Snippets about: Venture Capital
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Venture Capital's Two Essential Traits - Long Time Horizon and Asymmetric Payoffs
Venture capital is a unique enterprise defined by two key characteristics:
- Very long time horizon: VCs make few decisions but live with the consequences for many years. For example, Sequoia Capital invested in Google in 1999 and still owns most of that stake nearly 25 years later.
- Asymmetric payoffs that reward big bets: While VCs can lose at most 1x their investment, the upside can be 1000x or more. Missing out on the next Google is costlier than the downside of failed investments.
This combination of patience and upside-skewed bets enables VCs to invest in bold ideas that most industries would consider too speculative.
Section: 2, Chapter: 5
Book: On The Edge
Author: Nate Silver
Small Number Of Events Explain The Majority Of Outcomes
The distribution of success isn't even - a small number of outliers have a disproportionate impact. Consider:
- Venture capital: 65% of investments lose money, 4% earn 10x+, 1% earn 50x+. That tiny minority generates most returns.
- Stock markets: Less than 10% of public companies account for all the market's gains over time.
- Art: Most works have little value, but the tiny number that are considered masterpieces drive the market.
In many fields, a tiny proportion of successes explain the vast majority of results. Success is often driven by gaining exposure to such "tail events" - outcomes that are statistically unlikely but enormously impactful.
Section: 1, Chapter: 6
Book: The Psychology of Money
Author: Morgan Housel
Follow The Money
The power law of venture capital means that investments follow a steeply uneven distribution of payoffs. A small handful of companies wildly outperform all others. This implies that:
- The most likely outcome for a startup is failure, while a few rare companies achieve extraordinary success.
- To succeed as a VC, you must only invest in companies with the potential to be one of those few huge hits - not just ones with a good chance of modest outcomes.
- Rankings of VCs are not very stable over time because they depend on one or two extremely rare and unpredictable big hits.
As an individual, you also want to follow power law distributions in your career. That means aiming to join or found a company with the potential to be a 100-billion-dollar company, not just one with a good shot at moderate success.
Section: 1, Chapter: 7
Book: Zero to One
Author: Peter Thiel
Silicon Valley's Embrace of Variance and Risk-Taking
Silicon Valley's culture champions risk-taking and embracing variance, seeing them as necessary for progress and disruption. VC firms like Sequoia Capital and Andreessen Horowitz embody this spirit, targeting high potential returns even if it means many of their investments fail. This risk-tolerant mindset, driven by the potential for outsized rewards, sets Silicon Valley apart from other industries and enables it to move quickly on cutting-edge ideas.
Section: 2, Chapter: 5
Book: On The Edge
Author: Nate Silver
