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

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.


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