portfolios.