Marc Andreessen breaks down why VCs bet on extreme outliers: of 4,000 venture-fundable companies yearly, only 15 reach $100M revenue and generate 97% of returns. He prefers backing extreme strengths even with flaws over safe, well-rounded bets.
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Two general concepts that I would share. So one is the venture capital business is 100% a game of outliers. It's extreme exceptions. So the conventional statistics are on the order of 4,000 venture fundable companies a year that want to raise venture capital, about 200 of those will get funded by what's considered a top tier VC. About 15 of those will someday get to $100 million in revenue. And those 15 from that year will generate something on the order of 97% of all the returns for the entire category of venture capital in that year. And so venture capital is such an extreme feast for famine business. You're either in one of the 15 or you're not, or you're in one of the 200 or you're not. And so the big thing that you're just looking for, no matter which sort of particular kind of criteria we talk about, they all have the characteristic of you're looking for the extreme outlier. The other thing I'd highlight that we think about a lot internally is we have this concept, invest in strength versus lack of weakness. And at first that sounds obvious, but it's actually fairly subtle. Which is sort of the default way to do venture capital is to kind of check boxes, right? So really good founder, really good idea, really good products, really good initial customers. Check, check, check, check. Ok, if this is reasonable, I'll put money in it. But what you find with those sort of checkbox deals, and they get done all the time, but what you find is they often don't have something that really makes them really remarkable and special. They don't have an extreme strength that makes them an outlier. On the other side of that, the companies that have the really extreme strengths often have serious flaws. So one of the cautionary lessons of venture capital is if you don't invest on the basis of serious flaws, you don't invest in most of the big winners. And we could go through example after example after example of that, but that would have ruled out almost all the big winners over time. And so at least what we aspire to do is to invest in the startups that have a really, really extreme strength along an important dimension and then be willing to tolerate some other set of weaknesses.
