power law

Definition

The mathematical reality that in venture capital, one or two investments generate nearly all the returns while the rest are mediocre or dead. Why VCs can lose money on 90% of their portfolio and still return 3x the fund.

Example Usage

Our power law played out perfectly: Airbnb returned the entire $200M fund, and the other 49 investments basically broke even or failed.

Origin

Statistical concept applied to venture capital returns by Peter Thiel in his 2014 book 'Zero to One'

Fun Fact

Analysis shows that typically just 5% of VC investments generate 60% of returns, and the single best deal often returns more than all other investments combined.

Source: Venture capital economics literature and Peter Thiel's Zero to One

Related Terms

Beginner

growth stage

The phase when a startup has proven product-market fit and focuses on scaling revenue, typically raising Series B or C funding. Where dreams of changing the world meet the reality of quarterly revenue targets.

🚀 Startup / VC

Advanced

pay-to-play provision

A punitive clause forcing existing investors to participate in future rounds or lose their special privileges—the venture capital equivalent of 'put up or shut up.' Popular after market downturns when companies need to separate real believers from fair-weather friends.

🚀 Startup / VC

Advanced

drag-along

Rights allowing majority shareholders to force minority shareholders to join in selling the company. Corporate democracy's escape hatch, where your vote doesn't matter if enough people with more shares decide differently.

🚀 Startup / VC

Beginner

pay-it-forward mentality

The cultural expectation in startup ecosystems that successful entrepreneurs and investors should help newcomers, supposedly creating a virtuous cycle. In practice, it's often networking disguised as altruism.

🚀 Startup / VC

Intermediate

dilution

The soul-crushing moment when a startup issues new shares, and existing shareholders watch their ownership percentage shrink faster than a wool sweater in a hot dryer. While you still own the same number of shares, you now own a smaller slice of the pie—assuming the company actually grows enough to justify the dilution. It's the price founders pay for other people's money, and the reason early employees cry into their vested options.

🚀 Startup / VC

Intermediate

voting rights

The power to vote on corporate matters, typically held by common stock and sometimes special classes of preferred stock. Theoretically democratic, practically controlled by whoever wrote the term sheet.

🚀 Startup / VC

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