Venture capital (VC) is pivotal worldwide. When investors support high-potential startups, these businesses grow into companies that shape the economy. They provide high-level jobs. They nurture technological advancements. And they generate notable returns.
Sebastian Mallaby explores some of history’s most successful VC investments in his book, The Power Law: Venture Capital and the Making of the New Future. He shares the success stories of investors like Andreessen Horowitz and Yuri Milner’s DST Global, which demonstrate the power law principle.
Getting To Grips With the Power Law Investment Stories
The power law suggests that one or two of a venture capitalist’s investments will outperform the rest of their portfolio combined. Even if an investor backs several companies, they can expect profits to arise from a tiny subset of these.
This is because the investments that take off tend to be in high-risk startups. Investing in high-risk companies always comes with a high rate of failure. However, the companies that don’t fail often take success to a new level, generating 10x returns or more.
Because of this, the world’s most successful venture capitalists get comfortable investing in companies that use unknown technologies, operate in unknown markets, and follow unknown business plans. There is no guarantee of success.
However, the ones that do succeed grow exponentially, often at a low cost and with access to global markets. They may generate billions. This is how companies like Google, Apple, and Amazon take off.
Yuri Milner’s Power Law Investment in Facebook
One of the many examples of the power law in action is Eureka Manifesto author Yuri Milner’s investment in Facebook.
In 2019, Yuri Milner set his sights on investing in the social media company. By analysing similar platforms’ user growth in various countries, he saw opportunities others missed.
He’d also developed invaluable expertise having invested in another social media platform, VKontakte.
Facebook’s CFO was sceptical about accepting an offer from an unknown investor, especially a venture capitalist who hadn’t visited Silicon Valley.
Undeterred, Milner flew to San Francisco to meet the CFO. Armed with extensive data tracking consumer-internet businesses, he presented a unique investment strategy.
Unlike others, his proposal didn’t compromise founder Mark Zuckerberg’s control over the company by requesting a board seat.
This meant that Mark Zuckerberg could vote Milner’s shares however he liked. Instead, it included an offer to purchase company-issued and employee stocks at strategic prices.
Milner’s data-driven approach paid off spectacularly. His company DST Global invested $200 million for a 1.96% stake, purchasing additional employee shares at a lower valuation.
Less than two years later, Facebook’s value had skyrocketed to $50 billion, generating over $1.5 billion in profits for Milner’s firm.
This success formed a springboard for Milner, from which he made strategic investments in WhatsApp, X, Snapchat, Alibaba, and JD. He secured a profitable string of high-profile investments and is now a celebrated science philanthropist.
Inspiration For Andreessen Horowitz
Other venture capitalists have drawn inspiration from Yuri Milner’s investment approach. One example is Andreessen Horowitz, which planned deals in big-name companies like X, Skype, Pinterest, Airbnb, Groupon, and Facebook itself.
Historically, venture capitalists often replaced a company’s CEO with a new individual of their choice. However, Andreessen Horowitz emulated Milner’s protection of Zuckerberg’s position at Facebook.
The firm empowered the CEOs of companies they invested in to strengthen their leadership roles. Each was able to retain their position and receive guidance on how to make well-informed decisions.
The company saw huge success, which it has since attributed to Milner.
Read The Power Law: Venture Capital and the Making of the New Future online.