Average is intuitive. Almost every news summary, scientific paper and business report looks at an average. Average is a short-form summary of the normal distribution. In more depth, the normal distribution is described by deviations from the average, with larger deviations being less frequent.

Even the words average and normal provide an aura of comfort and safety. But that aura is false because the most important opportunities and risks in the world do not operate according to average, they follow power laws.

When we think of extreme outcomes, the initial ideas that spring to mind are negative: things like health problems, financial crashes and natural disasters. Although any single extreme negative event is unlikely, the probability of extreme negative events in general is actually very high because there are so many. Some, like financial crashes, are more cyclical in nature and happen with regular but unpredictable timing. Others, like health problems, are tied to a combination of complex genetic and environmental factors in a structural way: they typically get worse over time if left alone.

Although we struggle to predict individual negative outliers, we must build resilience into our lives in order to withstand them in general because something negative is inevitable. This means sacrificing efficiency and creating a drag on short-term performance. It does not matter how efficient you are currently if you cannot survive the next negative shock.

Power laws are not only negative. We can also find opportunities that follow extreme positive power laws. In healthcare, new discoveries are able to change millions of lives. In education, we are starting to make progress at scalable impact. In business, network effects are becoming more common. While individual positive extreme outcomes are difficult to predict in advance, they occur with enough frequency to believe that they can continue regularly under the right circumstances.

When evaluating opportunities, it is therefore extremely important to understand the upside potential of power laws. Any individual attempt at an extreme positive breakthrough seems unlikely, but having several different attempts increases the probability of success significantly. Importantly, the potential positive impact of that success is exponentially larger due to the inherent nature of power laws. This means that society and organizations should be aggressive in encouraging extreme breakthroughs even though the probability of a single breakthrough succeeding may be small.

So is there a paradox of power laws? People who focus on resilience tend to be conservative by nature. They are less excited by breakthroughs with a low probability of success. People who focus on breakthroughs tend to be aggressive by nature. They tend to worry less about resilience.

Although difficult, the ideal strategy is to combine resilience with breakthroughs. Focusing on resilience helps to protect against the inevitable downsides of power laws while focusing on breakthroughs helps to capture the upside potential of power laws.

Forget average because power laws are the real driver of risks and opportunities in the world.

There are two theories about the quantity and quality of entrepreneurs in the world: one is that the quantity and quality are fixed; the other is that our environment can change the quantity and quality of entrepreneurs.

Entrepreneurship is difficult to learn but so is reading and writing. We have seen how enhancing the environment can impact global literacy rates. So what are the factors that lead to more and better entrepreneurs?

1. Worse alternatives
A lack of economic stability and opportunity through traditional means has historically been the main driver of increased entrepreneurship. This is clearly the case now as jobs for life are not returning. Fortunately, unlike history, there are also other drivers which are fundamentally more positive.

2. Increased transparency
Previously entrepreneurs could only learn from firsthand experience, direct mentorship or outdated books which discussed the big success stories from previous decades. Now there is an endless, and timely, supply of online and offline information about what goes on behind the scenes at startups.

3. Decreased friction
Starting a company is still hard but it used to be a lot harder. It is now easier than ever to test market assumptions, build products plus services and scale with platforms. Early stage capital is more accessible and exponentially more productive because startup costs have collapsed and time to market has decreased significantly.

4. Globalization of startup culture
Startup ecosystems are growing across the world. It is still early and most of them need years or even decades to mature but these early seeds of entrepreneurship will grow in quantity and improve in quality over time.

5. Application and deployment
Even as new technologies are being developed on the horizon, there is still plenty of opportunity left in the application and deployment phase of more mature technology sectors. This application and deployment phase requires a more diverse skill set, allowing less technical people to create meaningful value by leveraging existing technology.

The idea that there is a fixed quantity and quality of entrepreneurs in the world is outdated because there are several structural shifts which are changing the environment to create more entrepreneurs and better entrepreneurs. Just as improved literacy rates helped society as a whole, the structural change in entrepreneurship is a cornerstone for building a better future.

Several years ago, I was tentatively toying with the idea of leaving my job on Wall Street and someone forwarded me a job description for something called an ‘Education Program Producer’ at a young, venture-backed, NYC-based tech start up.  Not only did it not make sense (at the time, education + tech start up = oxymoron), I almost immediately deleted it mostly because I never saw myself working in education. Sure, I believed in education and I valued education, but I most certainly didn’t want to work in education.  The word conjured up images of slow-moving organisations, underpaid teachers, inefficient practices, endless paperwork, cruel bullies, and overly demanding parents.  Being a teacher requires being patient and kind, two virtues that were not exactly valued in my then current line of work on the trading floor. As someone who had come to love the fast-paced, no bullshit attitude of the finance world, education is the last place I saw myself going.

I’m glad I didn’t let my obnoxiously judgmental attitude get the best of me and gave that job description a second glance because my experience at that NYC-based education start up changed my life forever.  Now, several years later and halfway across the world, I find myself doing everything I can to be involved in education.  I brought an education company to Asia, I joined a Fresco Capital because they are involved in education, I am making investments in early stage education companies, and now look – I’m even writing about education.

Since my obsession can, at times, feel out of character for an efficiency focused, mildly foul-mouthed, impatient individual like myself, I recently started asking, why the hell do I care so much about education anyway?  I mean, sure, if you ask someone if they care about education and they say “No,” they’re either ignorant, full of shit, or a psychopath.  But believe me when I say, I really care about it.  True education is all about asking why, so I decided I would dig a little deeper and try to figure out what about it resonates so much for me.

The word “education” itself comes with a myriad of connotations, but what I seek to do here is to minimise the emotional implications and figure out logically why it is so relevant and powerful.  Here’s what I came up with.  Three reasons: it is personal, it is sustainable, and it is scalable.  Hear me out.

1. Education is personal.

“It is personal.  That’s what an education does.  It makes the world personal.” – Cormac McCarthy

• Everyone has either had an education, or not.  Formal or informal, public or private, too much or not enough, your education has had an undeniable impact on where you are today.  For these reasons, everyone cares about education, everyone has an opinion on education, and everyone knows how important it is.  When you ask someone what their education was like, they will tell you with words but more than anything, you will see it in their eyes and feel it in their heart.  Engaging with individuals on this level is powerful and incredibly energising.  The connections I have made with people when discussing this topic have moved me to my core.
• Education is personal for me, too.  I may be selfish in my desire to change the world and not waste any time doing it, but I’m not an asshole.  I am infinitely grateful for all the opportunities I have been given, and I believe everyone deserves not only the opportunity to get what they want out of life, but also the privilege of being able to figure out what that is.

2.  Education is sustainable.

Give a man a fish, you feed him for a day; teach a man to fish and you feed him for a lifetime.”  – Proverb

• I care about the world I live in, mostly because I have to live in it for my entire life (unless space travel takes off, but that’s a different topic).  I want the world to be a better place, because then I get to live in a better place.
• I also value my own time.  Call me crazy but I’d much rather teach someone to fish and then move on with my life, than have people bugging me every day to give them fish.
• The beauty of education is that it never goes away.  Its presence, or lack thereof, impacts an individual’s every thought, word, action not just now but forever.

3.  Education is scalable.

“Give a man a fish, he eats for a day.  Teach a man to fish, he eats for a lifetime.  Teach him how to learn, and he’ll own a chain of seafood restaurants.”  – Someone on the internet

• Creating a sustainable solution is great, but sharing it with as many people as possible is even better.  Education is the most scalable solution to any problem simply because it empowers the individual.  This means its impact is not just lifelong, it can be worldwide.
• It’s very simple math, actually.  If I teach three people to fish, they each teach another three people, who teach another three people, who teach another three people, now 121 people know how to fish.  Definitely a lot more people will be eating fish than if I had just spent all day catching fish myself. And, selfishly, I don’t have to spend all day on a fishing boat.  Win, win.

The word “education” is socially, emotionally, politically loaded.  It means different things to different people and is undoubtedly scary and dangerous to try to tackle.  I don’t intend this post to make light of the weight of education, but instead to look at it from a practical standpoint and understand why it is a good place to focus one’s efforts.  Whether you’re a teacher, a student, an investor, or a business person, it’s hard to deny that education is the most efficient way to change the world.  And for what it’s worth, it sure is a hell of a lot of fun, too.

I was recently asked to speak at the opening event of Baker & Bloom, an innovative education center in Hong Kong that aims to empower young people with confidence through courses like social entrepreneurship, creative writing, and many others.  The topic was, “How can we create entrepreneurs and innovators?” A pretty powerful question that I am sure millions of people would love an answer to.  If we could just figure out how to effectively teach our youngsters to be gritty, driven, creative, and innovative, we could transform generations!  No pressure at all…

I started racking my brain for an answer and initially found nothing by a bad case of impostor syndrome.  What could I possibly have to add to this conversation?  However, as I reflected upon my own journey, it occurred to me that perhaps this problem of “creating entrepreneurs and innovative thinkers” is actually a false choice.  Perhaps we don’t need to create them at all.  I would argue that all children are born with a natural light inside them.  A natural penchant to create, to innovate, to affect positive change in the world around them.  Our job as educators, investors, parents, friends, and members of society is simply to figure out how to keep that light from dying out, to fan the flames of entrepreneurship within each child, and to empower them with the tools and the confidence to pursue their unique passions.

Of course, I’m not going to even pretend that I know how to do that, because I do not.  But I can share my own experience of how that light of entrepreneurship within me died out, how I was able to turn it back on again, and what I am doing now to keep the lights on for as many people in the world as possible.

When I was a child, I was incredibly creative, eager to try new things, and always trying to find a way to be different.  In second grade, I boldly proclaimed to my friends that I LOVED homework. I wrote a series of books about a cartoon aardvark named Dixie and her best friend, Missy the Chicken. I started a custom pillow business where I sold basketball shaped, heart shaped, and animal shaped pillows to literally anyone who would buy them, from my extended family, to my neighbors, to my computer teacher, Mr. Gilhooley.

But somewhere between the social pressures of trying to fit in, wanting to look cool but also wanting be successful, between attempting to work hard, play sports, be editor of the Yearbook, and study for the SAT’s, between getting into Harvard, wanting to be the “perfect student”, daughter, friend, or girlfriend, I forgot how to be weird, crazy, and to try new things.  Instead, I simply learned how to be the best according to other people’s standards.

As a sophomore at Harvard, I was recruited to work on Wall Street, within the Sales & Trading division at Goldman Sachs.  I had no idea what a “derivative” was, but I knew that it was an exclusive world that was very competitive and fast-paced, filled with smart people, and that I should be grateful for such a sought after opportunity.  Throughout my four years at University, in spite of career counselling, academic advisors, and a diverse group of friends, I can honestly say it never even once occurred to me to do something else.  So, after graduating with a degree in Economics and Film Studies, I joined the Equity Derivatives team at Goldman in New York.

My parents were extremely proud, people were always impressed by my business cards, I was able to support myself and even save a little money, and a lot of people wanted to have my job.  I felt lucky, but I was sad.  I was busy, but I was stressed.  I absolutely hated myself for not just being grateful for what I had, but there was no spark. I had no idea what it was, but something was missing.  Somewhere along the way, that crazy pillow saleswoman had closed shop and that little light inside me had gone out.

In 2012, I decided to do something about it.  I took a leap of faith and left Goldman to join an early stage education start up in New York City called General Assembly. I was an early member of the team and saying I got thrown into the deep end is putting it lightly.  I was tasked with building out their long-form courses for practical digital skills for entrepreneurs – programs to teach people how to code, digital marketing, data science, user experience.  All amazing skills, none of which I knew how to do.  It was completely overwhelming, but all of a sudden it was like someone turned on the lights and the world had gone from black & white to full colour.  I was learning new things, solving problems, creating completely new possibilities for myself and for others, I was engaging with other incredibly talented individuals in ways that came very naturally to me, but I had completely forgotten how to do.

Not only was I experiencing a change within myself, but by creating education programs that empowered others with the same experience, I was watching that light turn on within each and every student we had.  Our programs were geared toward adults, toward working professionals who, just like me, had been jaded by the real world and somewhere along the line, their lives had lost their spark.  I could see their eyes light up and their worlds turn to full color as they found themselves building their own websites, launching their own marketing campaigns, making their own dreams a reality.  All things they had always said they wanted to do, but had forgotten were completely within their reach.

Once I got a taste of my childhood back, the entrepreneur within me came back with a vengeance and I haven’t looked back since.  People tell me I am crazy all the time, but I can’t help that I just keep thinking bigger and bigger.  After seven months building out the education programs and team at General Assembly in New York, I decided I was going to move to Hong Kong and launch their business in Asia… they just didn’t know it yet.  I pitched the founders on why they should let me give it a try, they told me I was insane, that I was completely inexperienced, but I didn’t care.  I wouldn’t take no for an answer.  They finally said yes, and in 2013, I incorporated General Assembly Hong Kong.

From nothing, we started launching all types of education programs to empower entrepreneurs in Hong Kong. After just nine months (and very little sleep), we had dozens of amazing teachers on board, 2,000 students had come through our doors, we had formed countless partnerships, and I even had a full-time team of six people.   Then, in January of this year, I took on a whole new challenge when I handed off the business to a new Director and joined Fresco Capital, a seed stage fund investing in entrepreneurs around the world.

I have been learning a lot as an early stage investor but I just couldn’t stay away from the power of education and the magnitude of the work that needs to be done to make sure that everyone has what they need to keep the lights on and to see the world in full color.  Again, I can’t pretend to have any idea how to do that, but I know I can contribute.  So, now, we are raising a new fund at Fresco specifically to invest in entrepreneurs who are starting businesses in education technology.  The goal of this fund is to scale our impact as much as possible – to leverage our capital, experience, and network to help change the system, one business, one entrepreneur, one student at a time, one light at a time.

I share my experience here to highlight that the challenge of encouraging innovation and entrepreneurship is not about shaping our children as individuals.  They are already filled with infinite capability and wisdom.  Our challenge is banding together to shape the system so that it fuels their passion instead of stiffing it.

There’s been a lot of talk recently about female founders, discrimination in the start up world, and what we can do about it.  There have been countless articles, studies, and op-eds talking about what are the challenges for “female entrepreneurs”.  Those who have the courage to express their opinions and personal experiences are simultaneously praised for their bravery and viciously criticised for their skewed interpretation of the issues at hand.  There is no obvious answer for, “Why do only 13 percent of venture-backed companies have at least one female co-founder?” or “Why do women make up only 4.2% of partner level VC’s in the US?”  It’s dumb and unfair, and I want to be part of changing those numbers.  In order to do that, though, I have to stop walking on eggshells and own up to something important.

Regardless of my opinion on these issues, I must admit I often find myself holding my tongue and not saying what I really think. Not because I’m afraid of disagreement – I’m fine with that. It’s much more shameful to admit than that.  Mostly, I am afraid to let go of the idea that I can be totally objective.  That’s the ideal, isn’t it?  I don’t want to be seen as “biased”, “sexist”, “unsupportive” or “overly supportive”.  Especially when I am making decisions to invest or not invest on behalf of our partners, the last thing I want them to think is that my analysis may be skewed by prejudice.

However, it is precisely this fear that is keeping these unbalanced statistics firmly in their place.  Forget the numbers themselves, the conversation about minorities and entrepreneurship is not going anywhere until we all get real, acknowledge where we are coming from, and start saying what we really think.

Let’s face the facts — absolutely every single person is biased when it comes to gender issues.  Except for a very small subset of the population who have experienced the world as both genders at different times (who we should all pay close attention to because they can provide the most accurate description of the differences between society’s perceptions of men and women), we are born either a man or a woman.  You can’t help how you’re born, or how you grew up, or the set of experiences that have formed your current mindset.  So, guess what?  You are biased.  I am biased.  We are biologically hardwired to be biased.  So why is everyone pretending that they’re not?

Instead of striving for complete objectivity, we should all take ownership of our biases so we can fully embrace and benefit from diversity.  Diversity of experience, mindset, and purpose is a competitive advantage, but only if we allow it to be by being honest about where we’re coming from.  Hello, I am a white American female in my late-20’s. I went to an Ivy League school, worked on Wall Street, then at a VC-backed education start up in New York and Hong Kong.  I now live a privileged life of an expat in Asia.  Does that define who I am?  No.  Has it shaped how I see the world?  Absolutely.

As a woman in VC, I want to support female entrepreneurs.  I really do.  But yes, sometimes I am unintentionally harder on them than their male counterparts.  I have experienced the disadvantages of being a woman in male-dominated industries like finance and tech.  I believe I have had to fight a little harder than a male in my position would have, and sometimes I take that out on other women by expecting the same from them.  I am very aware of this bias.  I’m owning it right here, right now.  I hope I can change that, but I’ll never have the chance if I don’t acknowledge it.

As part of a team of two at Fresco, we come from different backgrounds, life experiences, professional capacities, and personal interests.  We communicate well, but most certainly approach problems in different ways.  Being aware of our differences and open to new ways of thinking has been a huge advantage for us in the investment process.  Out of our 28 companies, 50% have at least one female co-founder.  We don’t have quotas, and we never set out to encourage female co-founders, it simply happened as a byproduct of owning our biases and staying open to new possibilities.  I hope that through continued awareness and honesty, we can continue to peel back the layers of our own prejudices and create the space for diversity to truly flourish.

For entrepreneurs, there are always way too many things pushing and pulling in different directions. Being able to prioritize is key. But everything seems important. Everying seems urgent.

Start with the basic basics.

First, survive. Seems obvious, but if all your advisors and investors are telling you to go big, and they’re really smart people, it’s easy to forget about this most basic rule. It’s good to fail small and fail fast. But also make sure to survive the failure. It’s no good to fail if you can’t get up again. The most successful founders have an uncanny commonality: the ability to survive.

Second, explore. True exploration feels like zero progress. Everyone around you will tell you to focus. To stop messing around. To get on with it. The problem is, you need to find it first. This takes time and mistakes. In theory, this is all about fail fast, fail small. In reality, this is slow and painful.

Third, build. Once you find it, there’s something to build out properly. Don’t mess around. Yes it’s fine to test assumptions. But now is the time to build. Usually, it’s easier to start small. Find a great solution to a small pain point. Then use that to grow bigger.

Of course, there are many other things to do. Plenty of details to manage. Issues to consider.

But start with the basic basics.

Survive first. Explore second. Build third.

One of the worst parts of investing in early stage companies is saying no. A lot. We say no more than 100 times for every 1 yes.

Since our investment philosophy is people first, some assume that people are our only filter. They believe yes means we like the team and no means we don’t like the team. But that’s not the case. We also need to have conviction about the business and market plus of course need to be comfortable with the deal structure. As a result, there are many times when we say no even though we like the team a lot. That’s not fun for the team, or for us.

So why do we bother to give a clear no? Why not simply hang around on the sidelines with a maybe? Especially since it’s probably better for us, just in case the deal becomes hot and we can jump in at the last second.

Because that’s not fair to the team. We hear too many stories of investors playing games with entrepreneurs, resulting in wasted time. In addition to being fair with time allocation, we also try to be clear with feedback and give specifics of why we are saying no. If we have done serious work on the opportunity, by definition it means that we have been impressed by the team, and so we try to make this feedback useful for them. Once again, too many investors give a one line no, without any context for the decision.

Although there are no short term benefits for saying no clearly, we strongly believe that there are long term benefits for us by taking this approach. Great teams appreciate clear feedback, good or bad. When teams are doing due diligence on us, they inevitably speak to others who have received a no from us and how we act in these situations is a reflection of our overall approach. Great teams are smart enough to appreciate the connection.

So, even though it’s no fun for anyone, we will continue to say no a lot. Even to teams we like. Knowing that it’s the right thing to do for them and for us.

Venture capital is a risky asset class. So it would seem to be prudent for investors in venture capital to focus on the largest funds.

After all, by definition of their size, large funds have convinced other investors regarding their skill. This is social proof. Large funds should benefit from their additional management fees being deployed for additional resources. This is economies of scale. Large funds should get higher quality dealflow. This is network effects.

Altogether, this is the power of a strong brand. The expectation is that size and quality are related.

Let’s inspect the data. One of the most comprehensive recent studies was done by Silicon Valley Bank on 590 venture capital funds in the US using data from Preqin covering funds of at least US$50mln in size with vintage years from 1981 to 2003.

There was was a clear difference in performance. Large funds, defined as >US$250mln, struggled to generate attractive returns, with only 3% returning at least 3.0x while smaller funds, defined as US$50-250mln, did much better with 22% able to return at least 3.0x. In addition, the gap was consistent across all measures of return. On the flip side, the risk of getting less than a 1.0x return was lower among small funds.

Since there is potential for some cycle specific issues to impact the data (large funds were mostly raised during 1999-2000, the worst time to invest), a second approach was used comparing fund sizes in each vintage year. The conclusions were even more skewed in favour of small funds. In this case, larger than median funds were never able to return at least 3.0x while smaller than median funds were able to return at least 3.0x during 31% of the time. Once again, the gap was consistent across all measures of return while the risk of getting less than a 1.0x return was lower for small funds.

Why do smaller funds have consistently higher returns and lower risk? The first point brought up by Silicon Valley Bank is better alignment with investors. “As the managers of such funds earn relatively less from management fees, they have a stronger incentive to focus on portfolio performance in order to generate wealth through carried interest.” (Weber & Liou, Silicon Valley Bank).

There are several other possible causes, many of which relate to the fundamental challenge that running a US$500mln fund requires extremely large, and rare, exits to make a difference while running a US$50mln fund allows for more flexibility in the size of exits needed to generate high returns.

Does this mean that all large venture capital funds are bad and all small seed funds are good? Of course not.

What it does mean is that, statistically, managers have to be exceptionally skilled to generate excess returns at large funds. In fact, the same team running a large fund would probably be able to generate higher returns at a small fund. Conversely, as small funds get larger than US$250mln, investors should start to become more worried about the negative impact of size on performance.

For investors in venture capital funds, these are some sobering conclusions. It means that playing it safe and investing in large funds is actually a higher risk, lower return proposition. Conversely, investing in smaller seed funds results in a better return and a lower risk of earning less than 1.0x. When it comes to venture capital, small is the sweet spot.