The Lo Down: A Radical Shift in Perspective is Required in Venture

The venture capital (VC) industry generates considerable attention regarding potential high returns. Observers often view VC primarily as a source of massive financial gain, which when it works, does happen.

However, data shows that traditional VC only delivers significant wealth creation for the top 1% of firms. Without exceptional deal flow, the standard investment model frequently and on average underperforms.

I have come to the conclusion that industry participants in VC must re-evaluate itself, recognizing that for most firms, venture functions primarily as an ecosystem building activity.

Power law distribution

Data conclusively shows that venture returns adhere to a power law distribution. A minimal fraction of funds accounts for the overwhelming majority of all realized profits. PitchBook analysis from 2024 indicates that the top quartile of VC funds consistently captures over 75% of the total value generated across the sector.

This means that only 25% is left for everyone else. That’s an exceptionally low number.

This data emphasizes the difficulty new or smaller funds face when attempting to enter this elite cohort, if they’re able to at all.

Exceptional Access Required

Achieving differentiated deal flow requires exceptional access to secure positions in breakout companies at their earliest stages. Securing entry into the next significant technology firm, such as an OpenAI or Stripe, at the seed stage is crucial.

At least with seed stage, the larger you can carve out at that point, the more equity pro-rata you can keep and continue investing.