The Power Law At Work

One of Collaborative’s portfolio companies was acquired earlier this year, generating a fantastic return on our investment.

For context, we originally invested in the company in its Series A round. In a relatively short timeframe the company was acquired for cash at about 16X the valuation we originally invested at. Our investment was diluted in subsequent financings, which brought our realized return to about 13X.

I share this for a few reasons:

Venture capital is a weird business. Our model assumes at least 50% of the companies we invest in will go out of business. The only way for a venture capital firm to generate great returns for its investors is to have outcomes that follow the power law curve. Which is what happened with this investment.

A few of our investments will drive nearly all of our returns. It’s easy to forget that on a day-to-day, or even year-to-year basis. But occasionally we’re reminded what the hard work of our investment team, and the companies we back, can turn into.