The Power Law: Capturing Outliers in Seed Investing

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  Published in Stocks and Investing on Monday, May 18th 2026 at 1:05 GMT by 24/7 Wall St.

The Power Law Dynamics

At the heart of Lindzon's philosophy is the "Power Law." In traditional diversified investing, such as index funds, the goal is to achieve a steady, aggregate return where the average performance of the portfolio dictates success. Seed investing operates on an entirely different mathematical plane. In this environment, returns are not normally distributed; they are skewed heavily toward a tiny minority of outliers.

In a typical seed portfolio, a significant percentage of companies will go to zero. A smaller portion may return the initial capital or provide a modest multiple. However, the entire economic viability of the fund or the individual's portfolio depends on the "home run"--the single company that returns 50x, 100x, or 1,000x the original investment. This single outlier does not merely supplement the other returns; it pays for all the losses and generates the total profit for the entire portfolio.

The Psychology of Loss

Accepting that most investments will fail requires a psychological shift. Most investors are conditioned to avoid loss (loss aversion), but Lindzon argues that in seed investing, the fear of loss can be a hindrance if it leads to over-managing a portfolio or avoiding the high-risk, high-reward bets that create the Power Law effect.

When an investor focuses on the "batting average"--the percentage of companies that survive--they are using the wrong metric. The relevant metric is the "slugging percentage," or the magnitude of the wins. By shifting the focus from the frequency of success to the scale of success, the investor can maintain the emotional resilience necessary to withstand a series of consecutive failures without abandoning the strategy.

Strategic Implementation

To leverage the Power Law, seed investors must prioritize scalability and disruptive potential over immediate stability. A company that is "safe" and grows linearly is often less valuable in a seed portfolio than a company with a higher risk of failure but a theoretical ceiling that is exponentially higher.

Furthermore, this approach necessitates a level of diversification that allows the investor to stay in the game long enough to hit an outlier. Because it is impossible to predict with certainty which seed-stage company will become the outlier, the strategy becomes one of increasing the number of high-quality "lottery tickets" held, while ensuring that no single failure can bankrupt the investor.

Key Details of Seed Investing Philosophy

• Failure Rate: The vast majority of seed-stage investments result in a total loss of capital.
• The Power Law: A tiny fraction of investments (outliers) generate the bulk of the total returns.
• Metric Shift: Success is measured by the magnitude of the wins (scale) rather than the frequency of wins (probability).
• Risk Tolerance: High loss aversion is counterproductive; failure is viewed as a necessary cost of capturing exponential growth.
• Portfolio Construction: Diversification is essential not to minimize risk, but to maximize the probability of capturing a high-multiple outlier.
• Scalability focus: Priority is placed on companies with the potential for explosive, non-linear growth over those with predictable, linear growth.