The Fundamental Law Of Early Stage (Angel/Seed) Investing

I have been making early stage investments since 1994. I remember the year because I invested in Mark Scatterday’s Pro-Innovative Concepts and it was a hit and I ended up leaving my job as a stock broker to go work with Mark. As Marc Andreesen says…’sometimes you know‘.

I have had my fair share of wins and failures investing in early stage companies since.

For the most part these days, I invest in early stage funds. I do that because finding the ‘star pupils‘ as Fred Wilson calls them is very hard. From Fred:

I was looking at the numbers on an early-stage VC fund that the Gotham Gal and I are invested in. I am not very familiar with the portfolio but this fund was formed in 2012. There are 24 names (investments) in the portfolio and 3 of them have produced 92% of the value in the fund.

This is more or less the pattern of every early-stage venture capital fund I have helped to manage and every early-stage venture capital fund I have invested in over the last thirty years. I believe it is a fundamental law of early-stage investing that a small number of investments will produce that vast majority of the returns.

From my own experience investing in funds, Fred is correct.

Even at our funds at Social Leverage, the star pupils carry the load.

If you want to make early stage investments, be prepared to make 20-30 to find your star pupils.