Interview, Fireside Chat
David Weisburd, 10X Capital: Finding Alpha and LP Bias
- Tenex Capital's venture franchise was built over the last five and a half years by David Weisberg, who joined to develop the strategy before being retroactively designated a co-founder by co-founder Hans Thomas.
- Weisberg hosts two podcasts: Tenex Capital and Liquidity (a segment on Jason Calacanis' This Week in Startups with Eric Torenberg), both focusing on Limited Partners (LPs) and General Partners (GPs).
- Liquidity has produced over 40 episodes, with a goal to reach 10+ episodes in the upcoming season by featuring four-person panels discussing current VC events and startups.
- Weisberg asserts that podcasting skill requires repetition, recommending a minimum of 30–40 episodes before judging one's performance, noting that "nothing more cringe" exists than early self-evaluation.
- Key success factors identified for podcasters include active listening, leveraging existing networks (incumbent advantage), and recording sessions to identify behavioral discrepancies.
- Weisberg characterizes venture capital as an "access class" rather than a pure asset class, citing that while it offers the highest potential returns (top quartile), it is also the "worst asset class" due to high failure rates and potential for total loss.
- The current market is described as a "confusing cycle" with conflicting signals driven by AI acceleration and post-COVID business restructuring.
- Weisberg advises investors to use time diversification by deploying capital in 6-to-7 year increments (investing a portion of capital annually) to mitigate volatility and avoid market-timing pitfalls.
- A significant portion of current investment opportunities (over 80% at some firms like Kleiner Perkins) is now classified as AI, leading to a prediction that AI may become a ubiquitous "tech" catch-all rather than a distinct sub-sector.
- Weisberg identifies a strategic misalignment between founders, who prefer risk mitigation and diversified survival, and LPs, who demand concentrated "power law" outcomes (e.g., investing heavily in a few winners like SpaceX or Airbnb).
- Academic research by Ken French is cited to argue that portfolio diversification beyond 15 positions often dilutes alpha and is sometimes sold by money managers to increase fees and their own perceived importance.
- As funds scale (e.g., to $5 billion), they gain access to large institutional capital like CalPERS and sovereign wealth funds but face "alpha dilution," where later-stage investments shift from high-multiple outcomes to beta-like returns.
- A systematic bias exists where LPs re-up with managers based on relationships and lack of market data changes, rather than strictly on performance, particularly before Fund 3 or 4 where DPI (Distributions to Paid-In) data is unavailable.
- Weisberg argues that DPI is a critical "equalizer" but a highly lagging indicator that cannot predict a GP's future performance in subsequent vintages, as industry conditions and team dynamics evolve over 10+ years.
- GPs should consider proactive secondary sales (selling 10–20% of positions) to return capital, especially when investors like SoftBank enter at inflated prices that corrupt the cost basis for original LPs.
- Founders are advised to evaluate disruption risks (e.g., from OpenAI) probabilistically; a 10% chance of disruption is acceptable if the expected value of the remaining business is substantial (e.g., $200 million).
- Weisberg suggests early-stage GPs should target a portfolio size of 15 companies (up to 25 in early stages) to optimize for alpha, noting that a 10-company portfolio increases the odds of a 3x fund but reduces the probability of a 20x fund.
- Investors face a trade-off between pursuing a "pure alpha" 20x outcome with a smaller, concentrated portfolio versus a safer 3x–5x return with a larger, diversified portfolio.