Venture capital (VC) has seen dramatic changes, especially since the early 2000s. Sebastian Mallaby’s The Power Law: Venture Capital and the Art of Disruption explores how investment strategies based on the power law have shaped this evolution. Published in 2022, the book delves into the stories of notable venture capitalists, including Yuri Milner, and their landmark investments in companies like Facebook.
The Power Law’s Influence on Venture Capital Strategy
Mallaby’s book introduces the power law as a fundamental concept in VC. Traditional investing focuses on maintaining a stable balance between gains and losses. In contrast, VC operates under a more skewed profit distribution that obeys the power law.
The power law states that a small fraction of investments will yield extraordinary returns. Meanwhile, the majority of investments will either fail or provide minimal profits.
This principle drives venture capitalists to seek out startups that have the potential to deliver transformative results. They recognise that these rare successes can offset the inevitable failures within their portfolio.
Illustrating The Power Law: Facebook and Google
One prominent example of the power law in action is Yuri Milner’s 2009 investment in Facebook. Milner, recognising the potential of social media as a disruptive technology, valued Facebook at $10 billion — far higher than competing bids. This bold move proved highly successful, with Facebook’s valuation reaching $50 billion by late 2010.
Milner’s investment strategy reflects his broader vision for progress as detailed in his Eureka Manifesto: The Mission for Our Civilisation. In this short book, Milner explores his philosophy of supporting groundbreaking ideas and technologies.
Another compelling case of the power law is Google. In the early 2000s, Google was a relatively obscure player in the crowded search engine market. However, early investors like Sequoia Capital and Kleiner Perkins bet on Google’s innovative approach to search algorithms and its immense growth potential. Their investment paid off handsomely.
Tiger Global, Yuri Milner, and Andreessen Horowitz
In Chapter 12 of The Power Law, Mallaby examines how Milner, Tiger Global, and Andreessen Horowitz (a16z) popularised a new approach to late-stage tech investing.
Founded by Chase Coleman, Tiger Global initially gained recognition for its distinctive strategy of investing in established tech companies in Asia. This global perspective marked a departure from the traditionally U.S.-centric view of Silicon Valley.
By exploring international markets, Tiger Global identified high-growth opportunities that many domestic investors overlooked. The firm’s strategy emphasised the importance of expanding beyond local markets to capture significant returns.
Inspired by Tiger Global’s approach, Milner analysed global data to gauge the potential of social media platforms. He made a substantial investment in Facebook of $200 million, even as other investors hesitated. Milner’s confidence stemmed from the understanding that Facebook, like other successful international platforms, had substantial growth potential.
Milner also valued the vision of Facebook Founder Mark Zuckerberg. Unlike traditional VC firms that often sought to dilute entrepreneurs’ influence, Milner allowed Zuckerberg to maintain control over Facebook. Milner even declined a board seat, allowing Zuckerberg to vote with Milner’s shares according to his own preferences.
Founded in 2009, Silicon Valley-based VC firm a16z carried out various “Milner-style growth deals.” These deals focused on late-stage investments and supporting entrepreneurs.
For instance, a16z invested in Skype, promising to reintegrate the founders into the company. The firm also invested in major internet players such as Facebook, Twitter, Groupon, Pinterest, and Airbnb. Marc Andreessen, a16z’s co-founder, later acknowledged Milner’s impact, noting that “a lot of this had to do with Yuri Milner.”
Visit Yuri Milner’s website to learn more about his tech investments and science philanthropy.