
Why do VCs insist on only investing in high-risk, high-return companies? - guiambros
http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-investing-in-high-risk-high-return-companies.html
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cinquemb
>c. When alpha goes below 2, the expected return also becomes infinite, so
ERiβ=∞∞. This is an undefined quantity and can’t be compared apples to apples
to ERm. Are these good investments? What we know is that early stage venture
funds seem to have alphas of about 1.95, just below 2 (see the post I
referenced above). This is the area where venture capitalists operate.

To me, it seems that there needs to be a better technical model to describe
risk reward in the alpha < 2 area. How do you even define beta/alpha for
something pre revenue?

Do you know of any interesting conditional expected return models that
incorporate time value of money?

Only thing in my mind that makes sense to me is if there was a concept of
delta-neutral investing like there is in options market, where you should
invest in an incumbent company while at the same time taking a position in a
start up that could put that company out of business in the future, while
trying to manage the position by taking profit when the value of the incumbent
starts to exceed the amount invested in the start up.

