Billionaires do not need to be defended. White people do not need to be defended. White billionaires certainly need no defending today. And yet a new book explores why venture capitalists, the people who have funded the addictive vital apps on your phones at crazy valuations and become personally monumentally wealthy even as many of these companies lost money, do not get as much credit as they deserve.
What’s better, the book makes a great case for it. The Power Law is the single-defining rule behind venture capital. It says that in an investor’s portfolio, many investments will die, some will generate middling returns, but a few will become such gigantic outliers that they more than compensate. The 80:20 rule -- that 80 percent of your returns will be made by 20 percent of your investments, that 80 percent of the world’s wealth belongs to 20 percent of people (or fewer) -- is deeply examined by journalist Sebastian Mallaby in The Power Law: Venture Capital and the Art of Disruption.
There are enough biographies of famous companies and famous CEOs. But Mallaby, an author of five books, and Paul A Volcker, senior fellow for international economics at the Council on Foreign Relations, argue that no one has really detailed the origins of their investors and their contribution to these companies, or connected the dots over the decades. It shouldn’t surprise you that venture capitalists in fact do more in life than tweet about why Web 3 will solve all the world’s problems, from poverty to traffic to that annoying sound your fan makes at night.
The Power Law skillfully traces the history of venture capital, beginning from America in the 1950’s, when Arthur Rock and Tom Davis started their own firm, invested in Apple. It traces key characters over the years, how they met each other, why Silicon Valley became so hot (as opposed to say Michigan or Montana), and takes you inside the world’s most influential VC firms- Sequoia, Accel, Kleiner Perkins, Benchmark and Andreessen Horowitz among them.
With anecdotes aplenty, the book establishes that giving founders money is almost the side business for VCs. “VCs transform a mere agglomeration of smart people into an inventive network,” it says, adding that VCs help hire senior leaders, help founders grow, oust them when they get erratic (for the most part) and back the most daring ideas.
If you are interested in how this world works, where do these billions of dollars come from, how do you stomach the risk that comes with startup investing, and what makes a good venture capitalist, and why are they so highly regarded, look no further. This book has compelling anecdotes and board room drama around the founding and funding of Apple, Yahoo, Google, Facebook, Uber, WeWork, Impossible Foods and others. Even as someone relatively familiar with tech stories of the last two decades, I found new details, for example about the lengths Mark Zuckerberg and Sean Parker went to piss off and dissuade Sequoia Capital from investing, and great context around why Kleiner Perkins Caufield and Byers, a revered Valley VC firm, eventually collapsed.
Written chronologically, Mallaby peels away layer by layer, quirks about VC firms that are taken for granted today. Why did funds start early stage investing? How did growth stage investments come about? How did China become a technology hub?
Mallaby also addresses criticism against the industry, that it does not back real technology or innovation, by showing that VCs invested in biotechnology, renewable energy and other more noble efforts than delivering a chocolate in ten minutes. In recent years, VCs have also been accused of letting founders run amok, leading to cultural, governance and business disasters- WeWork, Theranos and Uber among them. Mallaby says in some cases classic Valley investors smelled and avoided the trainwreck from miles out, while in others, the real issues stemmed from big investors such as Masayoshi Son’s SoftBank. I found this argument harder to buy because early Valley investors still had a ringside view of all the action and when they did react, it was too late.
He also acknowledges the awful lack of diversity in the VC industry, and sheds light on how Kleiner wanted to pioneer the change but eventually bungled it.
The chapters on the origins of Tiger Global Management, the hedge fund ruining every VC’s sleep; and DST Global, the Russian investor that gets less credit than due, are particularly fascinating, although Mallaby curiously has not mentioned Lee Fixel, Tiger’s key dealmaker until recently and Flipkart’s godfather, even once.
Another chapter dedicated to why Sequoia Capital thrived, how its leadership has evolved and what makes it special, is also masterfully reported and written. Mallaby shows why people are the heart of VC firms, and how Sequoia picked the right people, dealt with leadership transitions and is dominant despite serious competition. The parts on Sequoia China are illuminating too, even though the India section was too simplistic, with convenient conclusions from half information. India arguably merits more space in this book, and Tiger’s role in Flipkart, SoftBank’s in Oyo and SAIF Partners’ role in Paytm would have been a natural inclusion.
Mallaby’s writing is sharp and engaging for a subject that could be considered ‘technical’, and he zooms out often enough to set the larger context. He shows the various hats VCs have donned over the years, profiles the interesting ones and gives a peek into their lives.
I only wished the book shed some more light on the Limited Partners- the pension funds, endowments and family offices which actually give VCs money to invest. A section generally away from the media spotlight as well, it would have been interesting to see what they think of this tech revolution, their power equations and how they make decisions.
The sceptic could dismiss a book extolling the role of venture capital to be culturally inappropriate when inequality is sharper than ever, and large institutions need to be held accountable. But you could argue that they aren’t mutually exclusive, and while appropriately examining and critiquing their role and power, venture capitalists’ contribution to society, to your favourite companies, and impact on your daily life and the world at large, needs to be given credit. Mallaby does just that.
The Power Law: Venture Capital and the Art of Disruption By Sebastian Mallby Publisher: Harper Collins Available on Amazon
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