The Asymmetric Bet: Venture Capital & The Power Law
The Asymmetric Bet: Venture Capital & The Power Law
Public markets follow a bell curve. Venture Capital follows a Power Law. Why one 1,000x winner is worth more than a portfolio of safe bets.
Executive Summary
- The Power Law Rule: In stocks, returns are normally distributed (most do okay). In VC, returns are skewed: The single best investment in a fund often returns more than all other investments combined. You are hunting for the “Outlier,” not the average.
- Access is Alpha: In public stocks, you can buy Apple anytime. In VC, you cannot just “buy” into Sequoia or Andreessen Horowitz. Top-tier funds are oversubscribed. Your “Alpha” comes from your access to these top-decile managers who see the best deal flow.
- The J-Curve Deep Dive: VC has the deepest J-Curve. You will see paper losses for 5-7 years before the winners emerge. It requires the longest time horizon (10-12 years) but offers the highest potential multiple on invested capital (MOIC).
The “Spray and Pray” Fallacy
Do not angel invest in 3 random startups. That is gambling. To capture the Power Law, you need a portfolio of 30-50 companies (via funds). Statistically, if you hold fewer than 20 names, your chance of hitting the “Home Run” drops to near zero.
Mechanic: The Return Distribution
1000x Goal
Target Multiple
QSBS Eligible
Tax-Free Exit
Top Decile
Manager Selection
10 Yr Lock
Zero Liquidity
Simulation: Portfolio Outcome ($1M Invested across 10 Deals)
The Power Law in Action
| Feature | Private Equity (Buyout) | Venture Capital (VC) |
|---|---|---|
| Company Stage | Mature, Cash Flowing | Early, Burning Cash |
| Risk Profile | Low Failure Rate / 2-3x Return | High Failure Rate / 100x Return |
| Tax Benefit | Capital Gains (20%) | QSBS (0% Federal Tax) |
“In Venture, ‘lemons’ ripen early, but ‘plums’ take time. You must have the stomach to watch the failures pile up while waiting for the single outlier to emerge.”
Essential Resources
INTERNAL
BMT Playbooks