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Ahmad Butt @ahmadmbutt
, 23 tweets, 10 min read Read on Twitter
[THREAD] As a systematic public market investor, #VentureCapital was an asset class that felt opaque to me based on only my limited exposure of #AngelInvesting & my friends in the industry. In this article, I set the context for Unpacking Alpha in Venture Capital.
1.) It is a challenging asset class to digest & I am sure a majority of large institutional pools of capital would struggle to list more than a handful of brand name VC firms or investors.
2.) That said, top decile returns in VC are extremely impressive so I decided to take a deeper look with a view to create an ecology map & building an institutional footprint from first principles.
3.) The historical narrative for prospective investors into this asset class has been one that believes the only way to access these returns is to invest in brand name funds.
4.) Such funds are capacity constrained & are usually closed to new #LPs. As a counter narrative, there are continually new funds entering the market & capturing value. This presents a problem.
5.) My base hypothesis was that as a pool of capital, an allocation to VC can deliver uncorrelated, strong returns & that there's an informational benefit to having a lens into the future technologies that will continue to displace operations, impair assets, & disrupt incumbents.
6.) Before I dive in, I do want to thank all the friends that have helped me understand this asset class better. We consider #VentureCapital to be an incredibly collaborative community and it has been a pleasure to learn more deeply.
7.) Whilst not wanting to spoil the suspense of what follows in the series, I thought it would be helpful to lay out my core conclusions on venture capital. Here goes:

•VC is a cottage industry but done scrupulously & systematically it can deliver strong, uncorrelated returns. #Alpha generation is very poorly attributed.

•Dollars should be focused into capacity constrained strategies that attack the early stages. VC doesn’t scale.

• I see no obvious warning signs that this is a poor time to enter the asset class. Technology-led innovation is pervasive & cumulative.

• Whilst #SiliconValley has undoubtedly been the epicentre of technology #innovation, other hubs of ideation, innovation & #global problem solving are developing fast.

• VC is a human capital business, driven by prescient #GPs & 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 & rigorous process that appreciate the risk. A quick summary of rigorous methodology is inspired by P. Tetlock’s #Superforecasting

• The best #EarlyStage investors are foxes — they are curious #polymaths, with broad peripheral vision. #LPs should test for & allocate to investors with the optimal attributes versus making their own editorial about where the next tech wave will come from.

• Technology #KPIs have evolved but I believe most #PublicMarket 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 & both sides must do better.

• Most early stage investors waste the informational alpha generated — it provides a lens into what will work in the future but in nearly every scenario tells you what isn’t working within incumbents. Cross-pollinate this info to unlock more alpha in public #portfolios.
17.) I plan to release another four chapters in this series that chronicle my learnings about this asset class. I encourage feedback & constructive criticism from #entrepreneurs, #investors & other interested parties.
18.) I hope you enjoy part 1 of the series: "Unpacking Alpha in Venture Capital — Chapter 1: Setting the Context"
@albertwenger thank you for reading! Your ‘open source’ book world after capital, inspired me to share my findings. Hoping this contributes to the narrative of evolution of VC...
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