Peter Thiel recently talked a little about this[1] counter-intutive phenomena (that pg states as
that effectively all the returns are concentrated in a few big winners):
One intuition is that people do not believe in a power law distribution. They intuitively don’t believe that returns could be that uneven. So when you have an up round with a big increase in valuation, many or even most VCs tend to believe that the step up is too big and they will thus underprice it.
Which is intersting, because he actually talked a little to pg about this during the class where he said it:
Peter Thiel: Do Y-Combinator companies follow a power law distribution?
Paul Graham: Yes. They’re very power law
But Thiel was not happy just stating the phenomena, but he also states on why most people discredit it, when he talked about secrets[2]:
The power law secret operates similarly. In one sense it’s a secret about finance. Startup outcomes are not evenly distributed; the follow a power law distribution. But in another sense it’s a very human secret. People are uncomfortable talking about inequality, so they either ignore it or rationalize it away. It is psychologically difficult for investors to admit that their best investment is worth more than the rest of their portfolio companies combined. So they ignore or hide that fact, and it becomes a secret.
The distribution secret also has two sides to it. Distribution is much more important than people think. That makes it a business secret. But it’s a human secret too, since the people involved in distribution work very hard to hide what’s going on. Salespeople do best when people do not know they’re dealing with salespeople.
[1] http://blakemasters.tumblr.com/post/21869934240/peter-thiels...
[2] http://blakemasters.tumblr.com/post/22866240816/peter-thiels...