Alpha is the portion of return that exceeds what you would expect from market exposure alone—what is left after accounting for beta and risk factors.

How it works

In public equities, regress portfolio returns against an index; residual outperformance is alpha. Venture lacks clean daily marks, so LPs use vintage-year IRR and TVPI versus peer medians as rough alpha proxies. A seed fund beating other 2019 vintage funds in fintech might claim selection alpha; skeptics ask if sector beta drove the outcome.

GPs market sourcing edge, operating help, or structural advantages (pro-rata rights, inside rounds) as alpha sources. Quantitative “factor” language appears more in hedge funds than classic VC, but LPs still ask: “Was this skill or being in the right place?”

Why it matters

• Founders: When an investor pitches alpha, ask for concrete mechanisms—portfolio support, follow-on reserves—not slogans.
• Investors: Persistently negative alpha after fees means you would have been better in an index or fund-of-funds basket.
• LPs: Separate manager alpha from asset-class beta when re-upping commitments.

Common mistake

Calling a whole fund’s return “alpha” during a bull market when every peer also doubled. Macro lifts many boats; durable alpha shows in relative rank across cycles.

Related ideas

Beta, benchmark IRR, TVPI vs peer medians, and manager selection in LP portfolios.