Sequoia Endures, Kleiner Perkins Falls Behind: The Difference Is Whether Leaders Manage Internally
Kleiner Perkins dropped off the top of the list while Sequoia kept leading, and the biggest difference is whether leaders spend their energy on internal management — how to hire young investors, how to develop them, and how to keep that Monday-morning decision table alive.
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The secret key to venture capital is the power law
Mallaby says most investing follows a normal distribution, with returns ending up near average; venture capital does not — most investments fail, because most startups fail, and only a very few companies earn enormous profits of ten or twenty times. This distribution forces investors to think in a completely different way: you cannot win on average hit rate, you can only cover all your losses with a handful of extreme successes. That is also why he chose The Power Law as the book's title.
— Sebastian MallabyArthur Rock designed the limited partnership and raising money in advance
Two of Arthur Rock's mechanism designs shaped the entire industry that followed: first, a seven-year fund life, which forced venture capitalists to invest quickly; second, raising money in advance, so you had money on hand first. Before he founded the first venture capital firm, when he encountered a new company he still had to go find potential investors specifically for that company and persuade them to put up money; once he had his own fund, the investment process was much faster. But he himself was too solitary and did not like building teams, so he never built a lasting organization the way Sequoia and Kleiner Perkins did.
— Sebastian MallabyStaged investment and deep involvement were the twin stars' contributions
Don Valentine and Tom Perkins made two major contributions to VC history: first, staged investment — when a startup comes asking for money you do not give it all at once, you give only enough for six to nine months, let the company prove itself over that period, and give more once it hits milestones; second, a very deep level of involvement in portfolio companies, not only sitting on the board but actively shaping the company. Tom Perkins himself was an engineer who had founded a laser company, and he would go deep into specific marketing or engineering problems; Arthur Rock also sat on boards, but rarely got involved in those things. Mallaby added one line: it depends on what kind of entrepreneur you are backing, and sometimes entrepreneurs need a lot of coaching, and if they do badly they may even need to be fired.
— Sebastian MallabyKleiner Perkins fell behind because nobody managed the inside
Mallaby attributes the biggest difference between Kleiner Perkins dropping off the top of the list and Sequoia's continued lead to the energy leaders put into management. John Doerr was an extremely charismatic salesman, smart, and understood engineering, but he did not focus on Kleiner Perkins' internal management problems. Sequoia's Michael Moritz and Doug Leone, by contrast, paid close attention to how to hire young investors, how to motivate and develop them, how to shape the fund's culture, and even to how, on a Monday morning when a group sits around deciding whether to put money into a deal, to keep that table alive and how to use behavioral science to improve decision quality.
— Sebastian MallabySequoia's succession mechanism is letting the young win first
Mallaby describes how Sequoia developed Roelof Botha: one of the most senior investors told him, when you invest in your first company I will partner with you and we will go on the board together, at the start I will be in the list and you will watch how I do it from the side; if this company fails, it counts as a stain on me, and I do not care, because I am already a senior investor, whereas a stain next to your name would be a big problem; if this company does well, we quickly switch places, you become the board member, and you get the bonus points, the halo and the list reputation. Mallaby believes this generosity from older investors — making sure a young investor's name is followed by a success story — is something Sequoia does that other firms may not.
— Sebastian MallabyMature VC firms usually fail by picking the wrong successor
Asked how Sequoia would fail if it failed, Mallaby says Sequoia is making big, dangerous bets, such as opening offices in new places and opening new business lines, but that when they do it they are very careful to make sure they do not overreach. He thinks the reason a venture capital firm at a mature stage fails may be that it chose the wrong person as its next leader: if it picks someone who alienates colleagues, other people start leaving the fund and forming other firms, and it can fail. He says this is to some extent what happened at Kleiner Perkins — in the 1990s the senior ranks included John Doerr and the equally outstanding Vinod Khosla, and the two could have been very good partners, but later other people left, and Doerr was too much the boss and not very good at handling these things alone.
— Sebastian MallabyWeak-tie networks turn a single gamble into a repeated game
Mallaby uses sociologist Mark Granovetter's ‘The Strength of Weak Ties’ to explain why Silicon Valley overtook Boston in the 1980s: Boston people stayed at one company and built deep ties with twelve friends inside it; Silicon Valley people kept joining startups, the company would fold a year later, they would move to another, and they shared ideas with people they had worked with five years earlier, so there were many weak ties, and ideas, money and people flowed very fast. Venture capitalists are bees flying among the flowers, carrying pollen. More crucially, venture capitalists turn a very risky single game into a repeated game: when John Doerr persuaded Eric Schmidt to join Google, he told him that if they kick you out, I will make you the CEO of another software company.
— Sebastian MallabyThe astonishing thing about Chinese VC is how much it resembles America
Mallaby says Chinese venture capital began in the late 1990s with Alibaba, Baidu and Tencent, and took only about 15 years to become as big as Silicon Valley in creating and succeeding with unicorns, partly because China's economy was growing very fast at the time, sometimes 10 percent a year. But he thinks the truly astonishing thing about the China story is how similar it is to the American story: it was firms like Sequoia that brought the model to China, they studied the American playbook and often used the same things, such as stock options for early employees. He also mentions that what Chinese venture capital liberated over the past 20 years was not scientists first but a batch of people building apps on phones, and only in the last year or two has it begun actively pivoting to the hard-tech track.
— Sebastian MallabyIn their own words · checked verbatim
I chose The Power Law because it is the secret key to how venture capital works.
我选择The Power Law是因为 它是风险投资运作的秘密钥匙
Sebastian Mallaby1:00
So I think the reason a venture capital firm at a mature stage fails may be that it chose the wrong person as its next leader.
所以我认为 处于成熟阶段的风险投资公司 会致使其失败的原因可能是选择了错误的人作为下一任领导者
Sebastian Mallaby30:59
If you have a lot of loose ties, it gives you a lot of options; if you have a small number of deep ties, you do not have as many options for hiring new people or developing new clients.
如果你有很多松散的联系 他会给你很多选择 如果你有少量的深层次联系 你就没有那么多的选择 可以雇佣新人或开发新客户
Sebastian Mallaby50:40
But in a way, the astonishing thing about the China story is how similar it is to the American story.
但在某种程度上 中国故事的惊人之处在于它和美国故事有多么的相似
Sebastian Mallaby53:41
Figures
| Number of top venture capitalists Mallaby interviewed | about 200 | 2:02 |
| Time Mallaby spent writing this book | five years | 2:02 |
| Life of Arthur Rock's fund | about 7 years | 8:06 |
| How long one tranche of staged investment covers | about 6 to 9 months | 12:09 |
| Proportion Masayoshi Son lost after the Nasdaq crash in March 2000 | about 97% | 34:56 |
| Length of the YC summer camp | 8 weeks or 10 weeks | 35:56 |
| Founding years of Excel, Benchmark and Founders Fund | 1983, 1995, 2005 | 38:03 |
| Share of Silicon Valley companies founded by people not born in the US | about two-fifths, or 40% | 33:55 |
| Time Chinese VC took to catch up with Silicon Valley | about 15 years | 52:51 |
| Time Mallaby spends on each book | five years | 1:05:05 |
Glossary
- The Power Law
- A return distribution in which a few investments earn ten or twenty times and cover the losses of the majority that fail.
- LP
- A limited partner: an investor who gives money to a venture capital fund to manage.
- GP
- A general partner: the partner in a venture capital fund responsible for investment decisions and management.
- Vaporware
- An internet company that uses cheap capital to advertise and attract customers and goes bankrupt the moment the capital stops.
- The Strength of Weak Ties
- Sociologist Granovetter's paper, arguing that loose connections bring more information and options than close ones.
How to listen
Suited to founders and investors focused on VC organizational mechanics, fund succession and the differences between Chinese and American venture capital, especially those who want to understand the split between Sequoia and Kleiner Perkins.
The part after 1:06:05 about writing rhythm and plans for the next book, which has nothing to do with investment judgment.