In his new book, The Power Law: Venture Capital and the Making of the New Future, New York Times bestselling author Sebastian Mallaby tells the story of Silicon Valley’s dominant venture-capital firms and how their strategies and fates have shaped the path of innovation and the global economy for the past sixty years.
On March 10, at the first in-person CHM Live event in two years, Mallaby shared insights and joined leading venture capitalists Roelof Botha from Sequoia and Aileen Lee of Cowboy Ventures for a discussion moderated by Stanford’s Leslie Berlin. On-site attendees enjoyed a pop-up exhibit of venture capital artifacts and video clips of pioneering VCs sharing stories and advice.
Mallaby opened the event with a story of how founders in India, who used to be considered “losers” ten years ago, are benefiting from a business culture that’s now much more favorable to entrepreneurial ventures. What changed? According to one Indian VC, everyone is watching Shark Tank in Hindi.
Like India, Silicon Valley wasn’t always a haven for founders, says Mallaby. It was just a place with a lot of engineers and good schools. Until venture capital entered the picture.
Sebastian Mallaby explains how venture capital freed entrepreneurs to innovate.
Mallaby notes that venture capital can de-risk some of the business of entrepreneurship, helping a new founder with funding, advice, and recruiting a team. And, if the company fails, a venture capitalist can promise to find the risk-taker a new job, just as John Doerr did when he encouraged Eric Schmidt to become Google’s CEO. This kind of support, he argues, can not only liberate talent, but also change business culture.
When founders see themselves as accountable to no one, what’s the role of active investors? Aileen Lee focuses on being of service to founders and ensuring that values are aligned. Roelef Botha tries to determine if a founder really cares about the mission and success of the company or is more interested in personal enrichment.
While a founder/funder relationship might start out with values aligned, Mallaby says, later-stage investors complicate things. They might agree to vote with the founder or decline a board seat. The public market governance model has some controls, as do early-stage hands-on investors, but these are lacking for private “unicorn” companies. There’s been a shift in power, driven by the capital invested.
Sebastian Mallaby and Aileen Lee discuss how capital can shift power.
Silicon Valley is a meritocracy, but only up to a point. Leslie Berlin points out the abysmally low numbers of women and Black investors and notes that one third of VCs with MBAs attended either Stanford or Harvard. Botha describes how by making a concerted effort Sequoia has gone from zero women investors when he started there to 25 percent today. Lee explains how networks can perpetuate inequality.
Aileen Lee describes how networks can contribute to inequality.
Venture capital and tech are facets of national power. Mallaby says there are real concerns about nationalistic leadership creating geopolitical competition, of which technology is a part. The spread of venture capital internationally, often by American firms, has meant that more homegrown investors are funding their own country’s entrepreneurs. While this is great for the global economy, what’s the effect on national power and the flow of talent to the US and Silicon Valley, which has historically relied on immigrant founders?
Botha notes that with recent changes to immigration policy in the US, it's difficult to recruit foreign engineers. But, he says, ideas are everywhere, so it is not realistic to try to control them. Lee believes that the power of software lies in its global accessibility and how it can and empower people to earn a living wage in remote parts of the world.
The audience was curious about what it’s like to actually be a venture capitalist. Lee notes how important it was for her to go with her instincts in following up on a promising venture even after a second meeting that didn’t go well. Botha described the rewards of relationships and a network in action.
Roelof Botha tells a story of meeting a future founder as a teenager.
In the context of broader socioeconomic issues, is the power law distribution of venture capital leading to fewer winners bringing in the most returns and exacerbating inequality? While that is probably the case to some degree, Botha argues that investors can help share the wealth by choosing limited partners that will use returns to do good in the world. Lee suggests that VCs should also pursue new networks to find diverse investors and startup teams. Mallaby says venture capital itself can be an equalizing force, providing money and connections to entrepreneurs raised without established connections, and sharing the wealth among entire startup teams.
Ultimately, it comes down to how venture capitalists evaluate founders and determine who gets their help. And, while they all have their formulas, it’s clear they rely heavily on their experience, judgment, and instinct. Botha made a case for VCs imagining the possibilities of an idea rather than just poking holes. He quoted legendary Sequoia founder Don Valentine, who said, “We are in the business of investing money. We are not in the business of not investing money.”
In CHM tradition, the participants all chose one word of advice for a young entrepreneur. Combining their words provides an apt takeaway for the event: When your curiosity (Mallaby) inspires you to dare (Botha) to try something new, go for it, always thinking about how you can serve (Lee) others.
The Power Law of Venture Capital | CHM Live, March 10, 2022
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