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Picking winners is a myth, but the Power Law is not
Clint asserts that VCs cannot reliably pick winners but they can, however, construct portfolios that increase the possibility of consistently generating great returns.
Venture is an extreme outlier business where a small number of investments drive most of the returns. Research from Cambridge Associates demonstrates that, as an industry, VCs pick winners only 2.5 percent of the time.
With such odds, the average early stage VC with a portfolio of 10 investments only has an 18% chance of investing in an outlier and generating above average returns. All else equal, a much larger portfolio of investments, such as Ulu's target number of 50 or more, gives as much as a 90% chance of an outlier.
LPs often ask VCs what their fund’s loss ratio is, hoping a low number will predict strong returns. Since even great early stage funds have high loss ratios, a better question is, “What are your fund's chance of an outlier?”