VCs use this ‘power law’ to identify ‘massive winners’ to invest in
Peter Specht is a general partner of Craandum, a venture capital company.
Muttering
As the founders’ fields are flooded, an investor announced that VCs use a historical “law” to determine the best investments.
“The power law in enterprise capital mainly creates the majority of returns. In fact, one or two major winners are overweight than all other investments,” said Peter Specht, a European VC firm Cryandum.
He described this as “important in deciding on VCs”.
Power law It is caused by the study of 19th-The Italian economist Vilfredo Pareto. He noticed that 20% of the peas in his garden produced 80% of peas and applied this observation to economic conditions and the inequality of reserve.
Specht announced that some of these initiatives will fail because VCs often finance risky and innovative ideas. However, returns from successful companies may be “big winners” that weighs more than all other losses or smaller outlets.
“From the perspective of the return, you want to hit the values really contrary. We want Spotifys, Revoluts, Clarnas,” he said.
“Results of this size or on this scale return more than five billion dollars to investors and founders. A 50 billion dollars out of an output of $ 50 billion is much larger than five $ 1 billion.”
‘Why can it be so big’
Although there is still a way to guarantee venture capital in Europe, there is still a way, Atomico’s European Technology Report 2024.
In fact, the average seed tour in Europe – the first official money collection tour in Europe – was $ 1.4 million last year compared to $ 3 million in the United States. In the growth phase, it is even more difficult to create more than $ 15 million funding tours twice as much as American initiatives.
60% of the respondents said that in 2024, Atomico was more difficult to increase external financing compared to the previous year.
Specht said that an important way to convince VCs that you have built the next Spotify or Revolut is to show that your company has a “largely outcome potential”.
“You should say why it can be so big, why it can become a company that defines the category,” he said.
This includes explaining how you fight the market and how the product can expand over time. During the seed stage, it can help to have pilot users with an early product or positive feedback.
If you don’t have a product yet, there must be evidence that the product fills a gap in the market and offers customers a real solution.
VCs are also looking for “extremely powerful and ambitious founders”, and Specht added that he wants to understand their motivation and driving forces.
“Obviously … One thing I want to see is whether the founders have an increase in a particular field or whether they have an increase or the excellence of it,” he said.
This may be related to having technical or leadership skills, even being perfect in sports or work.
‘Visionary storytelling’
Considering the gap between donations in Europe and the USA, Harry Stebbings, the founder of 20VC, found a difference in the founders’ field.
Stebbings said that American founders tend to be more brave and ambitious than their colleagues in Atlantic.
“I don’t think Europeans are like gathering good donations [as Americans]. We have to tell better stories. We must market ourselves better. We are very underestimated, CNBC Make said.
Stebbings, some founders’ fields “output slides” to add even “bad” was suggested. “This makes me sick, as if I plan to divorce when I get married.”
Although Specht does not agree that European founders are not ambition, he thinks that initiatives in the region can tell better stories.
“We have people and founders who really dream of dreaming and wanting to establish big companies.” He said. “In the general culture between Europe and the United States, I think the founders and Americans are quite good in storytelling, and at the same time very good sales officials.”
“We can focus on being more brave there, having a more refined and visionary storytelling there.”
