Summary

Mallaby traces venture capital from Arthur Rock's liberation capital (freeing the "traitorous eight" from Shockley) through modern mega-funds. The central thesis: VC follows the power law. The future is created by mavericks, not experts, and VCs are the third great institution of capitalism alongside markets and organizations.

Silicon Valley beat Boston and Japan because of weak ties, no non-competes, and VCs actively cultivating a culture of information sharing. The book chronicles evolving VC models: activist capital (Sequoia, KP), network capital (Apple era), growth capital (Benchmark, SoftBank), and the youth revolt (YC, Founders Fund). Success has path dependency, but emerging VCs still capture ~50% of alpha in top deals.

“A plethora of weak ties generates a greater circulation of information than a handful of strong ones.”

“Some secrets are more valuable when shared.”

“Better to find diamonds in the rough than polishing them.”

Key Takeaways

Notes

Intro: unreasonable people

• Impossible meat + Khosla: the crazies
• Khosla is the embodiment of the power law
• 80/20 rule / the power law
• YC: 2/280 generated 75% of returns
• Contrarianism
• The future is created by mavericks, not experts
• 2 great institutions of modern capitalism:
  1. Markets: coordinate via market signals and arms-length contracts
  2. Organizations: assembling teams, led by top-down managers
  3. Middle ground: VCs: somewhere in between ↑
• ↑ “should be the third great institution”
• VC expanding in 3 dimensions:
  • Beyond SV worldwide
  • Spread to new industries
  • Beyond the startup phase
• Purposes of book:
  1. Inside look at VC mindset
  2. Evaluate VC’s social impact

1: Liberation capital - Arthur Rock

• Shockley + traitorous 8 → liberation of talent
• Theory: VC is why SV beat other emerging tech markets
• Inception of higher-risk finance in the 50s
• ARD (American Research & Development based in Boston) first real precursor to VC
  • “A freakish philanthropic enterprise”
• Fear of setting precedent of employee ownership (stock options)
• Fairchild Semiconductor success

2: Equity, time-bound capital

• SBICs → VCs
  • Capped at $60k, though
  • Peaked at 3/4 of all VC in 60s
• Private limited partnership
  • Davis and Rock
  • GPs and LPs
  • Focus on equity incentives (novel)
• Modern portfolio theory: diversification to min risk, max return
• D+R “people-led investing”, EQ (non-technical so couldn’t diligence)
• Owning some of the company is powerfully motivating m

3: Activist capital - Sequoia, Kleiner Perkins

• 70s:
  1. Hands-on activism
  2. Stage-by-stage finance
• Atari + Sequoia
• KP + incubation / EIRs

4: Network capital - Apple

• Apple + the power of networks

5: Valley ascendant - Cisco, 3Com

• Sociology
• Boston + Japan dominated by large, secretive, vertically integrated companies
  • Vs Silicon Valley bubbling cauldron of small firms, vigorous due to fierce competition + formidable due to partnerships
  • Boundaries were porous
• Small experiments better when path is uncertain
• “A plethora of weak ties generates a greater circulation of information than a handful of strong ones”
• Three reasons:
  1. No CA non-competes
  2. Stanford professor startup sabbaticals
  3. MAIN: VCs cultivating this env’t ↑
• Eg. Sutter Hill lunch “who’s the absolutely best guy out there?”
  • Then, would send them papers, connections, etc.
• VCs siphoning talent
• East coast VCs incredibly risk averse
• 3Com founder: VC auction for who could bring him the best exec talent to run the company
  • Ethernet + Metcalf's law
• “Some secrets are more valuable when shared”
• KP: Keiretsu model between portcos
• Focus on reputation + trust
• Cisco firing founders

6: Planners / improvisers - Accel / KP

• Arrogance of “go big or go home” approach
• Inexorable power law
• Gov’t-research vs VC innovation
• Metcalf + Moore’s law (early internet)

7: Growth Capital - Benchmark, Softbank

• Momentum, traction, audience, brand > revenues
• “The key to Yahoo’s growth is that it had to keep growing”
• Yahoo + SoftBank $100M offer they couldn’t refuse + Blitzscaling
• SoftBank beta > alpha: 1 investment per week, on 30 boards
• Growth capital ↑
• Lesson: VC must adapt constantly
• Benchmark
  • Decidedly local
  • Rolled up sleeves
  • Cross-industry
• Benchmark + Ebay $6.7M → $5B+

8: Angels - Google

• Venture bubbles are much more powerful than public markets:
  • No hedging / options, only votes in favor
  • Insular VC community vs isolated hedge fund managers
• Angels shifted power in favor of the entrepreneurs
• Google + Schmidt
• Founders > shareholders for ethics, long-term thinking
• Dot com crash VC funding: $104B → $9B

9: SV’s youth revolt - YC and Peter Thiel

• PayPal vs X
• Youth revolt against Sequoia
• Founder’s Fund: founders monarchy > installed CEOs
• Theil: “better to find diamonds in the rough than polishing them”
• “Unusually aggressive risk taking”
• YC: PG against VC, but taught how to start a startup
  • Batch processing
  • Hacker → entrepreneur
  • “As big a deal as the Industrial Revolution”
  • Networks of small companies
  • “A third category of capitalist organization”
• Techstars, Seed Camp, Pioneer, Entrepreneur First

10: To China, and stir

• China’s first real VC deal in ‘99
• Alibaba + SoftBank
• Novelty of stock comp in China
• China + venture minting billionaires

11: Accel, Facebook, decline of KP

• Zuck hotshot
• Accel > corporate investor
• KP $1B clean tech fund fail
• Women in VC 5-7x lower than other finance
  • Harassment suit in KP
• Success isn’t guaranteed (duh?)

12: Growth equity - Milner, Tiger

• Milner Facebook two-tier $B+ investment
  • Protecting founders from giving away governance
• Could delay IPO by 3+ yrs
• Tiger hedge fund + venture model “Private investment partners fund”
• Global arbitrage
  • Investing in other countries “minor leagues”
  • Int’l clones, eg. Google → Yandex
  • Tencent → Facebook
• Unicorns
• a16z’s value prop: “smooth the learning curve for scientists who wanted to be chief executives” eg. management training
• Founder experience + status (network) > originality of methods

13: Sequoia’s strength in numbers

• “Florence in the renaissance”
• Havoc of adjustments (zero’d → caution, quick win → hubris)
• Sequoia high trust culture
• Cognitive psychology
• Scouting
• Partner training
• Stripe
• Sequoia growth, India + China, hedge fund (shorting losers)
• ↑ diversification smooths out returns

14: Unicom poker

• Tharanos: “premature truth”
• WeWork
• Uber + Bill Gurley
• ↑ unicorn governance broken, due to growth stage funding → recklessness

Conclusion: luck, skill, and the competition among nations

• Feedback effect / path dependency: long-term VC success strongly due to initial success due to timing / luck
• ↑ doesn’t mean it’s all luck
• Emerging VCs still get an avg of 50% of alpha in top deals
• VCs have a positive effect on economies + societies
• Myth that VCs can only back software
• Cons:
  • “Blitz scaling is survivorship bias masquerading as a strategy”
  • ↑ causes market distortions, causes monopolies
• Pros:
  • VC has an outsized impact on wealth creation, innovation
• Global embrace of VC
• Gov’t attempts to promote VC have largely failed (skin in the game)
• Policy recommendations:
  1. Encourage LPs
  2. Encourage stock options
  3. Fund scientific ed + research
  4. Think globally
• Policy levers to slow China dominance:
  1. Curb further investments in China
  2. Obstruct China investment into US
  3. Protect IP → restrict immigration flow