The Power Law: Venture Capital and the Making of the New Future

by Sebastian Mallaby

Once the stock market embraced the logic of the power law, nothing checked the venture capitalists. Private financing deals were done at ever higher valuations, and startups raised capital in ever greater quantities. In 1997 an online grocer called Webvan landed $7 million from Benchmark and Sequoia, even though it was less a company than a concept. In 1998, Webvan raised a further $35 million, this time from SoftBank, to finance the building of its first distribution center. In 1999, with the distribution center still barely up and running, investors were persuaded to part with an astonishing $348 million. By this point, venture speculators had assigned Webvan a paper value of more than $4 billion, even though it was losing money. In sum, Webvan looked like GO on steroids, a fantastical venture-capital ego trip. And yet, given the euphoric stock market, the VCs were not the only culprits in this tale. Webvan staged a successful IPO in the fall of 1999, and its value shot up to $11 billion. With public-market investors prepared to value companies this way, the venture-capital frenzy was at least partly rational.