7 essential insights from listening to 100s of VC podcasts
I have been working on this article for quite some time(80+ hours) now. Synthesizing these notes was a fun project, and I learned a lot. For full access to this article, reach out to me directly on LinkedIn (it’s free). Below is a glimpse of what you could expect in the article.
1. The Power Law of Venture Capital: Why magnitude of success matters more than frequency
The first thing to know about the Venture capital business is that the frequency of correctness does not matter. It is the magnitude of correctness that matters (concept of power law distribution). This means that historically, all returns have been concentrated in a few bets. Most VCs lose money on 70%-80% of their investments. The ones remaining determine the returns for the firm. The key takeaway from this is that in venture capital, you have to invest in businesses, and when they can succeed in a scenario, the magnitude of the outcome would be so high that it’s worth making that bet.
The nuanced point about the power-law distribution is that in the Venture capital world, Success begets success. It’s almost like a flywheel(when a VC firm achieves early success with a few investments, it gains a strong reputation, attracting top entrepreneurs who want to work with a proven partner. This, in turn, increases the likelihood of future successful investments, creating a positive feedback loop or “flywheel” effect. The cycle repeats as the firm attracts high-quality opportunities, further cementing its reputation and increasing its chances of continued success). This made me think about how critical my first ten investments are going to be in determining my career as a successful venture capitalist.
“The top investment is worth the total amount of all the other projects and more. You’re looking for the one high-water mark, not the average.
People don’t come to you looking for singles.”“The frequency of correctness does not matter. it is the magnitude of correctness that matter.”
“Success begets success in venture capital business. Most returns accrue to small group of firms Effectively all the returns are concentrated in few big winners. For Y combinator it’s Dropbox and Airbnb -> Of the 10B value created, 3/4th of it is just these two companies.”
“VC is a grand slam business. If your idea is not something that can generate $100M in revenue, you may not want to take Venture capital.”
“It doesn’t matter how many losers you have, all that matters is how big your winners are.” You can only lose one times your money as a venture capitalist. You make bets, and you have to be willing to be wrong a lot. It’s one of the few industries I know of where you can be wrong 70 percent of the time and be brilliant.”
“Venture capital is a hits business. All of the returns come from the top cohort of investments. Anything less than three times your money over a ten-year period [is a mediocre return in venture capital].”
Given that the venture capital industry is characterized by a power law distribution, where a small number of investments generate the majority of returns, the next logical question becomes: How do you identify the winners?
For full access to this article, reach out to me directly on LinkedIn (it’s free)!
