“The Law of Power” review: In pursuit of unicorns


The average venture capital fund launched in 2011 has outperformed the S&P 500 by 7% annually. But this statistic underestimates the astronomical returns achieved by a few of the top performers and the mediocre returns achieved by the rest. Between 1979 and 2018, the median fund underperformed the S&P 500, while the top 5% nearly tripled the performance of the index.

Benchmark investor Bill Gurley describes venture capital as a “grand slam business”. In “The Power Law,” business journalist Sebastian Mallaby argues that business is defined by its most extravagant successes. A few trades explain the majority of returns, a few funds drive the majority of asset class performance, a few crazy ideas change the world.

Venture’s contribution to innovation and entrepreneurship is massive. Mallaby notes that between 1995 and 2019, venture-backed companies accounted for nearly half of non-financial IPOs in the United States. These companies are orders of magnitude more likely to launch an IPO than startups that don’t receive venture capital. The dynamism of the American economy largely depends on the ecosystem of Silicon Valley.

Mr. Mallaby believes that this success is the result of a unique state of mind: “the patina of the counter-culture” combined with “a frank thirst for riches”. Venture capitalists will fund almost any idea, no matter how crazy or unreasonable. But checks stop happening if measurable results aren’t achieved, forcing every business to constantly confront the harsh realities of a competitive marketplace.

Boston was once the leader in venture capital. The legendary Georges Doriot, who taught at Harvard Business School, is considered the father of venture capital for his role in founding American research and development in 1946. But Doriot couldn’t bear to see companies fail in which he had invested, and his focus was more on people and patriotism than profits. “Capital gains are a reward, not a goal,” he told his underpaid employees.

Silicon Valley, on the other hand, has developed into a ruthless ecosystem that has accelerated corporate evolution by killing the weak while helping the strong pursue technological and business dominance. Mr. Mallaby tells a compelling story of the rise of this unique and important industry based on in-depth interviews with some of the most successful venture capitalists.

Arthur Patterson, the “unconsciously cerebral” co-founder of Accel, devised a systematic approach centered on the idea of ​​the “prepared mind”. At an offsite meeting in 2003, the company’s partners identified social networking as one of the most promising new innovations and a priority for the company’s decision makers. Months later, a young associate named Kevin Efrusy persuaded Mr. Patterson to visit a new company called Facebook. The company would invest around $13 million and make a profit of $12 billion when Facebook goes public.

Unlike the patrician intellectualism of Accel, Sequoia Capital built its reputation on the courage of immigrants. Three of the company’s main negotiators come from abroad: Michael Moritz from Wales, Douglas Leone from Italy and Roelof Botha from South Africa. Sequoia partners first contacted Arash Ferdowsi, the co-founder of Dropbox, through a Persian rug dealer the company had hired to network with the Iranian-American community in the Bay Area. . Patrick and John Collison, two brothers from a small town in Ireland, founded Stripe, the growing payment company. They partnered with Sequoia, John told Mr. Mallaby, because of the company’s reputation for supporting “young founding immigrants with courage.”

The law of power: venture capital and the creation of the new future

By Sebastien Mallaby

Penguin Press

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Although the book focuses on winners, Mr. Mallaby is quick to criticize, particularly in his description of Kleiner Perkins’ decline. The business was successful in the 1990s, but senior partner John Doerr became more interested in signaling virtue than making a profit. He launched a cleantech fund, based on a conversation with his teenage daughter about saving the planet, which significantly dented the company’s long-term track record. And he embarked on a high-profile gender equity campaign to hire female partners, only to see some of the most talented women quit and then see the company sued by a disgruntled employee for gender discrimination. .

Telling stories of wealthy investors betting on young visionaries and making insane profits might get tediously repetitive, but Mr. Mallaby writes a fast-paced tale. He also has a journalist’s eye for revealing details: Mr. Patterson, from Accel, serves a new recruit a dinner of just 12 grilled corn cobs and a bottle of Bordeaux; an executive assistant at Sequoia scrambles a replacement Porsche for a general manager when his car breaks down at 3 a.m.; a big shot uses a silver bell to summon his waiter to his San Francisco mansion.

M. Mallaby’s “More Money Than God,” published in 2010, was a narrative history of the hedge fund industry based on numerous insider interviews. “The Power Law” may seem, in part, like a spin-off of the previous book, replacing venture capital funds, which have benefited from the rise of smartphones and cloud computing, for hedge funds, which have had struggling to keep up with a booming S&P 500. .

In his final words in ‘The Power Law’, Mr. Mallaby warns that it is ‘unwise’ to bet against adventure. But public markets have recently turned against IPOs and other venture capital-backed companies, sending venture capital-style portfolios like Cathie Wood’s ETF into heavy losses. With the IPO window closing and tech stocks selling off, some venture capitalists might be thinking, “There, but by the grace of God, I’m leaving.” Only time will tell if Mr. Mallaby timed the publication of his book with the peak performance of the venture capital asset class.

Mr. Rasmussen is the founding partner of the hedge fund Verdad Advisers.

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