Weekly VC Insights by Uniborn #21

Inside: Thoughts on how to spot a unicorn and what the power law might mean
Barbara Krassner
🇬🇪 Uniborn Team
3 min read

This week, India became the fourth country to land a spacecraft on the moon, Italian cheese makers began embedding edible microchips in their parmesan — and we continue to collect captivating updates for venture capitalists in Europe. Subscribe and dive in!

🔥 The power law for VCs still holds power — or does it?

The word around venture town is that only a very small number of investments will yield the highest returns. In other words, there is a belief that investing in numerous startups at an early stage increases your likelihood of discovering a highly successful company, all the way up to a unicorn or even a decacorn.

But this concept has its detractors: the title of Entrepreneur's article, "Why Power Law Portfolio Construction Will Always Be Dead on Arrival in the Venture Capital Industry," speaks for itself. The fate of its author, Fredrick D. Scott, may be ambiguous — but not his expertise.

His experience suggests that "VCs that invest this way have no better chance of finding a unicorn or decacorn than a blind man picking random companies out of a hat. That is not investing, it's gambling." 

Why are we in this conversation right now? Well, recently, VenCap International plc analyzed data on 11,350 startups backed by 259 funds over a 30-year period, from 1986 to 2018!

The math says it all:

  • More than 6,000 of these companies (53.2%) were valued at less than 1x. Of those, more than 2,500 (22.6%) simply wasted money. Another 2157 companies (19%) were marginally successful, delivering returns in the vicinity of n 1x to 2x. 
  • Only 614 (5.4%) investors made 10x or more. And the lucky ones who returned 100% or more of their allocated capital — just 121, or 1.1%.
The conclusion would seem obvious. (Image: David Clark's Twitter account)
The conclusion would seem obvious. (Image: David Clark's Twitter account)

But the reality seems to be more complicated. The power law in the VC world shouldn't be about betting on diversification just for diversification's sake. It shouldn't be about recruiting as many new startups founded by "ex-Google employees" as possible. Instead, it should be about selectivity and constantly honing your search.

One of the comments made when discussing these stats. (Image: Michael Jackson’s LinkedIn account)
One of the comments made when discussing these stats. (Image: Michael Jackson’s LinkedIn account)

See the VenCap International plc thread for details.

🔥 Speaking of unicorns, looks like they're going to be even harder to recognize

PitchBook analyzed the European venture capital market in the second quarter of 2023 and found that in the first half of the year, the total valuation of European companies valued at more than €1 billion was worth €442 billion. This compares to €446 billion last year. The bottom line (sad bottom line) is that the total value of European unicorns has dropped for the first time in a decade.

Image: PitchBook
Image: PitchBook

The reasons are clear: the high base effect, the exposure of unicorns to public market volatility, and also the "demographic crisis" — only 5 startups-billionaires were born in Europe in the first six months of the year.

At Uniborn, we believe this trend will continue until the end of the year — and then we can expect the market to revive.

See the PitchBook rationale for details.

🔥 A green light has been given to provide LPs with greater freedom and equality

Chances are you've caught wind of the recent shifts by the SEC. One of the fresh regulations puts a stop to fund managers cutting sweetheart deals with one LP that come with terms that hurt other investors.

This is indeed a positive indicator, not just for the American market, but for the entire venture capital community. Now, let's delve into Uniborn's take on the situation.

Image: Dmitry Samoylovskikh’s LinkedIn account
Image: Dmitry Samoylovskikh’s LinkedIn account

See the PitchBook analysis for details.

Cover image: Unsplash

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