Books
Venture playground
The quiet revolutionaries who turbocharged capitalism—and the Silicon Valley giants
by LIONEL BARBER
Karl Marx had plenty to say about the contradictions of mid-19th century industrial capitalism, but he failed to grasp its capacity for reinvention. Certainly he never predicted the rise of venture capital, arguably the most important financial innovation of the last 50 years.
Venture capitalists are a special breed. They finance the most dynamic companies and generate disproportionate amounts of research and development. As a group, they are an intricate part of the networks that power the knowledge economy. Their influence far outweighs their numbers.
VC has produced trillion-dollar winners such as Amazon, Apple, Google and Tesla. Founder-titans like Jeff Bezos and Elon Musk have built global companies and earned fabulous wealth, enough to indulge their dreams of space travel and flying cars. Once largely the preserve of Silicon Valley, venture capital has gone global, with US offshoots and rival firms in London, Beijing, Berlin, Moscow, Mumbai and Shanghai.
The explosion of VC is partly explained by investors’ hunt for yield in a world economy addicted to low interest rates since the 2008 financial crisis. It has also been driven by the information technology revolution, with its promise of spectacular financial gains. As an alternative asset class, VC has produced returns far superior to equities or bonds. Its highrisk, high-reward model appeals to the most visceral instinct among investors, at least those fortunate enough to enjoy access to start-up companies: the desire to shoot for the jackpot.
There is, of course, a twist. As a rule, the best investment in a venture capital fund equals or outperforms the rest of the fund. Sebastian Mallaby calls this phenomenon “the power law,” a suitably weighty term that serves as the title for his new book. To adopt a baseball analogy, the VC business relies not just on a home run but a grand slam—an outsized return which, he argues, owes more to skill than good fortune.
Venture capital is above all a bet on future potential. Whereas most financiers work out the value of companies by projecting their cash flows, venture capitalists back promising start-ups before they have cash flow to analyse. They take small stakes in companies and hold them in the hope of substantial reward. “Venture capitalists,” notes Mallaby, “look for radical departures from the past.”