Hang around the world of of startup investing for a while and you will inevitably hear someone talking about the need for a home run.
“Everyone wants to be Johnny Appleseed,” an executive at one of NY’s biggest VC firms told The Observer earlier this week, punning on early stage investments, also known as seed funding. “The mentality is, you’re going to strike out a lot, so you better have a few companies that pay off huge.”
Fred Wilson took to his blog this morning to argue that it’s bad business to invest in a ton of companies, expecting most will fail and some will generate huge returns.
Startup returns are not bimodal. They exhibit more of a power law curve. There will certainly be one or two venture deals every year that generate 100x or more. And there will certainly be quite a few total busts. But there are a lot of outcomes in the middle of those two. And you can make a great return investing in startups without being in the 100x deal.
Wilson published this chart of Union Square Ventures’ current returns on their 2004 fund to illustrate this point. Over the past 15 years, he argues, he’s made a name for himself without investing in a single huge winner.
Wilson’s advice to newer VCs is to avoid the trap of trying to invest in every deal, because invetably you’ll miss some and make a lot of bad bets in the process. “I’ve spent my entire career playing the middle ground of this curve.”
Of course Wilson, who invested early in growing giants like Twitter and Zynga, doesn’t mind admitting he sees a few home runs in the the future. “With the exception of Geocities, which my partner Jerry led at Flatiron, I have never seen a 100x return. I suspect our first Union Square Ventures fund will change that.”
bpopper [at] observer.com | @benpopper