"Edge" -- What is it, really? Can it be created? Sources of "Edge"

I know that this sounds like a smooth-brained question, but give me some rope.

As a Growth Equity guy who invests not just in tech, but also in consumer companies [on both sides of the Pacific], I have been hearing the word "Edge" get thrown around a lot more recently (often very loosely), by LP's, Funds, Entrepreneurs/Operators of businesses, and intermediaries. The other related word I have also been hearing a lot is "Differentiated" -- as in "Differentiated Access", "Differentiated Discretion", or "Differentiated Execution". 

I spend a lot of time talking to LP's, and I have been hearing these terms a lot more from them as of the last 12 months, understandably, given how every Joe Schmoe & Co had raised a fund in 2020-2022. And to be fair, given how sophisticated some LPs' Direct Investment programs have gotten [often with larger, more experienced teams than many funds], what they are paying for really is the ability to access things that they cannot, and Diligence what they don't have the capability to. A great example of Differentiated Access is a friend of mine who is on Private Assets team of a middle-eastern Sovereign Wealth Fund says they just invested in the first fund of a new AI-Focused VC in the SF Bay Area, where there are three general partners who have PhD's, and he claims that two of them teach (or previously taught) at Stanford -- so that's fine, I get that there truly are things these three can access [good example is their students and research associates] and there are things known by these three that the rest of humanity does not even have the capability to understand in the near future. Another example of "Differentiated Access" this time, is a certain firm in Singapore/Indonesia that all of the State-Owned sovereign wealth funds in Southeast Asia invested a significant amount in. The Managing Partner is the son of a politician, and the family also happens to own a very large heavy industries company in Indonesia -- so that's also fine, I get that this guy can supposedly access investment opportunities that these LP's cannot, and can probably "add value" (whatever that means in 2024) for the portfolio companies, which other funds cannot.

I've also been hearing it from VC and PE folks a lot more regularly now -- they talk about Entrepreneurs as having "Edge", but as expected, the way that these guys talk about it is a lot more nebulous. For example, there was one VC in Singapore I spoke to recently who started talking about an entrepreneur that I know very well -- I didn't tell the VC that I know the Entrepreneur very well (as in I travel with him and his family) -- and how this person has a lot of "Operational Edge" because he comes from an entrepreneurial family in that market, and that a lot of the success of his company is due to his "edge". I know this to be completely untrue, as someone who has referred multiple senior hires to this company, speaking to the COO of said company very frequently, and being in the said company's office multiple days a month... The company's success factors are probably very different, and unknowable to outside observers who don't see the operations-level work product. But the confidence with which this VC was telling me about it in painstaking detail made me understand why his LP's also seem to believe it. Is "Edge" now just another cool way to say "Defensible Moat" or to go even more old school... the 'ol Michael Porter "Competitive Advantage"? In technology companies, I think "Edge" can be pretty well defined, companies can build objectively superior technology, or create ecosystems/integration that increase switching costs, so I am somewhat more willing to underwrite the ability of young companies to compound their advantage over time, if the technical talent and engineering approach are right. However, for non technology companies [i.e. Consumer, Retail, Healthcare, etc.], is there really a way to create a clearly defined "Edge" that allows them to eventually outcompete the incumbents, and how defensible is this, really, without some kind of technical/product breakthrough?

I wanted to get some opinions from the community about:

  • What truly constitutes "edge" -- can be for a fund, or for a company, or for an Entrepreneur/Operator
  • In the Hedge Fund world, "Edge" can be quite clear [ex. examples in the book More Money Than God], but in Private Markets, I don't think that "Edge" is as well-defined for the majority of funds -- especially those with senior investment staff who are primarily from a High Finance background... Are LP's [institutional and otherwise] in this day only be willing to pay for "Edge"? It doesn't seem so, because it seems like these seemingly undifferentiated funds keep managing to raise capital
  • Can "edge" be created by new companies, or companies that have raised capital and are having their management team augmented?

BTW, I started as a buy-side Equity Research analyst, so I understand that exceptional operational platforms, supply chain excellence, etc. etc. can lead to best-in-class ROIC's, higher profit margins than peers and all of that, but from a pragmatic standpoint, is this something that a young company, such as a venture/PE-backed company, can create within the holding period of a fund, in order to create outsized returns for Limited Partners in those said funds?

Appreciate the discussion, hopefully this can be helpful to other folks who are still trying to invest in this environment!

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