Alpha VC vs. Beta VC

The two competing logics of modern venture capital

Over the past few weeks, I’ve been reflecting on the venture capital industry and how my work at TheGP is fundamentally different than what’s happening inside larger multi-stage platform firms. We’re both called venture capitalists, but what we do and how we do it are so different, I think one of us (or perhaps both of us) needs a new name.

At large platform firms, market exposure is the goal and survival depends on achieving the required pace of annual deployment to support the fund’s scale. The metric that matters is dollars invested or deal count, which is a function of the number of founder meetings and the firm’s ability to deploy capital into the companies that fit the current thesis.

At TheGP, our approach is concentrated. Our returns and “sweat equity” model depend on finding rare founders with a distinct worldview, spending time understanding what shaped that worldview, and then helping them build. Each year, we form only a handful of deep partnerships—helping founders hire, ship, and find their first customers so they can do the best work of their careers. When that happens, a generational company can emerge.

A month ago, this was disputed as “contrarian vs consensus” investing. Historically, this conversation showed up in debates between stage-focused and multi-stage funds competing for founder attention, and again between industry specialists funds and platform teams as they expanded into new investment areas like crypto, bio, and defense.

A long-time friend and sophisticated LP originally shaped my thinking around this, which informed our approach to investing at TheGP. In 2021, as Dan and I were considering strategy for our new firm, this LP told me something that stuck: “No matter what size fund or the scale of the portfolio you create, the reality of a venture fund is the returns will be concentrated in one to three winners. As an LP, my job is to be diversified no matter how concentrated you are—so if a manager chooses to concentrate their portfolio, even investing the entire fund in a single company, it’s the manager’s risk, not mine. The more you think you’re right, the more you should be willing to concentrate, but know that if you’re wrong when you concentrate, subsequent funds will be hard to raise.”

In classic investing terms, “the more you think you’re right” is alpha—it’s the ability of a manager to outperform the market. If you believe your skill is picking assets within a market, you build your strategy to maximize alpha. You position yourself to earn exposure to desired assets within the market and optimize for deeper partnerships with smaller portfolios and scale capital to vertically fund this narrow subset of the market. Success is high multiples on invested capital.

If you believe your skill is not in being right, but in earning access to a desirable asset class or market segment as a whole, you build your strategy to lock in beta. Beta strategies seek broad access to investments that create coverage in the desired market. Beta strategies require diversification with larger portfolios and scale capital to lock in breadth of market coverage. Success is performance in line with the market benchmark.

There are three groups impacted by a firm’s alpha vs. beta strategy choice:

1. Founders

2. GPs

3. LPs

Success starts with knowing the game being played. For founders, investors and LPs, there are likely wins to be found in Alpha VC partnerships and Beta VC partnerships. The key will be knowing which one you’re dealing with and being sure the investment strategy and resulting tactical operating style fits your needs.

Alpha VC vs. Beta VC for founders

As a founder, you get to choose the investor you work with, and understanding their strategy is critical because it will shape the kind of partnership you’ll build with them.

Alpha investors will invest in beliefs, contrarians, and the misunderstood as the path to outlier returns. These investors believe that nothing can become something and something can become a 10,000x return that defines their career. Building small portfolios, Alpha VCs can be frustratingly curious, pushing deeper into details and demanding the time to fully understand the business. Strong points of view on approach and opportunity can lead to uncomfortable conversations around investment decisions, but also stronger alignment after a partnership is formed. Each investment is important to an Alpha VC and active engagement in the company’s success is a priority. Investors will market this as “deeply supportive,” but this type of partnership can be intense, even to the point of conflict with the founding team over time.

Beta investors follow a coverage model and navigate with market maps. They are seeking broad access to consensus opportunities, generating advantage with large funds and huge teams. Investors are deployed to efficiently identify opportunities that fit the firm’s narrative and can be strengthened through financing strategies where Beta VC has a distinct advantage. Founders get rapid decisions on large amounts of capital with limited sensitivity to price. Beta VC partners are navigating deals at high velocity and unlikely to be deeply engaged after an investment is made. “Partnership” looks like either handing support requests to a platform team or passively waiting for results as the founder builds. This limits their impact on your business, negative or positive.

However, the view of capital access as a competitive advantage will shape your company and can create an uncomfortable dependency on your investors as your organization scales ahead of your business traction. As a result, the DNA of your company wraps around capital as the primary solution to challenges.

Alpha VC vs Beta VC for GPs

GPs live within the systems that their firms create, and their work looks very different depending on whether success comes from generating alpha or accessing beta.

Alpha VC is great for idiosyncratic folks who are independent and refuse to be managed. These investors are self-motivated and not concerned with appearing wrong in the short term while they figure it out. Alpha VCs define their own focus, own their time and chase areas of interest driven by obsessive curiosity. To be clear, pursuing passion can lead to short careers of disastrous capital allocation decisions. Success is found in a few massive wins where an independent, contrarian view of the world becomes undeniably consensus fast enough to matter. Characterized by small, top heavy teams, Alpha VC is often impossible to break into, even for extremely talented people, and those interested in Alpha VC frequently start independent funds in response to this lack of opportunity.

Beta VC organizations are shaped like asset managers. These organizations are multi-layered and often siloed with matrices of decision making and control. The most senior people are focused on firm building and often required to stop spending a lot of time with founders or junior investors. The world is broken into sectors and performance of each group is built on categories, themes and theses believed to represent veins of opportunity by the managing director. The role of an investor in Beta VC is to execute against the chosen areas of interest and surface companies that represent exposure to chosen themes. Success for a partner lies in volume of operational metrics like social media followers gained, blog post views, founder meetings taken and rolls up to capital deployed. There is a ladder to climb and a clear path to success with areas of contribution, goals and performance reviews for each.

In the best cases, the management structure in Beta VC can remove a lot of the politics around attribution by creating a clear narrative truth for contributions from less senior team members. This structure can create a faster path to recognized impact on firm-level metrics and opens the door to managing substantial capital earlier in one’s career, without waiting to generate the returns typically required to an earn an investment mandate at scale in Alpha VC firms.

Alpha VC vs Beta VC for LPs

As VC matures, managers are no longer competing for LP investment with other venture capital firms, but with every other available investment an LP can make to achieve their portfolio goal. The role of VC within an LP’s overall strategy—to create Alpha vs. Beta—will define the groups worth talking to, the details of manager selection and the fees worth paying to have exposure to specific investments.

Alpha VC provides concentrated exposure to investments within a narrow fund strategy. An LP has to assemble a group of Alpha VC managers to gain diversified exposure to the broader market and these choices can only be made if there is consistency in strategy, intensity in execution and transparency around operational performance. Investing in Alpha VC requires an LP that believes the job of diversification sits at the LP level of the capital stack, and relationships between LP and managers should answer the question: “Are you successfully delivering the fund product that I bought?”

Narrow strategies tend to be harder to scale, so as an endowment grows, adding managers to meet the desired VC allocation can be difficult. Manager selection is also more nuanced in Alpha VC and portfolio turnover (swapping a strategy that did not perform or that you believe will not perform in the future in exchange for a new Alpha VC manager) at some regular cadence is likely a permanent cost of choosing to allocate to the category. Teams at Alpha VC tend to be small and decision-making is concentrated. This can enable deeper partnership with LPs and managers, but it also creates significant risk to the continuity of performance when a star partner leaves or a generational transition occurs.

Another cost of pursuing the Alpha VC strategy comes with manager success. Alpha VCs running concentrated portfolios in funds of limited size are very likely to be oversubscribed and may choose to take advantage of this to charge higher carried interest percentages. In taking on the concentration risk of Alpha VC, success is defined by fund multiples and managers are primarily motivated by carried interest rather than fees.

Beta VC delivers broad access to the upside of private markets. Often packaged as multi-stage exposure through stapled funds or large commitments to diversified platforms, Beta VC allows LPs to allocate capital efficiently across broad segments of the innovation market. Large, brand name firms have significant staying power and little dependency on individual managers to drive performance, limiting the risk associated with departures on a team. The operating system of Beta VC is designed to mitigate risk in any individual investment, team member, technology, industry or market. High velocity investing at scale across broad sectors optimizes for market rate returns but may struggle to compete with correlated alternatives that offer similar market-level exposure. Further, depending on how an LP defines market exposure, Beta VC managers may find themselves competing not only with peers but also with QQQ or mid-market software buyout funds—or at a minimum, on total fee load—as LPs increasingly consider direct strategies to improve return profiles on a net basis.

Alpha VC vs Beta VC today

Beta VC is a new asset class rapidly aggregating capital. Alpha VC is an old strategy being pursued with new, open questions about competitive advantage and durability—forced to answer the question: “Don’t the big guys just win?”

To succeed with an alpha-seeking strategy, the VC product has to be differentiated enough for founders to notice. It also has to create enough value for founders to care more than they care about the very tangible benefits of higher prices, larger rounds and faster decision processes. As beta strategies scale, their pace of decision making, price insensitivity and coverage put pressure on the Alpha VC’s ability to capture founder attention (and cap table allocation).

Beta VC is too young to be considered durable and the firms practicing it the most intensely are more defined by constant change (and growth) rather than consistency of strategy or structure. This new group of asset managers has yet to show category level returns, durability or relevance to the best founders, the most talented investors and many LPs.

At TheGP, we see the best founders understand the difference between alpha and beta strategies and how the VC category you work with shapes partnerships, investment structures, and operating practices. As long as exceptional founders continue to choose the partner they believe will add the most value to their business—and not just those who offer the highest price fastest—we’ll keep building a differentiated product designed for the few inspired entrepreneurs capable of generating outlier returns.