A number of investors I’ve had conversations with recently used the word “spiky” to describe their investments and investment prospects. Both VCs who described founders that way and LPs who described GPs that way. With the latter, I want to caveat that these LPs were fund-of-funds and smaller family offices. The investment profile of a larger LP may look quite different given the incentives of the organization. But I digress.
What is “spiky?” Spiky, or ‘spikey’ (I’ll let you decide what your preferred spelling is), is an adjective used to describe someone who has a few traits that excel quite extremely. Not many, just a few. The implicit understanding is that sometimes they can be poorly proficient in many other areas. For example, you can be the world’s greatest AI researcher, but not know how to make scrambled eggs or cook at all for yourself. But in the areas where an individual is “spiky” in, they are in the world’s top 0.01% with very little other competition.
I’m also personally a big believer, that you really do have to be in at least the top 0.1% on something if you want to have a chance at top decile (10%) returns because by order of you needing to take on other responsibilities in a company and/or firm where you might not spike in those as much, your overall “spikiness” slips two decimal points. So, as an LP who aims for top decile minimum, I look for people who would be 1 in 1000. An a startup investor/VC, to bet on the 100Xers, the top 1% per say, you need to find people who have 1 in 10,000. Metaphorically speaking, the bar is higher since you’re less diversified compared to LPs.
So if that’s spiky, what is “lumpy?” You’re better than others in many areas. Potentially most areas. If 3.0 was the grade point average of your competition, you’re a 3.5 or 4.0. Numerically better, but you don’t particularly excel in any particular area. Or at least not in ways that make you an N of 1.
In emerging GP land, there are a lot of ‘lumpy’ people. Investors who are probably already in the top quartile, even top decile of the human population. To have the ambition, the track record, the network, and the wherewithal to start a fund requires a certain state of privilege, luck and effort that most can’t afford or have. They have just enough to be better, but not enough to be the best. These are, at least for me, the hardest people to say no to (assuming they’re good people). They’re people that I’ve described to other allocators (when they do diligence) as “good human beings” and “people I really enjoy hanging out with.” All true statements, by the way.
But even for spiky people, is their differentiator enough to create portfolio divergence? Sometimes, it doesn’t. Arguably, oftentimes, it doesn’t. Then the question becomes is their portfolio converging with others to a point where there’s still alpha? And for the (established) firms they’re converging with, (a) will they continue to converge (i.e. will the other firm(s) always want this investor around for their spikiness?), and (b) are the other (established) firm(s) best days ahead of them or behind them?
Expectedly so, you are now underwriting the other firm(s) as well.
I wish it were an easy judgment call, but it isn’t. And I’m likely to be wrong more often than I’m right. As most of us will be.
Then, there are people who are “smooth.” Some may call them generalists. Others may say well-rounded. And while both can be true, in a world of attention scarcity, whether in the mind of founders or co-investors or other LPs, you need to stand for something. And “smooth” people are easily forgotten. We don’t talk about them much because we forget about them.
Photo by Sierra NiCole Narvaeth on Unsplash
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.