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

by Sebastian Mallaby

all these distributions are examples of the power law, so called because the winners advance at an accelerating, exponential rate, so that they explode upward far more rapidly than in a linear progression.

The celebrated hedge-fund stock picker Julian Robertson used to say that he looked for shares that might plausibly double in three years, an outcome he would view as “fabulous.”[22] But if venture capitalists embarked on the same quest, they would almost guarantee failure, because the power law generates relatively few startups that merely double in value. Most fail completely, in which case the value of their equity rounds to zero—an unthinkable catastrophe for a stock market investor. But each year brings a handful of outliers that hit the proverbial grand slam, and the only thing that matters in venture is to own a piece of them.

The future can be discovered by means of iterative, venture-backed experiments.[32] It cannot be predicted.

Venture capitalists have achieved this disproportionate impact because they combine the strengths of the corporation with the strengths of the market. They channel capital, talented employees, and large customers to promising startups; in this way, they replicate the team formation, resources, and strategic vision to be found in corporations.