At a recent networking event I was speaking to a private equity partner about the nature of venture capital funding. He was commenting on how early stage tech investment is considered extremely high risk in most cases and the model is that if a VC makes 100 early stage investments, the top 5 will make 99% of the ROI, more than 50 of the 100 will probably go to zero, and the others will make very little. In the end it's the big winners that make it all worth it. Lately the big winners are being called "unicorns": The billion dollar valuations. With this in mind, the P.E. partner was saying that when VC's look for investment opportunities, they look for cases where the company seems more than even just successful, but actually lucky. The cases where the stars are just seeming to align for them: They appeared at just the right time in the market, they had the perfect connections and skills, etc. Again, the reason for this is that the VC is looking for that unicorn style company that can exponentially grow month over month and possibly give them that huge return. VC's often describe this by saying they are looking for companies that follow a power law, basically meaning the company doubles in users, revenue, or usage consistently by some short time interval.

Being that one of the other things I enjoy is spectating mixed martial arts it occurred to me that this is actually very similar to how the Ultimate Fighting Championship's business model works. At any given time the UFC employs several hundred fighters. At the time of writing this the UFC has 569 fighters on their roster. That said, people tune in to watch stars. A quick look at the pay-per-view numbers for UFC events shows a strong correlation between the popularity of the headlining fight and the revenue earned by the event. In other words, the UFC invests in hundreds of athletes hoping that a few will become the next big headlining star: See the recent treatment of Connor McGregor with UFC president Dana White admitting they spent more advertising his recent fight than any other fight in UFC history. Fighters are the UFC's mini startups. They don't want a pretty good fighter that seems like he can win a few fights. Just like VC's want the lucky company, the UFC wants the fighter that seems almost lucky. This means the fighter who seems to win fights when they should lose, their fanbase seems to grow no matter what they do, etc.

To bring this back around to venture capital, this is a good self check about your next possible VC funded idea: How will you portray in every way that you and your company are the lucky ones? Is your business idea really one that can grow exponentially? If not, maybe your idea is not something a VC could invest in, but rather a hobby or lifestyle business.