Power law (investing strategy)

Core Concept

A small number of investments generate the vast majority of returns

Failure Rate

Approximately 90% of investments may underperform or result in losses

Strategic Goal

Identifying and backing 'unicorn' startups with industry-changing potential

Primary Application

Venture Capital (VC) and high-growth technology investing

Success Distribution

5-10% of investments drive total fund performance

1989-01-01

2000-01-01

From a strategic perspective, the Power Law pushes investors to be bold in backing ideas that could change industries and thoughtful in ensuring the overall approach can withstand the many misses on the way to a hit. For founders, it means aiming high and understanding VC backers' expectations. It reinforces the importance of diversification and access to top-tier opportunities for individual investors. (That alone means that Power Law investing is unsuitable for most HNWIs who participate in [...] In Venture Capital (VC), the Power Law is a concept and approach to shareholder and startup value creation. While some elements of the Power Law are inherent in all VC funds, deployment ranges from extreme to muted. On the extreme end, General Partners (GPs) expect a small percentage of a fund's portfolio (5-10%) will generate massive returns. The remaining companies (~90%) will be allowed to generally underperform, generating moderate gains, small losses, or even write-offs for investors. On [...] Despite its risk to everyone involved, the Power Law is a defining framework for U.S. venture capital. VCs use it to mathematically explain and justify seeking "unicorn" startups, structuring portfolios around one or two likely "winners," and accepting high failure rates (even though those failures affect their portfolio founders and LPs negatively).

From a strategic perspective, the Power Law pushes investors to be bold in backing ideas that could change industries and thoughtful in ensuring the overall approach can withstand the many misses on the way to a hit. For founders, it means aiming high and understanding VC backers' expectations. It reinforces the importance of diversification and access to top-tier opportunities for individual investors. (That alone means that Power Law investing is unsuitable for most HNWIs who participate in [...] In Venture Capital (VC), the Power Law is a concept and approach to shareholder and startup value creation. While some elements of the Power Law are inherent in all VC funds, deployment ranges from extreme to muted. On the extreme end, General Partners (GPs) expect a small percentage of a fund's portfolio (5-10%) will generate massive returns. The remaining companies (~90%) will be allowed to generally underperform, generating moderate gains, small losses, or even write-offs for investors. On [...] Despite its risk to everyone involved, the Power Law is a defining framework for U.S. venture capital. VCs use it to mathematically explain and justify seeking "unicorn" startups, structuring portfolios around one or two likely "winners," and accepting high failure rates (even though those failures affect their portfolio founders and LPs negatively).

The concept of outliers driving industry returns is nothing new – in fact, decades of historical data suggest venture returns exhibit a power law. Power law is a principle where one single investment yields returns larger than all other investments combined, often by orders of magnitude. To illustrate this principle, we went back to our database from 35 years of investing in venture capital. Key insights were: [...] must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance [...] must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance

Power Law is the investing theory that a small number of vc investments will generate the vast majority of returns which will make up for all the losses (and then some). Understand this well before anything. Not only do VCs invest in like 1% of deals they see but also <5% of the deals they invested in actually make favorable venture returns. 💰 And if you are new to pitching (DONT JUST WING IT) be sure to: 1. Start off with the people you care about least - work your way up 2. Stay organized [...] trust. Here’s what often gets overlooked: Investors aren’t only watching your numbers. They’re watching you. Do you carry conviction under pressure? Do you exude steadiness when markets shake? Do you project calm when others are reactive? Attracting capital takes skill. Retaining it takes presence. Credibility isn’t just performance, it’s how you show up when the pressure is on. If you’ve ever wondered whether conviction and presence can be trained, the answer is yes. It changes everything. [...] each would impact ownership, investor share, and control. 2. Explained the trade-offs: where flexibility could be given and where to protect equity. 3. Connected them to a certified finance partner/auditor: someone who could legally implement the optimized structure. 4. Guided them on communication: how to frame the round to investors while safeguarding the team’s equity and incentives. Result: Rest assured, the founder went with a clear strategy for raising capital without over-diluting, knows