With great power (law) comes great responsibility

Posted on Aug 31, 2023 Reading time: 1 min

Spider Man

What’s the link between investing in startups and content consumption?


Both follow a power law in their distribution.


In a nutshell, a handful of ‘hits’ drive most of the impact, while there’s a long tail of almost non-significant stuff. Of course for startup investing, we’re talking about returns.


If you’re not familiar with the term ‘power law’ and you’re curious about understanding how #startup investors think, besides googling it, I recommend reading Sebastian Mallaby’s book “The Power Law: Venture Capital and the Making of the New Future”.


But let’s get back to us.


This intriguing essay I recently read paints the evolving media landscape. With content supply constantly on the rise, the competition for attention plays out through recommendation algorithms, social dynamics, and community engagement.


Bottom line from the author? Mega hits will stick around, even in a splintering landscape. But ‘average’ content? It’s slipping into the shadows, elongating the tail.


So, here’s the thought: Could startup investing be influenced by these same dynamics?


Consider this: In a portfolio of startups, a few top bets (should) generate almost all the returns, power law indeed.


Moreover, data reveals that VC fund returns are already skewed towards a handful of ’top players’ who consistently secure the best deals.


We can confidently say that investment success is polarized.


As the number of startups continues to surge, just like media content does, and ecosystems become more interconnected, this might hike up the costs of finding those promising opportunities between the noise.


Are we envisioning a scenario where the power law effect in startup investing becomes even more pronounced on both portfolio returns and funds’s performance because only a few investors will have the strength to navigate this environment?


If more fragmentation will lead to more concentration, what might unfold for investors who find themselves on the less fortunate side of the curve?


And what about the private ones, will there be space for them?