Alpha & Beta of Leadership Investment

By – Raghav Chandra (Co-founder & CPTO, Urban Company)

If you invest in the stock market and are a young leadership, you will find this post to be a fun take. Perhaps a cross learning in both.

Alpha & Beta in Finance

While investing, one popular strategy in building a portfolio is the Core & Satellite approach. The simplified theory is, you believe the market (benchmark) grows by a certain amount every year. You take your money and split it into a part that tracks the market automatically, and a part which requires more active work to beat the market.

The part that you wish to run passively, governed by the market as a system, is called the “Core” portfolio. The idea here is to keep the risk and volatility in check, so that it moves with the market. The measure of this risk is called Beta β.

The part that you wish to generate excess returns from, that requires active work, is called the “Satellite” portfolio. The idea here is to generate more profit than what the market’s movement brings in. The measure of this excess return beyond the risk-adjusted is called Alpha α.

Here is a simplified equation. y = returns. α = alpha. β = beta. x = benchmark.

Alpha & Beta in Leadership

During my 1:1s with leaders, i’ve used the investment analogy to explain how a leader must invest his time into Alpha and Beta generators.

Beta Investments

A leader cannot work with every team member individually for all projects. Hence, a leader needs to invest in processes, frameworks & culture to put some autonomy into the team. This is the passive approach of leadership, the core portfolio, the beta strategy. As a leader, you need to constantly think through areas where the team needs help and improvement. You need to think through how best to solve these, and push yourself to find structured answers. These answers sometimes lead to good frameworks for the team, and might even evolve into a process or culture. Your investment into Beta helps the team think and work in a predictable fashion.
Some good examples — code review as a practice, target setting and roadmap planning, coding guidelines, PRDs, tech design docs, feedback and performance reviews, town halls for vision sharing.

However, the Beta approach only takes you so far. It helps you work in a systematic way, where every team member is helped through frameworks and processes. It creates tangible and predictable outcomes. But it does not help beat the expectation (benchmark) and create good spikes in the team.

Alpha Investments

The other thing a leader should do is invest time in cultivating & grooming. This requires you to be a good coach and a role model. The idea here is not to up skill every single person (that’s best done via Beta approach), but instead, to work with a few folks and really help them scale to the next level. This is a hard battle. Time investments here are often intangible. Not everyone learns when or how you want them to. However, if you put in good effort here, you will find a few keen enthusiasts in the team pick up the best from you and be the future leaders.
Some good examples — inspiring conversations, leading by example (code reviews, sales calls, etc), exposing members to your approach (vs your solution), coaching, grooming beyond core functional skills.

The Alpha approach requires a lot of investment into intangibles. A continuous alpha is hard. However, diligent efforts here overtime by coaching and example setting will shape rockstars in the team. Its alpha that will help you create great spikes and generate, well …. alpha.

In summary, being a good leader requires a lot of work beyond just the BAU. It requires you to invest time in building systems and processes that serve the team, and requires you to personally groom team members to become rockstars. A lot of young leaders often struggle to find this time, treating this investment as an expert ’s job. To them, I share this simple perspective —

Just like your money, your team also needs alpha (satellite) and beta (core) investments from you to grow!

About the author:
Raghav Chandra is a co-founder at Urban Company. He prefers functional programming and often imagines the world as platforms & systems.

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