Venture capital isn't about vision — it's about turning a one-shot gamble into a repeatable game
Mallaby wrote the history of Silicon Valley venture capital, and the most valuable mechanism in it is this: VC uses networks to turn an entrepreneur's one-shot gamble into a repeatable game, which is why he calls venture capital a "machine that manufactures courage."
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The power law is the key to venture capital
Mallaby says ordinary investing thinks in terms of a normal distribution: a big bell curve where most investments' gains or losses land near the average. Venture capital isn't like that — most projects fail, because most startups fail, but a handful can return 10x, 20x. This distribution forces you to think in a completely different way, which is why he titled the book The Power Law. This law isn't rhetoric; it determines every mechanism that follows: why you invest in people who look crazy, why you accept failure, why a few successes can cover all the losses.
— Sebastian MallabyVenture capital began with eight traitors
Mallaby traces the origin of venture capital directly to 1957: eight young researchers working under Nobel laureate Shockley refused his high-pressure management and left en masse to start their own venture. He coined his own term for this kind of capital — Liberation Capital. Its function is to let entrepreneurs leave big companies, defy their bosses, and start new companies on a completely different set of ideas. He later returns to this point when explaining Silicon Valley's origins: in 1957, Arthur Rock's investment in Fairchild Semiconductor was the starting point of venture capital.
— Sebastian MallabyThe seven-year fund life forced the pace of investing
One of Arthur Rock's contributions was designing the limited partnership mechanism, what we now call the LP: the fund raises money up front and commits to a life of about 7 years. Mallaby explains two consequences of this design: first, the time limit forces VCs to speed up their investing pace, they can't drag it out to 15 years; second, having the money ready in advance means that when a great entrepreneur appears, the investor knows he can put money in immediately without raising on the spot. This is a mechanism-level explanation, not a character narrative like "Rock had good judgment."
— Sebastian MallabySequoia won by managing itself, not by picking well
Mallaby attributes the key difference between Kleiner Perkins falling behind and Sequoia staying at the top to the energy leaders put into managing their own firms. John Doerr was an extremely charismatic salesperson who understood engineering, but he never really focused on managing Kleiner Perkins. Sequoia's Michael Moritz and Doug Leone cared intensely about: how to recruit young investors, how to develop them, what the dynamics around the table were on Monday morning when deciding whether to invest, and how to use decision science and behavioral science to improve decision quality. Sequoia also kept changing itself: around 1995 it only did A rounds and only invested in Silicon Valley; a decade later it already had an office in China, was doing growth funds and writing bigger checks, and was considering a hedge fund.
— Sebastian MallabyOlder investors hand the halo to the young
Mallaby gives the example of Roelof Botha: he was recruited into Sequoia in his twenties, and one of the most senior investors told him, when you make your first investment the two of us will go to board meetings together, at first I'll be the director and you'll watch how I do it; if the company fails, it's my fault, the black mark goes under my name, because I'm already an experienced investor and you're still young, a black mark would be a problem for you; if the company does well, we switch positions quickly, you become the director, and the halo and reputation of success go to you. Mallaby says this is a very generous way of bringing people along, and probably part of why Sequoia may have done better than other VCs.
— Sebastian MallabyDon Valentine deliberately spoke last in meetings
When Don Valentine founded Sequoia he didn't use his own name but named it after a famous California tree, unlike contemporaries like Kleiner Perkins or Arthur Rock & Company that hung their egos on the door. In the 1980s he recruited several people who were clearly strong founders, but in meetings together he wouldn't speak at the start, because he didn't want his opinion to set the tone for the whole discussion; he let others run it, so that everyone dared to express their own views. Mallaby says this shaped the DNA of the Sequoia partnership: deliberately encouraging young people to step forward.
— Sebastian MallabyThe Facebook investment was a relay across three age groups
Mallaby uses Accel's investment in Facebook to show that venture capital is a team sport: the first to notice Facebook spreading among Stanford students was a young person still studying at Stanford who wasn't a formal member of Accel; Accel paid him a little money to bring ideas in; he told Kevin Efrusy, who verified it and made early contact; then he brought in an Accel founder around 60 years old to meet Facebook together; finally they needed an investor of intermediate age, around 45, to persuade Facebook to let Accel invest. Sequoia's practice is: after a project exits successfully or is acquired, or after an IPO, write a memo listing everyone who contributed to that investment, emphasizing the team rather than the individual.
— Sebastian MallabyVenture capital is a machine that manufactures courage
Mallaby explains why networks drive innovation: a startup needs to persuade excellent engineers to join, and engineers fear the company will fail; it needs to recruit excellent salespeople, and salespeople are afraid too. If a famous VC is behind it, the VC can tell early employees, it doesn't matter if this one fails, I've invested in many other companies, I'll place you at one of them. He gives the example of Eric Schmidt: Schmidt initially didn't want to join Google, saying Larry Page and Sergey Brin were too young, too arrogant, and disrespectful of anyone over 30; John Doerr told him, you're right, they might kick you out, but if they really do, I'll get you a CEO job at another software company. From this Mallaby calls venture capital a "machine that manufactures courage": it turns a one-shot, extremely high-risk single game into a repeatable game.
— Sebastian MallabyIn their own words · checked verbatim
I chose The Power Law 因为它是 sort of the secret key to how venture capital works
Sebastian Mallaby1:01
Yes I think rebellion is the origin I called it sometimes Liberation Capital
Sebastian Mallaby4:02
so I think that time-limited fund idea of about 7 years forces the venture capitalists to hurry up and make investments
Sebastian Mallaby9:07
don valentine did not speak at the beginning because he didn't want his own opinion to set the pattern for the conversation
Sebastian Mallaby18:25
they write a memo that lists all of the different people at Sequoia who contributed to the success of the investment and they emphasize the team not the individual
Sebastian Mallaby22:27
by turning a single shot game which is very risky into a repeat game venture capitalists create the courage that entrepreneurs need
Sebastian Mallaby54:30
in this way I sometimes call venture capital a machine for manufacturing courage
Sebastian Mallaby54:30
if you've got lots of loose ties it gives you lots of options
Sebastian Mallaby56:48
Figures
| Number of VCs Mallaby interviewed | About 200 top venture capitalists | 2:01 |
| Time Mallaby needed to complete the interviews | About four to five years | 2:01 |
| Fund life designed by Arthur Rock | About 7 years | 9:07 |
| Proportion of Masayoshi Son's wealth lost in 2000 | About 97% | 36:50 |
| Share of Silicon Valley companies founded by people born outside the US | About two-fifths, i.e. 40% | 35:50 |
| Year Y Combinator was founded | 2005 | 37:51 |
| Length of the Y Combinator bootcamp | About eight to ten weeks | 38:51 |
| Founding years of Accel, Benchmark, Founders Fund | 1983, 1995, 2005 | 40:54 |
| Time it took China to reach unicorn scale comparable to Silicon Valley | About 15 years | 1:00:00 |
| How long Mallaby's book kept selling after he wrote the hedge fund history | 12 years | 1:15:00 |
Glossary
- The Power Law
- Venture returns are extremely unevenly distributed: most projects fail, a few return dozens of times over.
- Liberation Capital
- Mallaby's alias for venture capital, referring to how it lets entrepreneurs break away from big companies and stand on their own.
- growth investing
- Putting big money into a company that already has customers and is near IPO, letting it delay going public and keep expanding.
- the strength of weak ties
- Sociologist Mark Granovetter's idea: a large number of loose ties bring more information and options than a few close ties.
- vaporware
- Internet companies that are concept only, propped up by cheap capital and advertising, and collapse the moment capital dries up.
How to listen
Suitable for founders and LPs focused on VC mechanisms, fund organizational design, and Silicon Valley history; listeners who want character gossip and specific cases will also get something out of it.
From 1:13:50 to 1:15:00 the transcription is severely garbled and can be skipped.