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

by Sebastian Mallaby

In 2018, nine years after Pat Grady had first addressed his partners on the shift of software to the cloud, the hedge funders noticed something strange: most types of code had completed the predicted migration, but communications software was lagging. This anomaly seemed bound to end. The increasing acceptance of remote working would make video calls and messaging systems part of everyday life. The recent bankruptcy of a hardware-based communications software company, Avaya, suggested that the cloud’s moment was arriving. The hedge funders duly made three cloud-communications bets: Twilio, RingCentral, and the videoconferencing company Zoom. The first two generated 4x and 5x over the next two years. Assisted by the coronavirus pandemic, Zoom emerged as one of the breakout tech companies of 2020, generating 9x. Meanwhile, Sequoia’s hedge fund was short legacy telecom companies that would lose out from the transition to the cloud. One thematic insight had generated multiple winning positions.