Is Alpha Real or Are We Just on a Random Walk Down Sand Hill Road?

TL;DR:

The existence of alpha, a measure of an investment’s performance compared to a benchmark, in early-stage investing is a topic of ongoing debate. On one hand, successful investments like Facebook and Uber suggest that alpha might exist, potentially attained through strategic foresight, access to quality deal flow, and thorough due diligence. On the other hand, unsuccessful investments like Juicero and Theranos suggest that early-stage investing might be more akin to a random walk, significantly influenced by luck.

Given the crucial role of luck, distinguishing between skill and luck can be challenging. Although investors can’t control luck, they can manage its impact by adopting certain strategies such as diversifying their portfolio, following a disciplined investment process, and focusing on investing in competent teams. Regardless of the existence of alpha, understanding and navigating risks, embracing a long-term perspective, and learning from experience remain vital to successful early-stage investing.

Introduction

Early-stage investing involves investing in young companies with high growth potential. The goal is to identify companies that will become successful and generate high returns for investors. However, there is a debate…