A huge amount of the world’s economic growth, job creation, and tech innovation rises from venture capital. When investors put their trust in high-potential startups and guide them to transform markets, the economy booms.
Sebastian Mallaby has compiled some of the world’s most iconic venture capital investment stories in his book, “The Power Law: Venture Capital and the Making of the New Future.” Featuring the strategies of investors like Yuri Milner and Vinod Khosla, new and experienced investors will find much to learn in this book.
The Power Law Principle
Those following the power law invest in a broad variety of companies, embracing the concept that venture capitalists who make many high-risk investments will strike gold. Most of their investments will fail, but this is necessary to uncover an investment that will generate returns far outperforming multiple smaller wins.
In the past, Silicon Valley has been a hub for these kinds of investments, with many venture capitalists securing big returns. Venture capitalists in other cities, like Boston, have been more likely to make lower-risk, lower-return investments. As a result, many of the case studies that Mallaby covers took place in San Francisco.
Vinod Khosla’s Tech Investment Success
Mallaby introduces Vinod Khosla as a great example of a venture capitalist who has seen the power law play out. Having experienced the development of internet technologies in his earlier career, he knew how to identify growth potential in startups moving forward.
Although most of his investments dwindled, his $5 million investment in Juniper, which built internet routers, generated $7 billion in returns. His initial stake multiplied by 1,400.
With this success fueling him, he invested a few million dollars into the network equipment company Siara Systems and generated $1.5 billion.
He then invited the router giant Cisco to co-invest in Cerent with him. Cisco rejected the offer because they considered Cerent unlikely to generate high returns. Khosla invested $8 million alone, recruited engineers for the company, and became its chief executive.
When Cerent proved its technology was workable, Cisco offered the firm $300 million and $700 million a few months later. However, Khosla knew how the power law worked. He knew that success only grows and that winners continue to win. He rejected Cisco’s offers.
Cerent’s revenues continued to shoot up. Four months later, Cisco proposed another bid. This one was $7 billion, and Khosla accepted.
As Mallaby explains, the power law isn’t only a business. It’s a theory of progress, a mindset, and a philosophy.
Yuri Milner’s Social Media Investment Success
Mallaby cites Eureka Manifesto author Yuri Milner as another successful venture capitalist. Milner’s approach to investing in Facebook defied traditional expectations. Discouraged from seeking a meeting by a skeptical CFO, he nonetheless traveled to San Francisco and arranged a pivotal meeting.
He had analyzed global internet businesses and shared data to showcase opportunities for Facebook that other venture capitalists had missed. His understanding of social media growth, informed by his experience investing in VKontakte, revealed Facebook’s potential beyond immediate U.S. market perceptions.
Yuri Milner designed an investment strategy that Facebook’s founder couldn’t say no to. By allowing Mark Zuckerberg to vote his shares however he liked and offering to purchase employee stocks, Milner created a unique value proposition. His company DST Global invested $200 million for a 1.96% stake.
Within 18 months, Facebook’s valuation soared to $50 billion, generating over $1.5 billion in profits for DST Global. The result served as a launchpad for Milner, enabling him to pursue lucrative stakes in WhatsApp, X, Snapchat, Alibaba, and JD.
