The Power Law: How to Pick An Investor
Don't set up a business to fail 9 times out of 10.
In the card game of Hearts, your goal is to accumulate the fewest number of points each round. Each heart-suited card is worth 1 point and the queen of spades 13 points, for a total of 26 possible points. Players try to finish each round with as few points cards as possible.
But there's another way to win a round: shooting the moon, when you do the opposite of what you would normally do, collecting all cards worth points. When you accumulate all hearts cards and the queen of spades, you finish a round with zero points and cause your opponents to take 26 points each instead. If you miss by just one card though, you will probably lose the entire game.
The power law
Great fortunes have been won and lost by trying to shoot the moon.
In venture capital investing, there is a "power law" concept: that a single investment can return orders of magnitude more than all other investments in a portfolio combined.
In my experience as a founder who has raised over $200 million and pitched hundreds of investment firms over the last decade, I have met two types of investors:
- Investors who try to shoot the moon
- Investors who don't try to shoot the moon
I have met smart investors who use each strategy, and investors can make money using either strategy.
But this math is very different for founders and employees, which we'll show below.
Shoot the moon?
Founder beware of cheap capital that pushes growth at all costs.
Investors who try to shoot the moon build a portfolio of extreme bets. Growth at all costs. Even once a company reaches hundreds of millions dollars in revenue, it should try everything possible to reach 200% annual growth, business fundamentals notwithstanding.
