The Impact of Startup Growth and Venture Returns on Collective Memory: Insights from Mathematical Analysis

The Impact of Startup Growth and Venture Returns on Collective Memory: Insights from Mathematical Analysis

In the fast-paced world of startups and venture capital, one cannot underestimate the importance of growth and returns. A recent study titled "Startup Growth and Venture Returns: What We Found When We Analyzed Thousands of VC Deals" sheds light on the relationship between these factors and how they impact the success of a startup. Additionally, another study titled "Maths shows how we lose interest" explores the decay of collective memory and its implications for society. By examining the commonalities between these two studies, we can gain valuable insights into the dynamics of growth, returns, and memory.

The first study highlights two key reasons why seed-stage returns tend to be more extreme than later rounds. Firstly, startups experience faster growth in their early stages, which contributes to higher returns. Secondly, seed investments have a longer time frame to compound these higher growth rates. As a result, investors can increase their expected return by broadly investing in every credible deal at the seed stage. However, the study also suggests that even investors with the skill to pick deals may struggle to beat the index. Simulations reveal that fewer than 10% of investors will outperform the index, emphasizing the importance of diversification in venture investing.

To avoid missing out on the best seed deals, the simplest strategy is to invest in every credible deal. While this may seem counterintuitive, it allows investors to capture the potential of high-growth startups and benefit from their compounding returns. By spreading investments across a diverse portfolio, investors increase their chances of backing a winner. This strategy aligns with the findings of the study, which indicate that growth drops off in a startup's second year of funding and continues to decrease further. By investing in every credible deal, investors can mitigate the risk of missing out on startups that experience significant growth early on.

Now, let's shift our focus to the second study, which explores the decay of collective memory. The researchers analyze online views of Wikipedia profiles, citations of scientific papers, and online play counts of songs and film trailers. They discover that the decay of collective memory follows a mathematical law known as a biexponential function, which consists of two phases. The initial phase is characterized by a steep decline in attention, primarily driven by word-of-mouth transfer of information. However, the subsequent decline in attention is much gentler and slower, relying on cultural memory sustained by the physical recording of information.

This two-phase system of collective memory decay aligns with the insightful words of Chilean writer Pablo Neruda: "Love is so short, forgetting is so long." The initial decline represents the short-lived nature of communicative memory, which relies on oral transmission and is vulnerable to forgetting. However, the second phase, dominated by cultural memory, endures for a more extended period. Cultural memory is sustained by the physical recording of information, such as books, articles, and digital archives. This phase is less susceptible to decay and plays a crucial role in shaping identity and society.