The math behind venture capital investing reveals a fascinating principle that most people outside the industry don’t grasp. The numbers tell an interesting story: all but one of these investments return less than the initial capital. A select group of deals, just 5-6%, deliver remarkable gains of 50 times or more. This dramatic contrast shows the power law that drives success in venture capital.
This power law means just a handful of investments create most of the returns for venture capitalists. The sort of thing I love about venture capital investing is how this principle shapes investment decisions. Most funds only return 1.1x–1.3x over a decade. The difference between good and great funds comes down to knowing how to spot and fund potential winners. Great funds put 35-40% of their money into winners, while average ones manage just 18%. The biggest problem remains the same through all investment rounds: finding those rare companies that will reshape markets and deliver exponential returns.