An exponential plot where the 80% of Y comes from 20% of X.
See also:
Links to this note
-
Venture Capital Has Conflicting Incentives With Founders When it Comes to Outcomes
Venture capitalists and institutional investors need big returns and therefore they fund companies pursuing a big market (investor returns follow a power law). Fund sizes have increased and investors need larger and larger returns. However, there is a tension with founders' incentives to have a wide range of exit outcomes. An exit in the $100s of millions is life changing for a founder, but not a good enough outcome for investors. Investors are incentivized to push founders to riskier, but bigger opportunities even if the set of possible positive outcomes for the founder are significantly smaller (e.g. a highly competitive winner-takes-all market).
-
It becomes exponentially more difficult to make up for losses as they increase. A loss of 90% would need a gain of 900% to recover from it. Cutting your losses is important so that you don’t fall into the trap of an exponentially larger hole.
-
High Growth Companies Grow Quadratically
Most runaway successes we hear about often have some mythology of the moment the founding team unlocked exponential growth. Examples include Slack, Facebook, and HubSpot. The only problem is, most of these growth stories are not actually exponential but closer to “an initial period of quadratic growth followed by linear growth”.