Harari in the chapter "Ignorance" in Yuval Noah Harari's book "21 Lessons for the 21st Century" argues that technological disruption has become so prevalent that the lines between real information and fiction are blurred that it's impossible for anyone to understand the current situation or anticipate the future.
We know that he's right. The world is becoming too complicated for anyone to comprehend the vast array of information available. Due to the interplay of uncertainties, it's unlikely that we'll ever attain the same level of understanding as we did before.
What will the typical venture partner be able to prosper in the future given this scenario? It is feasible to know what's going on with ever-changing advancements in technology and the development of new and exciting fields of technology. Is it possible for anyone working in the field of venture capital to claim to be well-versed enough in the market and the newest technologies to assist them in choosing the right firm to market them?
The knowledge gaps are getting more complicated. The good news? We can employ alternative strategies to tackle these gaps.
We at Hatcher+, we've spent many years researching the factors that influence venture capital firms and their choices. And after years of investing, together with my co-founders Dan Hoogterp and Wissam Otaky and the latest studies, we've arrived at this conclusion: in the case of a smaller portfolio it's very likely that the investments you made with the most success proved to be your best investments because luck was on your side.
The notion that the returns of ventures are probabilistic led us to investigate ways to construct a venture portfolio by using a power law-based distribution curve. The venture capital investment is an uniform power law that result in distributions that are different than investing in shares of public companies. Certain outcomes in small venture portfolios may sway your portfolio in the opposite direction. Power curves can be used to design portfolios for larger funds with a greater probability of producing consistent return rates that are comparable to those of index funds.
Following this study, we launched the H2 Fund. It is an information-driven fund which utilizes the venture power law, research that covers more than 600,000 transactions, as well as hundreds of venture funds. This fund, which we introduced in 2018 but temporarily was suspended during Covid it's performing well within the projected parameters which is great news for investors seeking more predictability from an asset class that's typically regarded as reliable.
Recalling Harari I'm beginning to believe that the advantages of the H2 Fund strategy may go further than the application of the power law . They rather require a deeper understanding of the dynamics of the decision-making processes and how they may change when our levels of ignorance begin to outweigh our comprehension.
If the vast majority of venture investors (and their younger partners, regardless of how educated they might be) support Harari's idea that the world has become too complicated for any individual to grasp the significance of what is happening, then the old model of venture investing may be flawed and will likely to become more flawed as technology becomes more complex.
We can also recognize the benefits of the superscale deal origination technique we designed for the H2 fund.
The biases of your filtering systems will naturally disappear and your options will be more diverse when working with hundreds of deal origination partners, in the event that decisions that had been made by just a few humans will be replaced by crowd-sourced decision-making processes involving hundreds of individual in each process.
Does this sound true? It may appear that way. It has been fascinating to see how the best performers have changed over time as the H2 Fund portfolio has expanded. If I am being honest, I did not have enough information about the technologies, markets or resources required for success to feel confident in investing in a lot of these decisions made by the top managers.
The H2 leader board also appears to include an impressive number of investments that somehow made it into the portfolio as it was wide enough to accommodate the oddities, perhaps because of the larger number of participants in the deal-making funnel.]
In a way, I view this as further proof that a network of creators might be more effective than a single decision maker in a world becoming more complex. But, this isn't the only one. It would be interesting to know about the other's experiences in investing since technology is becoming more sophisticated , both vertically and laterally. portfolio
*Note - First Degree is located in Singapore and manages H2 Fund. Hatcher+ has developed the strategy. Fund employs a heavily diversifying early-stage venture strategy to guarantee predictable returns for early-stage startup investment. The plan requires investments in over 1,000 startups through a technology platform that allows fund managers to work with dozens of high-performing accelerators such as angel networks, angel networks, and VCs to source, filter and then index deals. One in 100 startups submits a funding request. The fund is expected to have half the number of investee companies by the end next year. It will also be half way to its aim of having a predictable top quarter, 4.2x net yields, based on amount of dry powder as well as the the current pace of investment.