The large winners

Startup investment returns are governed by power laws. As a result, success in VC comes from investing in a few very large winners. This is why we look to invest in companies that have the potential to be $100M businesses in Turkey and $1B businesses in the US.

Based on my estimates, there are 10 to 15 tech companies with a valuation north of $100M that were founded in Turkey since the year 2000. So, being generous, that’s roughly one company per year. Not all of these companies will exit at a $100M+ valuation and other companies founded between 2000 and today will eventually go on to achieve $100M+ exits. Let’s assume that these two opposing effects cancel out such that there is an average of 1 tech company founded each year in Turkey that eventually goes on to achieve an exit north of $100M.

We can perform a similar analysis for $1B+ exits in the US. Fortune reports that as of 2016 there were 174 US tech companies with a valuation north of $1B. Assuming that each of these companies was also founded between 2000 and 2016, that’s an average of roughly 10 companies per year. Once again, many of these companies have yet to exit and may not exit at $1B+ valuations, and other companies founded between these dates will eventually go on to exit for more than $1B. Assuming that these opposing effects cancel out, there are roughly 10 tech companies founded each year in the US that eventually go on to achieve a $1B+ outcome.

It’s that 1 company per year in Turkey and those 10 companies per year in the US that really drive and feed the ecosystem. They’re the ones that serve as role models for aspiring new entrepreneurs, keep investors backing new startups in the hope that they might invest in a future large winner, produce the angel investors that reinvest in the ecosystem, create the experienced employees that want to taste success with their own startup, and give the media the meat of their coverage.

This isn’t to say that other companies don’t matter. The large winners aren’t known in advance. As a result, the competition produced by all the other companies is necessary to help unearth the large winners. This makes other companies an essential part of the ecosystem.

But the large winners are what drive startup ecosystems. Every player in the ecosystem depends on them.

Also published on Medium.