📶 some power law math

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Good morning 👋

Clay here. I’m not taking meetings this week. That means I can actually get stuff done.

Last week, my feed kept showing the same conversations around power law data shared by an LP. I’ll break that down and give my two cents.

I’ll also share the best links we found last week, a new tool I’m loving, plus what we’re learning through building.

If you think I’m right, wrong, or way wrong on anything this week, let me know in the comment section.

Together with AE Studio

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Book a call with their team if you’re looking for a better way to build software.

This Week in Venture

Power law math chart 📶

Everybody knows VC runs on the power law: you expect most investments to fail in the hopes of one winner that cancels out all of the losers.

Last week, David Clark from Vencap shared some data on 11,350 venture-backed companies over the past four decades.

The results were interesting.

Why it matters: The image above shows just how hard it is to find investments that can make power law math work.

• Over half of the sample companies are valued at less than cost. VCs are supposed to quickly find out who the winners and losers are in the portfolio, and they will spend their focus on the companies with momentum. The sad reality is that over half

• Nearly a quarter (22.6%) are complete writeoffs. This is what VCs sign up for. (TBH I thought this number would be higher, but maybe it’s lower because of zombie companies).

• ~16% of companies returned 2-5x. These are modest winners, but not by traditional VC standards.

• Only 5.4% of companies returned 10x+. This is how many VCs underwrite upside (“What has to happen for this company to 10x?”). For good funds, this means that roughly 1 out of 20 portfolio companies has a chance of this outcome.

• Just 1.1% of companies returned the fund. This is what every investor is chasing. The math shows you need to take ~100 shots on goal before you can reasonably expect to see one of these outcomes.

What happens next: The numbers to really focus on are the last two bullets: what percentage of investments can 10x, and what percentage of investments can return the fund. That’s the entire venture model.

We’ve written in the past about how we think some venture investing frameworks are changing. Who knows if we’re right or wrong.

If we’re right, how does it change the math?

Will LPs start pushing for a lower loss rate? Will GPs start prioritizing companies with slower growth number but a higher likelihood of a modest outcome? Will funds start altering their portfolio construction models to match this data?

These are some of the things we’re thinking about. Let us know in the comments what you think.

Links We Like

🔥 The highest signal-per-word page on the internet: Useful things to think more clearly

🧲 $100M Leads: This is the best course I’ve ever taken, and I’ve consumed all the information twice

🧠 Charlie Munger wisdom: Notes from Poor Charlie’s Almanack

🔎 AI VC: Bain Capital Ventures built a chatbot to help founders with their pitch

💭 Six types of entrepreneurs: George Mack shares his thoughts on modern entrepreneurship

✅ How to win on Twitter in 2023: How to beat the algorithm

📌 Emotional resonance maps: How the Profitwell founder makes content that converts

👉 99 VC takeaways: Our most-popular post so far

Have an article you like that we should include in this section? Let us know by responding to this email or sharing a link in this Slack channel.

Tweet of the Week

The real economy

Shared this over the weekend.

Once you see it, you can’t unsee it.

Thanks for reading this far and giving us a little bit of your attention this week.

Feel free to unsubscribe whenever this stops becoming valuable to you.

- Clay and Tyler