Chapter Seven- Follow The Money

The economist Vilfredo Pareto noticed that 20% of peapods in the garden produced 80% of the peas, and similarly, 20% of the people owned 80% of the land in Italy. This is known as the Pareto principle. The tendency for a few to dominate the many is known as the power law. This is the backbone of venture capitalism.

The goal of venture capitalists is to find, fund and profit from early-stage companies. The biggest secret to venture capital is that the best investment is a successful fund that equals or outperforms the entire rest of the fund combined. This leads to two rules for venture capitalists

Just as more startups fail, the more venture funds fail. For this reason, venture companies should only fund enterprises that have the potential to pay off the entire investment of the whole venture company. This is a rule that meant venture funds had to ignore a lot of other promising startups. They can’t afford to be restrictive as they miss out on a lot of potential enterprises that may be big payoffs. It is important to understand that some companies become very successful while other companies perform average.

To a certain extent, we are all venture capitalists. We invest a great deal in building our careers. Before starting a company, know that it is likely to fail.