The Power Law: The Fear Is Not Investing Badly, but Missing Out

I have posted about the power law before. A great venture investor must think differently rather than simply follow the crowd. The key to venture capital returns is backing the best one or two companies. I recall an early internal analysis by the world-famous accelerator Y Combinator, when it had invested in roughly 200 startups. Unsurprisingly, the top investment returned more than numbers 2 through 200 combined; equally unsurprisingly, the second returned more than numbers 3 through 200 combined. Without those top two investments early on, whether YC could have developed into what it is today might still be uncertain. For venture capital, then, the fear is not losing money by investing in the wrong company but missing a good company. There is an English phrase, fear of missing out, or FOMO. Put plainly: better to make a hundred mistaken investments than miss the one that could determine your investing success. Sometimes you see VC funds backing seemingly bizarre founders or startup projects. Are those investors out of their minds? In 1978, you might not have invested in Steve Jobs. In 2004, you might have passed on a geek who had not even finished college, ‘Mark Zuckerberg.’ Or in 2003, you might not have backed a technology eccentric dreaming of Mars, ‘Elon Musk.’ Each could, through individual effort, change an entire generation.