The problem is that the investors mentioned in the post aren't VCs-- they are angel investors. Putting in $100k on a $10M valuation and then getting diluted down over several rounds of venture means that angels don't get compensated for the risk they are taking, even with big exits. These investors also most likely don't have the bank accounts to keep participating pro rata.

CB Insights says that 50% of seed companies will go away. And the reward that angels are given to take this risk is a 20% discount to the next priced round.

However, one of the benefits of writing smaller checks or running smaller funds is that you're less dependent on monster exits. For investors who are going smaller, valuations and terms do matter a lot more than at typical venture funds (that are very dependent on monster exits).

> VC returns are incredibly power law driven - i.e. they come from the 10-15 companies per year that end up being monsters.

You're almost right. Early stage investing is very much power law driven, later stage (more VC than incubator territory) comes in several flavors, some more relying on outliers than others.

Plenty of VCs won't even look at companies that are not yet capable of generating substantial revenues and profits, they are there as growth accelerators or to diversify founder (and early stage investor) risk.

There are as many risk profiles as there are VCs, you can't just lump them all on one pile.