Understanding the Power of Law in Venture Capital

This year's HHL SpinLab Investors Day discussed one of the central questions of the VC world: Why do only a few venture capital firms succeed in producing unicorns and why do so many others fail? Under the title “Power Law - Why some VCs produce many unicorns and most VCs none”, Chris Burkhardt (2150vc), Ertan Can (Multiple Capital), Martin Böhringer (Staffbase) and Maximillian Mayer (Activant Capital) discussed the mechanisms, opportunities and myths behind power law in venture capital.

What is the power law in the VC context, and can it be intentionally achieved?

In venture capital, returns follow a power law: a few investments generate the majority of a fund’s returns, while most contribute little. As Maximilian Mayer explained, a fund’s success often depends not on the average performance of its portfolio, but on a few extreme outliers. Ertan Can called this dynamic the “key in venture,” defining it as returns driven by a single exceptional company.

Imagine a venture capital fund that makes 20 investments. Of these, 15 startups fail completely and return nothing. Four others manage to achieve modest exits, collectively bringing in a total of €20 million. Then there is one exceptional outlier: a startup that becomes a unicorn and eventually returns a staggering €400 million. In this case, that single investment accounts for roughly 90% of the fund’s total returns. This is a textbook example of the power law in action, where a tiny fraction of outcomes drives the overwhelming majority of value. This dynamic is precisely why venture capitalists are so focused on identifying and winning a stake in potential breakout companies: because in a power-law-driven world, catching even one unicorn can determine the success of an entire fund.

Insights from the Vintage Europe VC Outlook 2025

This concentration of outcomes is not just theoretical.It’s vividly documented in the latest Vintage Europe VC Outlook 2025. According to the study:

• In recent European fund vintages, just the top 10% of portfolio companies generated over 70% of total value, and in some mid-sized funds, the top 5% of investments delivered more than 60% of returns.
• The report also revealed that the top 1% of European VC-backed startups accounted for over 35% of all value creation.
• This has actually intensified post-2020: the gap between median and top-decile outcomes has widened, making it even more critical for funds to secure stakes in the few breakout stars.

Interestingly, the study highlighted that several mid-sized European funds (€200M–€500M) are now outperforming comparable U.S. funds on Total Value to Paid-In, mainly due to sharper focus, disciplined capital deployment, and riding these outsized winners. Yet, even these funds still rely on one or two exceptional companies to deliver the majority of their success.

Unicorns aren’t guaranteed

Can this success be engineered or predicted? Short answer: no. While you can improve the odds, there is no formula. No one can reliably predict unicorns, and anyone claiming otherwise isn’t credible, said Ertan Can. Mayer and Can also highlighted the importance of ownership: a billion-dollar company means little to a fund if it holds only a tiny stake — ownership must be aligned with fund size.

According to Can, the chance of backing a unicorn early on is just one to two percent. Still, this uncertainty is the price for potentially exceptional returns. Chris Burkhardt emphasized that structure and strategic focus matter, but so does how you define success. There is no instruction manual on how to discover a unicorn, as many external factors — such as luck — play a major role. As Burkhardt put it, funders should focus on readiness to transform. Mayer agreed, underscoring resilience, the ability to break through barriers, and teamwork as key ingredients.

All experts also agreed on the appropriate extent of a VC’s involvement in management. VCs should create the right environment, not run the company. Founders know their business best. As Can put it, if a CEO isn’t the right fit, it’s the VC’s mistake for funding them. A VC’s true value lies in their network, opening doors to markets, customers, and talent.

Why the Right VC makes all the difference

Martin Böhringer, founder of Staffbase, argued that choosing the right VC isn’t just about finances, but also values and trust. His advice: bootstrap as long as possible and take VC money from investors you enjoy working with. While founders must think big, real progress comes with the right partners — hands-on, customer-focused investors who help the startup stay aligned. Böhringer also highlighted that success requires hard work, great talent, and plenty of luck.

In conclusion, unicorns aren’t guaranteed, but they’re possible within the right system. Success can’t be forced, but structures, strategies, and networks can improve the odds.

If your startup needs support with funding, help finding the right VCs, or guidance on what to watch out for during a financing round, apply to our accelerator program!

This article was written with Elisabed Lejava.