The x axis of this plot is the log-scaled return multiplier of the investment (i.e., 1x = money returned without profit, 10x = 900% return). That provides us with a universe of 1,808 investments to examine 1.īelow is a figure of a power-law fit over the subset of those investments that have positive returns (realized or unrealized), before fees, on the platform 2: (The right-hand bound of this figure is truncated at a 100x multiple for obfuscation the fit line is made with untruncated data.)
ANGELLIST VENTURE PROGRAM SERIES
To evaluate the distribution of early-stage investment returns, we selected all of the AngelList platform investments prior to Series C that are at least one year old and have a valuation change, or that have already exited. Supporters of the power-law hypothesis point to a handful of anecdotes on portfolio construction, but until now data that could rigorously evaluate the power-law hypothesis in venture capital has been absent. Thiel suggests that, consequently, investors should only invest in “ seven or eight promising companies from which you think you can get a 10x return.” The current venture obsession around counting “unicorns”, investments in companies that have a billion-dollar-plus valuation, probably derives its intellectual justification from this math-driven championing of outliers.
In a power law world, the only thing that matters is the presence of a home run investment in the portfolio. Grounded in that experience, Thiel is an enthusiastic proponent of venture capital returns being power-law distributed: where the best investments are worth exponentially more than the great investments, which are themselves worth exponentially more than merely good investments.
And the very best early investments offer incredible multiples: Peter Thiel made around $1.1 billion from his half-million dollar early investment in Facebook, a 2,200x return. Analyzing early-stage returnsĮarly-stage investing is an asymmetric bet: you can only lose your investment, but you could gain a multiple of it. The prominence of these huge winners suggests that an indexing strategy of investing in the entire early-stage venture universe will outperform roughly three-quarters of early-stage venture capital funds. Using AngelList’s curated data we show that the returns of early-stage investments follow a fairly extreme power law distribution, with enormous positive outliers skewing portfolio performance. It takes a top-quartile VC fund to outperform the early-stage venture market.
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