![]() ![]() These top one percentile firms invest in 0.5% of the deals they see, have three or four companies generating multiple times the entire size of the vintage in question, and a small proportion of their dry powder goes to the investments that don't perform, in some cases as little as 20%, which comes down to a rigorous and disciplined approach to deploying follow-on funds. The top one percentile, meaning those that generate better returns than 99% of their peers, generate outstanding returns of 70%, and even 90% in some cases. Top quartile VC funds generate strong returns of > 30% internal rate of returns (IRRs). Related: Middle East VCs Give You Three Industry Insider Rules To Note The final mathematical concept for investors to understand is that of "discipline," which is the discipline we have to maintain in only following on with further funds in those teams who demonstrate strong execution amongst other business drivers. ![]() It is worth noting that we have waited four years for the MENA ecosystem to grow and mature to a level whereby we will see 1000 deals this year. That means if we see 1000 deals, which we are on track to see this year, we will invest in <10 deals at the early stages. The other key mathematical driver to understanding our business model is that we invest in <1% of the deals that we see every year. We are in the business of taking calculated risks investing in strong entrepreneurial teams. Once this concept has been understood, it is then easier for our investors to understand our business model. In VC, our business model is governed by the "power law:" what this means in essence, is that out of every ten early-stage investments, around two will create all the returns and the rest will underperform by generating little to no returns. That means that most investments end up slightly below or ahead of the mean/median, and those investors that outperform an index, end up with a slightly higher weighting of their investments to the right of the mean/median. The business model of more traditional investment asset classes such as private equity and asset management is governed by the mathematical concept of outperforming on a normal distribution graph. Firstly, we need to address the business model of venture capital (VC), and in doing so, dispel the myth that VC is a "gamble," where we invest and hope for the best.
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