Harness "The Power Law" for Startup Success
This week in Florida, amidst handling family matters, I had ample free time, leading me to read and review "The Power Law: Venture Capital and the Art of Disruption" by Sebastian Mallaby. The book offers compelling insights into concepts known to entrepreneurs and VCs, enriched by an extensive exploration of the history, culture, and impactful role of VC’s role in the technology industry.
I highly recommend reading or listening to this insightful book, as the author's skillful writing and thorough research make it an engaging and thought-provoking read. As we move further into the 2020s, this book serves as an essential guide for anyone looking to understand the forces shaping technology, business, and society. For entrepreneurs, founders, VCs, angels, academics, and others interested in tech and innovation, the work offers a valuable perspective on where we have been and to the road ahead.
Tracing VC from its post-war origins through the dot-com era, the book examines the industry's evolution. It explores current trends like China's rise, the pandemic's impact, and mega-funds. Finally, it speculates on the future, considering VC's role in emerging sectors like biotech and crypto as well as its broader societal influence.
Drawing on extensive research and finance expertise, Mallaby provides a vivid, engaging history of venture capital. He balances nuanced analysis with compelling anecdotes, offering a realistic picture of VC's mechanics and impact. “Power” is enhanced by interviews with VC movers ‘n shakers including John Doerr, Marc Andreessen, Mary Meeker, and Masayoshi Son, as well as successful entrepreneurs. This mix of research, analysis and interviews provides insights into the approaches of both VCs and the founders they fund.
The book's main argument is that VC is driven by the power law, a math principle that states that a small number of events or outcomes account for a large proportion of the total effect or value. In VC, this means that most investments fail — think in terms of 80-90% — but a few succeed spectacularly and generate enormous returns. These are the so-called "unicorns", the relatively rare startups that reach a valuation of $1 billion or more, often by disrupting existing markets or creating new ones. Examples from the book of highly successful VC investments (mainly from the Silicon Valley) include major companies like Airbnb, Apple, Cisco, Facebook, Google, Intel, Uber, among others.
Mallaby shows how the power law shapes the VC industry in various ways. It creates a high-risk, high-reward culture that encourages VCs to seek out visionary entrepreneurs who can create breakthrough innovations. It also fosters a networked and collaborative ecosystem that relies on referrals, syndication, mentorship, and feedback. The book also goes into some of the other, perhaps less flattering, aspects of the VC world which generates a lot of hype, fosters intense competition, creates controversy, drives inflated valuations as VCs vie for the best deals, influence public opinion, and balance ethical and social challenges.
"The Power Law” is a must-read for anyone interested in the intricacies and impacts of VC. With its comprehensive exploration of VC's history, current trends, and potential future, coupled with engaging stories and insights from industry giants, the book offers a nuanced understanding of the power law principle in venture capital. Mallaby masterfully illustrates how this principle shapes the high-stakes, high-reward culture of VC, fostering an environment of innovation and collaboration, while also highlighting the industry's challenges and controversies.
Conclusion for “Lessons” Readers
Understanding the power law in VC is crucial for entrepreneurs seeking seed and series round investments. As such, top-tier firms like Sequoia Capital, Andreessen Horowitz, Kleiner Perkins, Khosla Ventures will tend to seek out these rare, potentially disruptive companies with the prospect of extraordinary returns. On the other hand, second- and third-tier VCs might focus on very good deals that, while growing and potentially profitable, may not achieve the coveted astronomical returns. Accordingly, entrepreneurs should thus tailor their expectations and pitches to the investment philosophy and track record of the VCs they approach.