The Brutal Power Law of Venture Investing Applies to Venture Funds Too

by | Mar 3, 2024

The Power Law of VC investing means that just a few of their startup investments create all their returns. It’s a game of a few blockbusters, not a game of averages.

The Power Law of venture investing applies to venture funds themselves. This is happening right now to VC funds, big and small.

The top 10% of VC funds is where the big cash-on-cash returns are and likely will be. Investors line up to be in these name-brand funds with proven results.

But 50% of venture funds are struggling and won’t produce top-tier returns (by definition).

Investors could have done better in a stock market index fund. This means these VCs won’t be able to raise another round.

Investors and their big LP investors are saying this publicly this year. They call these new funds that are struggling “Venture Tourists.”

What’s the difference in this Power Law game for VCs and funded founders?

If you are a founder who took VC funding and didn’t grow fast enough, you won’t make any money when the company goes under or sells for a small win.

If you are a VC who took LP investor money and didn’t create high enough returns, you still have a job while your investments play out. And you still collect the typical 2% fee every year based on the fund’s total size.

Those are very different results and levels of pain. It seems the VC house always wins, but the entrepreneur-gamblers not so much.

Big all-or-nothing high-risk VC investing is not bad and it’s not going away. It just expanded to crazy levels where there was more funding chasing not enough investable companies.

VC funders overprescribed big funding and it was misunderstood by the founders. That’s starting to change, but very slowly.

Most modern AI-powered and capital-efficient software companies don’t need big VC funding to start or grow like they used to.

That’s most software companies, like 80% or 90% of them. Like your software company too.

#practicalfounders

Greg Head posted this on LinkedIn on March 3, 2024.

Check out the comments and join the discussion on LinkedIn.

Related Posts

Healthy Startup Growth is a Game of Phases

For most SaaS companies, scaling up from $1M to $10M in revenue is a game of phases. Push and grow. Then regroup and fix. It’s rare to both grow fast and address your deepest challenges at the same time. You can expect bigger challenges than ...

Raising Outside Funding Creates More Stress For Founders

Is it more or less stressful to have outside investors in your SaaS business? Doesn’t that extra cash reduce the crazy stress of startups? Most founders actually find it’s more stressful to have investors, especially big VC ...

Startups Uaing AI Need Even Less Funding from VCs

5 or 10 years ago, startup founders used to say, "I have a great idea for a software company and I just need VC funding." They don't say that anymore. Big VC funding is not required to succeed in the modern software game in the AI-first or ...
No results found.
Practical Founders eBook

FREE 60-PAGE EBOOK

Win the Startup Game Without VC Funding

Learn how all 75 founders on the Practical Founders Podcast created an average founder equity value of $50 million.