Précis: For the foreseeable future – at least until mid-2023 – VCs are going to get pickier and there will be fewer but more consequential investments in startups in select sectors. This trend will parallel portfolio management strategy in the public markets.
Alpha and beta are used by investors to evaluate the performance and risk of an investment funds or stock in your portfolio.
Alpha signals that the returns of an investment exceed the returns that its beta would predict. Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations. A positive alpha of 1.0 means the fund or stock has outperformed its benchmark index (in other words, the broader market, such as the Dow Jones Industrial Average, S&P 500 or NASDAQ) by 1 percent. A similar negative alpha of 1.0 would indicate an underperformance of 1 percent.
Beta assesses market risk by measuring volatility relative to a benchmark index. A good beta will replicate the broader market in your portfolio, for instance by using an index ETF, giving you a beta of 1.0.
These macro issues certainly have relevance to startups, even if the day to day urgency feels less direct. “Fortunately” for early stage companies seeking PMF, one can focus on customer use cases to develop evidence of value creation.
Separately it might be useful to provide definitions or links to further reading on the financial concepts of alpha and beta. Especially for an engineer at heart, this might feel like a foreign language!
Thanks Bob for your comments.
Alpha and beta are used by investors to evaluate the performance and risk of an investment funds or stock in your portfolio.
Alpha signals that the returns of an investment exceed the returns that its beta would predict. Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations. A positive alpha of 1.0 means the fund or stock has outperformed its benchmark index (in other words, the broader market, such as the Dow Jones Industrial Average, S&P 500 or NASDAQ) by 1 percent. A similar negative alpha of 1.0 would indicate an underperformance of 1 percent.
Beta assesses market risk by measuring volatility relative to a benchmark index. A good beta will replicate the broader market in your portfolio, for instance by using an index ETF, giving you a beta of 1.0.
These macro issues certainly have relevance to startups, even if the day to day urgency feels less direct. “Fortunately” for early stage companies seeking PMF, one can focus on customer use cases to develop evidence of value creation.
Separately it might be useful to provide definitions or links to further reading on the financial concepts of alpha and beta. Especially for an engineer at heart, this might feel like a foreign language!