From Project Syndicate, April 15, 2022:
Sebastian Mallaby's new book offers a detailed exploration of how US venture capital became the go-to model for commercializing innovations at the technological frontier. But no industry exists in a vacuum, so it is important to consider precisely why this model evolved where and when it did.
Together, Mallaby, Nicholas, and O’Mara offer a comprehensive survey of how capital is mobilized to finance high-risk ventures at the technological frontier, whereas historian Christophe Lécuyer’s Making Silicon Valley, published in 2005, provides the essential “pre-history” by taking the story back to before World War II. Both perspectives are essential to understanding what gave rise to and has sustained the world’s premier hub of technological innovation. The Power Law is especially valuable for its deep dives into the lives of leading VC funds and the firms that they have created and led. Mallaby gained access to and won the confidence of two generations of VC leaders, and his book is all the more impressive for its (selective but effective) integration of the burgeoning academic literature on VC and entrepreneurship.
Mallaby’s focus on the most significant and financially successful venture investors fits well with two well-established “stylized statistical facts” of professional VC: that the industry has yielded extraordinary returns over the four decades for which we have reliable data; and that a very small number of firms are responsible for those returns. This extremely skewed distribution of returns expresses the “power law” of Mallaby’s title. Mallaby starts by recounting how Arthur Rock “liberated” the “Traitorous Eight” founders of Fairchild Semiconductor from the dictatorial grasp of William Shockley, the co-inventor of the transistor who by that time had left Bell Labs, in New Jersey, to set up shop in Mountain View (where his ailing mother was still living in Palo Alto). The book then walks us through a succession of venture champions and their distinctive styles and triumphs: Tom Perkins of Kleiner Perkins and Don Valentine of Sequoia, both firms founded in 1972; Arthur Patterson and Jim Swartz of Accel, founded a decade later; the team at Benchmark, launched in 1995 just in time for the dot-com bubble; and, most recently, Marc Andreessen and Ben Horowitz of the eponymous firm. Mallaby guides the reader through the problematic but generally successful passing of the torch to the next generation (John Doerr and Vinod Khosla at Kleiner Perkins; Mike Moritz and Doug Leone at Sequoia). He details how Kleiner Perkins lost its edge in the years after the dot-com bubble, and how Sequoia renewed itself as the most successful of all VC firms over a 50-year span. As the narrative approaches the present, familiar recent players appear, including the aggressively contrarian Peter Thiel of the “PayPal Mafia” and Founders Fund; and Paul Graham, the imaginative inventor of the first entrepreneurial “incubator,” Y Combinator.
The Cult of the Entrepreneur
Behind the personality profiles, Mallaby tells the story of Silicon Valley and its VC enablers in three acts. In the early days, risk capital was scarce and the “Golden Rule” of VC held: “He (it was virtually always a ‘he’) who has the gold makes the rules.” But as capital began to flow west in the 1980s, competition between funds became the defining feature of the game. Then, as the new mode of finance became an industry, Mallaby suggests, competition yielded to coordination among venture capitalists who orchestrated strategic partnerships across their portfolios.The current VC epoch has been characterized by “nontraditional” funders who have found their way to Silicon Valley’s fountain of value. The most visible, Masayoshi Son of SoftBank, made his first pass through the Valley during the dot-com bubble and then returned on a gargantuan scale with his $100 billion Vision Fund. The Russian-Israeli entrepreneur Yuri Milner, who arrived in the Valley around the same time, was both more discreet and far more successful as an investor. These outsiders turned the classic VC model inside out. The old way involved intense scrutiny of the entrepreneurial team and its technology, with close, active, board-level engagement. But the new VCs conducted minimal due diligence and wrote checks with the promise never to seek board representation. As a result, founders became increasingly entrenched, with many of them holding super-voting shares. The capital and valuations offered were irresistible. In 2021, the aggregate amount of capital invested in VC-backed deals in the US reached an astounding $330 billion, of which some $250 billion came from “nontraditional” sources. Moreover, the median late-stage financing round valued these private companies at no less than $500 million. Globally, almost 1,000 venture-backed companies had achieved “unicorn” status: a nominal valuation of at least $1 billion. The new investors were snatching up shares they could not sell and backing founders they could not fire....
....MUCH MORE
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Christophe Lécuyer, Making Silicon Valley: Innovation and the Growth of High Tech, 1930-1970, MIT Press, 2005.
CAMBRIDGE – In his new book The Power Law, Sebastian Mallaby has produced a rich and rewarding account of how Silicon Valley co-evolved with the professional venture capital (VC) industry since the late 1950s. His book complements two other recent works: VC: An American History, by Tom Nicholas of Harvard Business School, and The Code: Silicon Valley and the Remaking of America, by Margaret O’Mara of the University of Washington – both of which I reviewed previously.