Why I liked & disliked "The Power Law" by S. Mallaby

Recently I listened to a book by S. Mallaby "The Power Law". In his book, S. Mallaby tells us the history of venture capital (in the US and a little bit of China) based on the examples of famous VC firms (e.g. Kleiner Perkins, YC, Softbank, Sequoia, Benchmark).

“Power law” means that a small number of occurrences generate most of the results. This concept is also known as the Pareto principle, where 80% of the effects come from 20% of the causes. This phenomenon can be seen in the distribution of wealth: around 50% of the global wealth is concentrated in the hands of 1% of the world’s population. Also, this phenomenon is relevant for the venture capital industry. In order to make money in VC, the fund should hit a couple of “grand slams” (big fat exits) in order to be successful.

The book is well written and includes a bunch of interesting lessons about VC, but at the same time, I honestly don't understand the hype around it.

Below are the six core lessons I learned from the book and five biggest disappointments.

Lessons:

1. Risk-taking, high-quality & practical STEM education, and high-net-worth individuals are three core ingredients of a successful tech ecosystem.?There’s another (rather optional) component — a government that is open to innovation and tech development. It doesn’t matter if the country is a democracy or, well, China or Russia. In the book, you can see examples where “tier-1” VC firms invested in companies that weren’t even founded yet and had only a technical co-founder with a solid STEM background and his crazy or genius ideas. You can also see that the CEO could be “hired” externally and given an option pool. And finally, you can see that the only thing that interested VCs sometimes is if a product works and solves the problem. However, this risk was calculated to some extent. For example, VCs rarely invested alone in the round and required the startup to find other VCs willing to participate.
2. Networking is the “glue” that keeps the tech ecosystem and its main ingredients together.?The book strongly implies that everyone in the Valley is open to introductions. All you need to do is ask. Such a situation happened to Cisco co-founders. When they needed to raise money, they got an introduction through a “friend who knew a friend” to …Sequoia. The author says that people in SV liked to be positively bothered.
3. It’s important to invest in potentially big ideas before anyone else.?When anyone else invests in the same thing as you are, you might be in a bad position or even a bubble.
4. It’s not that important if a VC is from finance or an ex-entrepreneur.?It’s more important to have a “prepared mind”, be able to take risks, and have a good network. Even though it’s a common argument in the industry that VCs need to be entrepreneurs, the author makes a conclusion that it’s not the same thing: to be an entrepreneur and be able to identify potentially successful founders.
5. It’s OK when VCs replace founders by outside managers at some point.?In fact, sometimes they should do so to save the company, like it was with PayPal, Musk, and Thiel. (Can we please change the CEO of Twitter? Please?)
6. It’s not important to be a high-tech business to become large and bring profit to investors.?Alibaba wasn’t technological, Facebook, in fact, also wasn’t reliant on tech. But they had a moat and a potentially huge market to tend. Facebook was so viral among students that they were obsessed with it. Plus, they wanted to stay there for a long time because their friends were on Facebook, too. Alibaba faced a huge potential market and had an ambitious/charming enough founder to be successful.

Disappointments:

1. No place for women in the history of US tech.?There are literally three or four women mentioned in the book in the context of US tech. Two of them were eventually labeled as too erratic and psycho, like the co-founder of Cisco and the woman who worked in Kleiner Perkins. To make matters even spicier, the story of Cisco’s co-founder ends with her founding a cosmetics brand (lightly implying “if you're a girl, go build a girly business”). At the same time, almost every second male founder/VC mentioned in the book was erratic and crazy. And instead of canceling, they got respect and were labeled as geniuses. Like Elon Musk, who spent a lot of money on an expensive car, then crashed it, and laughed at it. Anyway, the main conclusion here is the following: to be invited to the table in the VC as a female, you need to be a Mary Meeker — one of the ten smartest people in tech (2010). To be invited to the table in US VC as a male, you need to have a friend from VC. Btw, China did a way better job raising & promoting female VCs.
2. The book is ultimately US-centric.?The author dismissed Israel, almost didn’t mention Europe at all, and said that the beginning of Chinese VC is largely attributed to the US. The book is not about the history of global VC, it’s about the history of VC from the perspective of the US. I am pretty sure that if it was written by a Chinese person, the history would be very different.
3. The book conveniently avoids uncomfortable topics.?For example,?the story behind Milner ?sounds too incomplete and makes him look like he was some poor young prodigy from Russia, who was so smart that he earned millions to invest in Facebook in the late 2000s. But this is not the full story. Of course, Milner built his reputation, network, and made a lot of awesome investments, including Alibaba, Twitter, Airbnb, Affirm. But avoidance of all facts makes his story flat and incomplete.
4. There’s no universal wisdom behind VC’s decision-making.?In “The Power Law”, Mallaby says a couple of times that even the most successful VCs didn’t always manage to keep up with their success in the future. Sometimes, they just got lucky in the very beginning. Another notable driver of successful investments is in VCs network. Almost every VC mentioned in the book never participated in the deal alone, often invested through an intro and asked for references about the startup.
5. (personal disappointment)?Ukraine & the whole CEE region desperately needs more “business education” at universities.?Especially Ukraine. The current level of understanding that building a startup is also a legit career is low. Ukrainians are mostly risk-averse. And finally, our education system is not practical at all. No one is encouraged to build a business, like it was in the US in the era of Paul Graham. Instead, building a startup is often laughed at in the media. Especially when someone fails.

Disclosure:?the opinions expressed in this review are solely those of the author and do not reflect the views or opinions of Flyer One Ventures. The author has written this review in their personal capacity and the views expressed are their own.