The single idea underneath the whole industry
If you take one idea from this course, it should be this one. Venture returns don't follow a bell curve, where most outcomes cluster near the average. They follow a power law: most investments return close to zero, a few return a modest multiple, and a tiny handful return so much that they generate the majority of the fund's entire profit by themselves.
The return decomposition
Worked example: a $40m fund makes 20 investments of $2m each.
| Outcome bucket | # companies | Capital deployed | Return | Contribution to fund |
|---|---|---|---|---|
| Total loss (0x) | 8 | $16m | $0 | $0 |
| Partial loss (0.5x) | 5 | $10m | 0.5x | $5m |
| Modest win (2x) | 4 | $8m | 2x | $16m |
| Good win (6x) | 2 | $4m | 6x | $24m |
| The fund-returner (60x) | 1 | $2m | 60x | $120m |
| Total | 20 | $40m | — | $165m (4.1x MOIC) |
The single fund-returner, one company out of twenty, one-twentieth of the capital deployed, produced $120m of the fund's $165m total return, roughly 73% of it. Remove that one company and the fund's MOIC falls from 4.1x to under 1.2x. This is why the industry obsesses over outliers rather than batting average.
What this means for every earlier lesson
- A fund that avoids risk to protect its "win rate" is optimizing the wrong metric, batting average doesn't determine fund performance, the magnitude of the best outcome does.
- Ownership in the eventual outlier (Lesson 20) matters enormously, a 2% stake in the fund-returner produces a fraction of the return an 18% stake would.
- This is also why follow-on strategy (Lesson 23) is so consequential: doubling down on the company that's starting to look like an outlier can matter more than any single new first check.
Checkpoint
- Power law: a tiny number of outcomes generate the large majority of a fund's total return.
- Most portfolio companies return little or nothing, and that's expected, not a sign of a bad fund.
- Ownership percentage in the eventual outlier matters more than batting average across the whole portfolio.
If anything here still feels unclear, ask before moving to Lesson 22.