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Picking a unicorn is roulette
The payouts are what make the comparison interesting. A roulette winner pays 35 to 1, while a venture winner can pay back 10,000 to 1. With odds that close and a payout that lopsided, you might as well play every square, which is the logic behind the Power Law strategy that most accelerators promote.
The other side starts with why hit rates are so absurdly low. Building a company and picking one are both hard, but there is a second reason: by definition, the average investor is pattern recognizing other average people. Spreading bets across everything is the easy fallback, and it leaves the odds exactly where they were.
The alternative is to obsess over the job. That means fine-tuning the details, challenging the status quo, and systematically raising the odds of being right when others are wrong. Average here is a matter of numbers and economic competition, not a judgment about anyone's worth.
Raising the odds is also a compounding game. A sharper reputation brings access to great deals through the network, since talent attracts talent. It also sets the bar for what it takes to receive a check from the fund, which steers capital toward founders who share the conviction and the will to win.
Why do venture returns follow a power law?
Venture investments are bets on companies that can grow far beyond their starting size, while the most an investor can lose on any one of them is the money put in. That asymmetry means a few huge outcomes can outweigh many failures. Analyses of venture portfolios, including data published by Correlation Ventures, have found that a majority of investments return less than the capital invested. A small number of companies account for most of the gains in a typical fund.
Why does roulette pay 35 to 1?
A European wheel has 37 pockets and an American wheel has 38, because the American version adds a double zero. A bet on a single number pays 35 to 1, even though the true odds against it are 36 to 1 or 37 to 1. That gap is the house edge. On the American wheel a single number comes up 1 time in 38, or about 2.6 percent of spins.
Why does talent attract talent?
Talented people tend to learn from and compete with the people around them, so a strong group raises the output of everyone in it. Economist Enrico Moretti studied top inventors and found that their productivity rose when they moved into cities with large clusters of other high-performing inventors. Strong people also pick workplaces by who they will work alongside, which makes a good group easier to grow once it exists.
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