An investor’s edge

There are three types of competitive edges that an investor can have. These are an informational edge, an analytical edge, and a behavioral edge.

Having an informational edge means having access to people, facts, or data that others don’t have. For example, local investors often have an informational edge over those that fly in to a country to invest or those that invest in a country from abroad because their on the ground presence lets them spend more time meeting with founders and collecting information about what interesting startups are working on.

Having an analytical edge means that you rely on the same information as others but have a unique insight which lets you arrive at a different conclusion based on the same information. Your perspective is your edge. Being able to see the second or third order effects of a particular action within a system is an example of an analytical edge. However, as this example shows, although these second or third order effects may escape most people, a small number of others will also likely see them. So having an analytical edge is pretty rare.

Having a behavioral edge means that you’re not exposed to an emotional shortcoming that disadvantages other investors. Examples of this include being able to invest in a founder or domain that other investors shy away from due to deeply ingrained prejudices, or investing over a longer time horizon than others.

If you don’t have an informational edge, an analytical edge, or a behavioral edge when making an investment, the investment can still be successful. However, your success will be due to luck, not skill. And in the long run, luck cancels out.

So, before making an investment, it’s useful to ask which, if any, of these competitive edges are letting you capture an opportunity that others are missing.

Also published on Medium.