Outsize Returns
Outsize Returns – A cartoon that illustrates how the power law of venture capital returns is becoming even more extreme.
Over the past few years, many of the investors backing Elon Musk‘s ventures have appeared repeatedly across SpaceX, X, and xAI. When Musk needed financing, he didn’t launch a broad fundraising process, but turned to a trusted network built over decades (e.g. Peter Thiel, Marc Andreessen‘s a16z). Similarly, when xAI raised billions, many of the same names reappeared.
The industry’s power-law dynamics are nothing new. Venture investors have always known that a small number of companies generate the majority of returns. Historically, the challenge was identifying those future winners before everyone else. But today, the challenge is gaining access to them at all. The most sought-after companies often raise capital through tightly connected networks of founders, repeat investors and strategic partners. Reports that some investors had only days to participate in Anthropic financing rounds illustrate this.
This has consequences for the entire VC industry. There are over 3,000 venture firms in the US, but perhaps only a few dozen firms ended up with positions large enough in SpaceX, OpenAI or Anthropic to materially impact fund-level returns. The question now is how many VC firms will generate the returns required to raise their next fund if they never gain meaningful access to the companies that define the asset class.
