New and experienced investors will find plenty to learn in Sebastian Mallaby’s The Power Law: Venture Capital and the Making of the New Future. Journalists Charles Duhigg and Jane Mayer describe this book as full of “exceptional reporting, analysis, and storytelling,” providing insights into “a subculture of unparalleled influence.”
The Power Law details core learnings that modern investors can take from the world’s most successful venture capital firms, from Andreessen Horowitz to Accel and Yuri Milner’s DST Global. These companies have each seen investments come to fruition via the power law.
The Power Law Simplified
The power law suggests that venture capitalists who make a broad selection of high-risk investments will see the best returns, even though most of their investments will fail. A small number of their investments will be so successful that they will generate returns far outdoing a collection of small successes.
Historically, Silicon Valley has been a hotspot for these high-risk, high-return investments. The investment scene in other tech cities, like Boston, has been much lower-risk. This is why the investment space hasn’t taken off anywhere like it has in San Francisco.
Investors Who Have Shaped Venture Capital
In The Power Law, Mallaby introduces several Silicon Valley investors who have shaped venture capital. One example is Tom Perkins, co-founder of Kleiner Perkins, who invested in pioneering companies like Tandem Computers and Genentech. He was keen to invest in companies that had the potential to progress the technology space, even if their profitability wasn’t clear.
Another example is Sequoia Capital’s founder Don Valentine, an early supporter of huge names like Apple and Cisco. Valentine’s investment strategy involved pinpointing companies that had the potential to fill large gaps in the market. Prioritising this paid off so well he is now known as the grandfather of venture capital in Silicon Valley.
A third example is DST Global’s founder Yuri Milner, who proposed an investment to Facebook that stood out against all other offers.
Yuri Milner’s Infamous Facebook Investment
When Yuri Milner invested in Facebook, a new chapter in venture capital began. He had been told that the social media platform might need to raise capital at a discount to the $15 billion valuation in its previous round. However, he went in with a starting offer of $5 billion, also offering to buy employee stock on top of his shares.
Milner was confident he would see returns as he had already analysed Facebook’s growth potential. He had collected data on consumer-internet businesses in several countries, identifying revenue opportunities that Facebook had not yet capitalised on.
He also knew that founder Mark Zuckerberg had rejected advances from investors who had requested board votes. Instead, Milner proposed an offer without a board seat, allowing Zuckerberg to vote his shares however he liked.
Rival investors offered $5-8 billion, which didn’t reach Zuckerberg’s desired $10 billion. Only Milner could meet this demand. The investment quickly generated major returns, with Facebook’s value climbing to $50 billion in 18 months.
Yuri Milner’s Giving Pledge Commitment
Given Milner’s success investing in Facebook, he went on to achieve immense returns investing in X (formerly Twitter), Alibaba, WhatsApp, Snapchat, JD, and Spotify. Having made a fortune, in 2012, he then signed the Giving Pledge. This agreement saw him agree to donate at least half of his lifetime wealth to charitable, predominantly scientific endeavours.
Now a major philanthropist, he has gone on to write a short book detailing his vision for our Universe: Eureka Manifesto: The Mission for our Civilization.