When Power Laws Collide, Incentives Do Too

Why the same math that drives venture capital’s biggest successes also creates its greatest misalignments

VC has always been a power law business. But never more so than today.

Historically power laws described exits. Now, it’s about fundraising:

• 12 firms collected 50%+ in the first half of 2025. It was 9 last year.

• 63% of capital went to $500M+ rounds this year up from 18% in 2021.

• 41% of all capital this year have gone to 10 companies.

The result is a growing divide between the top percentile and everyone else. For the former, the opportunity has never been greater. For the latter, potential for misaligned incentives—between founders and VCs, LPs—has never been clearer.

All to say, today’s market is less “buyer beware” and more “seller be aware.”

Big funds raise the stakes

Nearly all VC AUM growth over the past decade has come from $1B+ firms. These funds now control ~40% of all dollars raised, roughly double their share ten years ago.

Some of this organic as the venture market is maturing and successful funds do scale. $250M becomes $500M, then $1B.

But three expansionary shocks explain the accelerated trend. SoftBank’s $100B Vision Fund in 2017 normalized multi-billion-dollar raises. Cheap capital in the ZIRP era flooded the market in 2021. Now, AI’s allure of outsized outcomes justifies big bets.

Without a contractionary shock like the financial crisis, this trend will continue. And so, the stakes keep growing.

So do the biggest round sizes and valuations.

Rounds over $250M now appear twice as often as they did ten years ago and the average valuation has doubled.

In recent years, the standard deviation of valuations has grown, introducing a new cohort of have’s and have-mores.’ Power laws exist even at the very top.

These big valuations underwrite to even bigger outcomes.

Venture lore holds that your largest exit should at least return the fund.

This rule of thumb makes it easy to compare what “success” looks like for different funds and different scales.

The chart below uses indifference curves to illustrate the relationship between fund size, entry stage, and required exit value. Using Carta data on median ownership by round [Peter Walker], I estimated how much investors at each stage typically hold through successive rounds. Though data presented here is precise, it should be interpreted as only directionally accurate.¹

For example, take a $25 million pre-seed fund like Grid. In pure economic returns, we’d be roughly indifferent between a $230M exit after the Seed and a $430M exit after the Series D. Either would return the fund. If the exit is bigger, we return multiples!

Contrast this with a $1B fund. They may need a $7B+ exit to return the fund.

Founder math hits different

A startup CEO’s first job is to keep the company healthy and alive—through cash flow or external capital. The second is to create meaningful value for shareholders, resulting in a return/exit.

Fundraising accomplishes #1 but can complicate #2. Each shareholder, both founders and investors, defines “meaningful value” differently.

This is where incentives can diverge.

To illustrate, compare founding team proceeds (below) to venture returns (above). The chart below shows indifference curves for founder proceeds based on capital raised and exit value.

Consider the scenario of a $250M founding team payout.

In this data set, achieving it requires an exit in the $500M-2B range. For a $25M pre-seed fund, these exits double or triple the fund. But for a $1B growth fund, these outcomes barely move the needle.

A great outcome for founding team members and early investors, but only ok for later ones.

Welcome to Venture Purgatory

Despite an average of ~1,300 exits annually, only 50–60 exceed $500M. The average value if those is $2.4B.

That hasn’t deterred investors. VCs have created a growing backlog of 800+ unicorns. To clear it, exit volume would need to rise 3–5×—and that isn’t happening.

Take the 600+ unicorns minted in 2021. Roughly 25% have raised follow-on capital (40% of those at down rounds), ~15% have exited, and ~60% haven’t done either.”

For the latter, many didn’t choose this. They couldn’t raise. Performance plays a role, but structure does too. Big raises and high valuations limit optionality.

1. Fewer potential funders. As burn scales with each round, so does the check size required. Compare $150K in monthly burn to $1.5M. Thousands of firms can fund 24 months of runway at the former ($3.6M), but only a few hundred can at the latter ($36M). And those few hundred are often distracted by shiny new AI objects.

1. Fewer potential acquirers. A $1B valuation sets a high floor for enterprise value. Using a rule of thumb that acquirers target deals around 5% of their own EV, you’d need buyers worth $20B+. Only ~20 of the ~70 companies on BVP’s Cloud Index meet that bar.

The result is venture purgatory: companies too large or too mature for existing investors yet not compelling enough for new ones. Some backers quietly welcome a reset (RIF, down round, recap) while others are desperate to avoid one. Some investors just move on. But founders need to stay on.

Another source of diverging incentives.

The power law still rules exits

Some would say this misses the forest for the trees.

In a power-law world, it’s not about the thousand companies that will exit this year. It’s about the hundred that “matter,” and, more precisely, the ten that will drive most of the returns.

Encouragingly these top exits keep getting larger. (Note: the data below excludes small exits, so is based on a narrower sample than Pitchbook data above.)

Yes, exits still follow the power law too!

Perhaps even more so than before. Today there is only a modest growth in exit volume, but a huge growth in value—driven almost entirely by the very top. $500M+ exits now account for roughly 90% of total exit value, up from 50–70% pre-COVID.

This is the venture bet. If AI platforms exit according to expectations, we’ll see this ratio increase. Take OpenAI, reportedly valued between $300B and $500B. Investors are underwriting paths to $1T-plus outcomes... orders of magnitudes greater than even the top percentile exits today.

Diversification is the divide

As the absolute value of outliers grows, so does their importance to the market. When founders aren’t building that company, that’s where conflict ensues.

It’s rooted in diversification:

• Founders have virtually none. One company, often a decade+ of work

• VCs have some. E.g., 20–50 companies per fund, every 2–4 years

• LPs have a lot. E.g. A handful of fund commitments could create exposure to 200+

This matters because diversification changes both the odds and the stakes.

1. The probability of hitting an outlier goes up with diversification

2. As power law dynamics amplify, the of that outlier also goes up

From a $1B growth fund’s perspective, 20–30 positions provide a 97% chance of holding at least one top-decile company. For an LP with multiple fund commitments, the probability approaches 100%. Yet even those top-decile outcomes are marginal.

Not for founders. Their odds of building a top-decile company may be low (15% or less after raising mega-rounds), but the payoff is life-changing.

This dynamic explains big-fund behavior. LPs and large VCs need massive outcomes—top-percentile, $10B-plus exits—to make the math work. When exposure to an outlier is nearly guaranteed, it’s rational to push for the biggest possible outcome. Everything else effectively rounds to zero.

At the early stage, the algebra changes.

The probability of hitting an outlier is lower, but the impact is higher. A single breakout can 2–3× a small fund; a top-percentile win can 20× it. That creates far better alignment with founders, either of those outcomes are transformative.

For LPs backing smaller or seed funds, diversification still provides broad exposure to outliers — not as high as at the growth stage, but with far greater multiples on invested capital.

Find alignment, before it gets hard

The power law drives everything in today’s market.

Progress is faster. Rounds are bigger. Narrative takes over.

And while it all feels a little bananas at times, it isn’t irrational. It’s a reflection of the incentives of scale. Big funds take on size risk—deploying more dollars, earlier, at higher valuations—joining founders in pursuit of building the n-of-1 outlier.

Meanwhile, the smallest and earliest funds take on a different kind of risk. One less about size, more about access. Can they identify the outlier and successfully partner?

Founders are often most aligned with these early funds. But the market, incentives, and perspectives shift as the company grows. As founders graduate from round to round, they need to ensure everyone around the table stays aligned… and understands the expectations that come with how much capital is raised, from whom, and when.

Great founders do this and execute accordingly. They raise to capture demand, not to search for it. Because when a company performs to expectation, everyone wins.

But when it doesn’t, or when expectations differ, even a win can feel like a loss. The company can find itself caught in a distraction of conflict. As the power law expands, so too can the frequency and magnitude of these moments.

All in all, venture is as much about finding fit as it is finding potential.

It’s best when we have both.

1

• I assume only one investor per round, so these ownership levels are understated

• Ownership accounts for both investor dilution and option pool expansion

• Round naming (Seed, A, B, etc.) is mine. Carta used total capital raised as a proxy, so some translation error is possible

• In most, if not all, cases, numbers and values are inflated compared to reality given underreporting of small fundraising and exits.

• Furthermore, in cases where “teams” or “investors” are used, it refers to all of them, not an individual team or investor.