May 2024
I did not do a thorough reading of this book due to other commitments; the parts I have read are quite good, and so I am a bit sorry about that. Athough on the other hand this is not aligned with my current projects/interests, so I will probably let it go.
Here are the notes I have:
Precis
The book explores venture capital and its impact on the technology sector and the broader economy – looks at its beginnings in the mid-20th century and follows it up to the present day. Its theme is that VC depends on the power law, in which a small proportion of investments result in a few huge wins that more than compensate for all the other losses. Many big risks, a few huge rewards.
Examples covered in the book include:Fairchild; Genentech; Apple; Google; Amazon; Ebay; Twitter; Uber
Some points
- Power law is fundamental to the VC model
- VC relies on robust networks where entrepreneurs, investors, and other stakeholders collaborate and share knowledge.
- The decision-making processes and intuition of venture capitalists is often based on individual judgment rather than formal metrics or models
- VC allows enterprises to rapidly scale, something that is crucial when success relies on the network effect
VC Strategies
- Sector Specialization (e.g. in technology, biotech, or green energy) allows development of deep expertise.
- Stage Specialization (e.g., in seed stage, early stage, or growth stage).
- Geographic specialization to leverage regional expertise and networks.
- Ecosystem Creation: Investing that aims to create and control a dystem of interrelated businesses.
- Critical Factors: Rapidly growing markets, game-changing solutions, proprietary or other locked-in advantages, business models that scale (network effect)
- Control: Preferred returns/liquidation; board representation; anti-dilution provisions; drag-along and tag-along exit provisions.
- Syndication via partnering with other VC firms to spread the risk and draw on different areas of expertise.
Pro-VC Government Policies
Governments are not typically very effective at stimulating VC type investment, but here are some policies that Mallaby favors:
- Tax breaks (esp. via limited partnerships) work better than subsidies
- Tax breaks for investors should be coupled with incentives for entrepreneurs (e.g. non-voting stock options)
- Invest in scientific education and research
- Think globally – e.g., visas for foreign scientists/entrepreneurs; support foreign stock exchange listing; etc.
Importance of Randomness vs. expertise in VC investing
- Path dependency is not that great; many VC firms that have done well for a while, and then faded
- Examples where skill/new perspectives obviously critical to success: KP and Genentech and Tandem; late stage approach; Y-combinator
My Questions for our Visiting VC
- How often do funded ventures radically (significantly) shift course? Is the non-financial value of VC assistance in fine-tuning strategies to suit the business and regulatory envirionment?
- How often is an effort made to create an ecosystem of businesses, rather than just one
- What are some really, in hindsight, significant mistakes you’ve made? What is the smartest mistake you’ve made (in the sense that with all you knew it should have been the right call, but wasn’t). And what was the dumbest mistake you made (i.e. that you can’t believe you made that decision, in hindsight), and why did you make it.