What Silicon Valley’s Venture History Can Teach Global Investors

What Silicon Valley’s Venture History Can Teach Global Investors

Background concept wordcloud illustration of venture capital glowing light getty Q&A with Sebastian Mallaby

The Power Law by Sebastian Mallaby is the astonishingly frank and intimate 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.

It details the fascinating history of tech incubation by way of storytelling and analysis and helps anyone in the venture capital world think more effectively about their future in it.

Insight into the venture ecosystem as a whole can provide a new perspective on how specific emerging startup industries, notably fintech, can emerge from the capital standpoint and endure over the long-term.

I sat down with The Power Law ’s author, Sebastian Mallaby, to get some of his thoughts.

Key takeaways for me: Building venture capital moat requires balancing embeddedness and differentiation

New differentiation will emerge from new geographies, specialization and unique bridges

The importance of governance, and how it failed in some later stage deals

The pros and cons of blitzscaling

The role (and lack thereof) of AI in predicting market behavior

The coming diversification rather than institutionalization of VC

Advice for young VCs – get a few years of experience first

Alex Lazarow: Your book does a great job of highlighting the differentiation between more prominent, established firms – and smaller startups. Given the explosion of new emerging managers, what advice would you give a new venture capitalist?

Sebastian Mallaby: A moat in venture capital derives from the tricky mixture of differentiation and embeddedness. In short, you need to be differentiated and deeply embedded in the mainstream.

Let’s start with embeddedness. Who are your connections? Who trusts you? Who could you bring on to work for a portfolio company? You need strong, mainstream answers to these questions.

Embeddedness can also include non-obvious networks of value. Being deeply embedded in the Carnegie Mellon ecosystem, for example. It is not in Silicon Valley or off the beaten path. Embeddedness thus trends towards the mainstream.

At the same time, you need to be different from other funds out there. Successful launches, like Benchmark, link deliberately small funds, high fees, and a promise that the high fees represent greater performance.

Accel pioneered the Prepared Mind and a specialized VC fund. Founders Fund differentiated itself by being super founder friendly. A16Z differentiated with investment services.

They are all differentiated, even if perhaps their underlying value derives from being equally mainstream. Lazarow: For new fund managers today, what are the vectors of differentiation? Mallaby: By definition, today’s differentiation will not be what was done differently before.New differentiation will come from things like: Atypical geography: e.g., North East US, or an emerging market Network: for example, a unique network among CTOs for a SAAS fund or financial institutions for a fintech fund. In defense technology, there is an enormous value derived from having connections inside marine navy airfare. Getting the first contract is a big advantage. Bridging between geos. In many ways, this was Masayoshi Son’s original value proposition. Whether that was Cisco or Yahoo – or other deals early in the US – part of the attraction was launching the Japanese version of the product and getting into the market. There will be new ways to scale this in the future. Lazarow: What’s the one thing you would change about the VC model if you could that wasn’t mentioned in your book? Mallaby: The thing I’m most troubled by in the VC model is growth investors. Described in chapter 14, before the conclusion, are the WeWork and Uber stories. What started out really well for Uber almost went off the rails – as it did with WeWork.I blame that on how growth investing has become ‘governance light.’ I would venture to say growth investors are the worst offenders in American capitalism in terms of owning major stakes in companies but not taking care of governance.We have different types of governance in the US for different types of companies. In public companies, if you have bad governance, the CEO can get fired, or the business can get shorted. So there is discipline.In the PE model, an investor buys the full company, which creates strong incentives. And in early-stage venture, where a VC might own 25% of the company, they have strong incentives and aligned interests.But at growth, problems emerge. Founder deference is good, to a point. But some oversight is missing. Lazarow: What is your view on ‘blitzscaling’ today in Silicon Valley? Mallaby : For network-based businesses, the value you create is the […]

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