The Power Law Quotes

“Investors who focus on currencies, bonds, and stock markets generally assume a normal distribution of price changes: values jiggle up and down, but extreme moves are unusual. Of course, extreme moves are possible, as financial crashes show. But between 1985 and 2015, the S&P 500 stock index budged less than 3 percent from its starting point on 7,663 out of 7,817 days; in other words, for fully 98 percent of the time, the market is remarkably stable.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“you succeed in venture capital by backing the right deals, not by haggling over valuations.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Art of Disruption

“This book has pushed back against the randomness thesis, emphasizing instead the skill in venture capital. It has done so for four reasons. First, the existence of path dependency does not actually prove that skill is absent. Venture capitalists need skill to enter the game: as the authors of the NBER paper say, path dependency can only influence which among the many skilled players gets to be the winner. Nor is it clear that path dependency explains why some skilled operators beat other ones. The finding that a partnership’s future IPO rate rises by 1.6 percentage points is not particularly strong, and the history recounted in these pages shows that path dependency is frequently disrupted.[5] Despite his powerful reputation, Arthur Rock was unsuccessful after his Apple investment. Mayfield was a leading force during the 1980s; it too faded. Kleiner Perkins proves that you can dominate the Valley for a quarter of a century and then decline precipitously. Accel succeeded early, hit a rough patch, and then built itself back. In an effort to maintain its sense of paranoia and vigilance, Sequoia once produced a slide listing numerous venture partnerships that flourished and then failed. “The Departed,” it called them. The second reason to believe in skill lies in the origin story of some partnerships. Occasionally a newcomer breaks into the venture elite in such a way that skill obviously does matter. Kleiner Perkins became a leader in the business because of Tandem and Genentech. Both companies were hatched from within the KP office and actively shaped by Tom Perkins; there was nothing lucky about this. Tiger Global and Yuri Milner invented the art of late-stage venture capital. They had a genuinely novel approach to tech investing; they offered much more than the equivalent of another catchy tune competing against others. Paul Graham’s batch-processing method at Y Combinator offered an equally original approach to seed-stage investing. A clever innovation, not random fortune, explains Graham’s place in venture history.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Son arrived at Yahoo’s office looking as slight and uncommanding as ever. But he brought a bazooka. In a bid without precedent in the history of the Valley, he proposed to invest fully $100 million in Yahoo. In return he wanted an additional 30 percent of the company. Son’s bid implied that Yahoo’s value had shot up eight times since his investment four months earlier. But the astonishing thing about his offer was the size of his proposed check: Silicon Valley had never seen a venture stake of such proportions.[21] The typical fund raised by a top-flight venture partnership weighed in at around $250 million, and there was no way it would put 40 percent of its resources into a single $100 million wager.[22] Private-equity investors and corporate acquirers sometimes made investments in the $100 million range, but in return they expected to take full control of companies.[23] Son, in contrast, would be a minority investor and on an unheralded scale. Because he had SoftBank’s corporate balance sheet behind him, he could pump in fully one hundred times more capital than Sequoia had provided when Yahoo got started. After Son dropped his bombshell, Yang, Filo, and Moritz sat in silence. Disconcerted, Yang said he was flattered but didn’t need the capital.[24] “Jerry, everyone needs $100 million,” Son retorted.[25]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Was this luck, or was it more than that? Proving skill is difficult in venture investing because, as we have seen, it hinges on subjective judgment calls rather than objective or quantifiable metrics. If a distressed-debt hedge fund hires analysts and lawyers to scrutinize a bankrupt firm, it can learn precisely which bond is backed by which piece of collateral, and it can foresee how the bankruptcy judge is likely to rule; its profits are not lucky. Likewise, if an algorithmic hedge fund hires astrophysicists to look for patterns in markets, it may discover statistical signals that are reliably profitable. But when Perkins backed Tandem and Genentech, or when Valentine backed Atari, they could not muster the same certainty. They were investing in human founders with human combinations of brilliance and weakness. They were dealing with products and manufacturing processes that were untested and complex; they faced competitors whose behaviors could not be forecast; they were investing over long horizons. In consequence, quantifiable risks were multiplied by unquantifiable uncertainties; there were known unknowns and unknown unknowns; the bracing unpredictability of life could not be masked by neat financial models. Of course, in this environment, luck played its part. Kleiner Perkins lost money on six of the fourteen investments in its first fund. Its methods were not as fail-safe as Tandem’s computers. But Perkins and Valentine were not merely lucky. Just as Arthur Rock embraced methods and attitudes that put him ahead of ARD and the Small Business Investment Companies in the 1960s, so the leading figures of the 1970s had an edge over their competitors. Perkins and Valentine had been managers at leading Valley companies; they knew how to be hands-on; and their contributions to the success of their portfolio companies were obvious. It was Perkins who brought in the early consultants to eliminate the white-hot risks at Tandem, and Perkins who pressed Swanson to contract Genentech’s research out to existing laboratories. Similarly, it was Valentine who drove Atari to focus on Home Pong and to ally itself with Sears, and Valentine who arranged for Warner Communications to buy the company. Early risk elimination plus stage-by-stage financing worked wonders for all three companies. Skeptical observers have sometimes asked whether venture capitalists create innovation or whether they merely show up for it. In the case of Don Valentine and Tom Perkins, there was not much passive showing up. By force of character and intellect, they stamped their will on their portfolio companies.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Accel’s culture of training and trusting young investors seemed to hold the secret of success.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“But this parallel serves to underscore the difference, not the similarity, between the two nations: in China, the idea that an internet tycoon could publish a daily diet of critical antigovernment reporting is unthinkable.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“In the place of a few smart individuals, there was now a thick web of startup connoisseurs, significant because the combined force of their actions was greater than the sum of their separate endeavors. It was like going from a system driven by genius to one driven by evolution. A brilliant person can do great things. A large group of people can try many things. Through an evolutionary process of trial, failure, and occasional breakthroughs, the group may advance faster than the individual.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“By force of character and intellect, they stamped their will on their portfolio companies.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“They were dealing with products and manufacturing processes that were untested and complex; they faced competitors whose behaviors could not be forecast; they were investing over long horizons. In consequence, quantifiable risks were multiplied by unquantifiable uncertainties; there were known unknowns and unknown unknowns; the bracing unpredictability of life could not be masked by neat financial models. Of course, in this environment, luck played its part. Kleiner Perkins lost money on six of the fourteen investments in its first fund. Its methods were not as fail-safe as Tandem’s computers.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Was this luck, or was it more than that? Proving skill is difficult in venture investing because, as we have seen, it hinges on subjective judgment calls rather than objective or quantifiable metrics.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“In May 1976, a California securities regulator wrote to Kleiner Perkins, expressing concern about the riskiness of the Genentech investment. “Kleiner & Perkins realizes that an investment in Genentech is highly speculative, but we are in the business of making highly speculative investments,” Kleiner wrote back calmly.[90]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Most of all, Kleiner and Perkins agreed that they should emphasize a robustly activist approach. Both men had served as managers at storied West Coast companies, and both had started their own firms. “We distinguished ourselves right from the beginning by saying: We are not investors. We’re not Wall-Street, stock-picker, investor people,” Perkins later said. “We are entrepreneurs ourselves, and we will work with entrepreneurs in an entrepreneurial way. . . . We will be in it up to our elbows.”[51]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Having secured the introduction, Valentine packed Bushnell off to Sears with instructions to wear one of his “nonclown suits” and avoid being too “humorous.”[33] Bushnell did as he was told, and a buyer from Sears soon returned the visit.[34] By the middle of March, Sears had placed an order for seventy-five thousand Home Pong machines.[35] Atari now had what Valentine had been waiting for: a promising new product and a powerful distributor.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“The tally of initial public offerings plummeted from more than one thousand in 1969 to just fifteen in 1974, and the S&P 500 returned more or less nothing over this period.[26] The collapse all but wiped out the nascent hedge-fund business, and likewise a headline in Forbes wondered, “Has the bear market killed venture capital?”[27] After attracting $171 million in new funds in 1969, venture capitalists raised only $57 million in 1974 and a mere $10 million the year after.[28] A New Yorker cartoon showed two men chortling, “Venture capital! Remember venture capital?”[29] But adversity brought some advantages.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Entrepreneurs with managerial magic can’t lose, Rock reflected later. “If their strategy doesn’t work, they can develop another one.”[41]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Self-contradiction, wishful thinking, a fondness for ingratiation at the expense of honesty: these were the clues that Rock should pass on an investment. Intelligent consistency, gritty realism, fiery determination: these were the signs that he should seize the opportunity.[33] “Do they see things the way they are and not the way they want them to be?” Rock would often ask himself.[34] “Would they drop what they’re doing at a minute’s notice to do something which would help the business, or would they continue their dinner?”[”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“There were no more reasons not to go forward. Bud Coyle pulled out ten crisp dollar bills and proposed that every man present should sign each one. The bills would be “their contracts with each other,” Coyle said.[85] It was a premonition of the trust-based contracts—seemingly informal, yet founded, literally, on money—that were to mark the Valley in the years to come.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“The way you do this is you start your own company,” Rock said simply.[74] By striking out on their own, the scientists would be able to work independently in the location of their choosing. But more than that, they would be company founders. They would own the fruits of their creative wizardry. A self-made loner from outside the establishment, Rock felt strongly on this last point. A certain kind of justice would be served.[75] Rock’s proposal took some digesting. “We were blown away,” a researcher named Jay Last remembered later. “Arthur pointed out to us that we could start our own company. It was completely foreign to us.”[76]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“The way you do this is you start your own company,” Rock said simply.[74] By striking out on their own, the scientists would be able to work independently in the location of their choosing. But more than that, they would be company founders. They would own the fruits of their creative wizardry. A self-made loner from outside the establishment, Rock felt strongly on this last point. A certain kind of justice would be served.[75]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Seek out creative men with the vision of things to be done,” he counseled; show “loyalty to the idea and to its initiator, the creative man.”[59] Needless to say, Doriot’s adoring deference to “creative men with the vision” did not prevent him from pocketing 77 percent of a creator’s output. In this, too, Doriot anticipated the hypocrisy that would occasionally mark the venture industry in years to come.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“The way Doriot talked about his partnership with company founders was eerily modern. The founders were young, willful, and courageous; the venture capitalist’s role was to contribute wisdom and experience. The founders were brilliant, erratic, and sometimes emotionally fragile; “the venture investor must always be on call to advise, to persuade, to dissuade, to encourage, but always to help build.”[58]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“By freeing talent to convert ideas into products, and by marrying unconventional experiments with hard commercial targets, this distinctive form of finance fostered the business culture that made the Valley so fertile. In an earlier era, J. P. Morgan’s brand of finance fashioned American business into muscular oligopolies; in the 1980s, Michael Milken’s junk bonds fueled a burst of corporate takeovers and slash-and-burn cost cuts. In similar fashion, venture capital has stamped its mark on an industrial culture, making Silicon Valley the most durably productive crucible of applied science anywhere, ever. Thanks to venture capital, the Traitorous Eight were able to abandon William Shockley, launch Fairchild Semiconductor, and set this miracle in motion. By 2014, an astonishing 70 percent of the publicly traded tech companies in the Valley could trace their lineage to Fairchild.[12]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“By freeing talent to convert ideas into products, and by marrying unconventional experiments with hard commercial targets, this distinctive form of finance fostered the business culture that made the Valley so fertile. In an earlier era, J. P. Morgan’s brand of finance fashioned American business into muscular oligopolies; in the 1980s, Michael Milken’s junk bonds fueled a burst of corporate takeovers and slash-and-burn cost cuts. In similar fashion, venture capital has stamped its mark on an industrial culture, making Silicon Valley the most durably productive crucible of applied science anywhere, ever.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“What explains that magic? The title of a 1995 Time essay echoed Bono’s answer: “We Owe It All to the Hippies.”[10] But the Valley’s distinguishing genius is that the patina of the counterculture combines with a frank lust for riches. The pot-smoking, sandal-wearing inventors of Bono’s acquaintance have never been ashamed to earn vast fortunes, and the Valley is the place where career ladders have been scorned not just by bohemians, who disdain them as bourgeois, but even more by overachievers, who regard them as a pitifully slow way to get ahead. Steve Jobs was among the many who embodied both sides of this contradictory culture. He was too modestly egalitarian to demand a boss’s reserved slot in the company parking lot but too arrogantly entitled not to steal the space designated for disabled drivers.[11] He was a communalist collaborator, sharing his intellectual property freely with ostensible rivals; he was also a capitalist competitor, paranoid and controlling. It was this combination of laid-back creativity and driving commercial ambition that truly defined Silicon Valley, making it the place where flights of imaginative fancy begat businesses that shaped societies and cultures.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“What explains that magic? The title of a 1995 Time essay echoed Bono’s answer: “We Owe It All to the Hippies.”[10] But the Valley’s distinguishing genius is that the patina of the counterculture combines with a frank lust for riches. The pot-smoking, sandal-wearing inventors of Bono’s acquaintance have never been ashamed to earn vast fortunes, and the Valley is the place where career ladders have been scorned not just by bohemians, who disdain them as bourgeois, but even more by overachievers, who regard them as a pitifully slow way to get ahead.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“The funding of the Traitorous Eight and their company, Fairchild Semiconductor, was arguably the first such adventure to take place on the West Coast, and it changed the history of the region. After Fairchild got its $1.4 million in financing, it became evident that any team in the Valley possessed of grand ideas and stiff ambition could spin itself out, start itself up, and generally invent the organizational form that best suited its fancy. Engineers, inventors, hustlers, and artistic dreamers could meet, combine, separate, compete, and simultaneously collaborate, all courtesy of this new finance. Adventure capital could sometimes be defection capital, or it could be team-building capital, or almost just experimental capital.[1] But whichever way you looked at it, talent had been liberated. A revolution was afoot.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Rather, they will emerge as a result of forces that are too complex to forecast—from the primordial soup of tinkerers and hackers and hubristic dreamers—and all you can know is that the world in ten years will be excitingly different. Mature, comfortable societies, dominated by people who analyze every probability and manage every risk, should come to terms with a tomorrow that cannot be foreseen.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“The revolutions that will matter—the big disruptions that create wealth for inventors and anxiety for workers, or that scramble the geopolitical balance and alter human relations—cannot be predicted based on extrapolations of past data, precisely because such revolutions are so thoroughly disruptive.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Remember, above everything, the logic of the power law: the rewards for success will be massively greater than the costs of honorable setbacks. This invigorating set of axioms has turned America’s venture-capital machine into an enduring pillar of national power. Six decades after the formation of Davis & Rock, it remains unwise to bet against it”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future