Of the seven most valuable companies in the world, five (Apple, Google, Amazon, Tesla and Facebook), worth a collective $7.5 trillion, were founded on a small strip of California. There have been many attempts to explain Silicon Valley’s success, including the US university system and blend of hippy creativity and gold rush entrepreneurial mentality. But in this entertaining history, Sebastian Mallaby makes a convincing case that venture capital is a critical part of the jigsaw.
In the early decades of the computer revolution a new form of financing emerged, where an array of swashbuckling adventurers took substantial equity in unproven start-ups. Unlike traditional investing, they knew most would fail but banked on an occasional huge hit to make their fortunes. This unusual distribution — the “power law” of the title — requires an uncommon appetite for risk and a willingness to chase potential at the cost of personal dignity. One early pioneer won the confidence of the Atari founder, Nolan Bushnell, by stripping off and getting in his hot tub.
Indeed, much of the book is about the often fraught relationships between funders and founders. In the early days, when venture capital was still relatively scarce, it bought significant influence. VCs didn’t just invest; they often ended up in effective control. Cisco Systems was wrested away from the eccentric couple who set it up. An executive team had to be found to offer initial support to the unwashed oddballs who set up Apple.
However, the profits made by those who backed Apple, Google, Amazon and others led to a surge in available cash and a world in which the most attractive-sounding start-ups increasingly held the power. By 2004 Mark Zuckerberg was turning up to a prestigious venture fund in pajamas as a deliberate insult, knowing other funders would still be keen to invest.
One early pioneer won the confidence of the Atari founder, Nolan Bushnell, by stripping off and getting in his hot tub.
This cult of the founder has led to some spectacular blow-ups. Adam Neumann of WeWork managed to convince some of the most established investors to give him billions for a glorified office hire company before his erratic behavior finally caught up with him. Uber’s deeply unpleasant cofounder Travis Kalanick wasted an astonishing amount of cash before investors finally managed to wrest back control.
Despite these high-profile cases, the lure of finding the next Google remained strong enough to ensure plentiful capital, especially as interest rates dropped to zero.
The book’s closing chapters explore how American money kick-started the Chinese tech sector and the broader globalization of venture capital. Ironically, the remote-working technologies built in Silicon Valley have weakened the importance of geography, which drew so many entrepreneurs to California.
VC requires an uncommon appetite for risk and a willingness to chase potential at the cost of personal dignity.
Mallaby is a thoughtful guide who acknowledges the problems with venture capital: the lack of transparency; the startling absence of diversity; the profound inequality that focuses so much wealth in the hands of so few. On balance, though, he sees it as a necessary way of accelerating progress and creating consumer value.
Perhaps the most interesting question is whether there is any real skill in this kind of investing. Was there any way of knowing in advance that Amazon was going to be successful and boo.com wasn’t? Mallaby argues there is, but struggles to identify any consistent factors among successful venture capitalists. Some are shoot-from-the-hip compulsive risk takers; others carefully analyze future opportunities and base decisions on spreadsheet projections. Much of what the author ascribes to skill or judgment could equally be survivor bias. We don’t hear much about the many failed funds that missed a big hit.
Whether luck or judgment, though, no one can doubt the impact these companies have had on our lives. If you want to understand a world in which a handful of coders became richer than most countries, this is an invaluable guide.
Sam Freedman is a U.K.-based writer