Thread by @ahmadmbutt

[THREAD] In chapter 4, we discuss how to solve for #HumanCapital challenges in #VC. So if we haven’t found a strong argument why we shouldn't try & build a fund from scratch as there appears no structural barrier to entry that cannot be overcome — how do we therefore do this?

1.) Where to look first?

The churn in top tier performance is drastically increasing as the VC market matures & #Alpha is dispersed due to the inherent inefficiencies. Only the best funds plan for succession.

2.) Ultimately, VCs firms are small partnerships. Behavioural challenges in #InvestmentPartnerships include:

•Economic Allocation
•Shared Decision Making
•Diffused Responsibility
•Personal Risk Minimisation
•Go-along-to-get-along Interaction

3.) There is a long history of successful spin-outs, driven by:

•Poor inter-generational carry allocations
•Younger generations being closer to age of #entrepreneurs
•Retirement of #SeniorPartners having negative effects on the ability of #Funds to raise additional capital

4.) Therefore, the way to remotely access top tier #funds with persistent performance is through a meticulous assessment of the successful #VC’s network with the hope of finding the “next generation” managers.

5.) The #VentureCapitalist Mindset — The Fox

In the essay by Isaiah Berlin “The Hedgehog & the Fox”, Berlin divides thinkers into 2 groups: hedgehogs, who see things through the lens of a single defining idea, & foxes, who use wide variety of experiences & reject single ideas.

6.) In the context of #VentureCapital, my view is that mentality is imperative: #Hedgehogs are belief-driven; #Foxes are discovery-driven so VCs must be foxes! As with any investment field, #unconventionality is required for superior #InvestmentResults.

7.) This means #VCmanagers must be able to identify an “edge” & in this asset class, the available edges are found truly looking at “frontier” #Technologies that other investors are not willing to evaluate.

8.) #Analysis at the edge must be supported by a #Polymath approach with broad peripheral vision to understand & create a probabilistic view on the impact of #ConvergingTechnologies. The best VC’s are ones that construct #Methodologies that continually tilt odds in their favour.

9.) Ability to identify #OutlierFounders & have a working model that determine the outcome of certain behaviours, their interaction with the market & wider environment & how best to drive the best from working with them seems to be the holy grail.

10.) Testing for #Alpha

If we have isolated that individual manager hustle, #InvestmentAnalysis & strategic skill is the driver of returns supported by an auto-correlation of brand, network & fundraising, then we need to solve for all these elements in individuals.

11.) Returns are a #TrailingIndicator — so how do you evaluate performance of managers (whether new or existing)?

12.) As the best entrepreneurs will know, VCs are very partial to #KPIs, #metrics & any other #PerformanceIndicators that might provide insight into whether a nascent business is likely to become a bigger business.

13.) I believe efficient technology-enabled reporting can provide a great deal of information (privately & confidentially) that will enable LPs to make a much more informed decision about the performance of GPs.

14.) Traditional approaches to solving the #HumanCapital problem in venture capital by #LPs have largely been focused purely on track record & #QualitativeReferencing, which I consider a #LaggingIndicator given the time horizon of the asset class.

15.) As such, here are some ideas on how #EarlyStage investing can be better attributed : ow.ly/6xPN30mJjkX

I want to thank all of you for reading & hope you found it insightful. Sadly there is no segway into the final chapter, as I continue to focus on my core business! But I will share some preliminary rumblings shortly & I hope the final chapters write themselves with all your help.

@fdestin @nikiscevak @ganeumann @zavaindar @albertwenger @roybahat @gifernando @eladgil @christianhern @JoshuaBaer @HarryStebbings @KevinCrosby1 @christianhern @AlexKolicich @jamierowles @matthewclifford @sim0nwu @AdsLloyd @ShelleyZhuang @mattcharris @bonatsos @cape @chriswfarmer

Thank you to all of you for contributing to the debate & for your support in helping me understand the asset class.