The Power Law

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)

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)

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)

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)

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)

The future can be discovered by means of iterative, venture-backed experiments. It cannot be predicted. (View Highlight)

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.[ (View Highlight)

the Chinese venture industry has an advantage over its U.S. rival. It is more open to women. (View Highlight)

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)

in the left-liberal, sometimes libertarian politics; in the conviction that your productivity can be augmented by micro-dosing LSD (View Highlight)

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)

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)

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)

he proclaimed that the greatest rewards were to be had from the most ambitious and least obvious projects (View Highlight)

the best prospects involved advanced technology (View Highlight)

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)

I never wanted to be the richest corpse in the cemetery (View Highlight)

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)

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)

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)

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)

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)

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.

By the end of the day, a starstruck Bushnell had agreed to sell Atari for $28 million. (View Highlight)

How can you use a computer at home? Are you going to put recipes on it? (View Highlight)

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.”[ (View Highlight)

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)

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)

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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)

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.

VCs are always walking this fine line between competition and cooperation (View Highlight)

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)

Louis Pasteur. “Chance favors only the prepared mind,” (View Highlight)

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)

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)

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)

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)

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)

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.

“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)

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)

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)

“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)

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)

The title of Zuckerberg’s deck was even more insulting. “The Top Ten Reasons You Should Not Invest in Wirehog,” it proclaimed mockingly.

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)

Paul Graham had emphasized the tensions between ever larger venture funds and the limited need for capital at software startups (View Highlight)

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)

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.