Fred Wilson has another excellent post up titled Venture Fund Economics: When One Deal Returns The Fund.  He continues his expose on how VC funds work and builds his thoughts in this post around the statement:

"Every really good venture fund I have been involved in or have witnessed has had one or more investments that paid off so large that one deal single handedly returned the entire fund."

I've been a partner in several venture funds and am or have have been an investor (LP) in around 25 VC funds since 1995.  I reach the same conclusion as Fred on slightly different data - every successful venture fund that I've been a part of in any way has had at least one deal that effectively returned the fund (I'm changing the assertion a little as I'm including the funds where there were several deals that each returned at least 75% of the fund.)

In 100% of the cases where there wasn't at least a deal that returned 75% of the fund, the fund was a loser.  I can't think of case that I've been involved in or seen the data from a situation where this hasn't been true (I'm sure this is at least one case, but my assertion would be that it's an outlier.) 

Fred explains it well, but the meta-message is that you have to have at least one home run in a venture fund (where home run is defined as returning at least 75% of the fund) to have a successful fund.  For tech VC funds, this is relatively easy to get your mind around for funds under about $300m.  Once you start getting into higher numbers (say - $1 billion funds), you quickly realize that to return $750m on one deal, you have to own 20% of a company with a value over $4 billion at the time you exit.  That doesn't happen very often.

Fred's conclusion is also right on the money as it's not about just stepping up to the plate and swinging for the fence.

Some will read this and suggest that our business is all about swinging for the fences. But I don't think so. There are hitters in baseball, the best hitters in fact, that hit balls out of the park when they are just trying to make good contact. That's how you have to do it in the venture business. You try to make 20 great investments and you work with them closely in hopes that four years in you have six or seven that have home run potential, and after ten years, you maybe hit one or two out of the park. If you try to hit every one out of the park day one, you'll strike out way too much and the fund won't work out very well.

Fred is doing a superb job with this series.  If you aren't already a subscriber to his blog, what are you waiting for?