Asset management and funds
Power law (venture capital)
In venture capital, a few big winners produce most of the returns.
Facts checked against sources onWhat does Power law (venture capital) mean?
A power law describes outcomes where a very small number of cases are far bigger than all the rest. In venture capital, most startups fail or return little, while one or two huge successes return more than the rest of the fund put together. Example: a fund makes 20 investments of 5 each, 100 in total. Fifteen return nothing, four return 10 each and one returns 300. The fund gets back 340, or 3.4 times its money, and the one winner produced almost 90 percent of it. This is why venture investors back companies that could become very large, and why an average is a poor guide to venture results.
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Related terms
- MOIC (multiple on invested capital)How many times the money invested comes back.
- Pareto principle (80/20)A small share of causes often drives a large share of results.
- Limited partner (LP)An investor that puts money into a private equity or venture fund.
- Assets under management (AUM)The total market value of the money a firm manages for clients.
- Net flows (net new money)New client money coming in minus money taken out.
- Active versus passive investingTrying to beat the market versus simply tracking it at low cost.
- Sovereign wealth fund (SWF)A state-owned investment fund, often built from oil revenues or reserves.
- General partner (GP)The firm that raises and runs a private equity or venture fund.
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