Thread by @ryan_caldbeck

1/ I’ve talked several times before about building a systematic fund in the private markets. Systematic quant vc/pe funds are coming, and they will grow quicker than anyone expects.

https://twitter.com/ryan_caldbeck/status/1029209332825513984

2/ To build a successful systematic VC/PE fund, several things are needed.

I’m going to talk about two specifically here:
A. Information advantage (IA)
B. Large # of companies (N)

IA + large N = enormous value.

3/ In almost any domain, if you have a small advantage and enough swings at bat, you will ultimately come out on top. Let’s rattle through some examples:

4/ Casinos. The house “always” wins in the long game. They aren’t going to win every single game, but with enough hands, their slight advantage makes a big difference
bbc.com/travel/story/2…

5/ An info advantage does not mean perfect results - it doesn’t mean the casino wins every time. They just need to be slightly better than their counterpart (the average gambler). And in vc/pe... we just need slightly better information than the (arrogant) private investors.

6/ So the casino wins unless the player has an unfair IA spread out over a large enough N (bringing down the house).
abcnews.go.com/Primetime/stor…

7/ Moneyball. Small changes spread out over thousands of plays, hundreds of players, and over many seasons. You end up with a winning team and winning strategy.
datacenterknowledge.com/archives/2011/…

8/ Systematic public funds like Renaissance Technologies. I think I’ll just include this article and then be silent.
marketwatch.com/story/surprise…

9/ The Magnitude of IA required depends on the volume with which it is applied. In systematic public funds they might create a very very small edge- but then spread that edge out over 1,000 company portfolio. In contrast, a discretionary investor might only have dozens of co's.

10/ When folks talk about systematic vc/pe funds they focus on the IA, not the N. That’s a dramatic mistake. A realistic IA will need to be spread out over a lot of companies to take advantage of the IA.

11/ And how about a boring industry like insurance? Information Advantage and large N. Boom. Who has better information about the likelihood of a flood in your neighborhood? You or your insurance company?
v12data.com/blog/data-driv…

12/ Horse racing. No just kidding there is no IA in horse racing.
Wait.....WHAT??
bloomberg.com/news/features/…

13/ Now back to vc/pe. When you start thinking about building a large N of companies, life gets complicated in the private markets.
How do you use IA to:

-identify the co's
-reach out to & evaluate the co's
-close a large N of companies efficient
-add value post close

14/ The barriers to entry for whoever nails this will be huge. In the public markets its much easier to get data and develop a strategy. The IA isnt as big as it would be in the private mkt, thus N must be much much bigger.

15/ In addition, investing into a large N in publics is 100x easier than in privates.

16/ But what if there is a solve to investing into a large N in privates. Will take creativity and resources. It wont be as efficient as large N in publics…..but it doesn’t need to be. The IA & N in the private fund just need to work for privates. 150 co portfolio in vc?

17/ A concept like this sounds insane. Until it isn’t. That’s often why incumbents don’t try until someone else has already built it. And then the incumbents are sucking on the tailpipes of the innovators.

18/ Hard but possible.

And everything in life worth doing is hard.