The Golden Vintage: Did We Mistake Alpha for Beta?
As we close out the year, I find myself trying to use history to inform the present.
In hindsight, the 2009-2015 era looks like a “Golden Vintage.” If you were deploying capital then, the returns often look amazing. But looking back with an honest lens, I have to ask: Was it all skill, or was there a massive arbitrage opportunity? As they say, it’s better to be lucky than good!
2009 was scared money. And that’s exactly where the arb was found. The arbitrage stemmed from the established VC firms – the Sand Hill legends – effectively pulled back from Seed. They were busy triaging their existing growth portfolios or waiting for the dust to settle.
This left a massive opening. Valuations were compressed – $5M to $8M pre-money valuations for companies, some of which went onto massive success. The “arb” was buying ownership in a buyer’s market. You didn’t have to fight a 1,000 funds to get into a seed round!
As we moved toward 2015 and beyond, the dynamic shifted. The “easy money” started flowing. Low interest rates made capital chase alpha and venture was a perfect target:) ZIRP FTW!
The cloud/SaaS explosion, mobile distribution, seemingly easy advertising collapsed the cost (and challenge) of starting a company. You could do more with less capital, and “software was eating the world.”
This created a perfect storm: Low entry prices (initially), highly capital-efficient business models (SaaS), and a macro environment that eventually flooded the exit market with liquidity.
Those early vintages posted incredible IRRs. LPs, looking at those returns, did what LPs do: they wanted to double down.
Many firms (ourselves included) faced a choice. Stay small and disciplined, or scale up? The market incentivized scaling. Suddenly, seed funds that started at $40M were raising $150M, then $400M.
Its the “PE-ification” of Venture Capital. If you look at Private Equity in the 1980s and early 90s, it was a cowboy industry. It was small teams doing leveraged buyouts with high risk and massive returns. It was a cottage industry.
As the returns became obvious, institutional capital flooded in. Today, PE is an industrial-scale game of asset management, fee accumulation, and marginal operational improvements. Some of the largest like Blackstone and KKR are public. The “wild” alpha compressed into standardized beta.
Some funds are choosing to follow the PE playbook on the assumption that it will play out similarly. Become an RIA, gather assets, add products. Others, like us, believe this asset class is fundamentally different. To my mind, early stage investing isn’t really “finance,” its a weird mix of company building, human relationships and allocating capital in the right amounts to scale.
Only time will tell!
