The Power Law - Sebastian Mallaby  ## Metadata - Author: **Sebastian Mallaby** - Full Title: The Power Law - Category: #books - Tags: #business ## Highlights - In 1982, after completing his business degree, Khosla teamed up with three computer scientists to found Sun Microsystems, whose powerful workstations stamped their mark on the evolution of computing. Cocky and obnoxious, Khosla was soon fired. He became a venture capitalist. ([View Highlight](https://read.readwise.io/read/01gq4f6q5nzgy93950cw9qbbyk)) - By the time he met Patrick Brown, everything about Khosla—his risk appetite, his love of hubris, his quest for improbable ideas—made him the living embodiment of the power law, the most pervasive rule in venture capital ([View Highlight](https://read.readwise.io/read/01gq4f7v7zpbpg7vtkkbja719p)) - This sort of skewed distribution is sometimes referred to as the 80/20 rule: the idea that 80 percent of the wealth is held by 20 percent of the people, that 80 percent of the people live in 20 percent of the cities, or that 20 percent of all scientific papers earn 80 percent of the citations. In reality, there is nothing magical about the numbers 80 or 20: it could be that just 10 percent of the people hold 80 percent of the wealth, or perhaps 90 percent of it. But whatever the precise numbers, all these distributions are examples of the power law, so called because the winners advance at an accelerating, exponential rate, so that they explode upward far more rapidly than in a linear progression ([View Highlight](https://read.readwise.io/read/01gq4fa6gx73rvan254am5e8g1)) - Y Combinator, which backs fledgling tech startups, calculated in 2012 that three-quarters of its gains came from just 2 of the 280 outfits it had bet on.[[19]](#EndnoteNumber18) “The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund,” the venture capitalist Peter Thiel has written ([View Highlight](https://read.readwise.io/read/01gq4fh5achgwbzqfvbgk4995g)) - In the case of Cerent, he invited the dominant router giant, Cisco, to co-invest with him: among other things, Cerent would facilitate the handling of voice data. When Cisco refused, calling Cerent too much of a long shot, Khosla went ahead alone, investing $8 million, recruiting the first engineers, serving as chief executive.[[28]](#EndnoteNumber27) And then he exacted sweet revenge. As soon as Cerent’s technology proved workable, Cisco made two offers for the firm: $300 million in December 1998; $700 million the following April. But Khosla, believing in the power law, knew that winners often carry on winning: he took the risk of turning Cisco down and watched Cerent’s revenues take off exponentially. Four months later, in August 1999, Khosla was informed that Cisco had prepared another bid, this time for $7 billion. The news reached him when he was vacationing at Machu Picchu, twenty-five hundred meters up in the Peruvian Andes. Khosla boarded a helicopter, then a plane, and shook hands on the deal over breakfast in San Jose the next morning. ([View Highlight](https://read.readwise.io/read/01gq4grvzhak6rfq67mdyqvtzn)) - The future can be *discovered* by means of iterative, venture-backed experiments. It cannot be *predicted*. ([View Highlight](https://read.readwise.io/read/01gq4hrnfprfhj0atz6rkj39dv)) - Women are badly underrepresented: as of 2020, they account for 16 percent of investing partners. Racial diversity is even more limited: only about 3 percent of partners at venture-capital firms are Black.[[](#EndnoteNumber37) ([View Highlight](https://read.readwise.io/read/01gq6x5jjfb7rsbmjngnxzh6zb)) - the Chinese venture industry has an advantage over its U.S. rival. It is more open to women. ([View Highlight](https://read.readwise.io/read/01gq6xxcdp6v2cz9d2syp0a8sz)) - The defection of 1957 was made possible by a new form of finance, originally dubbed adventure capital. The idea was to back technologists who were too dicey and penurious to get a conventional bank loan but who promised the chance of a resounding payoff to investors with a taste for audacious invention. The funding of the Traitorous Eight and their company, Fairchild Semiconductor, was arguably the first such adventure to take place on the West Coast, and it changed the history of the region ([View Highlight](https://read.readwise.io/read/01gq6y1e6pwwr0sryr22mdf6na)) - in the left-liberal, sometimes libertarian politics; in the conviction that your productivity can be augmented by micro-dosing LSD ([View Highlight](https://read.readwise.io/read/01gq6yajkprbttw74n5gd75qa4)) - The truth is that the distinguishing genius of the Valley lies not in its capacity for invention, countercultural or otherwise.[[8]](#EndnoteNumber46) The first transistor was created in 1947, not in Silicon Valley, but at Bell Labs in New Jersey. The first personal computer was the Altair, created in New Mexico. The first precursor of the worldwide web, the network-management software Gopher, was from Minnesota. The first browser was developed by Marc Andreessen at the University of Illinois. The first search engine, Archie, was invented by Alan Emtage at McGill University in Montreal. The first internet-based social-networking site was SixDegrees.com, launched by Andrew Weinreich in New York City. The first smartphone was the Simon Personal Communicator, developed by Frank Canova at IBM’s lab in Boca Raton, Florida.[[9]](#EndnoteNumber47) No single geography—not even Silicon Valley—dominates invention. And yet all these breakthrough products have one thing in common. When it came to turning ideas into blockbuster products, the Valley was the place where the magic happened. ([View Highlight](https://read.readwise.io/read/01gq6yg17jh3b0b5j64nj5khp0)) - Digital Equipment’s premise was that transistors could also revolutionize computers made for civilians. To a modern venture capitalist, this pitch would have been instantly attractive: the founders came from a cutting-edge research lab, and they proposed to commercialize a technology that was already proven ([View Highlight](https://read.readwise.io/read/01gq9h0ztm0n7g00bgkx7zsr81)) - ARD would provide a $70,000 investment and a $30,000 loan in return for 70 percent of the company: it was a “take it or leave it” offer. Lacking any alternative, the MIT professors accepted; nor did they protest when Doriot managed to push his stake up to 77 percent ([View Highlight](https://read.readwise.io/read/01gq9h2cp1tyd7y3z9ctpen2zj)) - he proclaimed that the greatest rewards were to be had from the most ambitious and least obvious projects ([View Highlight](https://read.readwise.io/read/01gq9h4tgqpdrpfev3vp416vnh)) - the best prospects involved advanced technology ([View Highlight](https://read.readwise.io/read/01gq9h58s5hmgn8bw9d22vadye)) - Instead of pushing successful ventures to raise additional capital from other investors in order to expand quickly, Doriot was content to let them grow by reinvesting profits ([View Highlight](https://read.readwise.io/read/01gqc2fr997rswb8znw12pfv9x)) - I never wanted to be the richest corpse in the cemetery ([View Highlight](https://read.readwise.io/read/01gqc3aayftbxa212rtfx6vt6f)) - The only asset of tech startups, and the only possible reason to invest in them, was human talent, or what Rock liked to call “intellectual book value.” ([View Highlight](https://read.readwise.io/read/01gqc3pkbgxe9pwt78yzr1nq0m)) - Fortuitously, the 1970s marked the arrival of a new kind of venture investor, equipped with an expanded tool kit that transformed previously unbackable Atari-type startups into thinkable wagers. Rather than merely identifying entrepreneurs and monitoring them, as Rock had done, the new venture capitalists actively shaped them: they told company founders whom to hire, how to sell, and how to structure their research ([View Highlight](https://read.readwise.io/read/01gqena1s7s2qdgyky7r1ve11m)) - You had to go with the version of your invention that would earn you the fattest margin, and you had to open sales channels to as many customers as possible ([View Highlight](https://read.readwise.io/read/01gqenzwaz5ze5t3asze57zw6w)) - After attracting $171 million in new funds in 1969, venture capitalists raised only $57 million in 1974 and a mere $10 million the year after. ([View Highlight](https://read.readwise.io/read/01gqep44f7dxqpjb6qgj9vtc9z)) - At the beginning of June 1975, Valentine duly invested. He bought 62,500 shares for $62,500, making what would now be termed a “seed investment” in Atari ([View Highlight](https://read.readwise.io/read/01gqep8t33at20gwwvw92wtpka)) - To capitalize on this breakthrough, Atari was going to need a far larger capital infusion—perhaps as much as $50 million. There was no way the venture capitalists of the era could mobilize that kind of cash, and the stock market was all but closed; in 1976 only thirty-four companies managed to go public.[[38]](#EndnoteNumber247) For Atari to develop its multi-game console, Valentine would have to come up with another way of raising capital. Valentine resolved that Atari should sell itself to a deep-pocketed parent ([View Highlight](https://read.readwise.io/read/01gqephpx9h5j42xaf6bn5wgvw)) - By the end of the day, a starstruck Bushnell had agreed to sell Atari for $28 million. ([View Highlight](https://read.readwise.io/read/01gqeph3yzshhktjw2ypgb31rm)) - How can you use a computer at home? Are you going to put recipes on it? ([View Highlight](https://read.readwise.io/read/01gqha1tpxwh6j6n3jebn4astp)) - Jobs offered Nolan Bushnell, who had employed him at Atari, one-third of Apple for $50,000. “I was so smart, I said no,” Bushnell remembered. “It’s kind of fun to think about that, when I’m not crying.”[[](#EndnoteNumber316) ([View Highlight](https://read.readwise.io/read/01gqha4e67jn4ndf6q1dcnfbyg)) - With that, Markkula decided to put his energy behind Apple. He became an adviser to the Steves, writing their business plan, serving as marketing chief and company chairman, arranging a bank credit line, and ultimately investing $91,000 of his own capital in exchange for 26 percent of the company. ([View Highlight](https://read.readwise.io/read/01gqhamyt6dap9a9bwzhtjn6kv)) - And so, almost on a whim, Venrock committed $300,000 for 10 percent of Apple. By valuing the company at $3 million, the deal implied that Apple’s value had increased by around thirty times since Stan Veit had refused to pay $10,000 for a tenth of the stock, a year or so earlier. ([View Highlight](https://read.readwise.io/read/01gqhb0ft30a0hra7rdjybw0hb)) - Tags: #invest - With Venrock and Grove on board, Apple acquired momentum. It became the subject of an almost audible murmur; it was as though the Valley’s grapevine were whispering its name insistently ([View Highlight](https://read.readwise.io/read/01gqhb3j2k42k3y6gyz4vfgjk6)) - At a quarter to seven that evening, Mike Scott appeared again. “Mr. Montagu, you are really a fortunate guy,” he said. Steve Wozniak had decided to buy a house. To raise the cash, he wanted to sell some of his own equity. Montagu asked how much stock Wozniak was selling. “Four hundred and fifty thousand dollars,” came the answer. It was more stock by far than Venrock or Valentine had laid hands on. A giddy Montagu called Kramlich again. “Dick, I wouldn’t be here without you!” he said, offering to split the allocation. Kramlich never told Rock that he had acquired a large slice of Apple through this roundabout route, and for years he kept quiet about it. He permitted himself just one discreet celebration, like a man who pumps his fist and screams a victory scream, but silently. On the front gate of Kramlich’s San Francisco home, the iron handle is shaped like an apple. ([View Highlight](https://read.readwise.io/read/01gqhbdqjkmamy4gkb7gzy6d2n)) - VCs are always walking this fine line between competition and cooperation ([View Highlight](https://read.readwise.io/read/01gqksp354ev98mtsan9nfmn4t)) - From this privileged vantage point, Valentine could see which sorts of innovative networking technology Cisco might want to acquire. As a result, Sequoia backed a series of startups that it sold profitably to the mother ship. The partnership’s reputation swelled, and Silicon Valley flourished. ([View Highlight](https://read.readwise.io/read/01gqktjbyd805w1e400wvnq3wh)) - Louis Pasteur. “Chance favors only the prepared mind,” ([View Highlight](https://read.readwise.io/read/01gqkvyaxxg1zr4qy3tsmfveme)) - Yahoo was free, they informed Moritz. They had begun assembling their directory as a distraction from their PhD theses: it was a hobby, like joining a Frisbee club or indulging in horror-movie marathons. Their goal was to be playful, not boringly obsessed with revenues. They listed offbeat sites that caught their fancy—Brian’s Lava Lamp, Quadralay’s Armadillo Home Page. Their penchant for wacky nomenclature should have clued Moritz in to what they were about. Konishiki’s companion workstation was called Akebono. Yahoo stood for “Yet Another Hierarchical Officious Oracle.” Charging customers would be contrary to the quirky spirit of their enterprise. ([View Highlight](https://read.readwise.io/read/01gqpd51389m6w277c9h9czv3m)) - Moreover, Moritz had a rationale for his retort—one that Yang himself had never thought of. In his years as a journalist, Moritz had written a perceptive book about Steve Jobs. Now he insisted that Yahoo was that precious thing, an inspired and memorable company name. Like Apple.[[11]](#EndnoteNumber540) Whether by instinct or cunning, Moritz had given the perfect clincher of an answer. Because he understood Jobs as well as anybody in the Valley, he had the credibility to imply a connection between two unknown grad students and a storied Silicon Valley legend. Like all great venture capitalists, he knew how to amplify the sense of destiny of even the most confident founders. It was the ultimate seduction. ([View Highlight](https://read.readwise.io/read/01gqpdqgeppp9a0bk0qayy7njb)) - Startups came to be assessed not according to this year’s revenues or even next year’s, but rather according to their momentum, traction, audience, or brand—things that could, in theory at least, be monetized in the future. ([View Highlight](https://read.readwise.io/read/01gqpe6jetm1kqtghegmsgdk8f)) - Traditional venture capitalists, observing a cash-burning business with no technological moat and nothing more substantial than a brand, might have refused Yahoo the lifeline that it needed. But by late 1995, tradition was passé ([View Highlight](https://read.readwise.io/read/01gqpekagemn9ab5xtgsn52kkp)) - a system for ranking websites according to how many other sites had linked to them. Bechtolsheim immediately saw the analogy with academia, where reputation was based on numbers of citations ([View Highlight](https://read.readwise.io/read/01gqrypbcvv81n7en0rkzhn3n9)) - At the end of the summer, Brin and Page paddled their way back to Doerr. “This may surprise you,” they told him, “but we agree with you.”[[48]](#EndnoteNumber650) They now wanted an outside chief executive, and they even had identified their man. There was one person, and one alone, who met their standards. “We like Steve Jobs!” Brin and Page reported. ([View Highlight](https://read.readwise.io/read/01gqrz9r7tnfhg7xcn8awsfmsw)) - “I can’t imagine that Google would be worth that much,” Schmidt answered dismissively. “Nobody really gives a shit about search,” he added. ([View Highlight](https://read.readwise.io/read/01gqrzg4kb6jhtsbc3sh200p6f)) - Graham had founded a software company called Viaweb, selling it in 1998 to Yahoo for $45 million worth of stock: it was a classic hacker-makes-good story. Then Graham had turned his hand to writing, expounding on everything from the virtues of the programming language Lisp, to popularity in high school, to the challenges of entrepreneurship ([View Highlight](https://read.readwise.io/read/01gqs0vh9kma199nbj5vp3hy8f)) - At Graham’s own company, one of the angel investors had been a fearsome metals trader who “seemed like the kind of guy who would wake up in the morning and eat rocks for breakfast.” ([View Highlight](https://read.readwise.io/read/01gqs0wwgvn8kpqytb2dqeyh20)) - “What I discovered was that business was no great mystery,” Graham wrote. “Build something users love, and spend less than you make. How hard is that?” he demanded. ([View Highlight](https://read.readwise.io/read/01gqs0zb5qmbetm201w40gz99j)) - Presently, Zuckerberg and his buddy Andrew McCollum appeared at the Sequoia headquarters. They were not merely late. They were dressed in pajama bottoms and T-shirts. ([View Highlight](https://read.readwise.io/read/01gqvaxwpn4z14jq0fenby8447)) - The title of Zuckerberg’s deck was even more insulting. “The Top Ten Reasons You Should Not Invest in Wirehog,” it proclaimed mockingly. “The Number 10 reason not to invest in Wirehog: We have no revenue,” the deck began. “Number 9: We will probably get sued by the music industry.” A bit later, “Number 3: We showed up at your office late in our pajamas.” “Number 2: Because Sean Parker is involved.” “Number 1: We’re only here because Roelof told us to come.” ([View Highlight](https://read.readwise.io/read/01gqvb5c4yrkymgw4f4yg624sb)) - Hoffman declined to lead an investment in Facebook; he had himself founded a social network called LinkedIn, and there might be some rivalry. So Hoffman put Parker in touch with a Stanford friend named Peter Thiel, the co-founder of an online payments company called PayPal. Pretty soon, Thiel agreed to kick in $500,000 in exchange for 10.2 percent of the firm, with Hoffman providing a further $38,000.[[11]](#EndnoteNumber685) A third social-networking entrepreneur named Mark Pincus also wrote a check for $38,000. ([View Highlight](https://read.readwise.io/read/01gqvbnrdjpj4y3hk70rp93xvy)) - Paul Graham had emphasized the tensions between ever larger venture funds and the limited need for capital at software startups ([View Highlight](https://read.readwise.io/read/01gqvbsf0hqgh5p625q8xgce6x)) - Thiel was in many ways a Silicon Valley maverick. Although he had two degrees from Stanford, and so fitted the standard Valley mold, he had studied neither engineering nor business. Instead, he had immersed himself in libertarian thinking, excelled at law school, and abandoned California for New York. There, he practiced securities law, traded derivatives at a bank, and grew disillusioned with the corporate treadmill ([View Highlight](https://read.readwise.io/read/01gqvbw78g06444v6ap42awxha)) - If corporations had yet to wake up to the need for encryption, what about encrypting something else—something where the security need was obvious? Thiel suggested cash payments. If Levchin applied his coding wizardry to this field, people could safely email money to each other. Having executed this pivot, Thiel and Levchin called their payments service PayPal and their company Confinity ([View Highlight](https://read.readwise.io/read/01gqvc4z01ypd6dpnazzjeff1r)) - Confinity found itself battling a rival called X.com, led by an entrepreneur named Elon Musk. The two companies were close equivalents in many ways. Both had around fifty employees and 300,000 users. Both were growing fast, and for a while both had offices in the same building on University Avenue in Palo Alto. But X.com had one distinguishing advantage. Whereas Confinity had secured capital from Nokia, a marginal Silicon Valley player, X.com had been anointed by Sequoia. None other than Michael Moritz had pumped $25 million into X.com, five times more than Confinity had raised. Moritz had also fortified X by recruiting a seasoned chief executive named Bill Harris ([View Highlight](https://read.readwise.io/read/01gqvc7agwpqbg0hwyf7326bz1)) - Thiel and Levchin met Elon Musk and Bill Harris at Evvia, a Greek restaurant in Palo Alto, to discuss Moritz’s proposal. Musk was all for bringing the two companies together, but because he had Sequoia at his back, he presumed he was by far the senior partner. X.com had more money in the bank, and having a brand-name venture investor ensured that it could raise further cash if needed. By some reckonings, Confinity had the better engineering team.[[16]](#EndnoteNumber690) But in any drawn-out fight, it would be the first to run out of capital ([View Highlight](https://read.readwise.io/read/01gqvcb63jrsv7ac7q74jgs2av)) - Levchin was suitably impressed. He dropped his objections to a sixty-forty deal, subordinating his coding pride to Moritz’s grand vision. The path to a merger was now clear. The bloodshed would be over. A day or so later, Levchin saw Musk. “This sixty-forty is too good for you,” Musk taunted him. “Just so you know, you’re getting a great deal. This merger of unequals is a steal for you guys.” ([View Highlight](https://read.readwise.io/read/01gqvcj8ba2hs4637j7hajaxkp)) - The first clash hinged on who would run the merged entity. Not without reason, Moritz regarded Thiel as a sharp intellect but not a manager. He was a hedge-fund trader, after all; he had no experience in scaling up a company. As a result, Moritz saw to it that Bill Harris was picked to serve as CEO, and when Harris was removed, Musk was chosen to succeed him. Passed over for the top slot, Thiel quit his job as X.com’s vice president for finance, though he remained a big shareholder and continued to serve part time as chairman. ([View Highlight](https://read.readwise.io/read/01gqvcp2vt9e75w38fk31gy5jw)) - Thiel felt that all great startups had a “monarchy aspect,” as one of his lieutenants put it. “It’s not the libertarian part of Peter that made Founders Fund. It’s the monarchist part.” ([View Highlight](https://read.readwise.io/read/01gr0r95mq50mcpn1af448sx5e)) - the most destructive earthquakes are many times more powerful than all smaller earthquakes combined ([View Highlight](https://read.readwise.io/read/01gr0rbtsqj3qzz7v919zmzbeg)) - In the past, the present, and surely the future, a startup that monopolized a worthwhile niche would capture more value than millions of undifferentiated competitors ([View Highlight](https://read.readwise.io/read/01gr0rcpkec7y7y2nt3gxzxne2)) - When you look at the strongest performers in our portfolio, they are, generally speaking, the companies that we have the least amount of engagement with ([View Highlight](https://read.readwise.io/read/01gr0rtxy29mkcdg7g1f5af9em)) - It might flatter venture investors’ egos to offer sage advice. But the art of venture capital was to find rough diamonds, not to spend time polishing them ([View Highlight](https://read.readwise.io/read/01gr0rvcjmg15f9h5z2wz54psr)) - It was surely no coincidence, Thiel continued, that the best startup founders were often arrogant, misanthropic, or borderline crazy ([View Highlight](https://read.readwise.io/read/01gr0s35nj7s79bbtmhcv1m5y0)) - Elon Musk spent half the earnings from his first startup on a race car; when he crashed it with Thiel in the passenger seat, all he could do was laugh about the fact that he had failed to insure it ([View Highlight](https://read.readwise.io/read/01gr0s45e62ymk16x4ey3g5rvt)) - He liked to dabble philanthropically in eccentric causes: “seasteading”—the idea of building a floating libertarian utopia beyond the reach of governments ([View Highlight](https://read.readwise.io/read/01gr399b2pwkhfqazgasja3w3j)) - Soros had absorbed the notion that limits to human cognition prevent people from stably apprehending truth ([View Highlight](https://read.readwise.io/read/01gr39a5jrs2bc74t8ej4gqn1q)) - His first-ever conversation with Luke Nosek had been about how Nosek wanted to be frozen upon death in hope of medical resurrection ([View Highlight](https://read.readwise.io/read/01gr39bgca4ce15gagmzzgmn9t)) - But when he encountered a potential grand slam, Thiel was ready to pile his chips onto the table. ([View Highlight](https://read.readwise.io/read/01gr39edm9cafd0e0a0fvtv1wm)) - In 2010, Andreessen Horowitz invested $250,000 in the social-networking app Instagram. It was by some metrics a spectacular home run: two years later, Facebook paid $1 billion for Instagram, and Andreessen netted $78 million—a 312x return on its investment ([View Highlight](https://read.readwise.io/read/01gr39feksxbabp7qkj9cy5fwy)) - Now, at the wedding, Musk told Thiel that he was open to an investment in SpaceX. “Sure,” Thiel said. “Let’s bury the hatchet.”[[](#EndnoteNumber731) ([View Highlight](https://read.readwise.io/read/01gr39k67204es15ghxne4cqyx)) - Graham proceeded to lay out his favorite themes. Any hacker with a good idea was qualified to launch a business. No hacker should defer to venture investors. Founders needed only small amounts of cash to cover rent and groceries. Ideally, Graham added, this cash should come from an angel investor who had experience launching a startup—someone who could provide counsel and comradeship. ([View Highlight](https://read.readwise.io/read/01gr39s5zgsg17s0yt4wa63pxj)) - An idea gelled as the couple walked along the spotted brick sidewalks. They’d start a little angel investment firm together. Livingston could work there instead of at the venture fund that was taking forever to answer. She could take on the administrative and legal stuff that Graham found so unappealing. Graham, for his part, would draw on his experience as a founder to pick the next generation of winners. It would be the perfect partnership ([View Highlight](https://read.readwise.io/read/01gr39x2d3ytmksjq67wz0aqb5)) - Over the next couple of days, the pair came up with a plan for a novel form of seed investing. It would plug the gap that Graham saw in mainstream venture capital: the new breed of software founders just needed enough cash to buy groceries, plus occasional guidance and camaraderie to relieve the solitude of coding. The Graham-Livingston plan would also be more structured than the ad hoc impulses of scattered angels: it would involve an office and employees and standardized procedures. Graham put up $100,000 of his own money, and two co-founders of his old software startup, Viaweb, promised $50,000 each. Then he announced the plan in no-frills 10-point Verdana on his blog. The red bold title announced, “Summer Founders Program.” ([View Highlight](https://read.readwise.io/read/01gr39xt4hjmw5qjpyp897gb60)) - Graham billed the program as an experimental replacement for conventional college summer jobs. Instead of a salary, participants would get $6,000 each to sustain them through three months of programming. They would also receive practical and emotional help. Y Combinator, as the Graham-Livingston operation was called, would incorporate the participants’ startups, open company bank accounts, and advise about patents. Graham and a few of his smart friends would provide feedback on the young hackers’ projects, and there would be a dinner once a week so that the summer schoolers got to know each other. In return, Y Combinator would take equity—usually 6 percent of the shares—in each micro-company that it incorporated. ([View Highlight](https://read.readwise.io/read/01gr39yd0m4d55xf43yfq1c04j)) - There was a poised nineteen-year-old from Stanford who appeared wise beyond his years; this was Sam Altman, who went on to succeed Graham as Y Combinator’s guiding spirit. And there were Huffman and Ohanian, the pair from Virginia, who later ditched their restaurant-booking scheme in favor of a news site called Reddit, which provided YC with its first profitable exit. Altogether, eight teams made the cut. Y Combinator’s acceptance rate was 3.5 percent, comparable to that of Harvard Medical School. ([View Highlight](https://read.readwise.io/read/01gr3a1z1x3b4qhen5wncbtcp8)) - Having diagnosed the shortcomings of the venture incumbents, Graham was offering micro-investments on the theory that large checks were toxic for fledgling software startups. He had come up with the batch-processing idea and had invented a folksy, unsatanic way of turning hackers into founders. The way Graham saw things, his new investment formula was fundamentally different from conventional VC. He was not just meeting entrepreneurs and piggybacking on their talent. He was recruiting teenage coders and *creating* entrepreneurship ([View Highlight](https://read.readwise.io/read/01gr3a3q9q3mt7jv78sb32xcan)) - Graham was saying you could liberate yourself before you even joined a company. He distilled his message into a few stirring phrases. Work for yourself. Capture the value of your own ideas. Rather than climbing a ladder, grow a ladder underneath you ([View Highlight](https://read.readwise.io/read/01gr5yxwz2tw1cp5pq17d2amwt)) - The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies ([View Highlight](https://read.readwise.io/read/01gr5yydeewgew75vgte2ew9mg)) - As word spread of their programs, dozens of imitators sprang up, sometimes adding clever tweaks to Graham’s model. In 2006, a rival named Techstars got going in Boulder, Colorado, and within a few years it had spread to Boston, Seattle, and New York City ([View Highlight](https://read.readwise.io/read/01gr5z15rf6pqba1fx4akjvspw)) - If you are treated like an analyst, you are going to act like an analyst ([View Highlight](https://read.readwise.io/read/01gr8cr9z4r9pv34madkg0kadx)) - If Internet 1.0 had been about selling stuff (Amazon, eBay), Internet 2.0 was about using the web as a communications medium. “‘2.0’ frenzy around social networking ([View Highlight](https://read.readwise.io/read/01gr8csn6znnf3vnjgtre7e508)) - Experience showed that consumer internet companies were often founded by unorthodox characters ([View Highlight](https://read.readwise.io/read/01gr8d4mpw2t3hxm1ybzqw0d3q)) - By restricting admission to users with Stanford emails, Thefacebook was managing the Friendster problem of unwanted guests. It had put up the equivalent of a velvet rope outside a nightclub. ([View Highlight](https://read.readwise.io/read/01gr8dd7dvn6sbmn8vqyfb7f96)) - Parker reiterated his conviction that Thefacebook was so valuable that Accel would not offer enough for it ([View Highlight](https://read.readwise.io/read/01gray72gmsswq373zw6ej5zsf)) - The question was how to get Thefacebook to accept Accel’s capital. The partnership knew it was up against a corporate investor, probably a big media firm, and Parker had revealed the terms that the rival was offering: a pre-money valuation—that is, the value without counting the new capital going in—of $60 million. After some deliberation, Accel sent Thefacebook a term sheet valuing it at the same $60 million price, but with an offer to inject more money than the other bidder. ([View Highlight](https://read.readwise.io/read/01graygrgfajbmb5wy3rc36nvh)) - In a reprise of his conduct at Plaxo, Parker had resumed his erratic behavior: he was arrested (but never charged) for possession of cocaine at a beach house where he was partying with several friends, including an underage woman who was his assistant at Facebook.[[30]](#EndnoteNumber857) Having earlier ignored the lurid murals at the Facebook headquarters, Accel now decided that Parker had crossed the line. Jim Breyer, the Accel managing partner who had taken a seat on Facebook’s board, seized on the incident to demand Parker’s ouster. Despite Zuckerberg’s desire to forgive his friend, Breyer got his way, doing Facebook the service of eliminating a corrosive force within the company. In an echo of the Plaxo finale, Parker was forced to forfeit half of his options. Five years later, those options would have been worth about $500 million ([View Highlight](https://read.readwise.io/read/01graz55gtm464c43nnygyf00n)) - When Facebook went public in 2012, Accel reaped an astonishing profit of more than $12 billion.[[32]](#EndnoteNumber859) For shrugging off the slings and arrows of arrogant youth, the partnership had been amply rewarded. ([View Highlight](https://read.readwise.io/read/01graz6nztt0nb8h4wp6cn26zy)) - VCs who back winning startups acquire a reputation for success, which in turn gives them the first shot at the next cohort of potential winners. Sometimes they get to buy in at a discount, because entrepreneurs value the imprimatur of renowned investors. This self-reinforcing advantage—prestige boosts performance, and performance boosts prestige—raises a delicate question. Is there really skill in venture capital, or are the top performers merely coasting on their reputations? ([View Highlight](https://read.readwise.io/read/01graz9t2n2e4ck3srkdb7pnk9)) - But in the large majority of examples, new venture firms succeed because of the founders’ experience and status, not because of the claimed originality of their methods. ([View Highlight](https://read.readwise.io/read/01grb0dbsvxc9j3fpc60k2ys1j)) - As a doctoral student at Columbia University in 2005, a sociologist named Matthew Salganik took a closer look at the *Sugar Man* phenomenon. After all, versions of the Rodriguez story crop up repeatedly in the creative fields: *Harry Potter* became a blockbuster despite initial rejection by publishers. Many books, songs, and movies are good enough to have a shot at fame, yet a tiny number reap the majority of the spoils, and Salganik wanted to understand what determines these skewed outcomes. So, together with some collaborators, he designed an experiment. His results are a good starting point for a verdict on venture capital. ([View Highlight](https://read.readwise.io/read/01grb0jvesv1qnvb15336q7c0j)) - Try and fail, don’t fail to try. Remember, above everything, the logic of the power law: the rewards for success will be massively greater than the costs of honorable setbacks ([View Highlight](https://read.readwise.io/read/01grb0kqh17sfgd3fbvtws74br))