Read on Twitter
1/ Lots of talk in VC about the power law - ie small number of companies that are responsible for a large proportion of overall value. But is this actually true or just one of those urban myths?
2/ Using data from Pitchbook on the number and value of VC exits globally we've been able to quantify the impact of this power law. Hat tip to @JontyRussell for crunching the data.
3/ Since the start of 2010, there have been over 20,000 VC-backed companies that have completed an exit (IPO, M&A or buyout). These companies have generated a total exit value of just under $3.0 trillion.
4/ Exit value is calculated as the post-money IPO value plus announced transaction value for M&As and buyouts. Obviously some M&A deals don't announce valuations so we can't include these in the total exit value.
5/ We then looked at what proportion of the exit value was generated by the top 25 exits each year. This ranged from a low of 35% in 2010 to a high of 71% in 2012.
6/ In aggregate since the start of 2010, the top 25 exits each year (275 companies in total) accounted for over $1.5 trillion of exit value.
7/ So in percentage terms, this means that 52% of global VC exit value since 2010 came from just 1.3% of exits.
8/ Bearing in mind the high number of VC-backed companies that simply go out of business, it's fair to assume that the actual concentration of value is even more extreme.
9/ So from an LP perspective, it makes total sense to optimise investment strategy around the VC firms that have a proven ability to consistently back these top 25 companies year in year out. This is the single most important factor we look for when assessing managers.
