# The Power Law  ## Metadata - Author: [[Sebastian Mallaby]] - Full Title: The Power Law - Category: #books ## Highlights - Millions of dollars in federal funding flowed to the Pentagon-backed research centers around Boston, and by the end of the 1960s more than a hundred tech startups had spun out of these labs.4 If military ties had determined the location of applied science, in other words, Cambridge should have been the center of the universe. ([Location 674](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=674)) - At this stage in the story, none of the rebels had thought of starting a new enterprise. The idea had simply not occurred to them: venture-capital funds willing to back a crew of young and unknown scientists were virtually unheard of; what’s more, they were contrary to the spirit of postwar finance. ([Location 781](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=781)) - In April 1946, the Rockefeller family launched a parallel effort to Whitney’s, aiming to solve the generally acknowledged lack of finance for new firms. “What we want to do is the opposite of the old system of holding back capital until a field or an idea is proved completely safe,” declared Laurance Rockefeller, the prime mover, adding, “We are putting money into many underdeveloped areas.” ([Location 824](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=824)) - Gordon Moore, the engineer who led the failed appeal to Arnold Beckman, recalled a similar reaction. Years later, when he had achieved fame as the co-founder of two iconic Valley companies, Moore was still at pains to describe himself as an “accidental entrepreneur.” “I’m not the sort who can just say, ‘I’m going to start a company,’” he reflected. “The accidental entrepreneur like me has to fall into the opportunity or be pushed into it.” At that restaurant in San Francisco in late June 1957, Rock was pushing him firmly. ([Location 971](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=971)) - By the second year of its existence, Fairchild Semiconductor was doing even better. Noyce and his colleagues came up with a revolutionary process that made it possible to combine multiple transistors in one tiny integrated circuit, and in 1959 Fairchild took in orders worth some $6.5 million, thirteen times more than the previous year. ([Location 1077](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1077)) - Burgeoning pension funds were managing the “small man’s” money, increasingly assuming the effective ownership of great public corporations, but the small man’s money was not being channeled to small companies. The sources of capital were being democratized, in other words, but access to capital wasn’t, because the large pension funds that served as agents for the little guy had no practical way of scoping out startups. ([Location 1109](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1109)) - The beauty of this size and structure was that the Davis & Rock partnership now had a war chest seven and a half times larger than an SBIC, and with it the ammunition to supply companies with enough capital to grow aggressively. ([Location 1190](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1190)) - Venture investing was necessarily speculative, he explained, and most startups would fail; therefore, the winners would have to win big enough to make a success of the portfolio. ([Location 1230](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1230)) - Entrepreneurs with managerial magic can’t lose, ([Location 1294](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1294)) - In the banner year of 1969, $171 million worth of private capital flowed into the sector, the equivalent of fifty new Davis & Rock partnerships. ([Location 1332](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1332)) - In Boston, Georges Doriot’s deputy, Bill Elfers, expressed the simmering frustration with ARD’s public-company structure by defecting to found a Davis & Rock–style partnership named Greylock; by 1972, ARD was gone. ([Location 1334](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1334)) - In a letter laying out his thinking in August 1968, Rock described a way of balancing the interests of investors and workers: Intel should avoid equity grants to short-term employees but extend them to everyone who made a long-term commitment. “There are too many millionaires who did nothing for their company except leave after a short period,” he observed wisely. ([Location 1427](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1427)) - But investing in Atari would take a new kind of venture capitalist, because Atari was a new kind of tech firm. When Arthur Rock had backed Fairchild—or SDS or Teledyne or Intel—the gamble lay in the technology: Would the research and development yield products that worked? With Atari, in contrast, the technology was relatively trivial: the first Pong game was rigged up by an inspired tinkerer with a bachelor’s degree from Berkeley. Instead of technology risk, Atari involved business risk, marketing risk, and what might be termed wild-man risk. It was not for the faint of heart. ([Location 1448](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1448)) - Kleiner and Perkins set up shop in a new low-slung office park at 3000 Sand Hill Road, becoming the first partnership to occupy what was to be the epicenter of the venture industry.53 Their timing was poor: they were launching their fund on the eve of the first oil shock, and their first few investments performed as poorly as the economy. They backed a plausible semiconductor startup, but it was run into the ground by inexperienced managers. ([Location 1653](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1653)) - For the first time in the history of computing, they solved the challenge of “contention”: the problem that arises when two processors within the same system request access to the communications circuits at the same moment. ([Location 1689](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1689)) - In the end, venture capitalists were trying to figure out one thing: “Why is this a big market, and how are you going to build a really strong position in it?”62 ([Location 1696](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1696)) - At this point, Perkins might have folded. He had made only a small seed investment in Tandem, and he could have walked away easily. But, because he had built the company from scratch, he knew that Rock, Venrock, and Business Week were wrong. Tandem’s technology was distinctive, and it had applied for patents on its breakthroughs; it could stand up to IBM because it was genuinely innovative. Other venture capitalists, especially those lacking engineering backgrounds, had failed to appreciate Tandem’s scientific edge. “These were financiers,” Perkins sniffed dismissively.65 With that, Perkins resolved to finance Tandem’s Series A round without sharing the risk with other partnerships.66 Shoveling his chips onto the table, he invested $1 million in Tandem in early 1975, receiving 40 percent of the equity: it was the largest bet that Kleiner Perkins made during the 1970s. As Perkins himself confessed, if Tandem had not worked out, there might never have been a second Kleiner Perkins fund. ([Location 1707](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1707)) - Pretty soon, Tandem offered a spectacular demonstration of what became known as Perkins’s law: “market risk is inversely proportional to technical risk,” because if you solve a truly difficult technical problem, you will face minimal competition.69 Thanks to the high barrier to entry, Tandem’s profit margin remained juicy even as its sales soared. By 1984, Tandem had generated a bit over 100x on KP’s $1.45 million investment. The $150 million profit dwarfed the combined $10 million return that KP made on all of its first nine investments. ([Location 1720](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1720)) - Tags: [[pink]] - In the early days of venture capital, Arthur Rock had persuaded investors to back companies that failed the standard value-investing benchmarks, inventing the idea of “intellectual book value.” Two decades later, Perkins emerged as the pitchman for the next logical step: not only should companies without profits attract venture financing; they should also be able to go public. ([Location 1845](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1845)) - 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. ([Location 1873](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1873)) - Activism and stage-by-stage financing had become the accepted ways to manage risky startups. Up and down Silicon Valley, venture capitalists hunted for opportunities to liberate talent and drive it to create new industries. ([Location 1888](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1888)) - Xerox worried that a computerized paperless office would harm its core photocopying business. Intel and National Semiconductor feared that making a computer would put them in conflict with existing computer makers, which were among their top customers. HP fretted that building a cheap home computer would undercut its premium machines, which sold for around $150,000. ([Location 1902](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1902)) - And yet when Apple set out to raise money, the stars in the venture-capital firmament failed to recognize the opportunity, proving that even the most brilliant VCs are capable of costly errors. Tom Perkins and Eugene Kleiner refused even to meet with Steve Jobs. Bill Draper of Sutter Hill sent an associate to visit Apple, and when the associate reported that Jobs and Wozniak had kept him waiting, Draper wrote them off as arrogant.2 Meanwhile, Draper’s old SBIC partner, Pitch Johnson, wondered, “How can you use a computer at home? Are you going to put recipes on it?”3 Rejected repeatedly, Jobs cast his net as far as Stan Veit, the owner of New York City’s first retail computer store, proposing that Veit acquire 10 percent of Apple for a mere $10,000. “Looking at this long-haired hippie and his friends, I thought, ‘You would be the last person in the world I would trust with my ten grand,’” Veit recalled regretfully.4 Jobs offered Nolan Bushnell, who had employed him at Atari, one-third of Apple for $50,000. “I was so smart, I said no,” Bushnell remembered. “It’s kind of fun to think about that, when I’m not crying.” ([Location 1906](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1906)) - Fortunately for Jobs and Wozniak, the Valley’s venture-capital network was already big enough in 1976 that a handful of refusals did not have to be terminal. Pretty soon, the duo found their way to Don Valentine of Sequoia. ([Location 1917](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1917)) - Kleiner and Perkins had refused to meet Jobs because they preferred technical risks to business risks.6 ([Location 1926](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=1926)) - In the case of Apple, VCs were being told that they should invest simply because others were investing. However circular this logic, it was by no means crazy. ([Location 2020](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2020)) - little while later, an entertaining British friend of Kramlich’s visited Silicon Valley. His name was Anthony Montagu. He had founded a London investment firm called Abingworth, and he was an outsider in the Valley. “Richard, what’s hot?” Montagu asked.34 Kramlich told him that Apple was hot but that there was no chance of investing. A financing round had just closed. Kramlich himself had failed to get a piece of it. Montagu still seemed eager. He had come to California with the express purpose of checking out the nascent PC business, and he knew that Apple was a leader. So Kramlich called Apple’s president, Mike Scott. Could his British friend come over and visit? he asked. Montagu was the second son of a wealthy family, so he had to work for a living, Kramlich teased.35 Could Scott do him a favor? Scott agreed. But he also told Kramlich firmly that there was no chance his friend could invest. Apple had no need of further money. Montagu set off for Apple’s offices. A few hours later, he called Kramlich. “Dick, I am so excited,” he said. “This is really the most exciting company I’ve ever seen.” He was going to invest in Apple, no matter what. “You know, Mr. Scott,” Montagu told his host in his impressive British accent. “I brought my overcoat with me, and I have my toothbrush, and I’ll just sit in the lobby. I’m not going to leave without acquiring some stock.” It was hard to tell if he was an eccentric clown or a ferociously determined pain in the neck. Scott replied that his visitor could sit in the lobby if he liked, but the chances of acquiring stock were zero. Montagu said he would wait. “I have my toothbrush, and I can just lie here,” he repeated, as though dental hygiene were the only conceivable reason not to bed down in someone’s office. At a quarter to seven that evening, Mike Scott appeared again. “Mr. Montagu, you are really a fortunate guy,” he said. Steve Wozniak had decided to buy a house. To raise the cash, he wanted to sell some of his own equity. Montagu asked how much stock Wozniak was selling. “Four hundred and fifty thousand dollars,” came the answer. It was more stock by far than Venrock or Valentine had laid hands on. A giddy Montagu called Kramlich again. “Dick, I wouldn’t be here without you!” he said, offering to split the allocation. Kramlich never told Rock that he had acquired a large slice of Apple through this roundabout route, and for years he kept quiet about it. He permitted himself just one discreet celebration, like a man who pumps his fist and screams a victory scream, but silently. On the front gate of Kramlich’s San Francisco home, the iron handle is shaped like an apple. ([Location 2041](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2041)) - Two of the biggest winners in this saga were the improbable duo of Anthony Montagu and Dick Kramlich, proving that sheer luck can sometimes matter more than anything. ([Location 2069](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2069)) - The low capital-gains tax and the change to the prudent-man rule rounded out a policy mix that was extraordinarily favorable to venture investors. Venture-backed firms could go public without showing a history of profits. Employee stock options were taxed only when they were finally exercised, not when they were initially granted. Limited partnerships were exempt from tax, and they protected investing partners from lawsuits. No other country was so friendly to the venture industry. ([Location 2098](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2098)) - All in all, the capital managed by venture funds quadrupled from $3 billion to $12 billion between 1977 and 1983, and the number of independent venture partnerships more than doubled in this period. ([Location 2111](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2111)) - In Boston and Japan, the electronics business was dominated by large, secretive, vertically integrated corporations: Digital Equipment and Data General, Toshiba and Sony. In contrast, Silicon Valley was a bubbling cauldron of small firms, vigorous because of the ferocious competition between them, formidable because they were capable of alliances and collaborations. ([Location 2138](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2138)) - Saxenian’s contention was that a small number of tight relationships makes for less idea sharing and innovation than a large number of loose relationships. ([Location 2156](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2156)) - In a celebrated article published in 1973, the sociologist Mark Granovetter argued that a plethora of weak ties generates a greater circulation of information than a handful of strong ones.5 ([Location 2158](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2158)) - When an engineer named Chuck Geschke quit a secure job to found the software company Adobe, he declared himself untroubled by the prospect of failure. He had watched other entrepreneurs navigate the world of venture-backed startups, and he had seen that failure often meant that you raised more venture dollars the next time.17 ([Location 2211](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2211)) - Spurned by investors, the Cisco team soldiered on tenaciously. They kept the lights on by maxing out credit cards and deferring salaries; Lerner took a side job to help pay the bills, and one co-founder made a personal loan to the company. ([Location 2469](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2469)) - Bosack’s ferocious work ethic kicked into overdrive. “Sincerity begins at a little over a hundred hours a week,” he said. “You have to get down to eating once a day and showering every other day to really get your life organized. ([Location 2471](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2471)) - when you invest in a company facing a technical challenge, the first thing you do is take the white-hot risks off the table. ([Location 2756](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2756)) - Accel partners aimed to comprehend entrepreneurs so thoroughly that they could complete their sentences and predict the next slide in their pitches. ([Location 2804](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2804)) - They spoke internally of the “90 percent rule.” An Accel investor should know 90 percent of what founders are going to say before they open their mouths to say it.18 ([Location 2805](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2805)) - Its motto was “if you go for singles, the home runs will take care of themselves.” Some of those intended singles would sail off your bat more powerfully than you expected. ([Location 2818](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2818)) - Note: Wrt Accel - lucky fortunes: chance and serendipity and the mere fact of being in the venture game can matter more than diligence or foresight. At the same time, venture capital as a system is a formidable engine of progress—more so than is frequently acknowledged. ([Location 2836](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2836)) - Most people assumed that if anyone was going to bring online connections to the masses, it would be the government, again, and in July 1990 a young Tennessee senator named Al Gore laid out a public-sector vision for an “information superhighway.” Rather than operating on existing telephone lines, as the internet did, Gore’s superhighway envisioned brand-new fiber-optic pipes that would turn household TVs into interactive terminals. ([Location 2852](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2852)) - Unlike in the case of GO, Doerr was unpersuaded. UUNET was not the sort of company that Kleiner Perkins liked to back. It owned no intellectual property, so was defenseless against larger competitors.40 It required bucket loads of capital, so Kleiner would be unlikely to generate a home-run multiple. ([Location 2899](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=2899)) - Venture capitalists as individuals had made plenty of errors. But venture capital as a system helped UUNET to spread the internet to millions. ([Location 3053](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3053)) - Moritz kept chatting with Yang and Filo, but now he switched subtly from cross-examiner to courtier. He knew he would face competition to get into this deal: Yahoo was also weighing acquisition offers from two larger internet firms, AOL and Netscape. To muscle out these rivals, Moritz asked sensitive questions, listened intently to the answers, and climbed inside the young grad students’ heads. Years later, asked why he had picked Moritz over other suitors, Yang replied enigmatically that Moritz had “soul.”9 Despite his unpromising opening gambit, Moritz had connected with him. ([Location 3191](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3191)) - The dirty secret was that Yahoo had no choice but to build a brand, because it was not much of a technology company. It boasted no patents and not much of an engineering edge: its directory was put together by surfing the web and classifying sites, and much of the work was done manually. ([Location 3219](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3219)) - The question was who would provide it. The normal way for a young company to raise tens of millions was to go public, which was just what Yahoo was planning. But now here came Son, this Korean Japanese outsider, who appeared to have some kind of magic coolant in his veins. Politely, without swagger, he was offering the scale of money that usually came from public markets, coupled with the simplicity of a private deal. ([Location 3291](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3291)) - Before the Yahoo team arrived at a decision, Son made a second move that defied all convention. He asked Moritz and the founders to name Yahoo’s main competitors. “Excite and Lycos,” they answered. Son turned to one of his lieutenants. “Write those names down,” he commanded. Then he turned back to Moritz and the founders. “If I don’t invest in Yahoo, I’ll invest in Excite and I’ll kill you,” he informed them. ([Location 3297](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3297)) - To borrow the language of hedge funds, he didn’t care about alpha—the reward a skilled investor earns by selecting the right stock. He cared only about beta—the profits to be had by just being in the market. One young investor who managed Son’s funds recalls betting on at least 250 internet startups between 1996 and 2000, meaning that he had kept up an insane rate of around one per week, ten or maybe even twenty times as many as a normal venture operator. ([Location 3323](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3323)) - An investor who publicly questions a mania is spoiling the party for others. ([Location 3660](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3660)) - The lesson was that engineering products could improve more than non-engineers imagined. ([Location 3750](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3750)) - “I can’t imagine that Google would be worth that much,” Schmidt answered dismissively. “Nobody really gives a shit about search,” he added. ([Location 3841](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3841)) - At the peak in 2000, new capital commitments to VC firms had hit $104 billion. By 2002, they were down to around $9 billion. ([Location 3912](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3912)) - Silicon Valley lost 200,000 jobs between 2001 and early 2004; highway billboards were bereft of ads, and physics PhDs were waiting tables. To be in the Valley was to realize that “only the cockroaches survive, and you’re one of the cockroaches,” as one entrepreneur put it. ([Location 3916](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3916)) - But as animal spirits roared back to life, the venture industry woke up to the echoes and extensions of the Brin-Page challenge. Young entrepreneurs no longer deferred to experienced investors. In fact, they often regarded them contemptuously. The change in mood was crystallized by Paul Graham, a self-described hacker who became an influential guru among young startup founders. ([Location 3923](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=3923)) - “All failed companies are the same,” he reflected. “They failed to escape competition.” ([Location 4202](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=4202)) - Graham was saying you could liberate yourself before you even joined a company. He distilled his message into a few stirring phrases. Work for yourself. Capture the value of your own ideas. ([Location 4452](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=4452)) - With China’s economy growing at 10 percent per year, and with internet usage expanding roughly twice that quickly, the opportunities were everywhere.3 Ordinary Chinese had computers, modems, cell phones, and more disposable income than their parents could have fathomed. “All you had to do,” Rieschel said later, “was sprinkle capital on that and stir.” ([Location 4501](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=4501)) - At this stage in the story, two points are worth noting. First, the Chinese government had played no direct role in launching Alibaba, a company that would become a pillar of the nation’s digital economy. Second, and contrastingly, U.S. finance had made all the difference. But the U.S. influence on Ma and Alibaba extended beyond the capital that they received. Arthur Rock’s intellectual heirs conspired with Ma to deploy stock options as a magic weapon. ([Location 4646](https://readwise.io/to_kindle?action=open&asin=B094Q2ZQCV&location=4646))