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The Power Law by Sebastian Mallaby

The Power Law by Sebastian Mallaby

by Parker · 96 things on NewTwos

Venture Capital and the Making of the New Future
Introduction - Unreasonable People
“All progress depends upon the unreasonable man. Most people think improbable ideas are unimportant, but the only thing that’s important is something that’s improbable.” - Vinod Khosla
Empower people who feel the force and let them work their magic
There is no glory in projects that will probably succeed, for these by definition won’t transform the human predicament
The best investment in a successful fund equals or outperforms the entire rest of the fund
The future can be discovered by means of iterative, venture-backed experiments. It cannot be predicted
Experts may be the most likely source of incremental advances, but radical rethinks tend to come from outsiders
Chapter 1 - Arthur Rock and Liberation Capital
“The people who invented the twenty-first century were pot smoking, sandal-wearing hippies from the West Coast like Steve Jobs, because they saw differently.” - Bono
“The greatest rewards were to be had from the most ambitious and least obvious projects; investors have to wait patiently for returns to mature over the long term; the best prospects involve advanced technology, not orange juice or fishing in Asia.” - George’s Dorion
Anything that helps you keep your confidence, when you have no reason to have confidence, is valuable
The venture investor must always be on call to advise, to persuade, to dissuade, to encourage, but always to help build
Seek out creative men with the vision of things to be done
Chapter 2 - Finance Without Finance
“The fortunes of the past were made by stringing steel rails across the country. The fortunes of my generation will come from mens minds.” - Tommy Davis
“Trying to play it safe in small companies is, to my mind, self-defeating.” - Tommy Davis
The best way to manage risk is to embrace it fearlessly
“Back the right people” - Tommy Davis
“The single most important factor in the long run for any company is management.” - Arthur Rock
Self-contradiction, wishful thinking, a fondness for ingratiation at the expense of honesty; these were the clues to pass on an investment. Intelligent consistency, gritty realism, fiery determination: these were the signs that he should seize the opportunity
Do they see things the way they are and not the way they want them to be?
Chapter 3: Sequoia, Kleiner Perkins, and Activist Capital
“The one thing worse than entanglement with government is entanglement with lawyers.” - Don Valentine
One of the greatest virtuous cycles of the American system: venture capitalists backed knowledge-intensive startups, and some of the profits flowed to research institutions that’s generated more knowledge
Venture capitalists are trying to figure out one thing: “Why is this a big market, and how are you going to build a really strong position in it?”
Early risk elimination and stage by stage financing is what worked for companies with the highest returns
Chapter 4: The Whispering of Apple
A brilliant person can do great things. A large group of people can try many things
New Enterprise Associates was founded in 1977 by Dick Kramlich, who made a ton of money from Apple, and two East Coast partners, and raised $45M for a fund in 1981
Chapter 5: Cisco, 3Com, and the Valley Ascendant
“Who is the absolutely best guy you’ve worked with?” - Bill Younger
Three reasons a startup fails:
The excessive ego of the founder
Too little focus on the most promising products
Too little capital
A MOST memo: Mission, Objectives, Strategy, Tactics
Metcalfe’s law: the value of a network rises with the square of the number of devices connected to it
A startups scarcest resource is time. Venture capitalists in Boston turned out to be champions at wasting it
Chapter 6: Planners and Improvisers
Accel Capital was the first venture partnership to position itself as a specialist in particular technologies
“Chance favors the prepared mind” - Louis Pasteur
Accels 90% rule: an Accel investor should know 90 percent of what founders are going to say before they open their mouths to say it
Accels motto: if you go for singles, the home runs will take care of themselves
Accel Telecom more than conformed to the 80/20 rule: 95% of its profits came from the top 20 percent of its investments
Venture-capital returns are dominated by grand slams partly because of the dynamics of startups: most young businesses fail, but the ones that gain traction can grow exponentially
Tech startups are founded upon technologies that may themselves progress exponentially
Venture bets are like financial options. You could never lose more than your initial stake, but the upside was unbounded
“It seemed like a high price, especially with what seemed like a twelve-year-old as the technology guru behind it.” But we remembered another one of Tom Perkins dictums: you succeed in venture capital by backing the right deals, not by haggling over valuations
In the internet age, it is worth paying whatever it might take for stakes in turbo-power-law companies
Chapter 7: Benchmark, SoftBank, and “Everyone Needs $100 Million”
The yahoo founders goal was to be playful, not boringly obsessed with revenues
Yahoo intended on raising money from venture capitalists while giving its product away for free
Moritz insisted that the name Yahoo was that precious thing, an inspired and memorable company name. Like Apple
Startups came to be assessed not according to this years revenue or even next years, but rather according to their momentum, traction, audience, or brand—things that could, in theory at least, be monetized in the future
The dirty secret was that Yahoo had no choice but build a brand, because it was not much of a technology company
Internet users were likely to gravitate to a single way of searching for information on the web. The winner would capture the lions share of line ad dollars
Yahoo could not simply invent a product, market it, and count on technological novelty to bring in sales and profits. Rather, it had to remain buzzier than its revivals, which meant that it had to project an aura of momentum
“If you are afraid of losing everything, you tend to take your chips off the table too early.” - Moritz
“One of the huge changes at Sequoia is we’ve been trying, without getting giddy about it, trying to imagine with some of these companies, what can he open if everything goes right?” - Moritz
If you gave founders too much money, they would lose focus, attempt too many things, and the resources would be wasted
Chapter 8: Money for Google, Kind of for Nothing
Angel investing was invented by Andy Bechtolsheim investing in Google
Google’s mission statement: “We deliver the worlds information in one click”
When Google went public that only gave a single vote to all public shares so Brin and Page would maintain power
“Spend as little as you can, because every dollar of the investor's money you get will be taken out of your ass.” - Paul Graham
Chapter 9: Peter Thiel, Y Combinator, and the valley’s Youth Revolt
When Max Levchin wouldn’t merge PayPal with X.com for a 40/60 split: do you want to forge a major company that will be remembered years from now? Or do you lack the character to make your mark on the universe?
“All failed companies are the same. They fail to escape competition” - Peter Thiel
The art of venture capital is to find rough diamonds, not to spend time polishing them
VCs should celebrate misfits not coach them into conformity
Peter Thiel believes a small number of huge, high conviction bets is better than a large spread of half-hearted ones
Chapter 10: To China, and Stir
“There are not many great companies in the world, if you’re lucky enough to find one, hold on. That’s how you make money.” - Kathy Xu
“Think global. Act local.” - Moritz
Chapter 11: Accel, Facebook, and the Decline of Kleiner Perkins
Accel invests in consumer and missed Skype, Tickle, and Flickr
The next time Accel came across an internet property that customers turned to multiple times per day, it should seal the deal no matter what
In a world of power law returns, the costs of missing out were higher by far than the risk of losing one times your money
The problem that bedevils most popular clubs: as more people join, the original vibe gets watered down, and the early loyalists grow disaffected
Chapter 12: A Russian, a Tiger, and the Rise of Growth Equity
In China, most social-media revenues came from selling virtual gifts
Stalking the Tenbagger by Peter Lynch
“To assess the outlook of a company, you talk to its customers.” - Julian Robertson
Andreessen and Horowitz would coach technical founders as the tough questions arose: how to motivate executives, how to rally sales teams and supply a Rolodex that a seasoned CEO would have
“There is no single decision you will make that will impact your company value more than the pricing.” - Ben Horowitz
“A higher offer from an acquirer means you should not take it.” - Ben Horowitz
Chapter 13: Sequoia’s Strength in Numbers
Chapter 14: Unicorn Poker
Capital is power. The more capital you have, the more options you have
Kalanick decided that money was power and that expert venture capital guidance was dispensable. It was a premonition of the troubles of Ubers future
Conclusion: Luck, Skill, and the Competition Among Nations
Success leads to success because of reputational effects
VCs are the coaches, not the athletes, but their coaching can make all the difference
The goal of blitzscaling is to establish market power—something approaching monopoly
A sector with so much influence on the shape of the future should take diversity more seriously