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The Power Law, in detail
The Power Law is Sebastian Mallaby's history of venture capital, told through the people who built the industry from its roots in postwar military research to its current position as the primary financing mechanism for technology startups worldwide. Mallaby is a seasoned financial journalist and the author of acclaimed books on hedge funds and the Greenspan era; he brings the same research depth to venture capital, conducting hundreds of interviews with figures including John Doerr, Mike Moritz, Peter Thiel, and the founders of Sequoia and Kleiner Perkins.
The title refers to the statistical distribution that defines venture investing: returns are not normally distributed, where most investments cluster around the mean. Instead they follow a power law, where a tiny fraction of investments produce the vast majority of returns. One investment in a portfolio can return more than the entire rest combined. This isn't just a feature of VC economics; Mallaby argues it's the correct framework for understanding the tech industry itself. A small number of companies—Google, Amazon, Facebook—have captured an outsized share of value, and the venture model evolved in response to that reality, not the other way around.
The book traces the evolution of the industry through key moments: Georges Doriot's American Research and Development Corporation pioneering the model in the 1950s, the formation of the first Sand Hill Road firms in the 1970s, the Intel and Apple investments that made Kleiner Perkins and Sequoia, the dot-com bubble and its aftermath, the rise of Benchmark and its radically flat structure, and the emergence of Tiger Global and SoftBank with their growth-at-all-costs approach. Mallaby is willing to be critical—the bubble years and the SoftBank era both receive unflinching treatment—but the overall argument is that venture capital, for all its failures and occasional absurdities, has funded innovations that genuinely changed how people live.
The book is exhaustive and occasionally exhausting. Readers who aren't already interested in startup history may find the middle sections slow. But for anyone trying to understand how technology companies actually get built, funded, and scaled, The Power Law is the most thorough and authoritative account available.
The big ideas
- 1.
Venture returns follow a power law, not a bell curve. The correct strategy isn't diversification for average returns; it's concentration on the handful of investments with extreme upside potential.
- 2.
The best VCs don't just provide capital. They provide networks, operational expertise, and pattern recognition from watching hundreds of companies build and fail.
- 3.
The partnership model that defines most VC firms creates its own pathologies: decisions made by consensus tend toward incrementalism rather than the contrarian bets that produce outlier returns.
