VC & The Law of Large Numbers

  1. Typical funds invest in 30 or so startups
  2. 1 in 100 become the home runs which drive returns
  3. Thus, VCs need to get lucky for any single fund to not lose money for LPs
  4. Still, this is a rational strategy for any VC who can raise a large fund, because they earn management fees based on size of fund, regardless of whether LPs lose money (to wit: a $100M fund earns $20M in management fees for VCs).
Y-axis = outcome; X-axis = time
  1. While the “long run” in poker is measured in months / years, in VC it’s measured in decades / lifetimes.
  2. While some VCs are much more skillful than others at achieving returns, their skill edge is NOT in picking winners.




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Rafe Furst

Rafe Furst

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