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Sebastian Mallaby has this extraordinary ability to identify a random topic in the world of finance and expound on it with the same verve, excitement and panache that is otherwise reserved for elaborating James Bond’s uncomfortably close shaves with a crazy bunch of Yakuza assassins. “The Power Law” – a veritable tome – is no exception to the norm. An eclectic bunch of enterprising entrepreneurs, eccentric founders and egregious financiers waft in and out of the book at a pace that would put Ben Johnson on steroids, and Usain Bolt without them, to utter disdain.
Mallaby’ s sweeping and comprehensive charting of the trajectory of the Venture Capital revolution, commencing with its humble origins in the 1950s to its all-encompassing ubiquitous role today, is an absolute joy to read. Venture Capital made its mark for the first time as a form of “liberation capital”, when eight talented PhD researchers working for Nobel Laureate and famed engineer William Shockley mutinied against the irrational working practices of their intolerable employer and decided to branch out on their own. The “Traitorous Eight” (Gordon Moore of Moore’s Law fame was one of the eight), having had enough of their boss’ high handedness which included taking lie detection tests at work, incorporated Fairchild Semiconductor with $1.4 million of ‘adventure capital’. The eight were freed from the shackles imposed by a man who was one part genius, and two parts tyrant.
Contrast this with a stern warning that venture capital fund Kleiner Perkins received from a California securities regulator In May 1976, concerning the hazardous nature of its $100,000 investment in Genentech, an early biotechnology start-up. But as Peter Thiel elucidated many years later, Kleiner Perkins had got their act completely right. They had grasped a quintessential feature of Thiel’s power law, or the Pareto principle of venture financing – a small portfolio of investments generate most of the returns. Eugene Kleiner and his firm made a whopping return of 42 times on their investment following Genentech going public.
Venture Capital since then, has come a long way, as has the mode of financing itself. If the initial phase of Venture Capital investing was based on the Venture Capital entity acquiring a significant stake in the investing company, a transformation was ushered in when the founders called all the shots, owned the decision making stocks and also had Venture Capitalists eating out of their hands. Facebook and Google being just two examples. There was also a paradigm shift from informed investing to a buccaneering splashing of money. The flamboyant Masayoshi Son of Softbank fame upended the world of Venture Capital by writing out a check of a whopping $100 million dollars in favour of Jerry Yang and Yahoo. He was the unquestioned Bull in the China shop (with headquarters in Japan, of course).
“The Power Law” is laced with extraordinary true life hits and misses as well as intended and unintended hilarity. Venrock, a venture capital fund “offloaded” Apple stocks since they had no confidence in the founder, a young and unremarkable man going by the name of Steve Jobs who hardly believed in showering and was pungent, literally. A malodorous founder literally cost an intransigent financing outfit, billions of dollars in lost opportunity. However, Anthony Montagu, the founder of a London investment company called Abingworth understood the worth of Apple. He manifested at Apple’s office armed with a toothbrush and threated to occupy the lobby in perpetuity until he was offered an opportunity to invest. Impressed by his relentlessness, Steve Wozniak, the co-founder agreed to allow Montagu to invest in his company.
In yet another extraordinary incident, after an impudent duo, Sergey Brin and Larry Page had coaxed both Sequoia Capital and Kleiner Perkins to fund their start up venture called Google, both the VC entities had a hard time convincing Page and Brin that there was an urgent need for them to recruit an external Chief Financial Officer. After much persuasion, the two young entrepreneurs agreed to talk to various heads of companies that were backed by both Kleiner Perkins and Sequoia. After performing their due diligence Brin and Page came back with an audacious proposition to John Doerr, the legendary investor at Kleiner Perkins. While they perfectly understood the need for a CEO to be appointed at Google, they found only one individual who ticked all the boxes – Steve Jobs! However since Steve Jobs was a bit tied up managing Apple, Brin and Page had to make do with the next best bet. The alternative, going by the name of Eric Schmidt turned out to be just to the liking of the pugnacious founders.
Kevin Efrusy of Accel pursued with an unrelenting vigour and maniacal passion, Mark Zuckerberg and Facebook. Inspite of being humiliated, and insulted repeatedly (Zuckerberg not only turned up for a meeting late and in pajamas and flip flops, but also delivered a presentation that read, why not to invest in Facebook), by the arrogance and petulance of youth, Efrusy dug in his heels and battened all hatches. Zuckerberg finally relented and when Facebook went public in 2021, Accel took home a cool $12 billion in profits.
However, as Mallaby illustrates in grim detail, unfettered and obsequious deference to the whims and fancies of maverick founders, has its own perils. The flashy and brazenly outspoken founder of WeWorks, Adam Neumann was an unscrupulous and unethical businessman masquerading as a self-proclaimed genius. Surrounded by sycophants and pliant financiers toadying for his attention, WeWorks was tarnished by such a degree of mismanagement that only a failed IPO brought both the company and its globe trotting founder to their knees. Similarly it took an unfortunate but inevitable act of scheming and plotting on the part of Benchmark Ventures to unseat the misogynistic founder of Uber, Travis Kalanick from a position of colossal power. Kalanick, courtesy his reckless behaviour both personally and professionally, brought Uber to the brink before the aforementioned conniving on the part of the financiers and directors of the company finally resulted in the sacking of Kalanick.
From conducting meetings in bathtubs to hunting down founders closeted in their cubbyholes, “The Power Law” is an engrossing hymn to the strength of cohesion, collaboration and caution. It is also a thorough vindication of the economic empowerment ushered in by venture capital. The book also contains, like every other book, a customary chapter on China and the origins and explosion of venture capital industry in the most populous country on the planet. Goldman Sachs‘ absolute indiscretion in failing to see the potential of Jack Ma’s company, Alibaba, in spite of repeated entreaties by one of their more astute partners, makes for some fascinating reading. Goldman’s loss was Sequoia’s gain. Under the able vision and tutelage of Mike Moritz, Sequoia China played their bets assiduously and adroitly, investing in early start up such as Meituan and Dianping, before reaping rich rewards.
Mallaby ends his book with four simple strategies for bolstering the prospects of both the Venture Capital ecosystem and the entrepreneurial spirt: encourage limited partnerships that also ensure in eliminating double taxation; encourage employee stock options that allows them to have a critical component of skin in the game; invest in scientific education and research and finally think globally by attracting international and relevant talent.
Mallaby also highlights the gender inequality that permeates the Venture Capital world. Even though firms such as Accel, Sequoia and Kleiner Perkins have demonstrated intent to bridge the gender gap, there still needs to be a lot of concerted and concentrated effort in this movement.
“The Power Law” – one of the best business books of 2022. Yes, I know it’s only January!
(“The Power Law: Venture Capital and the Making of The New Future” by Sebastian Mallaby is published by Penguin Press and will be available for sale from the 1st of February 2022)
Thank you, Net Galley for the Advance Reviewer Copy!