What is the more correct / deeper reasoning behind power laws in VC? Is it just that your LP's demand a specific rate of return commensurate with the amount of risk they are taking? Or is that still too shallow?
I realize it's a bit hard to gauge exactly what I have in mind by reading this, so obviously not trying to say anyone who doesn't get it instantly is a moron haha. The answer I had in mind was: "Well, in early stage investing, you can't actually reliably pick these mediocre wins either, meaning everything is pretty illegible (by normal standards) and so you have to have a large enough sample to hit a win. Given that, it makes sense to go for wins that will actually compensate for the rest of the portfolio. The underlying assumption is that its much harder to pick winners at all relative to picking companies that would win big, conditional on winning. Does that make sense?
What is the more correct / deeper reasoning behind power laws in VC? Is it just that your LP's demand a specific rate of return commensurate with the amount of risk they are taking? Or is that still too shallow?
Thanks for the content!
I realize it's a bit hard to gauge exactly what I have in mind by reading this, so obviously not trying to say anyone who doesn't get it instantly is a moron haha. The answer I had in mind was: "Well, in early stage investing, you can't actually reliably pick these mediocre wins either, meaning everything is pretty illegible (by normal standards) and so you have to have a large enough sample to hit a win. Given that, it makes sense to go for wins that will actually compensate for the rest of the portfolio. The underlying assumption is that its much harder to pick winners at all relative to picking companies that would win big, conditional on winning. Does that make sense?