The following is a summary of Zero to One: Notes on Startups or How to Build the Future. I do not claim to own any of the book's original work, the following is simply a bulleted summarization with a few direct quotes. All copyrights and trademarks belong to their respective owners. Chapter 7 - Follow the Money:

• Pareto Principle (80-20 Rule) states that 80% of the effects come from 20% of the causes
  • Thiel says this effect also affects many social and natural things
• This chapter shows that: “where investors try to profit from exponential growth in early stage, companies a few companies attain exponentially greater value than all others.
• The Power Law of Venture Capital
  • VCs fund early stage companies in hopes of profit
    • raise money from wealthy people, pool it, and fund/invest it
  • If the company is successful, they take a chunk (usually 20%)
  • They make money when the companies they fund go public or are bought
  • Usually have a lifespan of 10 years (Companies take time to grow)
  • Most-venture backed companies fail and don’t get to be bought/IPO
  • VCs lose money at first, then hope the value of their funded companies will grow exponentially
  • VCs know that some funded ventures will fail
    • They try to balance their portfolio so that the winners counterbalance the losers
      • This pattern usually fails
      • Ventures do not follow normal distribution
        • They follow a power law
        • “...a small handful of companies radically outperform all others
  • “The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined
    • Implies that VCs should only invest if the company has the potential to return value of the entire fund
  • Since funds have great amounts of money to get the funds big returns, they have to net a lot of money.
    • $1.5 billion fund nets 80 million on a venture, would need 19 more to break even
  • This is why investors put a lot of money into single companies
  • “...every single company in a good venture portfolio must have the potential to succeed on a vast scale
• Less than 1% of businesses each year are VC backed
  • .2% of GDP in funding
  • But, venture backed companies created 11% of private sector jobs
  • and 21% of GDP
• “One market will probably be better than all others…”

  If you've liked this summary, I highly recommend you get the full book here: Zero to One: Notes on Startups, or How to Build the Future < Previous Chapter | Overview | Next Chapter > - Alec Kriebel