Investor Connect Podcast

Power Law

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

The power law is a key mental model for venture investing. 

The power law states that the majority of the returns will come from just a few of the investments.

Similar to the Pareto principle, 20% of the deals will account for 80% of the returns.

In venture capital, the power law requires that each investment have the ability to pay back the entire fund as only a few will have outsized returns.

The returns from those winning investments will cover the losses from all the rest.

This is different from other investment classes which produce returns based on the normal distribution.

As an investor in the venture space, you must be willing to suffer many losses for only a few wins.

It can be hard to select upfront which ones will have outsized returns. 

Some use an index strategy to place investments trying to include as many deals as possible.

Once invested, it’s best to support all the companies in your investment portfolio.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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Direct download: Power_Law_.mp3
Category:general -- posted at: 5:00am CST

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