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A review by jasonfurman
The Power Law: Inside Silicon Valley's Venture Capital Machine by Sebastian Mallaby
5.0
The Power Law is a fascinating, compelling, detailed but never boring, thoroughly reported and meticulously presented history of the venture capital industry from its inception to the present day, focusing on the people and firms, how they structured their finance and worked with founders and entrepreneurs, the successes (mostly) and a few failures, and how it has all evolved over time. It also is an effective synthesis and evaluation of the industry, both in understanding the causes and consequences of its success and evaluating real shortcomings and rebutting spurious ones.
Sebastian Mallaby is mostly positive about the industry, arguing that it is not just a set of lucky accidents or survivorship bias but instead the successes reflect a rich culture of personal networks as well as critical roles of venture capitalists in coaching, guiding and redirecting brilliant entrepreneurs and founders who can also be anything from inattentive to business concerns to reckless about disregarding them--all of which creates something much larger than the sum of its parts.
Virtually everything about the industry up through about twenty years ago was new to me. The fact that initially one might have bet on Boston with its science-related industry but a combination of accidents (the form of the venture-type companies there) and a corporate culture that was larger and more about secrets meant that did not happen and instead it emerged in Silicon Valley. How venture started with the view that founders needed to be replaced almost immediately with professional CEOs but over time the initial VC stakes got smaller and smaller, the philosophy shifted towards giving brilliant founders room to make high variance bets, and founders themselves (like Peter Thiel) started to set up their own VC firms.
The last twenty years was more familiar to me from reading the news and talking to people but even there I learned a lot about the rise of different stages of finance, how it enabled companies to stay private longer, the rise of the unicorns, and how the spectacular failures of Theranos and WeWork but even more the near implosion of Uber led to a pendulum shift back from founder control. Also the story of the failures of VCs and clean energy were interesting, as they foundered on the heavy capital requirements up front, the inability to get a big margin on their products, and changing and uncertain government policy.
The book left me wanting more on the international aspects of venture. The book's scope is largely the Silicon Valley VCs. It has a rich account of the initial phase of their movement into China and funding some of the initial Chinese super successes (much of the focus is in Alibaba), but it does not have very much on the Chinese VC industry let alone the successful Israeli one or the many failures to set up a rich network of VCs elsewhere in the world. (Some of this is in the conclusion but less in the form of narrative and history like the rest of the book and instead examples to make policy points.)
If pressed to identify a real shortcoming I would say that the book documents twenty successes for every failure and, of course, the industry's track record is almost the exact opposite. Moreover it has very few "normal" failures, the Go Network being the main one (and then Theranos and WeWork are the more spectacular one). But failures happen at lots of different stages, most of them failing to even take off into the high valuations before they crash. What are these like? Presumably the VCs in many cases played an active mentoring and coaching role and they still failed.
Mallaby defends the industry as genuinely contributing to the successes that it has generated and also against antitrust and other concerns (arguing, correctly, that those concerns should be addressed when companies misbehave not when they are initially growing and being financed). He is very critical of the lack of gender and racial/ethnic diversity in the industry (much less than in many other areas of finance) and calls out both the behavior and consequences of this.
Finally Mallaby has a number of policy recommendations both for the U.S.-China relations and for countries that want to set up a VC industry that are broadly thoughtful and sensible (although I would want to apply some critical scrutiny to his enthusiasm for tax breaks).
I would also recommend Mallaby's hedge fund history [b:More Money Than God: Hedge Funds and the Making of a New Elite|7936425|More Money Than God Hedge Funds and the Making of a New Elite|Sebastian Mallaby|https://i.gr-assets.com/images/S/compressed.photo.goodreads.com/books/1432927841l/7936425._SY75_.jpg|11340346] which shares all of the same strengths as this book: thorough reporting, detailed history, but still a spellbinding story with some broader lessons. (I also loved his biography of former World Bank President Jim Wolfensohn [b:The World's Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations|87181|The World's Banker A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations|Sebastian Mallaby|https://i.gr-assets.com/images/S/compressed.photo.goodreads.com/books/1309283956l/87181._SY75_.jpg|1498211] and will one day have the courage to tackle his biography of Alan Greenspan [b:The Man Who Knew: The Life and Times of Alan Greenspan|29358555|The Man Who Knew The Life and Times of Alan Greenspan|Sebastian Mallaby|https://i.gr-assets.com/images/S/compressed.photo.goodreads.com/books/1630482865l/29358555._SY75_.jpg|49602231]).
Sebastian Mallaby is mostly positive about the industry, arguing that it is not just a set of lucky accidents or survivorship bias but instead the successes reflect a rich culture of personal networks as well as critical roles of venture capitalists in coaching, guiding and redirecting brilliant entrepreneurs and founders who can also be anything from inattentive to business concerns to reckless about disregarding them--all of which creates something much larger than the sum of its parts.
Virtually everything about the industry up through about twenty years ago was new to me. The fact that initially one might have bet on Boston with its science-related industry but a combination of accidents (the form of the venture-type companies there) and a corporate culture that was larger and more about secrets meant that did not happen and instead it emerged in Silicon Valley. How venture started with the view that founders needed to be replaced almost immediately with professional CEOs but over time the initial VC stakes got smaller and smaller, the philosophy shifted towards giving brilliant founders room to make high variance bets, and founders themselves (like Peter Thiel) started to set up their own VC firms.
The last twenty years was more familiar to me from reading the news and talking to people but even there I learned a lot about the rise of different stages of finance, how it enabled companies to stay private longer, the rise of the unicorns, and how the spectacular failures of Theranos and WeWork but even more the near implosion of Uber led to a pendulum shift back from founder control. Also the story of the failures of VCs and clean energy were interesting, as they foundered on the heavy capital requirements up front, the inability to get a big margin on their products, and changing and uncertain government policy.
The book left me wanting more on the international aspects of venture. The book's scope is largely the Silicon Valley VCs. It has a rich account of the initial phase of their movement into China and funding some of the initial Chinese super successes (much of the focus is in Alibaba), but it does not have very much on the Chinese VC industry let alone the successful Israeli one or the many failures to set up a rich network of VCs elsewhere in the world. (Some of this is in the conclusion but less in the form of narrative and history like the rest of the book and instead examples to make policy points.)
If pressed to identify a real shortcoming I would say that the book documents twenty successes for every failure and, of course, the industry's track record is almost the exact opposite. Moreover it has very few "normal" failures, the Go Network being the main one (and then Theranos and WeWork are the more spectacular one). But failures happen at lots of different stages, most of them failing to even take off into the high valuations before they crash. What are these like? Presumably the VCs in many cases played an active mentoring and coaching role and they still failed.
Mallaby defends the industry as genuinely contributing to the successes that it has generated and also against antitrust and other concerns (arguing, correctly, that those concerns should be addressed when companies misbehave not when they are initially growing and being financed). He is very critical of the lack of gender and racial/ethnic diversity in the industry (much less than in many other areas of finance) and calls out both the behavior and consequences of this.
Finally Mallaby has a number of policy recommendations both for the U.S.-China relations and for countries that want to set up a VC industry that are broadly thoughtful and sensible (although I would want to apply some critical scrutiny to his enthusiasm for tax breaks).
I would also recommend Mallaby's hedge fund history [b:More Money Than God: Hedge Funds and the Making of a New Elite|7936425|More Money Than God Hedge Funds and the Making of a New Elite|Sebastian Mallaby|https://i.gr-assets.com/images/S/compressed.photo.goodreads.com/books/1432927841l/7936425._SY75_.jpg|11340346] which shares all of the same strengths as this book: thorough reporting, detailed history, but still a spellbinding story with some broader lessons. (I also loved his biography of former World Bank President Jim Wolfensohn [b:The World's Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations|87181|The World's Banker A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations|Sebastian Mallaby|https://i.gr-assets.com/images/S/compressed.photo.goodreads.com/books/1309283956l/87181._SY75_.jpg|1498211] and will one day have the courage to tackle his biography of Alan Greenspan [b:The Man Who Knew: The Life and Times of Alan Greenspan|29358555|The Man Who Knew The Life and Times of Alan Greenspan|Sebastian Mallaby|https://i.gr-assets.com/images/S/compressed.photo.goodreads.com/books/1630482865l/29358555._SY75_.jpg|49602231]).