It might be hard for most Americans to muster much sympathy for ultrarich venture capitalists, but Sebastian Mallaby wants us to try. In his new book, “The Power Law,” he argues that the funders of troubled outfits like WeWork and Uber have been unfairly maligned as exceedingly greedy and insufficiently skeptical — all too willing to look the other way when the entrepreneurs they back do something stupid or reprehensible, as long as there’s oodles of money to be made.
The truth, Mallaby says, is at once simpler and more complicated. After all, venture capital from the beginning was supposed to be about actual adventure — taking chances on technologies that were too far-out for a traditional bank loan.
“Venture investing came down to that scary jump from messy information to a binary yes-or-no call. It came down to living with the reality that you would frequently be wrong. It was about showing up at the next partners’ meeting, rising above your wounded pride and mustering the optimism to make fresh bets on a bewildering future.” This is just one of several fulsome passages in the book that may prompt you to ask: Did a venture capitalist write this?
As someone who enjoyed Mallaby’s “More Money Than God” (2010) and “The Man Who Knew” (2016) — his mostly flattering portraits of hedge funds and the former Fed chair Alan Greenspan, respectively — I anticipated that he would be gentle on the otherwise tight-lipped venture capitalists who agreed to talk to him. And he is. But where the indulgences of those earlier narratives were redeemed by ample demonstrations of Mallaby’s intelligence and storytelling skills, “The Power Law” mysteriously contains only trace amounts of either.
Part of the problem is that Mallaby never quite settles on the story he wants to tell. He introduces the book by laying out what he intends to do: “to explain the venture-capital mind-set” and “to evaluate venture capital’s social impact.” This mind-set, he says, revolves around the “power law” of his title — the idea that the distribution of phenomena is not “normal” but skewed. Instead of a bell curve, picture a long tail, where “winners advance at an accelerating, exponential rate.” Adapt or die, sink or swim — there’s no middle ground. This is why V.C.s like to talk about “grand slams” and “moon shots”; Peter Thiel says that a fund’s top investment should generate returns so spectacular that it will outperform everything else in the fund put together.
This, clearly, isn’t the kind of logic that has much use for steady, incremental growth, to say nothing of a flourishing middle class. You might therefore wonder about the “social impact” of venture capital, which Mallaby deems to be, on the whole, good. He concedes that “V.C.s as individuals can stumble sideways into lucky fortunes,” or can sometimes do unhelpful things. But he is ultimately bullish on what they have to offer: “Venture capital as a system is a formidable engine of progress — more so than is frequently acknowledged.” That engine, Mallaby reminds us, has funded such ventures as the development of synthetic insulin and, more recently, plant-based alternatives to ecologically damaging meat.
“The Power Law” traces the origins of venture capital as we know it to the financing of the “Traitorous Eight” — a group of employees at Shockley Semiconductor Laboratory who, in 1957, walked out of their jobs working for their “maniacal despot” of a boss. (Earlier examples of “venture vehicles,” Mallaby says, were more oriented toward philanthropy or public service.) The eight founded Fairchild Semiconductor with the help of a broker on the East Coast named Arthur Rock, who raised the requisite “liberation capital.”
Mallaby follows the history through to the present day. He makes a detour to discuss venture capital in China, where the industry, compared with Silicon Valley, happens to be “less of a boys’ club.” He gives examples of the different kinds of funds, with their various personalities and philosophies. There are V.C.s who see it as their role to act as mentors and coaches to inexperienced founders. There are V.C.s who insist on installing seasoned outsiders at start-ups to serve as C.E.O.s. There are also “founder-friendly” V.C.s, who promise to be hands-off, allowing genius, no matter how unorthodox or weird, to do its work.
The traditional power of venture capitalists to exert influence over founders has been eroded by an “increasingly rebellious youth culture,” Mallaby says, recounting how Facebook’s Mark Zuckerberg deigned to show up late for a meeting with the venerable firm Sequoia dressed in a T-shirt and pajama pants. But Mallaby also points to a structural change. He says that the balance of power has tipped in favor of the most sought-after entrepreneurs because they now have their pick among clamoring suitors: There’s more money than ever before in search of the next big thing.
The book includes a lot of granular detail about deals getting made, phone calls volleyed back and forth, meetings arranged and postponed. Banal bits of conversations get recounted, even when they seem only to serve as narrative clutter. (“What are you doing tomorrow morning?” “I’m doing nothing.” “Great, how about we meet for breakfast?”) Some of Mallaby’s metaphors make no sense; he writes that one V.C., learning about a happy surprise, “digested this bolt from the heavens.” Another V.C., also triumphant, “permitted himself just one discreet celebration, like a man who pumps his fist and screams a victory scream, but silently.” So this V.C. screamed but didn’t scream — and since he’s only “like” this tortured image, he didn’t pump his fist either?
Such is the material that pads this overstuffed book, which never quite delivers on the case it laboriously tries to make. Mallaby’s main argument is that venture capital funds disruption, and disruption is usually to the good. Innovation begets more innovation, delivering us from a stagnant status quo.
Mallaby has clearly done copious amounts of research, and it’s not as if he’s oblivious to the “alleged shortcomings” of venture capital; he just decides that they’re dwarfed by the “attractions of the industry.” A passing sentence allows that all the money poured into Uber in order to “blitzscale” and decimate the competition may have forced existing taxi operators to “compete on a distorted playing field,” but those “incumbent taxi operators,” Mallaby says, were too cozy with municipal regulators anyway. There’s no mention of how utterly calamitous the dominance of apps like Uber has been for such “incumbents” (a dirty word among disrupters) — the financial ruin, the suicides; there’s only the cold (and questionable) conclusion that “cheap venture dollars served to balance that unfair advantage.”
Of the spectacular founder flameouts at Uber and WeWork, Mallaby’s apologia is a thing to behold. Their “responsible” V.C. backers may have kept quiet, registering any qualms “politely” and privately until embarrassing information became too public to be ignored, but the real blame, he says, lies not with those adults in the room but with “heedless, late-stage investors” — even though the same venture capitalists were happy to have their wayward founders take those “heedless” investors’ money.
There’s just one critique of venture capital that Mallaby says is deserved — the need for the industry to diversify beyond a “monoculture” that is “too white, too male, too Harvard/Stanford.” This is a fair assessment, but at this point it isn’t exactly speaking truth to power. Venture capitalists love to talk about boldness, but one imagines they will appreciate the tone of deferential restraint in this funder-friendly book; much better to get a familiar call for more diversity than anything that might call into question their bottom line.