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Amit Somani
Sebastian Mallaby has written a beautiful history of the evolution of the Venture Capital (VC) industry starting from its roots in Silicon Valley five decades ago to now. The title “The Power Law” intends to show that the bulk of VC returns come from a handful of winners. But don’t let the title fool you - this book is an intriguing and enriching narrative of the founding of various VC firms, the personalities of VCs and the founders they backed. It also traces the journey of beliefs of these firms and this asset class! It is masterful storytelling laced with intimate facts clearly gleaned from a rich network of people close to the action and a lot of intense research.
Being a practising VC myself at a relatively young firm, Prime Venture Partners, I was surprised and inspired by many facts, stories and anecdotes about the Venture industry. For example, Don Valentine, the Founder of Sequoia, apparently took a year and a half to raise $5M for Sequoia’s maiden fund in the early ’70s. That fund had a staggering annualised return of 60 per cent. Another VC partnership, Kleiner Perkins, started the same year and took a different approach but had outstanding returns due to one outlier investment in Tandem.
Mallaby covers the entire stack of VC investing and how ‘capital’ itself has been disrupted both at the entry-level and at the growth stage. The likes of Paul Graham at YCombinator started by offering $6K stipends to write code and liberate themselves from needing to work at ‘software’ jobs much like the founding father of venture capital, Arthur Rock, offered to help liberate engineering leaders from semiconductor behemoths to create new companies.
A New Era of Investing
Power angel cheques of a few $100K from the likes of Peter Thiel, Ron Conway, Andy Bechtolsheim brought about a new era of early and quick capital for founders. Peter Thiel, having been an iconoclastic founder himself, is credited with being an evangelist of the belief that almost all returns in venture capital will come from outlier companies from contrarian founders. He believes that a solid, median return in VC is actually a ‘losing’ return. Not unsurprisingly, he’s famously quoted as saying competition is for losers. This style of investing pushed for hands-off, extremely founder-friendly, governance-light capital unlike the traditional activist VCs with strong governance mandates.
Disruptive capital extended to the later stages as well -- the game-changing entry of growth stage investors like Masayoshi Son of Softbank, Yuri Millner of DST, Julian Robertson of Tiger Capital, who would quickly write $100M cheques or more without even often taking board seats. Voting their shares with the founders led to interesting disruption, not just on the cap tables but also on governance matters. The curious case of Travis Calanick, the founder of Uber and Adam Neumann, the founder of We Work showed the downsides of unlimited founder power and pliant boards until a marquee firm like Benchmark took matters into its own hands.
He explores the geographic expansion of various Funds into other geographies, including China and India. He also talks about the lack of gender diversity in VC firms, while pointing out some legendary star women VCs, Shirley Lin and Kathu Xu, from China. They have consistently made the Global Midas list in an industry otherwise dominated by men. In addition to the VC protagonists, the book also sheds some light on fundraising by iconic founders from different eras - from Intel, Apple, Google, Facebook, Uber and more.
Different investing styles
The difference between the approaches of various funds is stark and remarkably, perhaps unsurprisingly, derives from the belief system of the Fund’s founders. For example, he talks about funds that succeed by investing on gut and instinct versus those that approach things with a ‘prepared mind’ (attributed to Accel founders). Some funds win by specialising in a sector, geography (even a Street!). In contrast, others bet on founders with certain traits like “Humanity in the founder” or the “Engineering Genius” despite prior management or business experience. Many funds have an active investment style and are willing to put in the elbow grease, while others pride themselves on being hands off to the extent of not even taking board seats and delegating their voting rights to the founders.
Skill versus Luck
The author attempts to answer provocative questions. For example, how much of VC investing is about skill vs luck? Can the best investments be predicted or can they only be discovered with time? What impact does the performance of the first fund have on the franchise? Does fund success beget more success? What leads to the downfall of certain franchises whilst others have succeeded at multi-generational transfers?
I remember having a private conversation with one of the billionaire founding legends of an iconic VC firm saying, you are only as good as your last deal. Andy Grove’s prophetic saying, only the paranoid survive, would seem to apply to VCs as well.
As Josh Koppelman of First Round Capital states, venture capital is jet fuel and if you are not interested in building or flying a jet, this may not be the right capital for all innovative businesses. Paraphrasing a legendary VC, Vinod Khosla, venture capital is not merely a business; it is a mindset, a philosophy, a theory of progress!
So whether you are an investor, an entrepreneur, or just a curious being, Mallaby’s book is an epic read on how bold entrepreneurs backed by bold venture capitalists have unleashed human potential.
(Amit Somani is Managing Partner, Prime Ventures Partners, a Bangalore-based early stage fund)
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