Zero to One_ Notes on Startups, or How to Build the Future ( PDFDrive )

THE POWER LAW OF VENTURE CAPITAL
Venture capitalists aim to identify, fund, and profit from promising early-stage
companies. They raise money from institutions and wealthy people, pool it into a
fund, and invest in technology companies that they believe will become more
valuable. If they turn out to be right, they take a cut of the returns—usually 20%.
A venture fund makes money when the companies in its portfolio become more
valuable and either go public or get bought by larger companies. Venture funds
usually have a 10-year lifespan since it takes time for successful companies to
grow and “exit.”
But most venture-backed companies don’t IPO or get acquired; most fail,
usually soon after they start. Due to these early failures, a venture fund typically
loses money at first. VCs hope the value of the fund will increase dramatically in
a few years’ time, to break-even and beyond, when the successful portfolio
companies hit their exponential growth spurts and start to scale.
The big question is when this takeoff will happen. For most funds, the answer
is never. Most startups fail, and most funds fail with them. Every VC knows that
his task is to find the companies that will succeed. However, even seasoned
investors understand this phenomenon only superficially. They know companies
are different, but they underestimate the degree of difference.