Venture Capital is a Game of Power Laws—Why the Best Get Even Better

For years, conventional wisdom said diversification was king: don’t put all your eggs in one basket. But in venture capital, academic studies and industry data reveal an uncomfortable truth—the top firms keep winning, not because they do a bit better overall, but because one or two bets outsize everything else. This is the power law distribution: a few wins drive nearly all results, while most efforts hover near average or below.

This isn't just theory. Look at real returns: if a fund gets an early stake in a business like Facebook, that single investment can pay for every miss and more. Funds lacking that one rocket ride rarely make the cut, regardless of their 'batting average.' The cause? Positive signaling means elite firms get the best deals, which in turn cement their reputation, creating a self-reinforcing cycle.

Behavioral science approaches this as an example of feedback loops and inequality: small initial advantages snowball into massive outcomes. But there's a cost: breaking in as a new player is tough, and pure diversification can actually dilute you out of the winner's circle. Students of this pattern learn to focus energy where the payoff curve supports it, even at risk of sharp failures elsewhere.

Being aware of power laws helps you decide where to gamble and where to hold back, making smart bets in arenas—creative, business, or otherwise—where disproportionate returns are up for grabs.

When you look over your past projects, investments, or even friendships, try plotting them out—notice if just a couple deliver nearly all the real impact. If so, put extra thought into entering fields or circles where this dynamic holds, investing more fully in high-potential spots. Don’t spread yourself too thin: it’s the home runs that count, especially when competition is fierce and the odds aren’t evenly distributed. Draw this insight out on a paper, and commit to one power-law-driven focus area this season.