How VC Works

What – if anything – VCs can learn from Hedge Funds

Naively inspired by the recent show on “Billions” and seeing the word USP dropped in the investment case of a candy manufacturer, I was asking myself: what did I miss here?

My first notion on taking factor models, various risk premia and betas into consideration didn’t make any sense to me and seem far fetched. The PE view on things made way more sense and I almost dropped the case. Asking myself the other way: what can HF strategies learn from VC? But even if you believe that you could jump on making mid-term bets on how technology will affect companies with high – not market, but – innovation beta, this somewhat makes little sense and I wouldn’t spent a single dime on such a strategy. It’s dominated by macro or low latency opportunities and everything else seemed more important than how technology affects fundamentals in the mid term. Too many uncontrollable sigmas.

However, a few weeks later and after running on what I could find on HF investment strategies – which as interesting enough to read – I was somewhat getting my first ideas on how to sanitize VC investment cases using some easy to gather and easy to apply data from the public markets.

Markets vs fundamentals

No brainer that markets form myopic expectations about future developments and trading return frenzies in a bull or bear outsmart any logic from fundamentals. Probably the first thing you learn when trading in a short time investment horizon or, well, today! (Talking interest rates, not Trump!)

First thing that shoots your mind is that you should look at – well for seeds – revenue multiples from sector to industry in the MSCI world and you try to have an opinion on the now mid term and long term, since these multiples will impact leverage and debt situation and M&A activity in the value chain players that might want to buy your company. While that in itself makes sense, I don’t see why you should bet on any exit multiple without having an opinionated view on mid term market multiples and a model on how they relate on Exit multiples in your investment horizon…. Makes sense, I guess?

Pair Trading

Next big thing is whether you have a lot of pair trading opportunities in your buyers market. Even if your buyers are bulls and your estimate is that they will remain so, doesn’t mean all buyers are bulls. Pair trading activity in your MSCI or whatever sub-segment should give you an idea on what macro dynamics are at play and how strongly individual companies vary despite a strong market bull. This gives you an estimate on how the market favors specific strategies over others and how this might affect your buyer beta in a crash and – maybe more important – it tells you another story on discounting for liquidity risk from your buyers. If the bulls are innovator and M&A heavy, likely good for you, if only one is doing it, likely bad for bargaining and optimizing your exit negotiations. True? False? Who knows….


Probably there are more strategies to look at. But the key message that got to me is that a data driven strategy /quant VC approach that is getting more interest over the last years shouldn’t overlook hedge fund strategies. It is a easy to grasp field, and nothing is easier and cheaper than getting your hands on public market data. If you ask the right questions.

Anyone experiencing same thoughts? Drop a comment.

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