The Power Law drives the venture investing business model. Every VC investor’s success is powered by a few blockbuster 50X-500X returns that make up for the 75% of their bets that either go bust or don’t win much.
There’s no defying the Power Law with those big VC Series A, B, C, etc. funding, whether you are a funder or a founder.
The odds are against you when you take big VC funding. It probably won’t work, but there’s a chance.
VCs understand this, so they invest in a portfolio of startup bets that maximize their chance of having a big hit that will deliver all the returns for their current fund.
In the recent book about the history of venture capital, “The Power Law” by Sebastian Mallaby, the first chapter describes the VC’s excitement at finding the big 500X win: the improbable needle in the haystack investment.
It really is exciting to read. These are amazing entrepreneurial and investor stories. A crazy founder and a friendly investor set out against all odds and changed the world. The Hero’s Journey on steroids.
BUT HERE’S THE BIG PROBLEM:
It isn’t discussed by funders or ecosystems. It’s hidden in plain sight.
And it’s really important for ANY software startup founder who is thinking about playing the VC funding game someday.
The Power Law of VC investing means that 50% of investments will fail outright and 25% will barely return the invested capital to investors.
This is the modern math in software startup funding.
THIS MEANS THAT 75% OF VC-FUNDED FOUNDERS WILL HAVE A BRUTAL EXPERIENCE WITH LITTLE OR NO FINANCIAL GAIN AT THE END OF THEIR 5-10-YEAR JOURNEY.
The excitement of the big winners gets all the attention. We hear about fewer than 1% of VC-invested startups.
We don’t see the funded losers and nobody talks about them. But there are 5-10 times more fast flameouts or slow-death zombies out there than anyone knows.
The Power Law for investors has the opposite effect on most funded founders. Let’s call it the Pummel Law.
Raising funding and aiming high is exciting for sure, but the odds of founder success don’t actually go up. It’s binary for founders–win or lose.
I have co-founded a VC-funded software company that grew fast to $100M in revenues, went public, and was acquired successfully. And I have helped grow another VC-funded company to $100M in revenue that has plateaued.
I have won and lost this game, in different eras. I invest in startups and seed funds too.
VC funding isn’t bad or wrong. It’s just overprescribed by funders and misunderstood by most founders.
When will startup ecosystems, advisors, and tech media share the clear VC-funding realities and real odds that can help serious founders understand the modern funding game to be successful?
There are better ways for most (not all) software and SaaS founders to play the startup creation game to change the world and win bigger.
#practicalfounders
