Venture capital is a one-hit-wonder business

Hi! I’m glad you’re here. You’ve made it to issue #91 of VC Demystified🪄.

My name’s Nicole - I’m a Principal at an early stage venture fund, and I know firsthand that VC can often be a black box. Breaking into the industry may feel daunting and resources can seem scarce and inaccessible. I wanted to put together a newsletter to give others the playbook I wish I had when I first started.

Today’s deep dive: Why the best investors miss most of the time and still outperform

^{My personal mission is to open as many doors as possible for other people and this newsletter is just one avenue to do that. As always, I will continue to post VC insights daily for free across my socials. This newsletter may contain paid partnerships or affiliate links.}

Read time: 4 minutes

Why the best investors miss most of the time and still outperform

If you spend enough time in venture capital, it can start to feel like a game of constant motion.

Endless pitch decks, meetings, memos, constant decisions on repeat.

From the outside, it looks like the investors who win are the ones who see everything and back a lot of companies.

But over time, a different pattern becomes obvious.

Most venture funds aren’t built by lots of good investments. They’re built by ONE great one.

That’s the power law, in practice.

What the power law actually looks like

When people talk about the power law, it often sounds abstract.

In reality, it’s simple: Venture returns aren’t evenly distributed. A small number of companies (1-2) drive the vast majority of outcomes. Everything else, even solid, respectable investments, barely moves the needle.

Every so often, one company breaks out in a way that’s hard to fully appreciate at the time. And when it does, that single investment can return an entire fund or more.

The outcome usually needs to be $1 billion or more.

Why this surprises people

What catches most people off guard is how rare these outcomes are, even for great investors.

The best investors have many, many, many failed investments.

But none of that matters nearly as much as the one company that truly worked.

That’s why investors often talk about “the deal that made their career.” They can usually name it instantly.

You can see this clearly in the real world

If you want proof of how extreme the power law is, look at the Forbes Midas List, widely considered the definitive ranking of the best venture investors in the world.

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