Sample

The
SHORTLISTED FOR THE

FINANCIAL TIMES BUSINESS
BOOK OF THE YEAR AWARD
Power Law
PENG UIN PRES S
THE POW ER LAW
‘Thoroughly magnificent … Date: 01/02/2023
Seriously great, and wildly
SEBASTIAN MALL ABY THE POWER L AW

Designer: Olga
important … It would be difficult
Venture
Prod. Controller: Imogen
to find a more important book Pub. Date: 06/04/2023
ISBN: 9780141988948
than Mallaby’s in 2022, and Author photograph
Capital and
most any year for that matter’
© David Levenson.
Cover design: Olga Kominek
J O H N T A M M Y, F O R B E S S PINE W IDTH: 28.5 MM
• Confi
Estimated
• rmed
‘At last we have a storyteller with the
intelligence to understand venture capital, the Art of F O RMAT
Disruption
B format
the diligence to dig out some astonishing
tales, and the eloquence to make the PRINT
journey such a pleasure. A superb book’
TIM HARFORD •••• CMYK
‘If you want to understand a world in which
a handful of coders became richer than most F INIS HES
countries, this is an invaluable guide’ Regular Coated

S A M F R E E D M A N , S U N D AY T I M E S ‘Sweeping ‘A gripping Matte varnish to seal
and authoritative’ fly-on-the-wall story’
‘An impeccably researched and vividly FINANCIAL TIMES WALL STREET JOURNAL
reported exploration of a hugely PRO O F ING METHO D
important industry’ • Wet proofs

• Digital
Sebastian
J O H N T H O R N H I L L , F I N A N C I A L T I M E S , BOOK S OF T HE Y E A R only
• No further proof required
I S B N 978-0-141-98894-8
Mallaby
90000
AN
ALLEN
9 780141 988948 U.K. £0.00 LANE PENGUIN
Copyrighted Material BOOK Business
9780141988948_ThePowerLaw_COV.indd 1,3 01/02/2023 11:32

penguin books
The Power Law

‘An indispensable read for anyone looking at where power really lies’
Tom Knowles, The Times, Books of the Year
‘Sebastian Mallaby has done what many people would have thought it impossible
to do: write a gripping book about the modern history of venture capital . . .
Well-argued and compelling . . . A superb introduction to an important subject’
Paul Seabright, TLS
‘A compelling story of flesh and blood financiers, sprinkled with insights from
which all economists could learn’ Mervyn King
‘A must-read for anyone seeking to understand modern-day Silicon Valley and
even our economy writ large . . . Phenomenally detailed and engaging’
Bethany McLean, Washington Post
‘Venture capital has influenced the American economy for over half-a-century now,
and finally we have a book of exceptional reporting, analysis and storytelling to
bring that history to life. What makes Sebastian Mallaby’s The Power Law a classic
is how deeply it takes us into V C ’s defining successes and failures – which are much
harder to get anyone to talk frankly about. I’m not sure this is the book of V C s’
dreams, but it’s what the rest of us have been waiting for’ Charles Duhigg
‘The Power Law is essential and entertaining reading for anyone who aspires
to invest fruitfully’ Martin Vander Weyer, Literary Review
‘Sebastian Mallaby is the master of unspooling human drama from financial
systems. Here, the venture capitalists are the protagonists. Whether it’s financiers
scrambling to court a pajama-wearing young Mark Zuckerberg or venture
capitalist Bill Gurley’s efforts to oust Uber founder Travis Kalanick from the
company, the stories are almost Shakespearean in their depictions of
ambition, jealousy and ego’ NPR Books
‘The Power Law is a remarkable book. It takes us inside venture capital from
its origins with a handful of restless risk-takers to today’s powerhouses that reshape
our world. Both a formidable researcher – he has gotten key players to talk with
amazing candor – and a gifted storyteller, Mallaby captures the drama and clashes of
an extraordinary gallery of people who – with insight and instincts, appetite for risk
and tolerance for failure, unforgiving ego and relentless ambition – make big bets in
the face of huge uncertainty. It is destined to be of wide impact and lasting influence’
Daniel Yergin, Pulitzer Prize-winning author of The Prize and The New Map
‘In his well-researched book, leavened by lively portraits of leading figures,
Mr Mallaby explores the history of the V C industry and the reasons for its vitality’
John Thornhill, Economist
‘Mallaby, an astute chronicler of modern capitalism, writes with humour and
historical sweep . . . His account is immensely enriched by interviews with most
if not all of the rainmakers in venture capital’ Lionel Barber, Prospect
‘Sebastian Mallaby sets off into the world of venture
Copyrighted capital and the strange bunch
Material
of financiers behind some of the most successful companies. It’s a tale of triumphs
but also major failures, hubris and jaw-dropping eccentricity’ Financial Times,
‘Books to look out for in 2022’
‘A fascinating journey through the tightly networked world of the venture
capitalists who make Silicon Valley tick, from the scrappy dealmakers of the
1960s to the high-flying global investors of today. Filled with eye-opening case
studies and vivid personalities, frank in its analysis of the industry’s greatest
strengths and most dangerous blind spots, The Power Law is essential reading
for understanding our tech-driven economy and where it might go next’
Professor Margaret O’Mara, University of Washington
‘An absorbing new history of startup investing’ Liam Proud, Reuters
‘As we face urgent man-made existential challenges from climate change to
economic inequality, Sebastian Mallaby shows that the capitalists of Silicon
Valley are shaping the future in ways few understand. In The Power Law he takes
us inside their rarified world, showing the possibilities and shortcomings of their
big egos and big bets. Mallaby’s deep access enables us to get a rare and
unsettling look inside a subculture of unparalleled influence’ Jane Mayer,
Chief Washington Correspondent, The New Yorker
‘If you can read only one book on venture capital, this is the one. The Power Law
narrates the evolution of venture capital from its origins in Silicon Valley to its
emergence in China by following the ambitious and often idiosyncratic investors
who finance risky new ventures while recognizing that success is rare, but
transformative. The book is a fascinating read’ Professor AnnaLee Saxenian
‘Mallaby brings his trademark mixture of exhaustive research and clear analysis to
his most interesting subject so far’ Adrian Wooldridge, Bloomberg
‘This book is a powerful combination of careful research and great storytelling.
Sebastian Mallaby portrays many of the world’s most successful venture
capitalists but also shows how the industry has evolved and why it has
become a major source of innovation in our economies. Highly informative
and fun to read’ Baroness Minouche Shafik, Director of the London
School of Economics and Political Science
‘Heavyweight and richly detailed, The Power Law is both a careering ride through
the chaos of startup culture and a sober assessment of how the relationship between
founders and their financiers has evolved’ Mike Jakeman, Strategy+Business
‘A gripping fly-on-the-wall story of the rise of this unique and important industry
based on extensive interviews with some of the most successful venture
capitalists . . . Mr. Mallaby writes a fast-paced narrative. He also has a journalist’s
eye for revealing details’ Daniel Rasmussen, Wall Street Journal
Abou t the Au thor

Sebastian Mallaby is the author of several books, including the bestselling
More Money Than God and The Man Who Knew: The Life and Times of
Alan Greenspan, the winner of the 2016 Financial Times/McKinsey Busi-
ness Book of the Year Award. A former Financial Times contributing editor
and two-time Pulitzer Prize finalist, Mallaby is the Paul A. Volcker Senior
Copyrighted Material
Fellow for International Economics at the Council on Foreign Relations.
He lives with his family in London.
Sebast ia n Ma l l aby
The Power Law
Venture Capital and the Art of Disruption
PEN GU IN B O O K S
P E N GUIN B O O KS
UK | USA | Canada | Ireland | Australia
India | New Zealand | South Africa
Penguin Books is part of the Penguin Random House group of companies

whose addresses can be found at global.penguinrandomhouse.com.
First published in the United States of America by Penguin Press,

an imprint of Penguin Random House LLC 2022
First published in Great Britain by Allen Lane 2022
First published in Penguin Books 2023
001
Copyright © Sebastian Mallaby, 2022
Photo Credits: page 1: photo courtesy of Arthur Rock & Company; page 2: courtesy
of Don Valentine Family; page 3: San Francisco Chronicle/Hearst Newspapers via
Getty Images; page 4, top: photo courtesy of Daniel Kaufman; page 4, bottom: Ann E.
Yow-Dyson/Getty Images; page 5, top: photo courtesy of Jim Swartz; page 5, bottom, and
page 7: AP Photo/Paul Sakuma; page 6, top: The Asahi Shimbun via Getty Images; page 6,
bottom: James D. Wilson/Liaison Agency via Getty Images; page 8, top: photograph by
Karl Chiu; page 8, bottom: Xaume Olleros/Bloomberg via Getty Images; page 9:
© Robyn Twomey/Redux; page 10, top: courtesy of Sequoia Capital China; page 10,
bottom: Paul McKellar; page 11: photo courtesy of Tiger Global; page 12: photo courtesy
of the Breakthrough Prize; page 13: Jeffery Newbury; page 14, top: photo courtesy of
Michael Moritz; page 14, bottom, and page 15, top: photo courtesy of Sequoia Capital;
page 15, bottom: photo by Brian Ach/Getty Images for TechCrunch; page 16, top: Cole
Wilson/The New York Times/Redux; page 16, centre: Chris Ratcliffe/Bloomburg via Getty
Images; page 16, bottom: PETER EARL MCCOLLOUGH/ The New York Times/Redux
The moral right of the author has been asserted
Printed and bound in Great Britain by Clays Ltd, Elcograf S.p.A.
The authorized representative in the EEA is Penguin Random House Ireland,

Morrison Chambers, 32 Nassau Street, Dublin d02 yh68
A CIP catalogue record for this book is available from the British Library
isbn: 978–0–141–98894–8
www.greenpenguin.co.uk
Penguin Random House is committed to a
sustainable future for our business, our readers
and our planet. This book is made from Forest
Stewardship Council® certified paper.
To Zanny
To Zanny
MostMost
people
people
thinkthink
improbable
improbable
ideasideas
are unimportant.
are unimportant.
The only
The only
thingthing
that’sthat’s
important
important
is something
is something
that’sthat’s
improbable.
improbable.
—Vinod
—Vinod
Khosla
Khosla
Silicon
Silicon
Valley
Valley
is gripped
is gripped
by the
bycult
the of
cult
theofindividual.
the individual.
But those
But those
indi- indi-
viduals
viduals
represent
represent
the triumph
the triumph
of theofnetw
the ork.
network.
— Matt
— Matt
Clifford
Clifford
The great
The great
challenge
challenge
at venture
at venture
partnerships
partnerships
is thatisthe
thatprincipals
the principals
mustmust
refrain
refrain
fromfrom
killing
killing
each each
other.other.
— Michael
— Michael
Moritz
Moritz
Spend
Spend
as littas
le litt
as you
le ascan,
you because
can, because
everyevery
dollardollar
of theofinvestor’s
the investor’s
moneymoney
you get
youwill
getbe
will
taken
be taken
out ofout
your
of your
ass. ass.
— Paul
— Paul
Graham
Graham
John,John,
venture
venture
capital,
capital,
that’sthat’s
not anot
reala job.
realIt’s
job.like
It’sbeing
like being
a reala estate
real estate
agent.
agent.
— Intel’s
— Intel’s
AndyAndy
Grove,
Grove,
addressing
addressing
JohnJohn
Doerr
Doerr
Contents
Contents
Introduction Unreasonable
Introduction Unreasonable
People
People 1 1
Chapter 1 Arthur
Chapter 1 Arthur
RockRock
and Liberation
and Liberation
Capital
Capital 17 17
Chapter 2 Finance
Chapter 2 Finance
Without
Without
Finance
Finance 40 40
Chapter 3 Sequoia,
Chapter 3 Sequoia,
Kleiner
Kleiner
Perkins,
Perkins,
and Activist
and Activist
Capital
Capital 58 58
Chapter 4 The
Chapter 4 Whispering
The Whispering
of Apple
of Apple 81 81
Chapter 5 Cisco,
Chapter 5 Cisco,
3Com,
3Com,
and the
andValley
the Valley
Ascendant
Ascendant 93 93
Chapter 6 Planners
Chapter 6 Planners
and Improvisers
and Improvisers 120 120
Chapter 7 Benchmark,
Chapter 7 Benchmark,
SoftBank,
SoftBank,
and “Everyone
and “Everyone
NeedsNeeds
$100$100
Million”
Million”
149 149
Chapter 8 Money
Chapter 8 Money
for Google,
for Google,
KindKind
of forofNothing
for Nothing 173 173
Chapter 9 Peter
Chapter 9 Peter
Thiel,
Thiel,
Y Combinator,
Y Combinator,
and the
andValley’s
the Valley’s
YouthYouth
Revolt
Revolt 194 194
Chapter 10 To
Chapter 10China,
To China,
and Stir
and Stir 222 222
Chapter 11 Accel,
Chapter 11 Accel,
Facebook,
Facebook,
and the
andDecline
the Decline
of Kleiner
of Kleiner
Perkins
Perkins 249 249
Chapter 12 A12
Chapter Russian,
A Russian,
a Tiger,
a Tiger,
and the
andRise
the Rise
of Growth
of Growth
Equity
Equity 273 273
Chapter 13 Sequoia’s
Chapter 13 Sequoia’s
Strength
Strength
in Numbers
in Numbers 301 301
Chapter 14 Unicorn
Chapter 14 Unicorn
PokerPoker 339 339
Conclusion Luck,Luck,
Conclusion Skill,Skill,
and the
andCompetition
the Competition
AmongAmong
Nations
Nations 375 375
Acknowledgments
Acknowledgments 405 405
Appendix:
Appendix:
Charts
Charts 409 409
NotesNotes 415 415
Timeline
Timeline
Copyrighted Material 465 465
IndexIndex 469 469

The Power Law
Introduction
Unreasonable People
N
ot far from the headquarters of Silicon Valley’s venture-capital
industry, which is clustered along Palo Alto’s Sand Hill Road,
Patrick Brown strode out into his yard on the Stanford Univer-
sity campus. Atop a little hill behind his house, Brown got down on his
hands and knees, a shaggy fifty-four-year-old professor in a T-shirt, peer-
ing at the vegetation through rounded glasses. Proceeding delicately, like
a detective collecting samples that might yield a vital clue, Brown began
digging out the roots of some wild clover plants.1 It might impress the or-
dinary gardener to know that those roots would soon yield $3 million.
Brown was one of the world’s leading geneticists. In 1995, his lab had
published pioneering work on DNA microarrays, which help distinguish be-
tween normal and cancerous tissue. He had been elected to the National
Academy of Sciences and the National Academy of Medicine. He was the
recipient of a Howard Hughes award, which guaranteed no-strings-attached
research funding. But his objective on that hilltop had nothing to do with
genetics. The year was 2010, and Brown was using a sabbatical to plot the
downfall of the meat-industrial complex.
A friend had set him on this path by means of a stray comment. Pos-
sessed of a keen environmental conscience, Brown had been worrying that
animal husbandry occupied one-third of the world’s land, causing significant
2 2 T H E TPH
OEWPEO
RWL EAW
R L AW
greenhouse
greenhouse
gas emissions,
gas emissions,
waterwater
degradation,
degradation,
and aand
lossa loss
of biodiversity
of biodiversity
. .
The planet
The planet
was clearly
was clearly
goinggoing
to need
to need
a bettaer
bett
kind
er kind
of food
of food
for the
forgrowing
the growing
population
population
of theoftw
the
enty
tw-enty
first-century.
first century.
ThenThen
Brown’s
Brown’s
friend
friend
mentioned
mentioned
that that
if youifcould
you could
makemake
a vegetarian
a vegetarian
burger
burger
that tasted
that tasted
better
bett
than
er than
a beef
a beef
burger,
burger,
the free
the market
free market
wouldwould
magically
magically
take take
care care
of theofproblem.
the problem.
Adventurous
Adventurous
res- res-
taurants
taurants
would
would
serveserve
it, and
it, then
and then
McDonald’s
McDonald’s
would
would
serveserve
it, and
it, pretty
and pretty
soonsoon
you could
you could
eliminate
eliminate
meatmeat
fromfrom
the food
the food
system.
system.
2 2
The more
The more
Brown
Brown
pondered
pondered
this, this,
the more
the more
he grew
he grew
agitated.
agitated.
If youIfcould
you could
makemake
a yummier
a yummier
vegetarian
vegetarian
burger?
burger?
Of course
Of course
you could
you could
makemake
a yummier
a yummier
vegetarian
vegetarian
burger!
burger!
WhyWhy
was nobody
was nobody
treating
treating
this as
thisa as
solvable
a solvable
problem?
problem?
“People
“People
just fijust
gured
figured
we have
we have
this insanely
this insanely
destructive
destructive
system
system
and it’s
andjust
it’s just
nevernever
goinggoing
to goto
away,”
go away,”
BrownBrown
fumed.
fumed.
“They
“They
thought,
thought,
‘Bummer,
‘Bummer,
but there
but there
you are.’
you ”are.’ ”
In most
In most
places
places
and at
andmost
at most
points
points
in human
in human
history,
history,
Brown’s
Brown’s
epiphany
epiphany
would
would
havehave
beenbeen
inconsequential.
inconsequential.
But, as
But,
Brown
as Brown
himself
himself
reflected
reflected
later,later,
he he
had “the
had “the
very very
goodgood
fortune
fortune
of living
of living
in the
inepicenter
the epicenter
of venture
of venture
capital.”
capital.”
3 3
Because
Because
Stanford
Stanford
sat atsat
theatheart
the heart
of Silicon
of Silicon
Valley,
Valley,
its golf
its course
golf course
laid out
laid out
alongalong
the edge
the edge
of Sand
of Sand
Hill Road,
Hill Road,
BrownBrown
was digging
was digging
up his
upyard
his yard
with with
a a
clearclear
purpose.
purpose.
ThoseThose
clover
clover
rootsroots
contained
contained
heme,heme,
an iron-
an iron-
carrying
carrying
mole-mole-
cule cule
foundfound
in hemoglobin,
in hemoglobin,
whichwhich
givesgives
bloodblood
its red
itscolor.
red color.
If Brown
If Brown
couldcould
showshow
how how
this plant
this plant
molecule
molecule
couldcould
mimicmimic
the properties
the properties
of bloody
of bloody
meat,meat,
therethere
was awas
good
a good
chance
chance
that athat
venture
a venture
capitalist
capitalist
wouldwould
fundfund
a plantburger
a plantburger
company.
company.
Brown
Brown
dissected
dissected
the clover
the clover
rootsroots
with with
a razor
a razor
bladeblade
and blended
and blended
themthem
up toup
extract
to extract
and culture
and culture
the juices.
the juices.
Pretty
Pretty
soon,soon,
he had
he what
had what
he needed
he needed
to fashion
to fashion
a vegetarian
a vegetarian
burger
burger
that that
smelled
smelled
and sizzled
and sizzled
and dripped
and dripped
and and
squished
squished
like 100
like percent
100 percent
Grade
Grade
A beef.
A beef.
“I got“Ito
got
a point
to a point
where,
where,
though
though
I I
didn’t
didn’t
havehave
muchmuch
data,data,
I’d enough
I’d enough
to gotoand
go talk
and to
talk
some
to some
venture-
venture-
capital
capital
companies—
companies—
of which
of which
therethere
are aare
ridiculous
a ridiculous
number
number
in Silicon
in Silicon
Valley—
Valley—
and and
hit them
hit them
for some
for some
money.”
money.”
A scientist
A scientist
friend
friend
mentioned
mentioned
that that
VinodVinod
Khosla,
Khosla,
a venture
a venture
capitalist
capitalist
who who
ran the
raneponymous
the eponymous
Khosla
Khosla
Ventures,
Ventures,
was interested
was interested
in environmen-
in environmen-
tally tally
friendly,
friendly,
“cleantech”
“cleantech”
projects.
projects.
WhatWhat
he didn’t
he didn’t
mention
mention
was that
was Khosla
that Khosla
was also
was aalso
preacher
a preacher
of theofValley’s
the Valley’s
mostmost
bracing
bracing
creed:
creed:
the belief
the belief
that most
that most
U N RU
EANS
ROEN
AASO
BLNEA B
PLEE
OPPLEEO P L E 3 3
social
social
problems
problems
can be
canameliorated
be ameliorated
by technological
by technological
solutions,
solutions,
if only
if only
in- in-
ventors
ventors
can be
cangoaded
be goaded
to betosuffi
be ciently
sufficiently
ambitious.
ambitious.
“All progress
“All progress
depends
depends
uponupon
the unreasonable
the unreasonable
man,”man,”
the “creatively
the “creatively
maladjusted,”
maladjusted,”
Khosla
Khosla
declared,
declared,
borrowing
borrowing
eclectically
eclectically
fromfrom
George
George
Bernard
Bernard
ShawShaw
and and
Martin
Martin
Luther
Luther
Jr.4 “Most
KingKing Jr.4 “Most
people
people
thinkthink
improbable
improbable
ideasideas
are unimportant,”
are unimportant,”
he loved
he loved
to add,
to add,
“but “but
the only
the only
thingthing
that’sthat’s
important
important
is something
is something
that’sthat’s
improbable.”
improbable.”
If youIfwere
you were
goinggoing
to pitch
to pitch
Khosla
Khosla
an invention,
an invention,
it haditbett
haderbett
not erfall
notinto
fall the
into the
incremental
incremental
category
category
he called
he called
“one “one
sheetsheet
of toilet
of toilet
paper,
paper,
not tw
not
o.”tw
5
Khosla
o.”5 Khosla
wanted
wanted
radical
radical
dreams,
dreams,
the bolder
the bolder
and more
and more
improbable
improbable
the bett
theer.
better.
Brown
Brown
roderode
a bicycle
a bicycle
to Khosla’s
to Khosla’s
office,
offiace,
sleek
a sleek
designer
designer
building
building
of of
glassglass
and wood.
and wood.
He had
He prepared
had prepared
a slide
a slide
deckdeck
that he
thatadmitt
he admitt
ed “in
edretro-
“in retro-
spectspect
was ridiculous.” The6 fiThe
was ridiculous.”
6
rst slide
first slide
laid out
laidhis
outgoal:
his goal:
rendering
rendering
the entire
the entire
meatmeat
industry
industry
redundant.
redundant.
ThoseThose
rounded
rounded
glasses—
glasses—
the John
the John
Lennon,
Lennon,
SteveSteve
Jobs,Jobs,
visionary
visionary
look—look—
seemed
seemed
altogether
altogether
appropriate.
appropriate.
Khosla
Khosla
has large
has large
eyes eyes
and chiseled
and chiseled
features
features
and thick,
and thick,
cropped
cropped
gray gray
hair. hair.
He fiHe
xedfihis
xedvisitor
his visitor
with with
an impish
an impish
stare.stare.
“That’s
“That’s
impossible!”
impossible!”
he said,
he said,
delightedly.
delightedly.
Silently,
Silently,
Khosla
Khosla
was thinking
was thinking
to himself,
to himself,
“If there
“If there
is a one-
is a in-
one-a-in-
hundred
a-hundred
chance
chance
that this
that works,
this works,
this is
this
a shot
is a shot
worthworth
taking.”
taking.”
7 7
Brown
Brown
explained
explained
how how
he proposed
he proposed
to out-
to beef
out-beef
the beef
the beef
industry.
industry.
He He
would
would
breakbreak
the challenge
the challenge
downdown
into into
its component
its component
parts:
parts:
how how
to repli-
to repli-
cate cate
the smell,
the smell,
the consistency,
the consistency,
the taste,
the taste,
and the
andappearance
the appearance
of a real
of a beef
real beef
burger.
burger.
OnceOnce
you analyzed
you analyzed
eacheach
question
question
separately,
separately,
an apparently
an apparently
impos-
impos-
siblesible
ambition
ambition
became
became
a setaofset
soluble
of soluble
problems.
problems.
For example,
For example,
the clover-
the clover-
root root
juicesjuices
wouldwould
drip drip
like blood
like blood
ontoonto
hot coals;
hot coals;
they they
wouldwould
turn turn
fromfrom
red red
to brown
to brown
as they
as they
sizzled
sizzled
on a barbecue.
on a barbecue.
Dr. Frankenstein
Dr. Frankenstein
had met
hadRay
metKroc.
Ray Kroc.
Nobody
Nobody
would
would
eat ground
eat ground
cow cow
fleshflagain.
esh again.
Khosla
Khosla
ran through
ran through
a testa that
test he
that
applied
he applied
to supplicants.
to supplicants.
The onus
The onus
was was
not on
not
Brown
on Brown
to prove
to prove
that his
thatidea
his would
idea would
definitely
definitely
work.work.
Rather,
Rather,
the ques-
the ques-
tion tion
was was
whether
whether
Khosla
Khosla
couldcould
comecome
up with
up with
a reason
a reason
why why
it obviously
it obviously
couldcould
not work.
not work.
The more
The more
Khosla
Khosla
listened
listened
to histovisitor,
his visitor,
the less
the he
lesscould
he could
rule out
rulethat
out he
that
was
he onto
was onto
something.
something.
Next,Next,
Khosla
Khosla
sizedsized
up Brown
up Brown
as a person.
as a person.
He was
He fond
was fond
of proclaiming
of proclaiming
a Yoda
a Yoda
approach
approach
to investing:
to investing:
empower
empower
people
people
who who
feel the
feelforce
the force
and let
and let
4 4 T H E TPH
OEWPEO
RWL EAW
R L AW
themthem
workwork
theirtheir
magic.
magic.
8
Brown
8
Brown
was evidently
was evidently
brilliant,
brilliant,
as hisascredentials
his credentials
as as
a geneticist
a geneticist
demonstrated.
demonstrated.
He was
He gate-
was gate-
crashing
crashing
a new
a new
field,fiwhich
eld, which
meantmeant
he was
he unburdened
was unburdened
by preconceptions
by preconceptions
aboutabout
whatwhat
conventional
conventional
wisdom
wisdom
deemed
deemed
possible.
possible.
Moreover,
Moreover,
Brown
Brown
was clearly
was clearly
as determined
as determined
as heaswas
he was
bright:
bright:
he was
heready
was ready
to leave
to leave
his academic
his academic
perch—
perch—
the prestige
the prestige
of a Stanford
of a Stanford
professorship,
professorship,
the blank
the blank
checkcheck
fromfrom
the Howard
the Howard
Hughes
Hughes
foundation.
foundation.
All inAll in
all, Brown
all, Brown
fittedfiKhosla’s
tted Khosla’s
archety
archety
pe ofpe
the
ofideal
the ideal
entrepreneur.
entrepreneur.
He had
He the
had the
dazzling
dazzling
intellect,
intellect,
the willingness
the willingness
to put
tohis
putown
his own
neckneck
on the
online,
the line,
the glo-
the glo-
riousrious
hubris
hubris
and naïveté.
and naïveté.
9 9
There
There
was one
was last
one test
last that
test that
Khosla
Khosla
caredcared
about.
about.
If Brown
If Brown
managed
managed
to produce
to produce
a yummy
a yummy
plantburger,
plantburger,
would
would
he generate
he generate
profiprofi
ts that
ts would
that would
be be
commensurately
commensurately
succulent?
succulent?
Khosla
Khosla
routinely
routinely
put capital
put capital
behind
behind
moonmoon
shotsshots
with with
a nine-
a nine-
in-ten
in-
chance
ten chance
of failure.
of failure.
But the
Butlow
theprobability
low probability
of a moon
of a moon
landing
landing
had to
had
beto
balanced
be balanced
by the
byprospect
the prospect
of a large
of a large
payout:
payout:
if theifcompany
the company
thrived,
thrived,
Khosla
Khosla
wanted
wanted
to reap
to reap
moremore
thanthan
ten times
ten times
his investment—
his investment—
preferably,
preferably,
muchmuch
moremore
than than
that. that.
ThereThere
was no
waspoint
no point
gambling
gambling
for success
for success
unless
unless
the the
success
success
was worth
was worth
having.
having.
Brown
Brown
had gott
had en
gott
toenhis
tofihis
nal fislide,
nal slide,
wherewhere
he stuck
he stuck
all the
all mundane
the mundane
market
market
data data
that failed
that failed
to interest
to interest
a scientist.
a scientist.
He noted
He noted
matter-
matt
of-er-
factly
of-factly
that that
“it’s a“it’s
trillion-
a trillion-
and-a-and-
half-
a-half-
dollar
dollar
global
global
market
market
beingbeing
served
served
by prehistoric
by prehistoric
technology.”
technology.”
10 10
Khosla
Khosla
latched
latched
on. Ifon.
plant
If plant
patt ies
patt
could
ies could
reproduce
reproduce
the properties
the properties
of of
beef—
beef—
the taste,
the taste,
the consistency,
the consistency,
the browning,
the browning,
and the
and bleeding
the bleeding
as you
as you
flipped
flipped
the burger
the burger
on the
ongrill—
the grill—
the potential
the potential
was cosmic.
was cosmic.
Brown
Brown
looked
looked
Khosla
Khosla
in theineyes.
the eyes.
“I promise
“I promise
to make
to make
you even
you even
moremore
in- in-
sanely
sanely
rich than
rich than
you already
you already
are, ifare,
youif give
you give
me this
me money,”
this money,”
he told
he him.
told 11him.11
At that,
At that,
Khosla
Khosla
bet $3
betmillion
$3 million
on Impossible
on Impossible
Foods,
Foods,
as Brown
as Brown
fittingly
fittingly
named
named
his company.12
Recounting
his company.12
Recounting
this story
this story
in 2018,
in 2018,
Khosla
Khosla
happily
happily
notednoted
Impossible’s
Impossible’s
progress
progress
sincesince
2010:2010:
the company
the company
would
would
soonsoon
havehave
moremore
than than
$100$100
million
million
in annual
in annual
revenues,
revenues,
and the
andImpossible
the Impossible
Whopper
Whopper
would
would
be be
served
served
at Burger
at Burger
King.King.
But the
Butmain
the main
message
message
that Khosla
that Khosla
emphasized
emphasized
tran-tran-
scended
scended
dollars
dollars
and even
and even
the food
the food
system.
system.
“You“You
can imagine,
can imagine,
if Patiffails,
Pat fails,
the the
hubris
hubris
of saying
of saying
he could
he could
eliminate
eliminate
animal
animal
husbandry;
husbandry;
he’ll he’ll
be mocked
be mocked
for for
that,”that,”
KhoslaKhosla
observed.
observed.
But, he
But,
continued,
he continued,
the mockery
the mockery
wouldwould
be misplaced.
be misplaced.
U N RU
EANS
ROEN
AASO
BLNEA B
PLEE
OPPLEEO P L E 5 5
Which
Which
is bett
iser:
bett
toer:
trytoand
try fail,
and or
fail,
toor
fail
toto
fail
try?
to13try?
Reasonable
13
Reasonable
people—
people—
well-well-
adjusted
adjusted
people,
people,
people
people
without
without
hubris
hubris
or naïveté—
or naïveté—
routinely
routinely
fail in
fail
life’s
in life’s
important
important
missions
missions
by not
by even
not even
att empting
att empting
them;them;
the way
the way
Khosla
Khosla
saw saw
things,
things,
Brown
Brown
should
should
be hailed
be hailed
as a hero,
as a hero,
whatever
whatever
happened
happened
to histocom-
his com-
pany.pany.
TrulyTruly
consequential
consequential
changes
changes
are bound
are bound
to seem
to seem
outrageous
outrageous
whenwhen
they they
are fiare
rst imagined
first imagined
by messianic
by messianic
inventors.
inventors.
But there
But there
is noisglory
no glory
in projects
in projects
that will
thatprobably
will probably
succeed,
succeed,
for these
for these
by defi
bynition
definition
won’twon’t
transform
transform
the human
the human
predicament.
predicament.
Khosla
Khosla
was himself
was himself
an unreasonable
an unreasonable
man,man,
creatively
creatively
maladjusted.
maladjusted.
As a As
boya boy
in hisinnative
his native
India,
India,
he rebelled
he rebelled
against
against
his parents’
his parents’
religion,
religion,
declined
declined
to fol-
to fol-
low his
lowfather
his father
into the
intoarmy,
the army,
and refused
and refused
an arranged
an arranged
marriage.
marriage.
On his
Onwed-
his wed-
ding ding
day, he
day,
set
hehis
setwatch
his watch
alarm,
alarm,
declaring
declaring
that the
thatreligious
the religious
portion
portion
of theof the
ceremony
ceremony
had to
had
beto
done
be done
inside
inside
thirtythirty
minutes.
minutes.
As soon
As soon
as heas
earned
he earned
an en-
an en-
gineering
gineering
degree,
degree,
he left
hefor
leftthe
forUnited
the United
States,
States,
wherewhere
he studied
he studied
moremore
en- en-
gineering
gineering
at Carnegie
at Carnegie
Mellon
Mellon
University
University
. After
. After
that,that,
he set
hehis
setsights
his sights
on on
Stanford
Stanford
Business
Business
School;
School;
learning
learning
that he
that
needed
he needed
two years’
two years’
workwork
experi-
experi-
enceence
to qualify
to qualify
for admission,
for admission,
he did
hetw
did
o jobs
two at
jobs
once
at once
and declared
and declared
afterafter
one one
year year
that he
that
had
hemet
hadthe
metrequirement.
the requirement.
In 1982,
In 1982,
afterafter
completing
completing
his business
his business
degree,
degree,
Khosla
Khosla
teamed
teamed
up with
up with
threethree
computer
computer
scientists
scientists
to found
to found
Sun Mi-
Sun Mi-
crosystems,
crosystems,
whose
whose
powerful
powerful
workstations
workstations
stamped
stamped
theirtheir
markmark
on the
onevo-
the evo-
lution
lution
of computing.
of computing.
CockyCocky
and and
obnoxious,
obnoxious,
Khosla
Khosla
was was
soonsoon
fi red.fi red.
He He
became
became
a venture
a venture
capitalist.
capitalist.
Joining
Joining
the storied
the storied
venture
venture
partnership
partnership
of Kleiner
of Kleiner
Perkins,
Perkins,
Khosla
Khosla
dis- dis-
covered
covered
his true
his true
métier.
métier.
His unreasonable
His unreasonable
impatience—
impatience—
his determination
his determination
that anything
that anything
mightmight
be possible
be possible
and everything
and everything
should
should
workwork
his way—
his way—
mademade
him one
him part
one part
ty rant,
ty rant,
two parts
two parts
visionary.
visionary.
In later
In later
life, he
life,bought
he bought
a village
a village
with with
fortyforty
-seven
-seven
cott ages
cott ages
on the
onCalifornia
the California
coastcoast
and fought
and fought
a series
a series
of los-
of los-
ing court
ing court
casescases
to block
to block
public
public
access
access
to the
tobeach,
the beach,
eveneven
though
though
he never
he never
found
found
time time
to spend
to spend
the night
the night
there—
there—
not once,
not once,
ever.ever.
But he
Butchanneled
he channeled
his his
contempt
contempt
for conventional
for conventional
thinking
thinking
into into
a series
a series
of dazzling
of dazzling
investments,
investments,
frequently
frequently
losing
losing
his money
his money
and sometimes
and sometimes
generating
generating
bonanzas.
bonanzas.
By the
By the
time time
he met
he Patrick
met Patrick
Brown,
Brown,
everything
everything
aboutabout
Khosla—
Khosla—
his risk
his appetite,
risk appetite,
his his
6 6 T H E TPH
OEWPEO
RWL EAW
R L AW
love of
love
hubris,
of hubris,
his quest
his quest
for improbable
for improbable
ideas—
ideas—
mademade
him the
himliving
the living
embodi-
embodi-
mentment
of the
ofpower
the power
law, the
law,most
the most
pervasive
pervasive
rule in
rule
venture
in venture
capital.
capital.
14 14
ManyMany
phenomena
phenomena
in lifeinare
lifenormally
are normally
distributed:
distributed:
nearly
nearly
all the
allobser-
the obser-
vations
vations
in a data
in a data
set cluster
set cluster
around
around
the average.
the average.
For example,
For example,
the average
the average
height
height
of anofAmerican
an American
man man
is five
is feet
five ten
feetinches,
ten inches,
and tw
and
o-thirds
two-thirds
of Amer-
of Amer-
ican ican
men men
are within
are within
threethree
inches
inches
of that
of average.
that average.
When When
you plot
you height
plot height
on on
an x an
axis
x axis
and the
andprobability
the probability
that that
a mana man
will have
will have
that that
height
height
on a on
y axis,
a y axis,
whatwhat
you see
youissee
a bell
is a curve:
bell curve:
the greatest
the greatest
probability
probability
is that
is athat
man’s
a man’s
height
height
will be
willthe
beaverage
the average
height,
height,
and the
andprobabilities
the probabilities
decline
decline
as you
as move
you move
awayaway
fromfrom
that that
midpoint.
midpoint.
The The
chances
chances
of meeting
of meeting
a man
a man
whose
whose
height
height
is tenis ten
inches
inches
fromfrom
the average—
the average—
that that
is, less
is, than
less than
five feet
five or
feetmore
or more
than than
six feet
six feet
eight—
eight—
are exceedingly
are exceedingly
small.
small.
Further
Further
awayaway
fromfrom
the mean,
the mean,
the thin
the tails
thin tails
of of
the curve
the curve
tapertaper
toward
toward
zero.zero.
Normal
Normal
Distribution
Distribution
Average
Average
Frequency
Frequency
Size Size
Not all
Notphenomena
all phenomena
follow
follow
this patt
thisern,
patthowever.
ern, however.
A chart
A chart
showing
showing
the the
wealth
wealth
of Americans
of Americans
rather
rather
than than
theirtheir
height
height
lookslooks
very very
different.
different.
People
People
who who
are richer
are richer
than than
the median
the median
are sometimes
are sometimes
vastly
vastly
richer,
richer,
so the
sofar
theright
far right
side of
side
theofwealth
the wealth
chartchart
features
features
an extended
an extended
fat tail
fatbetw
tail betw
een the
eencurve
the curve
and and
the xthe
axis.
x axis.
Because
Because
the very
the very
rich are
richnumerous
are numerous
enough
enough
and wealthy
and wealthy
enough
enough
to impact
to impact
the average
the average
for the
forwhole
the whole
nation,
nation,
the average
the average
is pulled
is pulled
to thetoright:
the right:
unlike
unlike
in a normal
in a normal
distribution,
distribution,
the mean
the mean
is higher
is higher
thanthan
the median.
the median.
In a In a
U N RU
EANS
ROEN
AASO
BLNEA B
PLEE
OPPLEEO P L E 7 7
normal
normal
distribution,
distribution,
moreover,
moreover,
you can
you remove
can remove
the biggest
the biggest
outlier
outlier
fromfrom
a a
sample
sample
without
without
affecting
affecting
the average:
the average:
if a seven-
if a seven-
foot NBA
foot NBA
star walks
star walks
out of
out of
a cinema,
a cinema,
the average
the average
height
height
of the
ofremaining
the remaining
ninety
ninety
-nine-nine
movie-
movie-
watching
watching
men men
falls falls
fromfrom
five feet
five 10
feetinches
10 inches
to five
to feet
five 9.9
feetinches.
9.9 inches.
In a non-
In a normal,
non-normal,
skewed
skewed
distribution,
distribution,
in contrast,
in contrast,
the outliers
the outliers
can have
can have
a dramatic
a dramatic
effect.
effIf
ect. If
Jeff Bezos
Jeff Bezos
walkswalks
out ofout
theofcinema,
the cinema,
the average
the average
wealth
wealth
of those
of those
who who
stay be-
stay be-
hind hind
will plummet.
will plummet.
Power
Power
LawLaw
Distribution
Distribution
Average
Average
Frequency
Frequency
Size Size
This This
sort of
sort
skewed
of skewed
distribution
distribution
is sometimes
is sometimes
referred
referred
to asto
the
as80/
the20
80/20
rule: rule:
the idea
the that
idea80
that
percent
80 percent
of theofwealth
the wealth
is held
is by
held
20by
percent
20 percent
of theofpeople,
the people,
that 80
thatpercent
80 percent
of theofpeople
the people
live in
live
20inpercent
20 percent
of theofcities,
the cities,
or that
or 20
thatper-
20 per-
cent cent
of allof
scientifi
all scientifi
c papers
c papers
earnearn
80 percent
80 percent
of theofcitations.
the citations.
In reality
In reality
, there
, there
is nothing
is nothing
magical
magical
aboutabout
the numbers
the numbers
80 or80
20:
orit20:
could
it could
be that
be just
that10
just
per-
10 per-
cent cent
of the
ofpeople
the people
hold hold
80 percent
80 percent
of the
ofwealth,
the wealth,
or perhaps
or perhaps
90 percent
90 percent
of of
it. But
it. whatever
But whatever
the precise
the precise
numbers,
numbers,
all these
all these
distributions
distributions
are examples
are examples
of theofpower
the power
law, so
law,
called
so called
because
because
the winners
the winners
advance
advance
at anat
accelerating,
an accelerating,
exponential
exponential
rate, rate,
so that
so they
that they
explode
explode
upward
upward
far more
far more
rapidly
rapidly
than than
in a lin-
in a lin-
ear progression.
ear progression.
OnceOnce
Jeff Bezos
Jeff Bezos
achieves
achieves
greatgreat
riches,
riches,
his opportunities
his opportunities
for further
for further
enrichment
enrichment
multiply;
multiply;
the more
the more
a scientifi
a scientifi
c paper
c paper
is cited,
is cited,
the bet-
the bet-
ter known
ter known
it is and
it is the
andmore
the more
likelylikely
it is to
it is
attto
ract
attfurther
ract further
citations.
citations.
Anytime
Anytime
you have
you have
outliers
outliers
whosewhose
success
success
multiplies
multiplies
success,
success,
you switch
you switch
fromfrom
the the
8 8 T H E TPH
OEWPEO
RWL EAW
R L AW
domain
domain
of theofnormal
the normal
distribution
distribution
to thetoland
the land
ruledruled
by the
bypower
the power
law—law—
fromfrom
a world
a world
in which
in which
things
things
vary vary
slightly
slightly
to one
toof
oneextreme
of extreme
contrasts.
contrasts.
And And
onceonce
you cross
you cross
that perilous
that perilous
frontier,
frontier,
you bett
youer
bett
begin
er begin
to think
to think
differently.
differently.
The rethinking
The rethinking
required
required
is especially
is especially
pronounced
pronounced
in finance.
in finance.
Investors
Investors
who focus
who focus
on currencies,
on currencies,
bonds,
bonds,
and stock
and stock
markets
markets
generally
generally
assume
assume
a normal
a normal
distribution
distribution
of price
of price
changes:
changes:
values
values
jigglejiggle
up and
updown,
and down,
but extreme
but extreme
moves
moves
are unusual.
are unusual.
Of course,
Of course,
extreme
extreme
moves
moves
are possible,
are possible,
as financial
as financial
crashes
crashes
show.show.
But betw
But betw
een 1985
een 1985
and 2015,
and 2015,
the S&
the
P S&
500Pstock
500 stock
indexindex
budged
budged
less than
less than
3 per-3 per-
cent from
cent from
its starting
its starting
pointpoint
on 7,663
on 7,663
out ofout
7,817
of 7,817
days;days;
in other
in other
words,
words,
for fully
for fully
98 percent
98 percent
of theoftime,
the time,
the market
the market
is remarkably
is remarkably
stable. Because
stable.
15 15
Because
the distri-
the distri-
bution
bution
of price
of price
changes
changes
in these
in these
widely
widely
traded
traded
markets
markets
approaches
approaches
normal,
normal,
speculators
speculators
concentrate
concentrate
on harvesting
on harvesting
profiprofi
ts from
ts from
the modest
the modest
fluctuations
fluctuations
that occur
that occur
on most
on most 16
Like
days.days. 16
Like
the seven-
the seven-
foot foot
NBANBA
star in
star
theincinema,
the cinema,
un- un-
expectedly
expectedly
largelarge
priceprice
jumpsjumps
are rare
are rare
enough
enough
and moderate
and moderate
enough
enough
that that
they they
do not
doaff
not
ectaffthe
ectaverage.
the average.
NowNow
consider
consider
the returns
the returns
in venture
in venture
capital.
capital.
Horsley
Horsley
Bridge
Bridge
is anisin-
an in-
vestment
vestment
company
company
with with
stakes
stakes
in venture
in venture
fundsfunds
that backed
that backed
7,0007,000
startups
startups
betwbetw
een 1985
een 1985
and 2014.
and 2014.
A small
A small
subset
subset
of these
of these
deals,
deals,
accounting
accounting
for just
for just
5 percent
5 percent
of theoftotal
the total
capital
capital
deployed,
deployed,
generated
generated
fully fully
60 percent
60 percent
of allof
the
all the
Horsley
Horsley
Bridge
Bridge
returns
returns
during
during
this period. (To17put
this period.
17
(Tothat
put in
that
context,
in context,
in 2018
in 2018
the top-
the performing
top-performing
5 percent
5 percent
of subindustries
of subindustries
in the
inS&
theP S&
500P accounted
500 accounted
for only
for only
9 percent
9 percent
of theofindex’s
the index’s
totaltotal
performance.)18
Other
performance.)18
Other
venture
venture
inves-
inves-
tors tors
report
report
eveneven
moremore
skewed
skewed
returns:
returns:
Y Combinator,
Y Combinator,
which
which
backsbacks
fledg-
fledg-
ling tech
ling tech
startups,
startups,
calculated
calculated
in 2012
in 2012
that three-
that three-
quarters
quarters
of itsofgains
its gains
camecame
fromfrom
just 2just
of the
2 of280
the outfi
280 outfi
ts it had
ts it bet
hadon. “The
bet19 on.19
“The
biggest
biggest
secret
secret
in venture
in venture
capital
capital
is that
is that
the best
the best
investment
investment
in a successful
in a successful
fundfund
equals
equals
or outper-
or outper-
forms
forms
the entire
the entire
rest of
restthe
of fund,”
the fund,”
the venture
the venture
capitalist
capitalist
PeterPeter
ThielThiel
has has
writtwritt “Venture
en.20 en.20
“Venture
capital
capital
is notiseven
not even
a home-
a home-
run business,”
run business,”
Bill Gurley
Bill Gurley
of of
Benchmark
Benchmark
Capital
Capital
onceonce
remarked.
remarked.
“It’s a“It’s
grand-
a grand-
slamslam
business.”
business.”
21 21
WhatWhat
this means
this means
is that
isventure
that venture
capitalists
capitalists
needneed
to beto
ambitious.
be ambitious.
The cel-
The cel-
ebrated
ebrated
hedge-
hedge-
fundfund
stockstock
picker
picker
JulianJulian
Robertson
Robertson
usedused
to saytothat
say he
that
looked
he looked
for shares
for shares
that might
that might
plausibly
plausibly
double
double
in three
in three
years,
years,
an outcome
an outcome
he would
he would
viewview
as “fabulous.”22
But22ifBut
as “fabulous.” venture
if venture
capitalists
capitalists
embarked
embarked
on the
onsame
the same
quest,
quest,
they they
wouldwould
almost
almost
guarantee
guarantee
failure,
failure,
because
because
the power
the power
law generates
law generates
rel- rel-
U N RU
EANS
ROEN
AASO
BLNEA B
PLEE
OPPLEEO P L E 9 9
atively
atively
few startups
few startups
that that
merely
merely
double
double
in value.
in value.
MostMost
fail completely,
fail completely,
in in
which
which
case case
the value
the value
of their
of their
equity
equity
rounds
rounds
to zero—
to zero—
an unthinkable
an unthinkable
catas-
catas-
trophe
trophe
for a for
stock
a stock
market
market
investor.
investor.
But each
But each
year year
brings
brings
a handful
a handful
of outli-
of outli-
ers that
ers that
hit the
hitproverbial
the proverbial
grandgrand
slam,slam,
and the
andonly
the only
thingthing
that that
matters
mattiners in
venture
venture
is to is
ownto own
a piece
a piece
of them.
of them.
23 23
When
When
today’s
today’s
venture
venture
capitalists
capitalists
backback
flyingflying
cars cars
or space
or space
tourism
tourism
or or
artifiartifi
cial intelligence
cial intelligence
systems
systems
that write
that write
film scripts,
film scripts,
they they
are following
are following
this this
power-
power-
law logic.
law logic.
TheirTheir
job isjob
to look
is to look
over over
the horizon,
the horizon,
to reach
to reach
for high-
for high-
risk, risk,
huge-huge-
reward
reward
possibilities
possibilities
that most
that most
people
people
believe
believe
to beto
unreachable.
be unreachable.
“We “We
couldcould
cure cure
cancer,
cancer,
dementia,
dementia,
and all
andthe
alldiseases
the diseases
of age
ofand
agemetabolic
and metabolic
decay,”
decay,”
PeterPeter
ThielThiel
enthuses,
enthuses,
dripping
dripping
with with
disdain
disdain
for incrementalism.
for incrementalism.
“We can
“Wein-
can in-
vent vent
fasterfaster
waysways
to travel
to travel
fromfrom
placeplace
to place
to place
over over
the surface
the surface
of theofplanet;
the planet;
we can
we even
can even
learnlearn
how how
to escape
to escape
it entirely
it entirely
and sett
andlesett
new le new
frontiers.” Of24 Of
frontiers.”
24
course,
course,
investing
investing
in what
in what
is categorically
is categorically
impossible
impossible
is a waste
is a waste
of resources.
of resources.
But the
Butmore
the more
common
common
error,error,
the more
the more
human
human
one, one,
is to is
invest
to invest
too timidly:
too timidly:
to back
to back
obvious
obvious
ideasideas
that others
that others
can copy
can copy
and from
and from
which,
which,
consequently,
consequently,
it willit be
will
hard
be hard
to extract
to extract
profiprofi
ts. ts.
Which
Which
brings
brings
us back
us back
to Vinod
to Vinod
Khosla.
Khosla.
In the
In tw
the
o decades
two decades
he spent
he spent
at at
Kleiner
Kleiner
Perkins
Perkins
before
before
starting
starting
his own
his own
venture
venture
firm,fihe
rm,learned
he learned
not to
not to
worry
worry
aboutabout
the bets
the bets
that went
that went
to zero.
to zero.
All he
All
could
he could
lose was
lose one
was times
one times
his his
money.
money.
25
What
25
What
Khosla
Khosla
caredcared
aboutabout
werewere
the bets
the bets
that did
thatpay
didoff
pay
, and
off,in
and
thein the
mid-1990s
mid-1990s
he fastened
he fastened
on anonespecially
an especially
audacious
audacious
and contrarian
and contrarian
notion:
notion:
that, that,
with with
the coming
the coming
of theofinternet,
the internet,
consumers
consumers
wouldwould
not be
not
satisfi
be satisfi
ed with
ed with
a mere
a mere
doubling
doubling
or tripling
or tripling
in theincapacity
the capacity
of traditional
of traditional
phonephone
lines.lines.
Rather,
Rather,
they they
wouldwould
clamor
clamor
for afor
step
a step
change
change
in bandwidth,
in bandwidth,
involving
involving
routers
routers
that that
handled
handled
data data
flowsflows
a thousand
a thousand
timestimes
larger.
larger.
WhileWhile
the telecom
the telecom
establish-
establish-
mentment
snickered
snickered
at this
at sci-
thisfisci-
babble,
fi babble,
Khosla
Khosla
set out
setto
out
kick-
to kick-
startstart
the compa-
the compa-
nies that
nies would
that would
makemake
the step
the step
change
change
possible.
possible.
The startups
The startups
that Khosla
that Khosla
backed
backed
are largely
are largely
forgott
forgott
en names:
en names:
Juniper,
Juniper,
Siara,Siara,
Cerent.
Cerent.
But they
But they
illustrate
illustrate
whatwhat
venture
venture
capitalists
capitalists
do best
do best
and how
and how
they they
generate
generate
bothboth
wealth
wealth
and progress.
and progress.
While
While
incumbent
incumbent
telecom
telecom
compa-
compa-
nies planned
nies planned
incremental
incremental
upgrades,
upgrades,
Khosla
Khosla
wagered
wagered
on the
onidea
the of
idea
a big
of aleap,
big leap,
10 10 T H E TPH
OEWPEO
RWL EAW
R L AW
eveneven
though
though
he had
he no
hadprecise
no precise
vision
vision
of what
of what
people
people
wouldwould
do with
do with
all the
all the
extraextra
bandwidth.
bandwidth.
Nobody
Nobody
yet imagined
yet imagined
social
social
media
media
or YouTube;
or YouTube;
digital
digital
photography
photography
was litt
was le litt
more le more
than than
a concept.
a concept.
But Khosla
But Khosla
had witnessed
had witnessed
whatwhat
had happened
had happened
with with
otherother
breakout
breakout
technologies.
technologies.
AfterAfter
the invention
the invention
of theof the
semiconductor,
semiconductor,
or after
or after
the invention
the invention
of the
ofEthernet
the Ethernet
cables
cables
that that
hooked
hooked
personal
personal
computers
computers
together,
together,
usageusage
picked
picked
up gradually
up gradually
and then
and then
exploded
exploded
upward
upward
in anin
exponential
an exponential
curve;
curve;
this was
this the
wasinnovation
the innovation
powerpower
law that
law un-
that un-
derlay
derlay
the fithe
nancial
financial
one observed
one observed
in venture-
in venture-
capital
capital
portfolios.
portfolios.
Khosla
Khosla
was was
willing
willing
to bettothat
bet the
thatinternet
the internet
wouldwould
follow
follow
a similar
a similar
pattern:
pattsteady
ern: steady
adop-adop-
tion in
tion
theinfithe
rst half
first of
half
theof1990s,
the 1990s,
a breathtaking
a breathtaking
acceleration
acceleration
as the
aspower-
the power-
law curve
law curve
wentwent
almost
almost
vertical.
vertical.
The result
The result
was awas
setaofset
Khosla
of Khosla
companies
companies
that did
thatmore
did more
than than
just suc-
just suc-
ceed.ceed.
By inventing
By inventing
a newa new
generation
generation
of bandwidth-
of bandwidth-
boosting
boosting
hardware
hardware
and and
softwsoftw
are, they
are, they
captured
captured
hugehuge
chunks
chunks
of anof
exploding
an exploding
market.
market.
Khosla’s
Khosla’s
first first
jackpot,
jackpot,
Juniper
Juniper
NetwNetw
orks,orks,
builtbuilt
internet
internet
routers:
routers:
he invested
he invested
$5 million
$5 million
and and
reaped
reaped
an extraordinary
an extraordinary
$7 billion
$7 billion
for Kleiner’s
for Kleiner’s
fund—fund—
multiplying
multiplying
his ini-
his ini-
tial stake
tial stake
by anbyastonishing
an astonishing
1,4001,400
and generating,
and generating,
at theattime,
the time,
the greatest
the greatest
venture-
venture-
capital
capital
bonanza
bonanza Khosla
ever.ever.
26 26
Khosla
put another
put another
few million
few million
into ainto
net-a net-
workwork
equipment
equipment
company,
company,
SiaraSiara
Systems,
Systems,
and reaped
and reaped
$1.5 billion.
$1.5 billion.
27
In 27
theIn the
case case
of Cerent,
of Cerent,
he invited
he invited
the dominant
the dominant
router
router
giant,giant,
Cisco,
Cisco,
to co-
toinvest
co-invest
with with
him: him:
amongamong
otherother
things,
things,
Cerent
Cerent
wouldwould
facilitate
facilitate
the handling
the handling
of voice
of voice
data.data.
When When
CiscoCisco
refused,
refused,
calling
calling
Cerent
Cerent
too much
too much
of a long
of a long
shot,shot,
Khosla
Khosla
wentwent
aheadahead
alone,
alone,
investing
investing
$8 million,
$8 million,
recruiting
recruiting
the fithe
rst engineers,
first engineers,
serv-serv-
ing as
ingchief
as chief
executive. And
executive.
28 28
And
then then
he exacted
he exacted
sweet
sweet
revenge.
revenge.
As soon
As soon
as as
Cerent’s
Cerent’s
technology
technology
proved
proved
workable,
workable,
CiscoCisco
mademade
two off
twers
o offfor
ersthe
forfithe
rm:firm:
$300$300
million
million
in December
in December
1998;1998;
$700$700
million
million
the following
the following
April.April.
But Khosla,
But Khosla,
believing
believing
in theinpower
the power
law, knew
law, knew
that winners
that winners
oftenoften
carrycarry
on winning:
on winning:
he he
took took
the risk
theof
risk
turning
of turning
CiscoCisco
downdown
and watched
and watched
Cerent’s
Cerent’s
revenues
revenues
take take
off off
exponentially.
exponentially.
FourFour
months
months
later,later,
in August
in August
1999,1999,
Khosla
Khosla
was informed
was informed
that that
CiscoCisco
had prepared
had prepared
another
another
bid, this
bid,time
this time
for $7for
billion.
$7 billion.
The news
The news
reached
reached
him him
whenwhen
he was
he vacationing
was vacationing
at Machu
at Machu
Picchu,
Picchu,
twenty
tw-enty
five -hundred
five hundred
meters
meters
up up
in theinPeruvian
the Peruvian
Andes.
Andes.
Khosla
Khosla
boarded
boarded
a helicopter,
a helicopter,
then then
a plane,
a plane,
and shook
and shook
hands
hands
on the
ondeal
the deal
over over
breakfast
breakfast
in San
in Jose
San Jose
the next
the next
morning.
morning.
Khosla
Khosla
was by
wassome
by some
calculations
calculations
the top
theventure
top venture
capitalist
capitalist
in theinVal-
the Val-
U N RU
EANS
ROEN
AASO
BLNEA B
PLEE
OPPLEEO P L E 11 11
ley, and
ley, he
andhad
he no
hadobjection
no objection
to vast
to vast
riches.
riches.
29
He29conducted
He conducted
a worldwide
a worldwide
search
search
for an
forarchitect
an architect
for his
forhome
his home
near near
Stanford
Stanford
and lavished
and lavished
money
money
on on
the vineyard
the vineyard
surrounding it.30 But
surrounding it.30 what
But what
reallyreally
animated
animated
Khosla
Khosla
was was
the the
contrarianism
contrarianism
he had
heexhibited
had exhibited
in youth:
in youth:
WhyWhy
did his
didparents
his parents
go togo
thetotem-
the tem-
ple, why
ple, why
couldn’t
couldn’t
he choose
he choose
wherewhere
to work
to work
and whom
and whom
to love,
to love,
why why
couldn’t
couldn’t
everything
everything
be diff
beerent?
different?
And,And,
just as
justPatrick
as Patrick
Brown
Brown
wanted
wanted
nothing
nothing
less less
than than
to eliminate
to eliminate
the entire
the entire
meatmeat
industry,
industry,
so Khosla
so Khosla
mademade
extraordinary
extraordinary
claims
claims
for his
forwork.
his work.
Venture
Venture
capital
capital
was not
wasmerely
not merely
a business;
a business;
it wasitawas
mind-
a mind-
set, aset,
philosophy,
a philosophy,
a theory
a theory
of progress.
of progress.
SevenSeven
hundred
hundred
million
million
people
people
en- en-
joyedjoyed
the lifesty
the lifesty
le that
le seven
that seven
billion
billion
wanted,
wanted,
he liked
he liked
to say.
toBold
say. Bold
innovators
innovators
goaded
goaded
by even
by even
bolder
bolder
venture
venture
capitalists
capitalists
offered
offered
the best
the best
shot shot
at satisfying
at satisfying
human
human
aspirations.
aspirations.
31 31
Venture
Venture
capitalists
capitalists
oftenoften
fail to
fail
live
to up
livetoup
this
to hype,
this hype,
as weaswill
we see
willshortly.
see shortly.
But you
Butdon’t
you don’t
havehave
to swallow
to swallow
all ofall
Khosla’s
of Khosla’s
riff toriff
agree
to agree
that it’s
thatimportant.
it’s important.
The venture-
The venture-
capital
capital
approach
approach
of high-
of high-
risk, risk,
high-high-
reward
reward
experiments
experiments
doesdoes
represent
represent
a distinctive
a distinctive
way of
way
coming
of coming
at theatworld,
the world,
one that
one people
that people
outside
outside
Silicon
Silicon
Valley
Valley
mightmight
learnlearn
from.from.
To illustrate,
To illustrate,
a huge
a huge
amount
amount
of energy
of energy
in in
government,
government,
financial
financial
houses,
houses,
and corporations
and corporations
is spent
is spent
on forecasting
on forecasting
the the
future,
future,
mostly
mostly
by running
by running
statistical
statistical
analyses
analyses
on patt
on erns
patterns
fromfrom
the past;
the past;
without
without
a clear
a clear
forecast,
forecast,
committ
committ
ing resources
ing resources
wouldwould
seemseem
irresponsible.
irresponsible.
But the
Butway
the way
venture
venture
capitalists
capitalists
see things,
see things,
the disciplined
the disciplined
calibrations
calibrations
of of
conventional
conventional
social
social
scientists
scientists
can be
cana be
blindfold,
a blindfold,
not anot
telescope.
a telescope.
Extrapo-
Extrapo-
lations
lations
fromfrom
past past
data data
anticipate
anticipate
the future
the future
only only
whenwhen
therethere
is notismuch
not much
to to
anticipate;
anticipate;
if tomorrow
if tomorrow
will be
will
a mere
be a mere
extension
extension
of today,
of today,
why why
bother
bother
with with
forecasting?
forecasting?
The revolutions
The revolutions
that will
that matt
will er—
mattthe
er—big
thedisruptions
big disruptions
that cre-
that cre-
ate wealth
ate wealth
for inventors
for inventors
and anxiety
and anxiety
for workers,
for workers,
or that
or scramble
that scramble
the geo-
the geo-
political
political
balance
balance
and alter
and alter
humanhuman
relations—
relations—
cannot
cannot
be predicted
be predicted
based
based
on on
extrapolations
extrapolations
of past
of past
data,data,
precisely
precisely
because
because
such such
revolutions
revolutions
are so
are
thor-
so thor-
oughly
oughly
disruptive.
disruptive.
Rather,
Rather,
they they
will emerge
will emerge
as a result
as a result
of forces
of forces
that are
thattoo
are too
complex
complex
to forecast—
to forecast—
fromfrom
the primordial
the primordial
soupsoup
of tinkerers
of tinkerers
and hackers
and hackers
and and
hubristic
hubristic
dreamers—
dreamers—
and all
and you
allcan
youknow
can know
is that
is the
thatworld
the world
in teninyears
ten years
will will
be excitingly
be excitingly
different.
different.
Mature,
Mature,
comfortable
comfortable
societies,
societies,
dominated
dominated
by people
by people
12 12 T H E TPH
OEWPEO
RWL EAW
R L AW
who who
analyze
analyze
everyevery
probability
probability
and manage
and manage
everyevery
risk, risk,
shouldshould
comecome
to terms
to terms
with with
a tomorrow
a tomorrow
that cannot
that cannot
be foreseen.
be foreseen.
The future
The future
can be
candiscovered
be discovered
by by
means
means
of iterative,
of iterative,
venture-
venture-
backedbacked
experiments.32
It cannot
experiments. 32
It cannot
be predicted.
be predicted.
WhatWhat
ty pe ty
ofpe
experiment
of experiment
is likely
is likely
to betofruitful?
be fruitful?
Here,Here,
too, people
too, people
out- out-
side innovation
side innovation
hubshubs
can learn
can learn
something
something
fromfrom
Khosla.
Khosla.
MostMost
of usof
might
us might
as- as-
sumesume
that experts
that experts
in each
in each
field fi
will
eldadvance
will advance
the frontiers
the frontiers
of knowledge.
of knowledge.
But, But,
as weashave
we have
seen seen
fromfrom
Khosla’s
Khosla’s
bet on
betPatrick
on Patrick
Brown,
Brown,
that is
that
much
is much
too sen-
too sen-
sible.sible.
Experts
Experts
may may
be the
bemost
the most
likelylikely
source
source
of incremental
of incremental
advances,
advances,
but but
radical
radical
rethinks
rethinks
tend tend
to come
to come
fromfrom
outsiders.
outsiders.
“If I’m
“Ifbuilding
I’m building
a health-
a health-
care care
company,
company,
I don’t
I don’t
wantwant
a health-
a health-
care care
CEO,”CEO,”
Khosla
Khosla
says.says.
“If I’m
“Ifbuilding
I’m building
a a
manufacturing
manufacturing
company,
company,
I don’t
I don’t
wantwant
a manufacturing
a manufacturing
CEO.CEO.
I want
I want
some-
some-
bodybody
reallyreally
smartsmart
to rethink
to rethink
the assumptions
the assumptions
fromfrom
the ground
the ground
up.” After
up.” After
all, he
all,
continues,
he continues,
retailretail
innovation
innovation
did not
didcome
not come
fromfrom
Walmart;
Walmart;
it came
it came
fromfrom
Amazon.
Amazon.
Media
Media
innovation
innovation
did not
didcome
not come
fromfrom
TimeTime
magazine
magazine
or CBS;
or CBS;
it it
camecame
fromfrom
YouTube
YouTube
and Twitt
and Twitt
er and
er Facebook.
and Facebook.
Space
Space
innovation
innovation
did not
did not
comecome
fromfrom
Boeing
Boeing
and Lockheed;
and Lockheed;
it came
it came
fromfrom
Elon Elon
Musk’s
Musk’s
SpaceX.
SpaceX.
Next-Next-
generation
generation
cars cars
did not
didcome
not come
fromfrom
GM and
GM Volkswagen;
and Volkswagen;
they they
camecame
fromfrom
another
another
MuskMusk
company,
company,
Tesla.Tesla.
“I can’t
“I can’t
thinkthink
of a single,
of a single,
majormajor
innovation
innovation
coming
coming
fromfrom
experts
experts
in theinlast
thethirty
last thirty
, forty, forty
years,”
years,”
Khosla
Khosla
exclaims.
exclaims.
“Think
“Think
aboutabout
it, isn’t
it, that
isn’t stunning?”
that stunning?”
If theIffuture
the future
is best
is best
discovered
discovered
by means
by means
of maverick
of maverick
moonmoon
shots,
shots,
an- an-
otherother
insight
insight
follows.
follows.
Thanks
Thanks
to the
to work
the work
of the
of Nobel
the Nobel
laureate
laureate
Ronald
Ronald
Coase,
Coase,
the economics
the economics
profession
profession
has long
has long
recognized
recognized
two great
two great
institutions
institutions
of modern
of modern
capitalism:
capitalism:
markets,
markets,
whichwhich
coordinate
coordinate
activity
activity
via price
via price
signals
signals
and arm’s-
and arm’s-
length
length
contracts;
contracts;
and corporations,
and corporations,
which
which
do sodobysoassembling
by assembling
largelarge
teamsteams
led by
ledtop-
by down
top-down
managers.
managers.
But economists
But economists
havehave
focused
focused
less less
on the
on middle
the middle
ground
ground
that that
Khosla
Khosla
inhabits:
inhabits:
the venture-
the venture-
capital
capital
netwnetw
orks orks
that that
lie somewhere
lie somewhere
betwbetw
een markets
een markets
and corporations.
and corporations.
And And
yet netw
yet netw
orks orks
of venture
of venture
capitalists
capitalists
deserve
deserve
closer
closer
attention.
attention.
By means
By means
of Khosla-
of Khosla-
style style
maverick
maverick
experiments,
experiments,
they they
havehave
delivered
delivered
moremore
progress
progress
in applied
in applied
sci- sci-
enceence
than than
any kind
any kind
of rival:
of rival:
moremore
than than
centralized
centralized
corporate
corporate
R&DR&
units,
D units,
moremore
than than
isolated
isolated
individuals
individuals
tinkering
tinkering
in garages,
in garages,
and more
and more
than than
govern-
govern-
mentment
attempts
attempts
to pick
to pick
technological
technological
winners.
winners.
Because
Because
VC-backed
VC-backed
startups
startups
havehave
proved
proved
so fertile,
so fertile,
they they
havehave
changed
changed
how how
people
people
work,work,
socialize,
socialize,
shop,shop,
U N RU
EANS
ROEN
AASO
BLNEA B
PLEE
OPPLEEO P L E 13 13
and entertain
and entertain
themselves;
themselves;
how how
they they
access
access
information,
information,
manipulate
manipulate
it, and
it, and
arrive
arrive
at quiet
at quiet
epiphanies—
epiphanies—
how how
they they
think.
think.
Venture
Venture
capitalists
capitalists
havehave
achieved
achieved
this this
disproportionate
disproportionate
impact
impact
be- be-
causecause
they they
combine
combine
the strengths
the strengths
of the
ofcorporation
the corporation
with with
the strengths
the strengths
of of
the market.
the market.
TheyThey
channel
channel
capital,
capital,
talented
talented
employees,
employees,
and large
and large
customers
customers
to promising
to promising
startups;
startups;
in this
in way,
this way,
they they
replicate
replicate
the team
the team
formation,
formation,
re- re-
sources,
sources,
and strategic
and strategic
vision
vision
to beto
found
be found
in corporations. But33at
in corporations.
33
But
theatsame
the same
time,time,
because
because
theirtheir
netwnetw
ork isork
fluid
is fland
uid amorphous,
and amorphous,
they they
havehave
the flthe
exibil-
flexibil-
ity ofity
theofmarket.
the market.
The rainmakers
The rainmakers
of Sand
of Sand
Hill Road
Hill Road
can get
canbehind
get behind
a startup
a startup
with with
a fresh
a fresh
business
business
idea idea
or a scientifi
or a scientifi
c breakthrough;
c breakthrough;
they they
can shape
can shape
it, it,
expand
expand
it, murmur
it, murmur
its name
its name
into into
the right
the right
ears.ears.
But when
But when
a round
a round
of ven-
of ven-
ture ture
funding
funding
is exhausted,
is exhausted,
it is time
it is time
to put
tothe
putstartup
the startup
to a market
to a market
test. test.
If If
therethere
are no
are
enthusiastic
no enthusiastic
buyers
buyers
for the
fornext
the next
tranche
tranche
of theofstartup’s
the startup’s
equity
equity
, ,
the price
the price
signal
signal
will do
willitsdowork:
its work:
the venture
the venture
capitalists
capitalists
will close
will close
it down,
it down,
avoiding
avoiding
the waste
the waste
of resources
of resources
that comes
that comes
fromfrom
backing
backing
speculative
speculative
R&DR&D
beyond
beyond
the point
the point
at which
at which
success
success
appears
appears
impossible.
impossible.
Because
Because
of this
of pe-
this pe-
riodic
riodic
submission
submission
to the
todiscipline
the discipline
of price
of price
signals,
signals,
venture
venture
capitalists
capitalists
are are
goodgood
at recognizing
at recognizing
failure
failure
and good
and good
at doubling
at doubling
downdown
on early
on early
indicators
indicators
of success.
of success.
TheirTheir
blendblend
of corporate
of corporate
strategizing
strategizing
and respect
and respect
for the
formar-
the mar-
ket represents
ket represents
a third
a third
greatgreat
institution
institution
of modern
of modern
capitalism,
capitalism,
to betoadded
be added
to the
totw
the
o that
two Ronald
that Ronald
CoaseCoase
emphasized.
emphasized.
The underappreciated
The underappreciated
signifi
signifi
cancecance
of venture-
of venture-
capital
capital
netwnetw
orks orks
has be-
has be-
comecome
especially
especially
glaring
glaring
in theinpast
the past
few years
few years
as the
asindustry
the industry
has expanded
has expanded
in three
in three
dimensions.
dimensions.
First,First,
it hasitspread
has spread
beyond
beyond
its historical
its historical
stronghold
stronghold
in in
Silicon
Silicon
Valley,
Valley,
building
building
thriving
thriving
outposts
outposts
in Asia,
in Asia,
Israel,
Israel,
and Europe
and Europe
as well
as well
as inas
major
in major
U.S. cities. Second,
U.S. cities.
34 34
Second,
the industry
the industry
has spread
has spread
sectorially,
sectorially,
colo-colo-
nizing
nizing
new new
industries
industries
as venture-
as venture-
backed
backed
technologies
technologies
reachreach
ever ever
moremore
widely,
widely,
touching
touching
everything
everything
fromfrom
cars cars
to thetohotel
the hotel
business.
business.
Third,
Third,
venture
venture
capital
capital
is spreading
is spreading
beyond
beyond
the startup
the startup
phasephase
of a company’s
of a company’s
existence
existence
as as
Silicon
Silicon
Valley
Valley
has sprouted
has sprouted
multibillion-
multibillion-
dollar
dollar
corporations
corporations
that that
havehave
de- de-
layedlayed
raising
raising
capital
capital
fromfrom
public
public
shareholders.
shareholders.
BackBack
in 1997,
in 1997,
Amazon
Amazon
wentwent
public
public
threethree
yearsyears
afterafter
launch,
launch,
whenwhen
it was
it worth
was worth
just $438
just $438
million.
million.
As ofAs of
this writing
this writing
in 2020,
in 2020,
moremore
than than
480 “unicorns”
480 “unicorns”
boastboast
a valuation
a valuation
of more
of more
than than
$1 billion
$1 billion
yet seem
yet seem
in littin
le litt
hurry
le hurry
to gotopublic. Many
go public.
35 35
Many
of the
ofworld’s
the world’s
mostmost
14 14 T H E TPH
OEWPEO
RWL EAW
R L AW
dynamic
dynamic
and disruptive
and disruptive
companies
companies
are owned—
are owned—
and therefore
and therefore
governed
governed
or or
misgoverned—
misgoverned—
by venture
by venture
capitalists
capitalists
and other
and other
private
private
technology
technology
investors.
investors.
This This
bookbook
has tw
has
o broad
two broad
purposes.
purposes.
The fiThe
rst is
first
to is
explain
to explain
the venture-
the venture-
capital
capital
mindset.
mindset.
ThereThere
are dozens
are dozens
of histories
of histories
of Silicon
of Silicon
Valley
Valley
focusing
focusing
on on
the inventors
the inventors
and entrepreneurs;
and entrepreneurs;
therethere
havehave
beenbeen
fewerfewer
efforts
effto
orts
gettounder
get under
the skin
the of
skin
theofpeople
the people
who who
finance
finance
and often
and often
shapeshape
theirtheir
companies.
companies.
Through
Through
careful
careful
reconstruction
reconstruction
of celebrated
of celebrated
transactions—
transactions—
fromfrom
Apple
Apple
and Cisco
and Cisco
to WhatsApp
to WhatsApp
and Uber—
and Uber—
the story
the story
in these
in these
pagespages
showsshows
whatwhat
happens
happens
whenwhen
venture
venture
capitalists
capitalists
and startups
and startups
connect,
connect,
and why
and why
venture
venture
is so isdiff
soerent
different
fromfrom
otherother
ty pestyof
pesfinance.
of finance.
MostMost
financiers
financiers
allocate
allocate
scarce
scarce
capital
capital
basedbased
on quantitative
on quantitative
analysis.
analysis.
Venture
Venture
capitalists
capitalists
meetmeet
people,
people,
charm
charm
people,
people,
and and
seldom
seldom
bother
bother
withwith
spreadsheets. Most
spreadsheets.
36 36
Most
fi nanciers
fi nanciers
valuevalue
companies
companies
by by
projecting
projecting
theirtheir
cash cash
flows.
flows.
Venture
Venture
capitalists
capitalists
frequently
frequently
backback
startups
startups
be- be-
fore they
fore they
havehave
cash cash
flowsflto
owsanalyze.
to analyze.
OtherOther
financiers
financiers
tradetrade
millions
millions
of dol-
of dol-
lars of
lars
paper
of paper
assets
assets
in theinblink
the blink
of anof
eye.
an Venture
eye. Venture
capitalists
capitalists
take take
relatively
relatively
smallsmall
stakes
stakes
in real
in companies
real companies
and hold
and hold
them.them.
MostMost
fundamentally,
fundamentally,
otherother
fi nanciers
fi nanciers
extrapolate
extrapolate
trends
trends
fromfrom
the past,
the past,
disregarding
disregarding
the risk
the of
risk
ex-
of ex-
treme
treme
“tail”“tail”
events.
events.
Venture
Venture
capitalists
capitalists
look look
for radical
for radical
departures
departures
fromfrom
the the
past.past.
Tail events
Tail events
are all
arethey
all they
care care
about.
about.
This This
book’s
book’s
second
second
purpose
purpose
is to is
evaluate
to evaluate
venture
venture
capital’s
capital’s
social
social
im- im-
pact.pact.
VCs VCs
themselves
themselves
frequently
frequently
assert
assert
that that
“they“they
are making
are making
the world
the world
a a
better
bett
place.”
er place.”
This This
is certainly
is certainly
true true
sometimes:
sometimes:
Impossible
Impossible
FoodsFoods
is anisex-
an ex-
ample.
ample.
On the
Onother
the other
hand,hand,
videovideo
games
games
and social
and social
media
media
promote
promote
screen
screen
addiction
addiction
and fake
and news,
fake news,
eveneven
as they
as they
entertain,
entertain,
inform,
inform,
and allow
and allow
Grandma
Grandma
to admire
to admire
pictures
pictures
of herofdistant
her distant
grandchildren.
grandchildren.
The gap
Thebetw
gap betw
een VC
eenrheto-
VC rheto-
ric and
ricVC
andpractice
VC practice
is easily
is easily
mocked.
mocked.
In April
In April
2020,2020,
in theinthroes
the throes
of theofcoro-
the coro-
navirus
navirus
pandemic,
pandemic,
the venture
the venture
capitalist
capitalist
MarcMarc
Andreessen
Andreessen
proclaimed
proclaimed
that that
it wasit “time
was “time
to build.”
to build.”
“Where
“Where
are the
arehigh-
the high-
speedspeed
trains,
trains,
the soaring
the soaring
mono-mono-
rails,rails,
the hyperloops,
the hyperloops,
and yes,
andthe
yes,flthe
yingflying
cars?”
cars?”
he demanded. The37following
he demanded.
37
The following
month
month
Andreessen’s
Andreessen’s
partnership
partnership
invested
invested
in Clubhouse,
in Clubhouse,
an invitation-
an invitation-
only only
social-
social-
mediamedia
app. Meanwhile,
app. Meanwhile,
the venture
the venture
industry’s
industry’s
expansive
expansive
pronounce-
pronounce-
ments
ments
standstand
in contrast
in contrast
to the
tonarrowness
the narrowness
of itsofmonoculture.
its monoculture.
WomenWomen
are are
badlybadly
underrepresented:
underrepresented:
as ofas
2020,
of 2020,
they they
account
account
for 16for
percent
16 percent
of invest-
of invest-
ing partners.
ing partners.
Racial
Racial
diversity
diversity
is even
is even
moremore
limited:
limited:
only only
aboutabout
3 percent
3 percent
of of
U N RU
EANS
ROEN
AASO
BLNEA B
PLEE
OPPLEEO P L E 15 15
partners
partners
at venture-
at venture-
capital
capital
firmsfirms
are Black.
are Black.
38
Precisely
38
Precisely
because
because
venture
venture
capital
capital
doesdoes
so much
so much
to shape
to shape
society
society
, it must
, it must
become
become
moremore
diverse,
diverse,
bothboth
in terms
in terms
of the
ofinvestors
the investors
it hires
it hires
and the
andstartups
the startups
it fi nances.
it fi nances.
Finally
Finally
and and
mostmost
tellingly—
tellingly—
sincesince
this lies
this at
lies
the
atheart
the heart
of what
of what
the industry
the industry
presents
presents
as itsascore
its core
function—
function—
venture
venture
capitalists
capitalists
mustmust
reckon
reckon
with with
theirtheir
record
record
as as
the stewards
the stewards
of tech
of tech
companies.
companies.
VCs VCs
havehave
a proud
a proud
tradition
tradition
of building
of building
fledgling
fledgling
startups.
startups.
TheyThey
are less
aresuccessful
less successful
at governing
at governing
multibillion-
multibillion-
dollar
dollar
unicorns
unicorns
suchsuch
as the
asoffi
thece-
offi
rental
ce-rental
company,
company,
WeWork,
WeWork,
or the
orride-
the ride-
hailing
hailing
giant,giant,
Uber.Uber.
In short,
In short,
venture
venture
capitalists
capitalists
are far
arefrom
far from
perfect.
perfect.
Yet even
Yet even
as the
aspub-
the pub-
lic mood
lic mood
has turned
has turned
against
against
the tech-
the tech-
industrial
industrial
complex,
complex,
the positive
the positive
case case
for venture
for venture
capital
capital
has grown
has grown
moremore
compelling.
compelling.
UntilUntil
relatively
relatively
recently,
recently,
economists
economists
explained
explained
why why
somesome
geographies
geographies
growgrow
wealthier
wealthier
than than
others
others
by examining
by examining
country-
country-
levellevel
differences:
differences:
successful
successful
nations
nations
benefi
benefi
t from
t from
sound
sound
rule rule
of law,
of stable
law, stable
prices,
prices,
educated
educated
people,
people,
and so
and
on.
soLately,
on. Lately,
how-how-
ever,ever,
the more
the more
pressing
pressing
question
question
is why
is some
why some
regions
regions
within
within
countries
countries
leaveleave
otherother
regions
regions
so farsobehind
far behind
as innovation
as innovation
hubshubs
and generators
and generators
of prosper-
of prosper-
ity. Itity
has
. Itlong
has long
beenbeen
obvious
obvious
that one
thatarea
one area
can outperform
can outperform
others,
others,
as Silicon
as Silicon
Valley
Valley
has done;
has done;
but the
butrule
the of
rule
law
ofand
law price
and price
stability
stability
cannot
cannot
explain
explain
why why
the Valley
the Valley
is more
is more
innovative
innovative
than than
Montana
Montana
or Michigan. To39understand
or Michigan.
39
To understand
the Valley’s
the Valley’s
secret,
secret,
we need
we need
to update
to update
Ronald
Ronald
Coase’s
Coase’s
framework:
framework:
we must
we must
studystudy
venture-
venture-
capital
capital
netwnetw
orks orks
as deeply
as deeply
as weasstudy
we study
markets
markets
and corpo-
and corpo-
rations.
rations.
In a world
In a world
of intensifying
of intensifying
geoeconomic
geoeconomic
competition,
competition,
the countries
the countries
with with
the most
the most
creative
creative
innovation
innovation
hubshubs
are likely
are likely
to beto
the
bemost
the most
prosperous
prosperous
and ultimately
and ultimately
the most
the most
powerful.
powerful.
In a In
world
a world
of intensifying
of intensifying
income
income
in- in-
equality
equality
, the ,countries
the countries
that can
thatfoster
can foster
greater
greater
regional
regional
diversity
diversity
in theinloca-
the loca-
tionstions
of those
of those
hubshubs
will be
willhappier
be happier
and more
and more
stable.
stable.
EvenEven
as they
as they
seek seek
to to
regulate
regulate
Big Tech,
Big Tech,
governments
governments
mustmust
do everything
do everything
possible
possible
to foster
to foster
tech-tech-
nology
nology
startups—
startups—
a policy
a policy
challenge
challenge
to which
to which
we will
we return
will return
presently.
presently.
For now,
For now,
it is enough
it is enough
to say
toone
say thing
one thing
aboutabout
this challenge.
this challenge.
Whatever
Whatever
the failings
the failings
of venture
of venture
capitalists,
capitalists,
they they
are an
areessential
an essential
ingredient
ingredient
of dy-
of dy-
namic
namic
startup
startup
clusters.
clusters.
On any
Ongiven
any given
day in
day
Silicon
in Silicon
Valley,
Valley,
hundreds
hundreds
of VCs
of VCs
are chasing
are chasing
youths
youths
in T-in
shirts:
T-shirts:
they they
are schmoozing
are schmoozing
people,
people,
connecting
connecting
people,
people,
vouching
vouching
for one
for startup
one startup
as it as
seeks
it seeks
to hire
to hire
a wary
a wary
programmer,
programmer,
16 16 T H E TPH
OEWPEO
RWL EAW
R L AW
assuring
assuring
a skeptical
a skeptical
customer
customer
that another
that another
startup’s
startup’s
product
product
is reliable.
is reliable.
It is It is
the contention
the contention
of this
of book
this book
that this
that frenzy
this frenzy
of activity
of activity
explains
explains
muchmuch
of theof the
variation
variation
in creativity
in creativity
across
across
regions:
regions:
by forging
by forging
connections
connections
amongamong
entre-
entre-
preneurs,
preneurs,
ideas,ideas,
customers,
customers,
and capital,
and capital,
venture
venture
capitalists
capitalists
transform
transform
a mere
a mere
agglomeration
agglomeration
of smart
of smart
people
people
into into
an inventive
an inventive
netwnetw
ork. The
ork. traditional
The traditional
accounts
accounts
of economic
of economic
growth
growth
needneed
to make
to make
spacespace
for this
for phenomenon,
this phenomenon,
which
which
also also
explains
explains
China’s
China’s
emergence
emergence
as a as
top-
a fltop-
ightfltechnology
ight technology
power.
power.
Indeed,
Indeed,
if theifUnited
the United
States
States
risksrisks
falling
falling
behind
behind
ChinaChina
in today’s
in today’s
technol-
technol-
ogy race,
ogy race,
this is
this
precisely
is precisely
because
because
Valley-
Valley-
inspired
inspired
venture
venture
capital
capital
has kick-
has kick-
started
started
China’s
China’s
digital
digital
economy.
economy.
Moreover,
Moreover,
the Chinese
the Chinese
venture
venture
industry
industry
has an
has
advantage
an advantage
over over
its U.S.
its rival.
U.S. rival.
It is more
It is more
openopen
to women.
to women.
But that
But that
is toisjump
to jump
to the
to end
the of
endour
of story.
our story.
To understand
To understand
venture
venture
capitalists—
capitalists—
to grasp
to grasp
how how
they they
thinkthink
and why
and why
they they
matter—
mattwe
er—must
we must
beginbegin
at theatbeginning.
the beginning.
For, without
For, without
this strange
this strange
tribetribe
of financiers,
of financiers,
the orchards
the orchards
of theofSanta
the Santa
ClaraClara
valley
valley
mightmight
nevernever
havehave
beenbeen
linked
linked
to silicon,
to silicon,
and aand
stag-
a stag-
gering
gering
amount
amount
of wealth
of wealth
mightmight
nevernever
havehave
beenbeen
created.
created.
Chapter
Chapter
OneOne
Arthur
ArthurRock
Rock
and
and
Liberation
Liberation
Capital
Capital
SS
uccess
uccess
has many
has many
fathers,
fathers,
and Silicon
and Silicon
Valley
Valley
is noisexception.
no exception.
Search-
Search-
ing for
ingthe
fororigins
the origins
of this
of miraculously
this miraculously
innovative
innovative
region,
region,
somesome
fas- fas-
ten on
ten1951,
on 1951,
whenwhen
FredFred
Terman,
Terman,
the engineering
the engineering
deandean
at Stanford,
at Stanford,
created
created
the university
the university
’s famous
’s famous
research
research
park.park.
Others
Others
beginbegin
the story
the story
five five
yearsyears
later,later,
whenwhen
William
William
Shockley,
Shockley,
the father
the father
of theofsemiconductor,
the semiconductor,
aban-aban-
doned
doned
the East
the East
CoastCoast
to launch
to launch
a company
a company
on Terman’s
on Terman’s
campus,
campus,
bringing
bringing
silicon
silicon
to thetoValley
the Valley
for the
forfithe
rst time.
first time.
But the
Butmost
the most
compelling
compelling
origin
origin
story—
story—
the one
the that
one aims
that aims
the spotlight
the spotlight
squarely
squarely
at theatforce
the force
that makes
that makes
the Valley
the Valley
so distinctive—
so distinctive—
begins
begins
in the
in summer
the summer
of 1957,
of 1957,
whenwhen
eighteight
of Shockley’s
of Shockley’s
young
young
PhD PhD
researchers
researchers
rose rose
up inup
revolt
in revolt
and went
and went
out on
out
their
on their
own.own.
Shock-
Shock-
ley’s ley’s
seniority
seniority
, his ,fame,
his fame,
and even
and even
his Nobel
his Nobel
PrizePrize
did nothing
did nothing
to deter
to deter
the the
rebels;
rebels;
the “Traitorous
the “Traitorous
Eight”
Eight”
werewere
fed up
fedwith
up with
Shockley’s
Shockley’s
heavy-
heavy-
handed
handed
leadership
leadership
and resolved
and resolved
to find
to afidiff
nd aerent
different
home.home.
It was
It that
was act
thatofact
defection
of defection
that created
that created
the magic
the magic
culture
culture
of theofValley,
the Valley,
shattshatt
eringering
traditional
traditional
assump-
assump-
tionstions
aboutabout
hierarchy
hierarchy
and authority
and authority
and working
and working
loyally
loyally
for decades
for decades
untiluntil
you retired
you retired
with with
a gold
a gold
watch.
watch.
The defection
The defection
of 1957
of was
1957made
was made
possible
possible
by a new
by a form
new form
of finance,
of finance,
orig-orig-
inallyinally
dubbed
dubbed
adventure
adventure
capital.
capital.
The idea
The idea
was to
was
back
to back
technologists
technologists
who who
werewere
too dicey
too dicey
and penurious
and penurious
to get
toaget
conventional
a conventional
bankbank
loan loan
but who
but who
promised
promised
the chance
the chance
of a resounding
of a resounding
payoff
payoff
to investors
to investors
withwith
a taste
a taste
for for
18 18 T H E TPH
OEWPEO
RWL EAW
R L AW
audacious
audacious
invention.
invention.
The funding
The funding
of the
of Traitorous
the Traitorous
EightEight
and their
and their
com-com-
pany,pany,
Fairchild
Fairchild
Semiconductor,
Semiconductor,
was was
arguably
arguably
the fithe
rst fisuch
rst such
adventure
adventure
to to
take take
placeplace
on the
onWest
the West
Coast,
Coast,
and itand
changed
it changed
the history
the history
of theofregion.
the region.
AfterAfter
Fairchild
Fairchild
got its
got$1.4
its million
$1.4 million
in financing,
in financing,
it became
it became
evident
evident
that any
that team
any team
in the
inValley
the Valley
possessed
possessed
of grand
of grand
ideasideas
and stiff
and ambition
stiff ambition
couldcould
spin spin
itselfitself
out, start
out, start
itselfitself
up, and
up, generally
and generally
invent
invent
the organizational
the organizational
formform
that best
that best
suited
suited
its fancy.
its fancy.
Engineers,
Engineers,
inventors,
inventors,
hustlers,
hustlers,
and artistic
and artistic
dreamers
dreamers
couldcould
meet,meet,
combine,
combine,
separate,
separate,
compete,
compete,
and simultaneously
and simultaneously
collaborate,
collaborate,
all cour-
all cour-
tesy tesy
of this
of new
this new
finance.
finance.
Adventure
Adventure
capital
capital
couldcould
sometimes
sometimes
be defection
be defection
capital,
capital,
or it or
could
it could
be team-
be team-
building
building
capital,
capital,
or almost
or almost
just experimental
just experimental
capital. But1 whichever
capital.
1
But whichever
way way
you looked
you looked
at it, at
talent
it, talent
had been
had been
liberated.
liberated.
A A
revolution
revolution
was afoot.
was afoot.
The invention
The invention
of this
of new
this new
liberation
liberation
capital
capital
explained
explained
moremore
than than
mostmost
people
people
still still
realize.
realize.
The The
rivalrival
theories
theories
of what
of what
established
established
the Valley’s
the Valley’s
preeminence—
preeminence—
that that
it was
it was
homehome
to Stanford
to Stanford
University
University
, that, that
it benefi
it benefi
ted ted
fromfrom
military
military
contracts,
contracts,
that that
it hadit ahad
certain
a certain
WestWest
Coast,
Coast,
countercultural
countercultural
irreverence—
irreverence—
havehave
nevernever
beenbeen
especially
especially
persuasive.
persuasive.
AfterAfter
all, Stanford
all, Stanford
was was
no more
no more
distinguished
distinguished
than than
the Massachusett
the Massachusett
s Institute
s Institute
of Technology,
of Technology,
which
which
in turn
in turn
was located
was located
a short
a short
drivedrive
fromfrom
Harvard,
Harvard,
creating
creating
a research
a research
cluster
cluster
moremore
powerful
powerful
than than
anything
anything
that Silicon
that Silicon
Valley
Valley
couldcould
muster
muster
in itsin its
earlyearly Similarly,
days.days.
2 2
Similarly,
it was
it true
was true
that Stanford
that Stanford
benefi
benefi
ted from
ted from
military
military
re- re-
search
search
dollars;
dollars;
that fi
that
lm from
film from
U-2 spy
U-2planes
spy planes
was processed
was processed
at theatnearby
the nearby
NASA
NASA
AmesAmes
Research
Research
Center;
Center;
and that
and that
the Lockheed
the Lockheed
Missiles
Missiles
and Space
and Space
Division
Division
builtbuilt
submarine-
submarine-
launched
launched
weapons
weapons
at itsat
campus
its campus
in theinValley.
the Valley.
3
But3 But
the famous
the famous
military-
military-
industrial
industrial
complex
complex
of the
of1950s
the 1950s
was primarily
was primarily
an East
an East
Coast
Coast
alliance
alliance
betwbetw
een the
eenPentagon
the Pentagon
and Cambridge,
and Cambridge,
Massachusett
Massachusett
s. The
s. The
personifi
personifi
cation
cation
of that
of axis,
that axis,
Vannevar
Vannevar
Bush,Bush,
was dean
was dean
of theofMIT
the MIT
School
School
of of
Engineering,
Engineering,
founder
founder
of theofCambridge-
the Cambridge-
basedbased
defense
defense
contractor
contractor
Raytheon,
Raytheon,
and Franklin
and Franklin
Roosevelt’s
Roosevelt’s
top science
top science
administrator
administrator
during
during
World
World
War War
II. II.
Millions
Millions
of dollars
of dollars
in federal
in federal
funding
funding
flowed
flowed
to the
toPentagon-
the Pentagon-
backed
backed
re- re-
search
search
centers
centers
around
around
Boston,
Boston,
and by
andthe
byend
theof
endtheof1960s
the 1960s
moremore
than than
a hun-
a hun-
dreddred
tech startups
tech startups
had spun
had spun
out ofout
these
of these If military
labs.4labs.4
If military
ties had
tiesdetermined
had determined
the location
the location
of applied
of applied
science,
science,
in other
in other
words,
words,
Cambridge
Cambridge
should
should
havehave
beenbeen
the center
the center
of the
ofuniverse.
the universe.
5 5
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
BTE IROANT ICOANP ICTAAPLI T A L 19 19
If neither
If neither
Stanford
Stanford
nor defense
nor defense
contracts
contracts
explain
explain
Silicon
Silicon
Valley’s
Valley’s
rise rise
to preeminence,
to preeminence,
whatwhat
of the
oftheory
the theory
that that
the region
the region
was distinguished
was distinguished
by by
that West
that West
CoastCoast
counterculture,
counterculture,
whichwhich
freedfreed
people
people
to imagine
to imagine
technolo-
technolo-
gies as
gies
yetasunborn?
yet unborn?
DougDoug
Engelbart
Engelbart
of theofAugmented
the Augmented
HumanHuman
Intellect
Intellect
Re- Re-
search
search
Center
Center
in Palo
in Palo
Alto,Alto,
who who
conceived
conceived
the early
the early
versions
versions
of theofcomputer
the computer
mouse
mouse
and the
andgraphical
the graphical
user user
interface,
interface,
was involved
was involved
in LSD
in LSD
experiments
experiments
and hijacked
and hijacked
Pentagon
Pentagon
funding
funding
to explore
to explore
the personal-
the personal-
growth
growth
training
training
method
method
known
known
as est.
as The
est. The
young
young
SteveSteve
Jobs Jobs
was was
similarly
similarly
enthralled
enthralled
by by
eastern
eastern
mysticism;
mysticism;
he went
he went
aboutabout
barefoot,
barefoot,
rinsed
rinsed
his feet
his in
feet
theincompany
the company
toilet,
toilet,
and maintained
and maintained
that that
his fruitarian
his fruitarian
diet rendered
diet rendered
regular
regular
washing
washing
obsolete.
obsolete.
“The“The
people
people
who who
invented
invented
the tw
theenty
tw-enty
fi rst-ficentury
rst century
werewere
pot- pot-
smoking,
smoking,
sandal-
sandal-
wearing
wearing
hippies
hippies
fromfrom
the West
the West
Coast
Coast
like Steve,
like Steve,
because
because
they they
saw diff
sawerently,”
differently,”
observed
observed
Bono,Bono,
the rock
the rock
musician
musician
and friend
and friend
of Steve
of Steve
Jobs’s;
Jobs’s;
and some
and some
version
version
of this
ofstory
this story
is widely
is widely
accepted
accepted
in theinValley,
the Valley,
whosewhose
denizens
denizens
like to
like
think
to think
of themselves
of themselves
as cool
as cool
as well
as well
as rich
as and
rich powerful.
and powerful.
The hippies’
The hippies’
anticorporate
anticorporate
vibe vibe
drovedrove
themthem
to share
to share
ideasideas
rather
rather
than than
run run
to thetonearest
the nearest
patent
patent
lawyer,
lawyer,
according
according
to this
tonarrative.
this narrative.
TheirTheir
egalitarianism
egalitarianism
ensured
ensured
that they
that they
werewere
openopen
to any
tounkempt
any unkempt
upstart
upstart
who who
might
might
see some-
see some-
thing,thing,
sensesense
something—
something—
something
something
with with
the potential
the potential
to change
to change
everything.
everything.
You can
Youstill
can see
stilltraces
see traces
of this
of counterculture
this counterculture
in theinValley:
the Valley:
in theinsan-
the san-
dals,dals,
eveneven
if next-
if next-
gen nylon
gen nylon
has displaced
has displaced
frayed
frayed
leather;
leather;
in theinleft-
theliberal,
left-liberal,
sometimes
sometimes
libertarian
libertarian
politics;
politics;
in theinconviction
the conviction
that your
that your
productivity
productivity
can can
be augmented
be augmented
by micro-
by micro-
dosing
dosing
LSD.LSD.
But the
Buttrouble
the trouble
with with
the cultural
the cultural
ex- ex-
planation
planation
for West
for West
CoastCoast
exceptionalism
exceptionalism
is that
is that
the rest
the of
rest
the
ofworld
the world
has has
nevernever
beenbeen
as butt
as oned
butt oned
up asupthe
asValley’s
the Valley’s
boosters
boosters
imagine.
imagine.
The hacker
The hacker
ethic,ethic,
championed
championed
by communalist
by communalist
nerdsnerds
who who
obsessed
obsessed
over over
codecode
and de-
and de-
clined
clined
on principle
on principle
to monetize
to monetize
it, actually
it, actually
originated
originated
at MIT—
at MIT—
with with
the Tech
the Tech
Model
Model
Railroad
Railroad
Club,Club,
a group
a group
of MIT
of MIT
undergrads
undergrads
enthralled
enthralled
by the
bytech-
the tech-
nology
nology
behind
behind
model
model
trains
trains
before
before
theirtheir
attention
attention
was diverted
was diverted
to thetoTX-
the0TX-0
computer. (The
computer.
6 6
(The
TX-0TX-
was0 so
wascaptivating
so captivating
that the
thatauthorities
the authorities
at MIT
at MIT
consid-
consid-
ered ered
getting
gett
rid
ingofrid
it. of
“People
it. “People
stopped
stopped
washing,
washing,
stopped
stopped
eating,
eating,
stopped
stopped
theirtheir
social
social
life, and,
life, and,
of course,
of course,
stopped
stopped
studying,”
studying,”
according
according
to one
to account.)
one account.)
7 7
Similarly,
Similarly,
Tim Berners-
Tim Berners-
Lee, the
Lee,British-
the British-
bornborn
and Geneva-
and Geneva-
based
based
inventor
inventor
of of
the World
the World
WideWide
Web,Web,
combined
combined
creative
creative
imagination
imagination
with with
an antimaterialist
an antimaterialist
20 20 T H E TPH
OEWPEO
RWL EAW
R L AW
disdain
disdain
for business.
for business.
“If you’re
“If you’re
interested
interested
in using
in using
the code,
the code,
mail mail
me,” me,”
he he
wrote
wrote
in a public
in a public
announcement,
announcement,
refusing
refusing
to profi
to profi
t from
t from
his invention.
his invention.
In In
Finland,
Finland,
not the
notsort
the sort
of place
of place
wherewhere
BonoBono
played
played
a lot aoflot
gigs,
of gigs,
LinusLinus
Tor- Tor-
valdsvalds
created
created
the bare
the bare
bonesbones
of theofLinux
the Linux
operating
operating
system
system
and gave
and gave
it away
it away
freely.
freely.
In short,
In short,
therethere
was no
waslack
no lack
of inventiveness
of inventiveness
outside
outside
Silicon
Silicon
Valley,
Valley,
and no
andlack
no of
lack
countercultural
of countercultural
antibusiness
antibusiness
prejudice,
prejudice,
either.
either.
The truth
The truth
is that
is that
the distinguishing
the distinguishing
genius
genius
of the
ofValley
the Valley
lies not
liesin
not
itsin its
capacity
capacity
for invention,
for invention,
countercultural
countercultural
or otherwise. The8 fi
or otherwise.
8
Therst fi
transistor
rst transistor
was created
was created
in 1947,
in 1947,
not innot
Silicon
in Silicon
Valley,
Valley,
but atbut
Bell
at Labs
Bell Labs
in New
in New
Jersey.
Jersey.
The The
first fi
personal
rst personal
computer
computer
was the
wasAltair,
the Altair,
created
created
in New
in New
Mexico.
Mexico.
The fi
Therst first
precursor
precursor
of the
ofworldwide
the worldwide
web,web,
the netw
the netw
ork-management
ork-management
softwsoftw
are Go-
are Go-
pher,pher,
was from
was from
Minnesota.
Minnesota.
The fi
Therst fi
browser
rst browser
was developed
was developed
by Marc
by Marc
An- An-
dreessen
dreessen
at theatUniversity
the University
of Illinois.
of Illinois.
The fi
The
rst fi
search
rst search
engine,
engine,
Archie,
Archie,
was was
invented
invented
by Alan
by Alan
Emtage
Emtage
at McGill
at McGill
University
University
in Montreal.
in Montreal.
The fiThe
rst internet-
first internet-
based
based
social-
social-
netwnetw
orking
orking
site was
site was
SixDegrees.com,
SixDegrees.com,
launched
launched
by Andrew
by Andrew
Weinreich
Weinreich
in New
in New
YorkYork
City. City
The. fiThe
rst smartphone
first smartphone
was the
wasSimon
the Simon
Personal
Personal
Communicator,
Communicator,
developed
developed
by Frank
by Frank
Canova
Canova
at IBM’s
at IBM’s
lab inlabBoca
in Boca
Raton,
Raton,
Florida. No 9single
Florida.
9
No single
geography—
geography—
not even
not even
Silicon
Silicon
Valley—
Valley—
dominates
dominates
inven-
inven-
tion. tion.
And And
yet all
yetthese
all these
breakthrough
breakthrough
products
products
havehave
one thing
one thing
in common.
in common.
When
When
it came
it came
to turning
to turning
ideasideas
into blockbuster
into blockbuster
products,
products,
the Valley
the Valley
was the
was the
placeplace
wherewhere
the magic
the magic
happened.
happened.
WhatWhat
explains
explains
that magic?
that magic?
The title
The of
title
a 1995
of a 1995
TimeTime
essayessay
echoed
echoed
Bono’s
Bono’s
answer:
answer:
“We Owe
“We Owe
It AllIttoAll
thetoHippies.” But10the
the Hippies.”
10
ButValley’s
the Valley’s
distinguishing
distinguishing
ge- ge-
nius nius
is that
is the
thatpatina
the patina
of the
ofcounterculture
the counterculture
combines
combines
with with
a frank
a frank
lust for
lust for
riches.
riches.
The pot-
Thesmoking,
pot-smoking,
sandal-
sandal-
wearing
wearing
inventors
inventors
of Bono’s
of Bono’s
acquaintance
acquaintance
havehave
nevernever
beenbeen
ashamed
ashamed
to earn
to earn
vast fortunes,
vast fortunes,
and the
andValley
the Valley
is theisplace
the place
where
where
career
career
ladders
ladders
havehave
beenbeen
scorned
scorned
not just
not by
justbohemians,
by bohemians,
who who
dis- dis-
dain dain
themthem
as bourgeois,
as bourgeois,
but even
but even
moremore
by overachievers,
by overachievers,
who who
regard
regard
themthem
as a pitifully
as a pitifully
slowslow
way to
wayget
toahead.
get ahead.
SteveSteve
Jobs Jobs
was among
was among
the many
the many
who who
embodied
embodied
bothboth
sidessides
of this
of contradictory
this contradictory
culture.
culture.
He was
He too
was modestly
too modestly
egalitarian
egalitarian
to demand
to demand
a boss’s
a boss’s
reserved
reserved
slot in
slot
theincompany
the company
parking
parking
lot but
lot but
too arrogantly
too arrogantly
entitled
entitled
not to
not
steal
to steal
the space
the space
designated
designated
for disabled
for disabled
driv-driv-
He11was
ers.11ers. He awas
communalist
a communalist
collaborator,
collaborator,
sharing
sharing
his intellectual
his intellectual
property
property
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
freely
freely
with with
ostensible
ostensible
rivals;
rivals;
he was
he also
was also
a capitalist
a capitalist
competitor,
competitor,
paranoid
paranoid
and controlling.
and controlling.
It was
It this
was combination
this combination
of laid-
of back
laid-back
creativity
creativity
and driving
and driving
commercial
commercial
ambition
ambition
that truly
that truly
defined
defiSilicon
ned Silicon
Valley,
Valley,
making
making
it theitplace
the place
where
where
flights
flights
of imaginative
of imaginative
fancyfancy
begatbegat
businesses
businesses
that that
shaped
shaped
societies
societies
and cultures.
and cultures.
QuiteQuite
wherewhere
this contradictory
this contradictory
culture
culture
sprang
sprang
fromfrom
is naturally
is naturally
diffi-diffi-
cult to
cult
pinpoint.
to pinpoint.
SomeSome
put itput
down
it down
to thetofrantic
the frantic
pioneer
pioneer
materialism
materialism
of San
of San
Francisco’s
Francisco’s
nineteenth-
nineteenth-
century
century
gold gold
rush,rush,
whichwhich
enriched
enriched
individualistic
individualistic
hustlers
hustlers
fromfrom
outside
outside
the old
thehierarchies
old hierarchies
and spawned
and spawned
a burst
a burst
of entrepre-
of entrepre-
neurship,
neurship,
including
including
the creation
the creation
of theoffithe
rst Levi
first Strauss
Levi Strauss
jeans.jeans.
OtherOther
theories
theories
emphasize
emphasize
California’s
California’s
education
education
and prosperity
and prosperity
, which
, which
fostered
fostered
progres-
progres-
sive open-
sive open-
mindedness
mindedness
and workaholic
and workaholic
focusfocus
all atall
once.
at once.
But the
Buttonic
the tonic
of lib-
of lib-
eration
eration
capital
capital
provides
provides
another
another
explanation,
explanation,
one that
onemerits
that merits
moremore
attention
attention
than than
it hasitreceived
has received
untiluntil
now.now.
By freeing
By freeing
talent
talent
to convert
to convert
ideasideas
into prod-
into prod-
ucts,ucts,
and by
andmarrying
by marrying
unconventional
unconventional
experiments
experiments
with with
hardhard
commercial
commercial
targets,
targets,
this distinctive
this distinctive
formform
of finance
of finance
fostered
fostered
the business
the business
culture
culture
that that
mademade
the Valley
the Valley
so fertile.
so fertile.
In anInearlier
an earlier
era, J.era,
P. Morgan’s
J. P. Morgan’s
brandbrand
of finance
of finance
fashioned
fashioned
American
American
business
business
into into
muscular
muscular
oligopolies;
oligopolies;
in the
in1980s,
the 1980s,
Mi- Mi-
chaelchael
Milken’s
Milken’s
junk junk
bondsbonds
fueled
fueled
a burst
a burst
of corporate
of corporate
takeovers
takeovers
and slash-
and slash-
and-burn
and-burn
cost cuts.
cost cuts.
In similar
In similar
fashion,
fashion,
venture
venture
capital
capital
has stamped
has stamped
its mark
its mark
on anon
industrial
an industrial
culture,
culture,
making
making
Silicon
Silicon
Valley
Valley
the most
the most
durably
durably
productive
productive
crucible
crucible
of applied
of applied
science
science
anywhere,
anywhere,
ever.ever.
Thanks
Thanks
to venture
to venture
capital,
capital,
the the
Traitorous
Traitorous
EightEight
werewere
able able
to abandon
to abandon
William
William
Shockley,
Shockley,
launch
launch
Fairchild
Fairchild
Semiconductor,
Semiconductor,
and set
andthis
set miracle
this miracle
in motion.
in motion.
By 2014,
By 2014,
an astonishing
an astonishing
70 70
percent
percent
of theofpublicly
the publicly
traded
traded
tech tech
companies
companies
in theinValley
the Valley
couldcould
tracetrace
theirtheir
lineage
lineage
to Fairchild.
to Fairchild.
12 12
In the
Inyear
the year
before
before
they they
turned
turned
to liberation
to liberation
capital,
capital,
the young
the young
researchers
researchers
at Shockley
at Shockley
Semiconductor
Semiconductor
Laboratory
Laboratory
werewere
discovering
discovering
that that
theirtheir
boss boss
was at
wasonce
at once
a scientifi
a scientifi
c genius
c genius
and aand
maniacal
a maniacal
despot.
despot.
When When
Shockley
Shockley
had re-
had re-
cruited
cruited
them,them,
they they
had felt
hadhonored
felt honored
to beto
chosen:
be chosen:
getting
gettaing
callafrom
call from
the great
the great
scientist
scientist
was “like
was “like
picking
picking
up the
upphone
the phone
and talking
and talking
to God.” Handsome,
to God.”
13 13
Handsome,
22 22 T H E TPH
OEWPEO
RWL EAW
R L AW
bespectacled,
bespectacled,
with with
a professorial
a professorial
receding
receding
hairline,
hairline,
Shockley
Shockley
was not
wasonly
not only
the father
the father
of semiconductors
of semiconductors
but also
but aalso
finea showman:
fine showman:
he would
he would
beginbegin
lec- lec-
turestures
by promising
by promising
to gettointo
get ainto
hotasubject;
hot subject;
then then
he would
he would
openopen
up a up
book
a book
and smoke
and smoke
would
would
burstburst
fromfrom
the pages.14
But14as
the pages. But
soon
as soon
as the
asyoung
the young
recruits
recruits
entered
entered
the presence
the presence
of this
ofdeity
this ,deity
his fl, aws
his flbecame
aws became
apparent.
apparent.
Shockley
Shockley
staged
staged
public
public
firings,
firings,
posted
posted
employee
employee
salaries
salaries
on a on
company
a company
bulletin
bulletin
board,
board,
and and
laughed
laughed
at one
at scientist
one scientist
for agreeing
for agreeing
to work
to work
for too
for litt
too le.litt
15
He
le.15hired
He hired
the the
smartest
smartest
researchers
researchers
he could
he could
fi nd,fibut
nd,was
but quick
was quick
to belitt
to belitt
le them,
le them,
some-
some-
timestimes
taunting
taunting
an employee,
an employee,
“Are “Are
you sure
you sure
you have
you have
a PhD?”
a PhD?”
WhenWhen
a fewa few
members
members
of hisofteam
his team
ventured
ventured
that that
they they
would
would
like to
like
publish
to publish
academic
academic
papers,
papers,
Shockley
Shockley
responded
responded
withwith
contempt
contempt
and egotism.
and egotism.
He jott
Heedjott
down
ed down
somesome
notesnotes
on one
on of
onehisofown
his own
theories
theories
and told
and them,
told them,
“Here,
“Here,
fleshflthis
esh out
this out
and publish
and publish
it.”16 it.”16
“I don’t
“I don’t
thinkthink
‘ty rant’
‘ty rant’
begins
begins
to encapsulate
to encapsulate
Shockley,”
Shockley,”
one of
one
theofyoung
the young
researchers
researchers
said later.
said later.
17 17
In May
In May
1957, 1957,
fifteen
fifteen
months
months
afterafter
Shockley
Shockley
had launched
had launched
his operation,
his operation,
his fihis
nancial
financial
backer
backer
paid paid
him ahim
visit.
a visit.
The previous
The previous
year,year,
whenwhen
Shockley
Shockley
had had
wanted
wanted
money,
money,
venture
venture
capital
capital
had barely
had barely
existed.18
So 18
existed. Shockley
So Shockley
had turned
had turned
to Arnold
to Arnold
Beckman,
Beckman,
founder
founder
of the
ofeponymous
the eponymous
Southern
Southern
California
California
com-com-
panypany
Beckman
Beckman
Instruments.
Instruments.
Beckman
Beckman
had set
hadShockley
set Shockley
up asup
a division
as a division
of of
his company,
his company,
hoping
hoping
to see
torapid
see rapid
and profi
and profi
tabletable
progress.
progress.
NowNow
he arrived
he arrived
to demand
to demand
moremore
commercial
commercial
output
output
and less
and managerial
less managerial
dysfunction.
dysfunction.
Shockley
Shockley
responded
responded
with with
defiance.
defiance.
“If you
“If don’t
you don’t
like what
like what
we’rewe’re
doingdoing
up here
up here
I canI take
can take
this group
this group
and get
andsupport
get support
any place
any place
else,”else,”
he railed.
he railed.
19 19
ThenThen
he stormed
he stormed
out of
out
the
ofroom.
the room.
Watching
Watching
theirtheir
boss boss
yell at
yell
Beckman,
at Beckman,
Shockley’s
Shockley’s
youngyoung
researchers
researchers
re- re-
alized
alized
that they
that they
facedfaced
a choice.
a choice.
This This
was the
was1950s,
the 1950s,
the era
theof
era
bigofcorpora-
big corpora-
tions,tions,
big labor,
big labor,
and big
andwhite-
big white-
collarcollar
hierarchies;
hierarchies;
the title
the of
title
a 1956
of a 1956
bestseller
bestseller
proclaimed
proclaimed
a newa kind
new kind
of American,
of American,
the meek
the meek
“organization
“organization
man.”man.”
EvenEven
re- re-
search
search
and development
and development
werewere
increasingly
increasingly
stultifi
stultifi
ed: one
ed: chapter
one chapter
of The
of The
Organization
Organization
Man Man
was was
titledtitled
“The“The
Bureaucratization
Bureaucratization
of the
of Scientist.”
the Scientist.”
20 20
Shockley’s
Shockley’s
engineers
engineers
couldcould
either
either
submit
submit
to the
tozeitgeist
the zeitgeist
and languish
and languish
un- un-
productively
productively
under
under
a suffaocating
suffocating
manager
manager
or seize
or seize
the opening
the opening
created
created
by by
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
his outburst.
his outburst.
Huddling
Huddling
over over
lunchlunch
afterafter
the confrontation,
the confrontation,
they they
resolved
resolved
to to
take take
theirtheir
grievances
grievances
to Beckman
to Beckman
and and
demand
demand
that that
he clamp
he clamp
downdown
on on
Shockley.
Shockley.
“Look,
“Look,
goddammit!”
goddammit!”
one rebel
one rebel
declared.
declared.
“We “We
either
either
havehave
to doto do
something
something
aboutabout
this or
this
stop
or stop
talking
talking
aboutabout
it!”21 it!”21
Gordon
Gordon
Moore,
Moore,
who who
would
would
laterlater
become
become
headhead
of research
of research
and devel-
and devel-
opment
opment
at Fairchild,
at Fairchild,
was chosen
was chosen
as the
asgroup’s
the group’s
spokesman.
spokesman.
Balding,
Balding,
with with
bushy
bushy
brows
brows
lurking
lurking
behind
behind
fashion-
fashion-
forward
forward
1950s1950s
glasses,
glasses,
MooreMoore
was at
was at
onceonce
unpretentiously
unpretentiously
quietquiet
and unyieldingly
and unyieldingly
conficonfi
dent.dent.
Borrowing
Borrowing
a phone
a phone
at at
a colleague’s
a colleague’s
homehome
afterafter
the rebels’
the rebels’
lunchlunch
conference,
conference,
he dialed
he dialed
Beckman.
Beckman.
22 22
“That’s
“That’s
not anot
serious
a serious
threat,”
threat,”
MooreMoore
told Beckman,
told Beckman,
referring
referring
to Shock-
to Shock-
ley’s ley’s
outburst.
outburst.
“Shockley
“Shockley
couldn’t
couldn’t
take take
the group
the group
with with
him if
him
he if
wants
he wants
to at to at
this stage
this stage
of the
ofgame.”
the game.”
“Things
“Things
aren’taren’t
goinggoing
well up
well
there,
up there,
are they?”
are they?”
Beckman
Beckman
askedasked
nervously.
nervously.
“No, “No,
they they
reallyreally
are not.”
are not.”
23 23
Beckman
Beckman
agreed
agreed
to meet
to meet
Moore
Moore
and his
andcolleagues,
his colleagues,
and after
and after
a fewa few
rounds
rounds
of discussion
of discussion
he promised
he promised
to take
to take
theirtheir
side side
against
against
the boss.
the boss.
De- De-
spitespite
his scientifi
his scientifi
c talent,
c talent,
Shockley
Shockley
was stifl
wasing
stiflprogress;
ing progress;
sometimes
sometimes
it takes
it takes
a good
a good
defenestration
defenestration
for capitalism
for capitalism
to advance.
to advance.
Shockley
Shockley
wouldwould
be phased
be phased
out of
outhisofmanagement
his management
responsibilities,
responsibilities,
Beckman
Beckman
assured
assured
the rebels.
the rebels.
His His
role at
role
theatcompany
the company
would
would
be restricted
be restricted
to anto
advisory
an advisory
function.
function.
Within
Within
a fewa days,
few days,
however,
however,
Beckman
Beckman
lost his
lostnerve.
his nerve.
He was
He running
was running
his own
his own
company,
company,
and he
andcould
he could
makemake
decisions
decisions
as heas
wanted;
he wanted;
unlike
unlike
a mod-
a mod-
ern venture
ern venture
capitalist,
capitalist,
he had
he no
hadinvestors
no investors
holding
holding
him accountable
him accountable
for his
for his
return
return
on capital. He24was
on capital.
24
Hetherefore
was therefore
free to
free
duck
to duck
unpleasant
unpleasant
decisions,
decisions,
and and
a callafrom
call from
a senior
a senior
East East
CoastCoast
scientist,
scientist,
protesting
protesting
that Shockley
that Shockley
wouldwould
be be
ruined
ruined
by a demotion,
by a demotion,
mightmight
havehave
beenbeen
enough
enough
to change
to change
his mind.
his mind.
Shock-
Shock-
ley might
ley might
be a be
ty rant,
a ty rant,
but he
butwas
he was
afterafter
all a all
Nobel
a Nobel
Prize–
Prize–
winning
winning
ty rant,
ty rant,
Beckman
Beckman
now now
reasoned.
reasoned.
He informed
He informed
the young
the young
rebels
rebels
that that
they they
would
would
havehave
to make
to make
theirtheir
peacepeace
with with
the boss.
the boss.
Having
Having
experienced
experienced
the diffi
theculty
difficulty
in changing
in changing
a company
a company
fromfrom
the in-
the in-
side,side,
the mutineers
the mutineers
considered
considered
theirtheir
options.
options.
TheyThey
werewere
all supremely
all supremely
qual-qual-
ified ifi
anded could
and could
easilyeasily
get hired
get hired
elsewhere,
elsewhere,
but they
but they
knewknew
they they
werewere
mostmost
likelylikely
to accomplish
to accomplish
something
something
if they
if they
stuckstuck
together
together
as a team.
as a team.
At the
Atsame
the same
24 24 T H E TPH
OEWPEO
RWL EAW
R L AW
time,time,
if keeping
if keeping
the team
the team
together
together
meant
meant
suffering
suffering
underunder
Shockley,
Shockley,
it was
it was
not anot
pleasant
a pleasant
prospect.
prospect.
In a recent
In a recent
episode,
episode,
the tythe
rant
ty rant
had demanded
had demanded
that that
his staff
his staff
submit
submit
to a lie
to detector
a lie detector
test.25
test.25
One One
evening
evening
as they
as they
pondered
pondered
theirtheir
predicament,
predicament,
the rebels
the rebels
hit on
hita on a
possible
possible
solution.
solution.
Eugene
Eugene
Kleiner,
Kleiner,
the only
the only
member
member
of theofband
the band
over over
thirtythirty
, ,
had ahad
connection
a connection
via his
viafather
his father
to a to
Newa New
YorkYork
investment
investment
fi rm.fiKleiner
rm. Kleiner
would
would
writewrite
to histofather’s
his father’s
broker
broker
and request
and request
assistance.
assistance.
A team
A team
of Shock-
of Shock-
ley engineers
ley engineers
stoodstood
readyready
to quit
to the
quitcompany,
the company,
Kleiner
Kleiner
wouldwould
explain
explain
in hisin his
letter.lett
Perhaps
er. Perhaps
a well-
a well-
connected
connected
finance
finance
house
house
couldcould
identify
identify
an employer
an employer
willing
willing
to hire
to the
hireentire
the entire
squad?
squad?
At this
At stage
this stage
in theinstory,
the story,
nonenone
of the
ofrebels
the rebels
had thought
had thought
of starting
of starting
a newa new
enterprise.
enterprise.
The idea
The had
ideasimply
had simply
not occurred
not occurred
to them:
to them:
venture-
venture-
capital
capital
fundsfunds
willing
willing
to back
to back
a crew
a crew
of young
of young
and unknown
and unknown
scientists
scientists
werewere
virtually
virtually
un- un-
heard
heard
of; what’s
of; what’s
more,more,
they they
werewere
contrary
contrary
to the
tospirit
the spirit
of postw
of postw
ar finance.
ar finance.
The 1929
The 1929
crashcrash
and the
andensuing
the ensuing
Depression
Depression
had destroyed
had destroyed
investors’
investors’
risk risk
appetite
appetite
for afor
generation;
a generation;
the big
themoney-
big money-
management
management
houses
houses
had names
had names
like Fidelity
like Fidelity
and Prudential
and Prudential
and were
and were
moremore
interested
interested
in preserving
in preserving
capital
capital
than than
in taking
in taking
chances.
chances.
To the
Toextent
the extent
that fithat
nanciers
financiers
wanted
wanted
to buy
toany
buycor-
any cor-
porate
porate
equity
equity
, they, they
preferred
preferred
safe, safe,
established
established
companies—
companies—
preferably
preferably
onesones
sitting
sitton
ingenough
on enough
working
working
capital
capital
that athat
shareholder
a shareholder
couldcould
countcount
on mak-
on mak-
ing money
ing money
even even
if they
if went
they went
bust.bust.
The legendary
The legendary
investor
investor
Benjamin
Benjamin
Graham,
Graham,
assisted
assisted
by a young
by a young
hire named
hire named
Warren
Warren
Buffett
Buff, ferreted
ett, ferreted
out companies
out companies
that that
traded
traded
at least
at least
one-third
one-third
belowbelow
the value
the value
of their
of their
cash,cash,
inventory,
inventory,
and re-
and re-
ceivables
ceivables
so that
so that
they they
couldcould
be liquidated
be liquidated
at a profi
at a profi
t: in t:
onein coup,
one coup,
Buffett
Buffett
bought
bought
a block
a block
of Union
of Union
Street
Street
Railway
Railway
of New
of New
Bedford,
Bedford,
Massachusett
Massachusett
s, s,
which
which
was selling
was selling
for $45
for but
$45had
but $120
had $120
per share
per share
of cash
of cash
in theinbank. So26 So
the bank.
26
long long
as there
as there
werewere
bargains
bargains
to betofound
be found
with with
such such
hugehuge
margins
margins
of safety
of safety
, ,
riskyrisky
technology
technology
ventures
ventures
appeared
appeared
almost
almost
disreputable.
disreputable.
In 1952,
In 1952,
Fortune
Fortune
observed
observed
that “it
thatmight
“it might
shockshock
the unsuspecting
the unsuspecting
holder
holder
of, say,
of, asay,
Johna John
Han-Han-
cockcock
life-insurance
life-insurance
policy
policy
to learn
to learn
that his
thatmoney
his money
was helping
was helping
to finance
to finance
... ...
scientifi
scientifi
c gadgetry.”
c gadgetry.”
27 27
Of course,
Of course,
therethere
werewere
exceptions
exceptions
to this
to caution,
this caution,
but they
but they
werewere
scat-scat-
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
teredtered
and obscure.
and obscure.
In 1949
In 1949
a romantic
a romantic
ex-Marxist
ex-Marxist
named
named
Alfred
Alfred
Winslow
Winslow
JonesJones
had created
had created
the fithe
rst “hedged
first “hedged
fund,”
fund,”
but until
but until
the 1960s,
the 1960s,
whenwhen
a crowd
a crowd
of sideburned
of sideburned
gunslingers
gunslingers
began
began
to emulate
to emulate
his methods,
his methods,
he operated
he operated
under
under
the radar.
the radar.
ThreeThree
yearsyears
before
before
Jones,
Jones,
a pairaof
pair
rich
ofEast
rich East
CoastCoast
families—
families—
the Whitneys
the Whitneys
and the
andRockefellers—
the Rockefellers—
had begun
had begun
to dabble
to dabble
amateurishly
amateurishly
in in
riskyrisky
fledgling
fledgling
businesses,
businesses,
but their
but their
motives
motives
werewere
patriotic
patriotic
and and
philan-
philan-
thropic
thropic
rather
rather
thanthan
straightforwardly
straightforwardly
commercial.
commercial.
On the
OnWest
the West
Coast,
Coast,
a a
group
group
of San
ofFrancisco
San Francisco
brokers
brokers
invited
invited
entrepreneurs
entrepreneurs
to pitch
to pitch
startups
startups
over over
informal
informal
lunches,
lunches,
but atbut
theattime
the time
of theofShockley
the Shockley
defections
defections
they they
werewere
only only
just gett
justing
gettstarted.
ing started.
The most
The most
serious
serious
earlyearly
experiment—
experiment—
the one
thewith
one with
a reala real
claimclaim
to betoseen
be seen
as the
asforerunner
the forerunner
to modern
to modern
venture
venture
capital—
capital—
was Ameri-
was Ameri-
can Research
can Research
and Development.
and Development.
But ARD
But ARD
focused
focused
on the
onBoston
the Boston
area,area,
and and
the Shockley
the Shockley
rebels
rebels
had not
hadheard
not heard
of it.of
Like
it. Like
the Whitneys
the Whitneys
and the
andRocke-
the Rocke-
fellers,
fellers,
it was
it was
imbued
imbued
withwith
public-
public-
service
service
motives.
motives.
And,And,
as we
asshall
we shall
see see
presently,
presently,
it diditnot
didserve
not serve
as the
asmodel
the model
for later
for later
venture
venture
investors.
investors.
John John
Hay Whitney
Hay Whitney
exemplifi
exemplifi
ed these
ed these
earlyearly
experiments
experiments
in adventurous
in adventurous
finance. He28was
finance.
28
He possessed,
was possessed,
as a 1951
as a New
1951 New
Yorker
Yorker
profiprofi
le putleit,put
of it,
a “vibrat-
of a “vibrat-
ing social
ing social
conscience,”
conscience,”
the result
the result
of hisofexperiences
his experiences
during
during
WorldWorld
War II.
War
29
II.29
Taken
Taken
prisoner
prisoner
by the
byGermans,
the Germans,
he had
he informed
had informed
his captors
his captors
that that
he was
he was
fighting
fighting
for freedom;
for freedom;
whenwhen
his enemies
his enemies
retorted
retorted
that the
thatUnited
the United
States
States
was was
no freer
no freer
than than
Hitler’s
Hitler’s
Germany,
Germany,
Whitney
Whitney
saw some
saw some
of the
ofcaptured
the captured
Ameri-
Ameri-
can soldiers
can soldiers
nodding
nodding
in agreement.
in agreement.
Appalled,
Appalled,
he returned
he returned
homehome
afterafter
the the
war, war,
withdrew
withdrew
his name
his name
fromfrom
the Social
the Social
Register,
Register,
and created
and created
a foundation
a foundation
to address
to address
social
social
problems.
problems.
As part
As part
of hisofeff
his
orts,
efforts,
he launched
he launched
a $5 amillion
$5 million
fundfund
to safeguard
to safeguard
the spirit
the spirit
of free
of enterprise
free enterprise
by providing
by providing
investment
investment
cap- cap-
ital for
italentrepreneurs. But30 after
for entrepreneurs.
30
But after
five years
five years
in operation,
in operation,
J. H. J.Whitney
H. Whitney
& &
Company
Company
had backed
had backed
just eighteen
just eighteen
ventures;
ventures;
his successes
his successes
included
included
an an
earlyearly
makermaker
of the
ofbuilding
the building
material
material
perlite
perlite
and Vacuum
and Vacuum
Foods,
Foods,
the pro-
the pro-
ducerducer
of Minute
of Minute
MaidMaid
orange
orange
juice.juice.
In hisInfihis
rst five
rst years,
five years,
moreover,
moreover,
Whit-Whit-
ney outperformed
ney outperformed
the much
the much
safersafer
S&P S&
500P by
500a relatively
by a relatively
modest
modest
margin.
margin.
31 31
Indeed,
Indeed,
on the
on risk-
the adjusted
risk-adjusted
basisbasis
that that
financiers
financiers
use to
usemeasure
to measure
them-
them-
selves,
selves,
the fund
the fund
couldcould
not justify
not justify
its existence.
its existence.
32 32
Whitney’s
Whitney’s
ego, ego,
not to
notmention
to mention
that that
vibrating
vibrating
conscience,
conscience,
bridled
bridled
at at
commentators
commentators
who who
bracketed
bracketed
him with
him with
ordinary
ordinary
bankers.
bankers.
The New
The New
YorkYork
26 26 T H E TPH
OEWPEO
RWL EAW
R L AW
Times
Times
referred
referred
to histofund
his fund
as a “New
as a “New
YorkYork
investment
investment
banking
banking
firm,”firm,”
and and
one day
onethe
dayirritated
the irritated
patriarch
patriarch
challenged
challenged
his colleagues
his colleagues
to come
to come
up with
up with
a a
better
bett
term.
er term.
“I think
“I think
we should
we should
get the
getconnotation
the connotation
of risk
of into
risk into
the description
the description
of of
our fiour
rm,”firm,”
one person
one person
responded.
responded.
“I think
“I think
the most
the most
interesting
interesting
aspect
aspect
of our
ofbusiness
our business
is theisadventure,”
the adventure,”
said another.
said another.
“How
“How
aboutabout
private
private
venture
venture
capital
capital
investment
investment
firm?”
firm?”
a third
a third
offered,
offered,
abbreviating
abbreviating
the term
the term
“adventure
“adventure
capital,”
capital,”
whichwhich
was already
was already
usedused
in some
in some
circles.
circles.
33 33
“That’s
“That’s
it!” Whitney
it!” Whitney
concurred.
concurred.
The Times
The Times
editors
editors
werewere
duly duly
informed
informed
of theofphilanthropist’s
the philanthropist’s
desired
desired
usage,
usage,
and by
and
1947
by 1947
the paper
the paper
was making
was making
oc- oc-
casional
casional
reference
reference
to venture
to venture
capital.34
But
capital.34
despite
But despite
Whitney’s
Whitney’s
efforts,
efforts,
his his
linguistic
linguistic
innovation
innovation
failedfailed
to catch
to catch
on widely.
on widely.
As late
As as
late
1962,
as 1962,
pioneering
pioneering
tech tech
investors
investors
who who
introduced
introduced
themselves
themselves
as venture
as venture
capitalists
capitalists
werewere
met met
with with
blankblank
stares.
stares.
35 35
In April
In April
1946,1946,
the Rockefeller
the Rockefeller
family
family
launched
launched
a parallel
a parallel
efforteff
toort
Whit-
to Whit-
ney’s,ney’s,
aimingaiming
to solve
to solve
the generally
the generally
acknowledged
acknowledged
lack of
lack
finance
of finance
for new
for new
firms.
firms.
“What
“What
we want
we want
to doto
isdo
theisopposite
the opposite
of theofold
thesystem
old system
of holding
of holding
backback
capital
capital
untiluntil
a field
a fi
oreld
anor
idea
an is
idea
proved
is proved
completely
completely
safe,”safe,”
declared
declared
Laurance
Laurance
Rockefeller,
Rockefeller,
the prime
the prime
mover,
mover,
adding,
adding,
“We are
“Weputt
areing
puttmoney
ing money
into many
into many
un- un-
derdeveloped
derdeveloped
areas.” His36fund
areas.”
36
His fund
proceeded
proceeded
to back
to back
a cottaon
cott
mill
on in
mill
Africa,
in Africa,
a South
a South
PacifiPacifi
c fishing
c fishing
company,
company,
a Pennsylvania
a Pennsylvania
helicopter
helicopter
company,
company,
and aand a
motion
motion
picture
picture
project
project
on Long
on Long
Island.
Island.
“Capital
“Capital
no longer
no longer
is used
is used
just for
just for
profiprofi
t,” Rockefeller
t,” Rockefeller
exulted.
exulted.
“It goes
“It goes
wherewhere
it canitdo
canthe
domost
the most
good.”37
Per-
good.” 37
Per-
hapshaps
as a result,
as a result,
his profi
his profi
ts were
ts were
not good.
not good.
In 1961,
In 1961,
Barron’s
Barron’s
reported
reported
that that
Rockefeller
Rockefeller
Brothers
Brothers
had returned
had returned
$40 million
$40 million
on the
on$9
themillion
$9 million
invested
invested
during
during
fifteen
fifteen
yearsyears
in business.38
The
in business.38
S&
TheP S&
500P had
500shot
had shot
up byup
600
by percent
600 percent
over over
this period.
this period.
39 39
The early
The early
WestWest
CoastCoast
amateurs
amateurs
werewere
at least
at least
able able
to claim
to claim
somesome
spec-spec-
tacular
tacular
returns.
returns.
Reid Reid
Dennis,
Dennis,
one of
onethe
of half
the half
a dozen
a dozen
financiers
financiers
who who
at- at-
tended
tended
the investment
the investment
lunches
lunches
in San
inFrancisco,
San Francisco,
won an
wonearly
an early
bet on
bet
Ampex,
on Ampex,
a pioneering
a pioneering
makermaker
of tape
of tape
recorders.
recorders.
Ampex
Ampex
had captured
had captured
the att
theention
attention
of theofsinger
the singer
BingBing
Crosby,
Crosby,
who who
preferred
preferred
to play
to golf
play on
golf
Sunday
on Sunday
afternoons
afternoons
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
rather
rather
than than
perform
perform
his radio
his radio
showshow
live. “I
live.
don’t
“I don’t
knowknow
anything
anything
aboutabout
tape tape
recording,”
recording,”
Dennis
Dennis
laterlater
recalled
recalled
thinking,
thinking,
“but “but
I think
I think
that technology
that technology
is is
goinggoing
to betouseful
be useful
for afor
lot amore
lot more
things
things
than than
just recording
just recording
BingBing
Crosby’s
Crosby’s
voice.”40
And
voice.” 40
so
Andinso
1952,
in 1952,
freshfresh
out ofout
business
of business
school,
school,
Dennis
Dennis
wagered
wagered
all his
all his
savings—
savings—
a total
a total
of $15,000—
of $15,000—
on the
oncompany,
the company,
telling
telling
his wife
his wife
that that
“if she
“if she
was good
was good
enough
enough
to get
tome,
get she
me,ought
she ought
to betoable
be able
to get
tosomebody
get somebody
else to
else to
support
support
her ifher
anything
if anything
happened.”41
Ampex
happened.”41
Ampex
succeeded
succeeded
wildly,
wildly,
goinggoing
pub-pub-
lic inlic
1958,
in 1958,
and Dennis
and Dennis
earned
earned
aboutabout
$1 million—
$1 million—
a return,
a return,
as venture
as venture
capi-capi-
talists
talists
learned
learned
to say
tolater,
say later,
of 67x. “I realized
of4267x.42
“I realized
it was
it awas
pretty
a pretty
goodgood
way to
way to
makemake
a living,”
a living,”
Dennis
Dennis
musedmused
fondly,
fondly,
“so I “so
began
I began
looking
looking
around
around
at other
at other
high-high-
tech tech
companies
companies
downdown
here.”
here.”
43 43
The Ampex
The Ampex
win earned
win earned
Dennis
Dennis
a reputation
a reputation
amongamong
San Francisco
San Francisco
bro- bro-
kers,kers,
whichwhich
in turn
in turn
led toled
the
tocreation
the creation
of theofinformal
the informal
lunchlunch
club club
that sty
thatled
styled
itselfitself
“the Group.”
“the Group.”
Starting
Starting
in 1957,
in 1957,
five or
five
sixorregulars
six regulars
convened
convened
at Sam’s
at Sam’s
or or
Jack’sJack’s
in theinfithe
nancial
financial
district,
district,
restaurants
restaurants
“where
“where
the sole
the was
sole dependable
was dependable
and the
andsourdough
the sourdough
fresh.” Sam’s
fresh.”
44 44
Sam’s
was awas
particular
a particular
favorite
favorite
because
because
it hadit had
little litt
plywood
le plywood
booths
booths
that permitt
that permitt
ed anedillusion
an illusion
of privacy,
of privacy,
eveneven
if theifply-
the ply-
woodwood
was just
wasanjust
eighth
an eighth
of anof
inch
an inch 45
The
thick.thick.45
entrepreneur
The entrepreneur
would
would
tell his
tell his
story,story,
the men
the men
would
would
munch
munch
theirtheir
sourdough,
sourdough,
and then
and then
the supplicant
the supplicant
wouldwould
be instructed
be instructed
to stand
to stand
outside
outside
on the
onsidewalk
the sidewalk
whilewhile
he awaited
he awaited
a verdict.
a verdict.
If all Ifhad
all gone
had gone
well,well,
therethere
wouldwould
be a be
handshake
a handshake
and aand
promise
a promise
of perhaps
of perhaps
$80,000
$80,000
or $100,000,
or $100,000,
with with
the likelihood
the likelihood
of more
of more
capital
capital
fromfrom
the Group’s
the Group’s
campcamp
followers
followers
and hangers-
and hangers- “We
on.46on.46
“We
essentially
essentially
grewgrew
up inup
theinbusiness,
the business,
and then
and then
they they
changed
changed
the name
the name
of it of
to it
venture
to venture
capital,”
capital,”
Dennis
Dennis
remem-
remem-
bered.47
But47 even
bered. But even
though
though
the San
the Francisco
San Francisco
lunchlunch
club club
boasted
boasted
somesome
suc- suc-
cesses,
cesses,
it financed
it financed
only only
around
around
two dozen
two dozen
dealsdeals
in theinlate
the 1950s
late 1950s
and early
and early
1960s.
1960s.
Its full
Its signifi
full signifi
cance cance
would
would
emerge
emerge
later,later,
whenwhen
it was
it formalized
was formalized
as as
the Western
the Western
Association
Association
of Venture
of Venture
Capitalists.
Capitalists.
48 48
Of allOfthe
allearly
the early
experiments,
experiments,
it was,
it was,
unsurprisingly,
unsurprisingly,
Boston’s
Boston’s
that that
led led
during
during
the immediate
the immediate
postwpostw
ar years.
ar years.
GivenGiven
MIT’sMIT’s
position
position
at theatheart
the heart
of of
the military-
the military-
industrial
industrial
complex,
complex,
it was
it natural
was natural
to bet
tothat
bet the
thatregion’s
the region’s
eco- eco-
nomic
nomic
development
development
couldcould
be accelerated
be accelerated
by financing
by financing
technologies
technologies
fromfrom
its its
labs. labs.
To lead
To such
lead such
an effan
ort,
effan
ort,
elite
an band
elite band
of New
of New
Englanders—
Englanders—
among
among
themthem
the the
headhead
of MIT
of MIT
and the
andpresident
the president
of theofBoston
the Boston
Federal
Federal
Reserve
Reserve
Bank—Bank—
turned
turned
28 28 T H E TPH
OEWPEO
RWL EAW
R L AW
to Georges
to Georges
Doriot,
Doriot,
a dapper
a dapper
French
French
immigrant
immigrant
with with
a military
a military
mustache
mustache
and aand
military
a military
bearing
bearing
who who
taught
taught
at Harvard
at Harvard
Business
Business
School.
School.
WithWith
the the
blessing
blessing
of the
of Boston
the Boston
patriarchs,
patriarchs,
Doriot
Doriot
assumed
assumed
the helm
the helm
at American
at American
Research
Research
and Development
and Development
in 1946.
in 1946.
Doriot
Doriot
was was
the ultimate
the ultimate
embodiment
embodiment
of the
of military-
the military-
industrial
industrial
com-com-
plex.plex.
During
During
WorldWorld
War War
II, heII,had
he overseen
had overseen
technology
technology
procurement
procurement
for for
the Pentagon’s
the Pentagon’s
Quartermaster
Quartermaster
Corps,
Corps,
a position
a position
he had
he used
had used
to champion
to champion
innovations—
innovations—
cold-cold-
weather
weather
shoes,
shoes,
water-
water-
repellent
repellent
fabrics,
fabrics,
and and
the light-
the light-
weight
weight
plastic
plastic
armorarmor
Doron,
Doron,
which
which
was named
was named
afterafter
him. him.
He was
He thus
was thus
per- per-
fectlyfectly
suited
suited
to the
totask
the task
of investing
of investing
in high-
in high-
tech tech
firmsfiemerging
rms emerging
fromfrom
the the
Pentagon-
Pentagon-
backed
backed
laboratories
laboratories
around
around
Boston. He49badgered
Boston.
49
He badgered
his invest-
his invest-
mentment
teamteam
to visit
to visit
the labs
the regularly,
labs regularly,
sometimes
sometimes
placing
placing
a subway
a subway
tokentoken
on on
a desk
a desk
and admonishing
and admonishing
the young
the young
man man
sitting
sitttoo
ing peacefully
too peacefully
behind
behind
it, it,
“MIT“MIT
is only
is only
a token
a token
away.”50
An50early
away.” An early
Doriot
Doriot
win was
win High
was High
Voltage
Voltage
Engi-Engi-
neering
neering
Corporation,
Corporation,
an MIT
an MIT
spinout
spinout
that that
mademade
generators
generators
and nuclear
and nuclear
particle
particle
accelerators,
accelerators,
challenging
challenging
incumbents
incumbents
such such
as General
as General
Electric.
Electric.
51 51
In 1957—
In 1957—
the year
the year
the Group
the Group
started
started
its lunch
its lunch
meetings,
meetings,
and the
andyear
the year
of of
the mutiny
the mutiny
against
against
Shockley—
Shockley—
Doriot
Doriot
mademade
the bet
thethat
bet transformed
that transformed
ARD’s
ARD’s
fortunes.
fortunes.
He fiHe
nanced
financed
Digital
Digital
Equipment
Equipment
Corporation,
Corporation,
a company
a company
founded
founded
by twby
o MIT
two MIT
professors
professors
who who
had helped
had helped
to develop
to develop
the TX-
the0TX-
computer
0 computer
at theat the
military-
military-
backed
backed
Lincoln
Lincoln
Laboratory.
Laboratory.
The TX-
The0’s
TX-achievement
0’s achievement
was to
wasshow
to show
how how
transistors
transistors
couldcould
outperform
outperform
vacuum
vacuum
tubestubes
in equipment
in equipment
builtbuilt
for for
the military;
the military;
Digital
Digital
Equipment’s
Equipment’s
premise
premise
was that
was that
transistors
transistors
couldcould
also also
revolutionize
revolutionize
computers
computers
mademade
for civilians.
for civilians.
To a modern
To a modern
venture
venture
capitalist,
capitalist,
this pitch
this pitch
wouldwould
havehave
beenbeen
instantly
instantly
attractive:
attractive:
the founders
the founders
camecame
fromfrom
a a
cutting-
cuttedge
ing-edge
research
research
lab, and
lab, they
and they
proposed
proposed
to commercialize
to commercialize
a technol-
a technol-
ogy that
ogy was
that already
was already
proven.
proven.
But in
But
theinfithe
nancial
financial
climate
climate
of theof1950s,
the 1950s,
eveneven
the most
the most
compelling
compelling
scientists
scientists
had ahad
hard
a hard
time time
raising
raising
money,
money,
and Doriot
and Doriot
exploited
exploited
this circumstance
this circumstance
to the
tomaximum,
the maximum,
making
making
Digital’s
Digital’s
founders
founders
an an
offeroff
that
er by
thatlater
by later
standards
standards
wouldwould
havehave
counted
counted
as anasinsult.
an insult.
ARDARD
would
would
provide
provide
a $70,000
a $70,000
investment
investment
and aand
$30,000
a $30,000
loan loan
in return
in return
for 70
forpercent
70 percent
of the
ofcompany:
the company:
it was
it awas
“take
a “take
it or it
leave
or leave
it” offit”
er.off
Lacking
er. Lacking
any alternative,
any alternative,
the MIT
the MIT
professors
professors
accepted;
accepted;
nor did
northey
did they
protest
protest
whenwhen
Doriot
Doriot
managed
managed
to to
pushpush
his stake
his stake
up toup77topercent. Having
77 percent.
52 52
Having
seized
seized
so much
so much
of the
of equity
the equity
, ,
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
Doriot
Doriot
was in
was
a position
in a position
to profi
to profi
t massively
t massively
whenwhen
the professors
the professors
succeeded.
succeeded.
By the
Bytime
the time
ARDARD
closed
closed
in 1972,
in 1972,
it hadit reaped
had reaped
somesome
$380$380
million
million
fromfrom
its its
bet on
betDigital—
on Digital—
or $2.3
or $2.3
billion
billion
in today’s
in today’s
money.53
It was
money. 53
It awas
bonanza
a bonanza
that ac-
that ac-
counted
counted
for perhaps
for perhaps
80 percent
80 percent
of allofthe
allgains
the gains
that ARD
that ARD
generated
generated
over over
a a
quarter
quarter
of a century.54
It was
of a century. 54
It an
wasearly
an early
demonstration
demonstration
of the
ofpower
the power
law. law.
Doriot
Doriot
is sometimes
is sometimes
regarded
regarded
as the
asfather
the father
of venture
of venture
capital—
capital—
a case
a case
mademade
by hisbybiographer,
his biographer,
Spencer
Spencer 55
Like
Ante.Ante. 55
Like
John John
Hay Whitney,
Hay Whitney,
Doriot
Doriot
was was
at pains
at pains
to distinguish
to distinguish
himself
himself
fromfrom
ordinary
ordinary
financiers,
financiers,
but being
but being
a busi-
a busi-
ness ness
school
school
professor,
professor,
he was
he more
was more
penetrating
penetrating
and persuasive
and persuasive
in defi
inning
defining
venture
venture
capital’s
capital’s
mission.
mission.
In lectures
In lectures
delivered
delivered
in hisinthick
his thick
French
French
accent,
accent,
he proclaimed
he proclaimed
that the
thatgreatest
the greatest
rewards
rewards
werewere
to beto
had
be from
had from
the most
the most
am- am-
bitious
bitious
and least
and least
obvious
obvious
projects;
projects;
that that
investors
investors
wouldwould
havehave
to wait
to wait
pa- pa-
tiently
tiently
for returns
for returns
to mature
to mature
over over
the long
the long
term;term;
and that
and the
thatbest
the prospects
best prospects
involved
involved
advanced
advanced
technology,
technology,
not orange
not orange
juicejuice
or fishing
or fishing
in Asia. Antic-
in Asia.
56 56
Antic-
ipating
ipating
laterlater
venture
venture
capitalists,
capitalists,
he understood
he understood
that his
thatrole
his was
role to
wasprovide
to provide
not simply
not simply
moneymoney
but also
but managerial
also managerial
counsel,
counsel,
assistance
assistance
with with
hiring,
hiring,
and and
tips on
tipseverything
on everything
fromfrom
marketing
marketing
to finance.
to finance.
He staged
He staged
technology
technology
fairs fairs
to advertise
to advertise
his portfolio
his portfolio
companies’
companies’
products
products
and advised
and advised
Digital
Digital
Equip-
Equip-
mentment
to present
to present
sample
sample
circuit
circuit
boards
boards
on sheets
on sheets
of purple
of purple
velvet,
velvet,
in the
in the
manner
manner
of a jeweler
of a jeweler
showing
showing
off a off
brooch.
a brooch.
Plugging
Plugging
his protégés
his protégés
into ARD’s
into ARD’s
netwnetw
ork was
ork all
waspart
all part
of Doriot’s
of Doriot’s
service.
service.
“Your“Your
company
company
was on
wasdisplay,”
on display,”
one founder
one founder
said said
of ARD’s
of ARD’s
well-well-
attended
attended
annual
annual
meetings,
meetings,
at which
at which
entre-
entre-
preneurs
preneurs
mingled
mingled
with with
investors.
investors.
“The“The
netwnetw
orking
orking
that was
thatcreated
was created
and the
and the
introductions
introductions
that were
that were
possible,
possible,
all ofall
that
of was
that very
was very
important.
important.
Anything
Anything
that helps
that helps
you keep
you keep
youryour
conficonfi
dence,dence,
whenwhen
you have
you have
no reason
no reason
to have
to have
con- con-
fidence,
fidence,
is valuable.”
is valuable.”
57 57
The way
The Doriot
way Doriot
talked
talked
aboutabout
his partnership
his partnership
with with
company
company
founders
founders
was was
eerilyeerily
modern.
modern.
The founders
The founders
werewere
young,
young,
willful,
willful,
and courageous;
and courageous;
the ven-
the ven-
ture ture
capitalist’s
capitalist’s
role was
role to
wascontribute
to contribute
wisdom
wisdom
and experience.
and experience.
The found-
The found-
ers were
ers were
brilliant,
brilliant,
erratic,
erratic,
and sometimes
and sometimes
emotionally
emotionally
fragile;
fragile;
“the “the
venture
venture
investor
investor
mustmust
always
always
be onbecall
on to
call
advise,
to advise,
to persuade,
to persuade,
to dissuade,
to dissuade,
to en-
to en-
courage,
courage,
but always
but always
to help
to help
build.” Like
build.”
58 58
Like
laterlater
venture
venture
capitalists,
capitalists,
Doriot
Doriot
was emphatic
was emphatic
that that
the company
the company
founders
founders
werewere
the stars
the stars
of the
ofentrepre-
the entrepre-
neurial
neurial
drama.
drama.
“Seek“Seek
out creative
out creative
men men
with with
the vision
the vision
of things
of things
to beto
done,”
be done,”
30 30 T H E TPH
OEWPEO
RWL EAW
R L AW
he counseled;
he counseled;
showshow
“loyalty
“loyalty
to the
to idea
the idea
and to
anditstoinitiator,
its initiator,
the creative
the creative
59
Needless
man.”man.” 59
Needless
to say,
to Doriot’s
say, Doriot’s
adoring
adoring
deference
deference
to “creative
to “creative
men men
with with
the vision”
the vision”
did not
didprevent
not prevent
him from
him from
pocketing
pocketing
77 percent
77 percent
of a creator’s
of a creator’s
out- out-
put. In
put.
this,
In this,
too, Doriot
too, Doriot
anticipated
anticipated
the hypocrisy
the hypocrisy
that would
that would
occasionally
occasionally
markmark
the venture
the venture
industry
industry
in years
in years
to come.
to come.
Yet inYet
other
in other
waysways
Doriot
Doriot
was less
wasaless
founding
a founding
father
father
than than
a failed
a failed
prophet:
prophet:
a pioneer
a pioneer
who who
stumbled
stumbled
ontoonto
the wrong
the wrong
territory
territory
and led
and his
ledfollowers
his followers
astray.
astray.
ARDARD
was the
wasfithe
rst fi
venture
rst venture
outfioutfi
t to raise
t to raise
capital
capital
fromfrom
institutional
institutional
investors,
investors,
but rather
but rather
than than
setting
settup
ingARD
up ARD
as a partnership,
as a partnership,
in the
inmanner
the manner
of future
of future
venture
venture
capitalists,
capitalists,
Doriot
Doriot
structured
structured
it as aitpublic
as a public
company,
company,
a de-a de-
cision
cision
that that
ensnared
ensnared
him him
in a in
cat’s
a cat’s
cradle
cradle
of regulation. ARD
of regulation.
60 60
ARD
was was
re- re-
stricted
stricted
in itsinability
its ability
to grant
to grant
stockstock
options
options
to employees,
to employees,
in itsinfreedom
its freedom
to to
invest
invest
freshfresh
capital
capital
into portfolio
into portfolio
companies,
companies,
and in
and
theinway
the that
way it
that
calcu-
it calcu-
latedlated
the value
the value
of investments.61
In 1964,
of investments. 61
In 1964,
the Securities
the Securities
and Exchange
and Exchange
Com-Com-
mission
mission
raided
raided
ARD’s
ARD’s
offices,
offishowing
ces, showing
up atup
theatJohn
the John
Hancock
Hancock
building
building
in in
Boston
Boston
without
without
warning.
warning.
“They
“They
fullyfully
expected
expected
that that
we were
we were
here here
withwith
nothing
nothing
else to
else
doto
but
doreceive
but receive
themthem
and spend
and spend
the next
the next
two days
two days
with with
them,”
them,”
Doriot
Doriot
huffed.
huff
62
Following
ed.62
Following
the raid,
the raid,
the SEC
the SEC
claimed
claimed
that that
Digital
Digital
Equip-
Equip-
ment’s
ment’s
valuation—
valuation—
at one
athundred
one hundred
timestimes
its acquisition
its acquisition
cost—cost—
needed
needed
restat-
restat-
ing. “Is
ing.the
“Isvaluation
the valuation
too high?
too high?
Is it too
Is it low?
too low?
Just what
Just what
is wrong
is wrong
with with
it?” it?”
Doriot
Doriot
protested
protested
furiously.63
“I rather
furiously. 63
“I rather
resent,
resent,
afterafter
twenty
twenty
yearsyears
of experi-
of experi-
ence,ence,
to have
to have
two men
two men
comecome
here,here,
spendspend
two days,
two days,
and tell
andus
tell
that
us we
thatdo
wenot
do not
knowknow
whatwhat
we are
wedoing.”
are doing.”
Doriot
Doriot
kept kept
files fi
ofles
hisoflett
hisers
letttoers
the
toregulators.
the regulators.
One One
folder
folder
was labeled
was labeled
“Not“Not
sent—
sent—
on advice
on advice
of counsel.”
of counsel.”
AsideAside
fromfrom
his poor
his poor
choice
choice
of legal
of legal
structure,
structure,
Doriot
Doriot
damaged
damaged
the ap-
the ap-
peal peal
of hisofexample
his example
by disdaining
by disdaining
financial
financial
incentives.
incentives.
He never
He never
shedshed
the the
public-
public-
service
service
brand
brand
that came
that came
with with
ARD’sARD’s
original
original
regional-
regional-
development
development
mission.
mission.
“Capital
“Capital
gainsgains
are aare
reward,
a reward,
not anot
goal,”
a goal,”
he proclaimed
he proclaimed
loftily. He64 He
loftily.
64
refused
refused
to pay
tohis
payyoung
his young
lieutenants
lieutenants
generously,
generously,
telling
telling
themthem
that they
that they
werewere
in business
in business
not to
notmake
to make
money
money
but to
butserve
to serve
theirtheir
country.
country.
65
Likewise,
65
Likewise,
he he
promised
promised
nevernever
to abandon
to abandon
underperforming
underperforming
portfolio
portfolio
companies,
companies,
eveneven
if if
they they
hogged
hogged
capital
capital
that could
that could
be more
be more
productively
productively
deployed
deployed
elsewhere;
elsewhere;
it was
it as
wasthough
as though
pulling
pulling
the plug
the plug
on one
on of
onehisofprotégés
his protégés
wouldwould
be morally
be morally
akin akin
to abandoning
to abandoning
a wounded
a wounded
comrade
comrade
on the
onbatt
thelefi
batteld.
lefiBecause
eld. Because
Doriot
Doriot
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
refused
refused
to tietomoney
tie money
to success
to success
and vice
and vice
versa,
versa,
his staff
his staff
and his
andinvestors
his investors
grewgrew
fed up
fedwith
up with
him: him:
they they
werewere
fine with
fine with
psychic
psychic
income,
income,
but they
but they
also also
wanted
wanted
the fithe
nancial
financial
sort.sort.
Charles
Charles
P. Waite,
P. Waite,
an ARD
an ARD
employee
employee
who who
worked
worked
hardhard
to take
to take
one portfolio
one portfolio
firm public,
firm public,
remembered,
remembered,
“I had
“Imade
had made
a very
a very
sub- sub-
stantial
stantial
contribution
contribution
to that
to company.
that company.
The CEO’s
The CEO’s
net worth
net worth
wentwent
fromfrom
0 to 0 to
$10 million
$10 million
and Iand
got Iagot
$2,000
a $2,000
raise.” For66their
raise.”
66
For their
part,part,
Wall Wall
Street
Street
investors
investors
viewed
viewed
ARDARD
as a freakish
as a freakish
philanthropic
philanthropic
enterprise
enterprise
and consistently
and consistently
valued
valued
its shares
its shares
at a discount
at a discount
to the
tovalue
the value
of itsof
portfolio
its portfolio
companies.
companies.
67 67
ARD’s
ARD’s
inability
inability
to impress
to impress
Wall Wall
Street,
Street,
and its
andconsequent
its consequent
failure
failure
to to
spawn
spawn
an industry
an industry
of imitators,
of imitators,
entailed
entailed
a painful
a painful
irony.irony.
Whatever
Whatever
his faults,
his faults,
Doriot
Doriot
assembled
assembled
stakes
stakes
in thrilling
in thrilling
growth
growth
enterprises
enterprises
over over
his twhis
enty
tw-enty
five -five
yearsyears
in business;
in business;
thanks
thanks
to Digital
to Digital
Equipment
Equipment
and the
andpower
the power
law, he
law,
mul-
he mul-
tiplied
tiplied
his original
his original
investors’
investors’
stakestake
somesome
thirtythirty
timestimes
over,over,
trouncing
trouncing
the the
S&P S&
500.
P 68 And
500. 68
And
yet throughout
yet throughout
ARD’sARD’s
existence,
existence,
its own
its own
stockstock
mimicked
mimicked
one of
onethose
of those
pitifully
pitifully
undervalued,
undervalued,
stodgily
stodgily
mature
mature
companies
companies
beloved
beloved
by by
Benjamin
Benjamin
Graham
Graham
and Warren
and Warren
Buffett
Buff. Because
ett. Because
Wall Wall
Street
Street
disdained
disdained
it, it,
ARDARD
would
would
be worth
be worth
moremore
to itstoowners
its owners
if liquidated
if liquidated
or merged
or merged
into into
an- an-
otherother
company.
company.
And And
so, inso,
1972,
in 1972,
it was.
it was.
SuchSuch
was the
wasinhospitable
the inhospitable
financial
financial
landscape
landscape
in June
in June
1957, 1957,
whenwhen
Shockley’s
Shockley’s
young
young
researchers
researchers
plottplott
ed their
ed their
revolt.
revolt.
ARDARD
had not
had yet
notfiyet
nanced
financed
Digital
Digital
Equipment;
Equipment;
the San
the Francisco
San Francisco
lunchlunch
group
group
was just
was gett
justing
gettstarted;
ing started;
a pair
a pair
of philanthropic
of philanthropic
plutocrats
plutocrats
financed
financed
odd projects
odd projects
in exotic
in exotic
overseas
overseas
loca-loca-
tionstions
or onorthe
onEast
the East
Coast.
Coast.
It was
It hardly
was hardly
surprising
surprising
that the
thatShockley
the Shockley
rebels
rebels
couldcould
not imagine
not imagine
raising
raising
moneymoney
to start
to start
theirtheir
own own
enterprise.
enterprise.
Instead,
Instead,
Eu- Eu-
genegene
Kleiner’s
Kleiner’s
letterlett
toerhistofather’s
his father’s
broker
broker
laid out
laidaout
diffaerent
different
aspiration:
aspiration:
the the
teamteam
of disaff
of disaff
ectedected
Shockley
Shockley
scientists
scientists
hopedhoped
to betohired
be hired
by “aby
company
“a company
which
which
can supply
can supply
goodgood
management.” Kleiner’s
management.”
69 69
Kleiner’s
wife,wife,
Rose,Rose,
ty pedtyup
pedthe
up the
letter,lett
dated
er, dated
June June
14, 1957.
14, 1957.
ThenThen
she mailed
she mailed
it to the
it toNew
the New
YorkYork
firm of
firm
Hayden,
of Hayden,
Stone.
Stone.
The The
broker
broker
who who
had served
had served
Kleiner’s
Kleiner’s
father
father
was was
preparing
preparing
to retire
to retire
fromfrom
Hayden,
Hayden,
so hesopassed
he passed
the lett
theerlett
onertoona to
young
a young
MBAMBA
named
named
Arthur
Arthur
Slight,
Rock.Rock.
70 70
Slight,
taciturn,
taciturn,
his eyes
his eyes
oftenoften
clouded
clouded
behind
behind
largelarge
glasses,
glasses,
RockRock
32 32 T H E TPH
OEWPEO
RWL EAW
R L AW
was not
wasan
not
obvious
an obvious
founding
founding
father,
father,
especially
especially
not of
not
a new
of a new
kind kind
of swash-
of swash-
buckling
buckling
finance.
finance.
Unlike
Unlike
the Whitneys
the Whitneys
and the
andRockefellers,
the Rockefellers,
he had
he grown
had grown
up poor
up poor
in Rochester,
in Rochester,
New New
York,York,
the child
the child
of Yiddish-
of Yiddish-
speaking
speaking
immigrants,
immigrants,
and had
and worked
had worked
as a as
soda
a soda
jerk in
jerk
hisinfather’s
his father’s
smallsmall
grocery
grocery
store.store.
Unlike
Unlike
Doriot,
Doriot,
he had
he no
hadexperience
no experience
with with
military
military
technology,
technology,
and not
andmuch
not much
eveneven
with with
the military;
the military;
during
during
a miserable
a miserable
stint stint
as anas
army
an army
conscript,
conscript,
he had
hebri-
had bri-
dled dled
at reporting
at reporting
to superiors
to superiors
whom whom
he considered
he considered
“not too
“notbright.”
too bright.”
Perhaps
Perhaps
because
because
of hisoftough
his tough
childhood—
childhood—
he suff
heered
suffered
fromfrom
polio,polio,
performed
performed
miser-
miser-
ably ably
in athletics,
in athletics,
and was
and brutally
was brutally
victimized
victimized
by anti-
by anti-
Semitic
Semitic
classmates—
classmates—
RockRock
was reserved
was reserved
to the
topoint
the point
of being
of being
prickly. Deal-
prickly.
71 71
Deal-
making
making
financiers
financiers
are supposed
are supposed
to beto
suave.
be suave.
But Rock
But Rock
suffered
suffered
foolsfools
impatiently,
impatiently,
and the
andfools
the fools
always
always
knew.
knew.
And And
yet, as
yet,
luck
as would
luck would
havehave
it, Rock
it, Rock
was the
wasperfect
the perfect
person
person
to receive
to receive
Kleiner’s
Kleiner’s
letter.lett
Twoer. Two
yearsyears
previously
previously
he had
he assembled
had assembled
a funding
a funding
package
package
for General
for General
Transistor,
Transistor,
the fithe
rst fi
independent
rst independent
manufacturer
manufacturer
of germanium
of germanium
semiconductors,
semiconductors,
which
which
werewere
to betoused
be used
in hearing
in hearing
aids.aids.
Having
Having
steeped
steeped
himself
himself
in this
in emerging
this emerging
industry,
industry,
RockRock
appreciated
appreciated
Shockley’s
Shockley’s
divine
divine
sta- sta-
tus among
tus among
scientists:
scientists:
the god
the could
god could
hire anyone,
hire anyone,
so it so
followed
it followed
that Kleiner
that Kleiner
and his
andcomrades
his comrades
mustmust
be top
beof
top
their
of their
field.fiAt
eld.
the
Atsame
the same
time,time,
the fact
the that
fact that
Kleiner’s
Kleiner’s
crewcrew
was on
wasthe
onpoint
the point
of mutiny
of mutiny
addedadded
an extra
an extra
dimension:
dimension:
the the
scientists
scientists
evidently
evidently
had character
had character
as well
as well
as credentials. The
as credentials.
72 72
combina-
The combina-
tion tion
of anofelite
an elite
teamteam
and aand
potentially
a potentially
breakout
breakout
technology
technology
added
added
up toup to
an obvious
an obvious
commercial
commercial
opportunity
opportunity
. It was
. It awas
prospect
a prospect
analogous
analogous
to Digital
to Digital
Equipment,
Equipment,
which
which
Doriot
Doriot
would
would
finance
finance
laterlater
that summer.
that summer.
On June
On June
20, 1957,
20, 1957,
RockRock
placed
placed
a long-
a long-
distance
distance
call to
call
Kleiner,
to Kleiner,
assuring
assuring
him of
himhisofinterest.
his interest.
The next
The next
day he
daywrote
he wrote
Kleiner
Kleiner
a lettaer,lett
urging
er, urging
him to
him to
keepkeep
his team
his team
together
together
untiluntil
they they
couldcould
meetmeet
face-to-face. The
face-to-face.
73 73
following
The following
weekweek
RockRock
flew fl
toew
San
to Francisco,
San Francisco,
accompanied
accompanied
by a glad-
by a glad-
handing
handing
Hayden
Hayden
partner
partner
named
named
Alfred
Alfred
“Bud”“Bud”
Coyle.
Coyle.
RockRock
and Coyle
and Coyle
met Kleiner
met Kleiner
and his
andcomrades
his comrades
at a San
at a Francisco
San Francisco
res- res-
taurant
taurant
for dinner.
for dinner.
The visitors
The visitors
fromfrom
Wall Wall
Street
Street
understood
understood
that the
thatreb-
the reb-
els wanted
els wanted
to operate
to operate
as a team,
as a team,
without
without
Shockley’s
Shockley’s
suffocating
suffocating
oversight.
oversight.
TheyThey
further
further
understood
understood
that the
thatengineers
the engineers
wanted
wanted
to remain
to remain
in theinSanta
the Santa
ClaraClara
valley,
valley,
wherewhere
they they
all had
all bought
had bought
homes.
homes.
But they
But they
had come
had come
to pro-
to pro-
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
posepose
a novel
a novel
way of
way
meeting
of meeting
thosethose
objectives—
objectives—
one that
one the
thatrebels
the rebels
had failed
had failed
to imagine.
to imagine.
“The“The
way you
way do
youthis
do is
this
youis start
you start
youryour
own own
company,”
company,”
RockRock
said said
sim- sim-
74
By74striking
ply. ply. By striking
out on
outtheir
on their
own,own,
the scientists
the scientists
wouldwould
be able
be able
to work
to work
in- in-
dependently
dependently
in the
in location
the location
of their
of their
choosing.
choosing.
But more
But more
than than
that, that,
they they
would
would
be company
be company
founders.
founders.
TheyThey
would
would
own own
the fruits
the fruits
of their
of their
creative
creative
wizardry.
wizardry.
A self-
A made
self-made
lonerloner
fromfrom
outside
outside
the establishment,
the establishment,
RockRock
felt felt
strongly
strongly
on this
on last
thispoint.
last point.
A certain
A certain
kind kind
of justice
of justice
wouldwould
be served.
be served.
75 75
Rock’s
Rock’s
proposal
proposal
took took
somesome
digesting.
digesting.
“We “We
werewere
blown
blown
away,”
away,”
a re-a re-
searcher
searcher
named
named
Jay Last
Jay Last
remembered
remembered
later.later.
“Arthur
“Arthur
pointed
pointed
out to
out
usto
that
us that
we could
we could
startstart
our own
our own
company.
company.
It was
It completely
was completely
foreign
foreign
to us.”
to76us.”76
Gordon
Gordon
Moore,
Moore,
the engineer
the engineer
who who
led the
ledfailed
the failed
appeal
appeal
to Arnold
to Arnold
Beck-Beck-
man,man,
recalled
recalled
a similar
a similar
reaction.
reaction.
YearsYears
later,later,
whenwhen
he had
heachieved
had achieved
famefame
as as
the co-
thefounder
co-founder
of twof
o iconic
two iconic
Valley
Valley
companies,
companies,
MooreMoore
was still
was at
still
pains
at pains
to to
describe
describe
himself
himself
as anas
“accidental
an “accidental
entrepreneur.”
entrepreneur.”
“I’m not
“I’mthe
notsort
the who
sort who
can can
just say,
just‘I’m
say,going
‘I’m going
to start
to start
a company,’
a company,’
” he refl
” heected.
reflected.
“The“The
accidental
accidental
entre-
entre-
preneur
preneur
like me
likehas
meto
has
fall
tointo
fall into
the opportunity
the opportunity
or beorpushed
be pushed
into into At 77 At
it.”77 it.”
that that
restaurant
restaurant
in San
in Francisco
San Francisco
in late
in June
late June
1957, 1957,
RockRock
was pushing
was pushing
him him
firmly.
firmly.
RockRock
himself
himself
remembered
remembered
something
something
different.
different.
Thinking
Thinking
backback
on that
on that
samesame
dinner,
dinner,
he recalled
he recalled
that that
his mention
his mention
of company
of company
ownership
ownership
had had
changed
changed
the researchers’
the researchers’
bearing.
bearing.
“They“They
seemed
seemed
to perk
to perk
up a up
bit,”
a bit,”
he said
he said
Unburdened
later.later.
78 78
Unburdened
by Doriot’s
by Doriot’s
sensesense
of patriotic
of patriotic
mission,
mission,
untroubled
untroubled
by a by a
plutocrat’s
plutocrat’s
vibrating
vibrating
conscience,
conscience,
RockRock
celebrated
celebrated
silently.
silently.
The way
The he
waysaw
he saw
things,
things,
the fact
the that
fact the
thatscientists
the scientists
responded
responded
to financial
to financial
incentives
incentives
was all
was all
to the
togood.
the good.
79 79
The The
discussion
discussion
moved
moved
to practicalities.
to practicalities.
The The
researchers
researchers
said said
they they
needed
needed
$750,000
$750,000
to get
totheir
get their
business
business
started.
started.
RockRock
and Coyle
and Coyle
countered
countered
that they
that they
should
should
havehave
at least
at least
$1 million.
$1 million.
The Wall
The Wall
Streeters
Streeters
werewere
project-
project-
ing more
ing more
conficonfi
dence dence
than than
was really
was really
justifijustifi
ed: fied:
nding
finding
northnorth
of $1of
million
$1 million
to to
launch
launch
an untested
an untested
collective
collective
wouldwould
not be
not
straightforward. But80the
be straightforward.
80
Butfithe
nan-finan-
ciers’ciers’
bravado
bravado
served
served
to win
to over
win over
doubters.
doubters.
WithWith
the promise
the promise
of a seven-
of a seven-
figure
figure
funding
funding
package,
package,
whatever
whatever
resistance
resistance
the researchers
the researchers
had been
had been
feeling
feeling
beganbegan
to melt
to melt
away.away.
34 34 T H E TPH
OEWPEO
RWL EAW
R L AW
NextNext
camecame
the question
the question
of who
of who
should
should
lead lead
the rebels.
the rebels.
In hisInlett
hiserlett
toer to
Hayden,
Hayden,
Kleiner
Kleiner
had stated
had stated
openly
openly
that the
thatband
the band
of traitors,
of traitors,
then then
number-
number-
ing seven,
ing seven,
included
included
“no person
“no person
who who
has ambitions
has ambitions
as a manager
as a manager
at theattop
the top
level.”
level.”
ThatThat
had been
had been
fine while
fine while
the plan
the plan
was was
to betomanaged
be managed
by another
by another
company.
company.
But ifBut
theifnew
the new
goal goal
was to
was
stay
to independent,
stay independent,
the scientists
the scientists
wouldwould
needneed
to identify
to identify
a leader
a leader
who who
couldcould
uniteunite
theirtheir
group.
group.
Persuading
Persuading
investors
investors
to finance
to finance
a loose
a loose
collective
collective
with with
no plausible
no plausible
chiefchief
executive
executive
wouldwould
be out
be out
of the
ofquestion.
the question.
Among
Among
the young
the young
men men
at Shockley’s
at Shockley’s
laboratory,
laboratory,
Robert
Robert
NoyceNoyce
stoodstood
out as
outthe
asobvious
the obvious
leader.
leader.
A charmer,
A charmer,
a prankster,
a prankster,
physically
physically
graceful,
graceful,
he he
was the
wasengineer
the engineer
who who
had compared
had compared
Shockley’s
Shockley’s
recruitment
recruitment
phone
phone
call to
call to
a divine
a divine
audience.
audience.
But Noyce
But Noyce
had been
had been
agonizing
agonizing
aboutabout
whether
whether
to join
to the
join the
mutiny
mutiny
and had
and stayed
had stayed
out of
out
theofmeetings
the meetings
so far.
soThe
far. son
Theand
son grandson
and grandson
of of
Congregational
Congregational
ministers
ministers
fromfrom
small-
small-
towntown
Iowa,Iowa,
he worried
he worried
aboutabout
the eth-
the eth-
ics oficsbetraying
of betraying
Shockley.
Shockley.
According
According
to one
to mutineer,
one mutineer,
Noyce
Noyce
was was
asking
asking
himself,
himself,
“What
“What
would
would
God God
think?”
think?”
81 81
RockRock
and Coyle
and Coyle
persuaded
persuaded
the seven
the seven
to get
toto
get
work
to work
on Noyce.
on Noyce.
The fi
The
- fi-
nanciers
nanciers
had laid
had out
laidaout
vision
a vision
of liberation.
of liberation.
The researchers
The researchers
wouldwould
havehave
to to
reciprocate
reciprocate
by recruiting
by recruiting
a chief.
a chief.
The plott
The plott
ers designated
ers designated
a member
a member
of their
of their
bandband
named
named
Sheldon
Sheldon
Rob-Rob-
erts erts
to phone
to phone
Noyce.
Noyce.
The The
call stretched
call stretched
late into
late into
the night,
the night,
with with
NoyceNoyce
swinging
swinging
erratically
erratically
betwbetw
een eagerness
een eagerness
and caution.
and caution.
Finally,
Finally,
with with
the car-
the car-
rot ofrot
theof$1
the
million–
$1 million–
plus plus
funding
funding
package
package
dangling
dangling
in front
in front
of him,
of him,
NoyceNoyce
agreed
agreed
to join
to the
joinothers
the others
for a for
meeting
a meeting
with with
CoyleCoyle
and Rock.
and Rock.
82 82
The next
The next
day Sheldon
day Sheldon
Roberts
Roberts
picked
picked
up Noyce
up Noyce
in hisinfamily’s
his family’s
station
station
wagon.
wagon.
TheyThey
toured
toured
theirtheir
colleagues’
colleagues’
houses,
houses,
stopping
stopping
in Los
in Altos,
Los Altos,
Palo Palo
Alto,Alto,
and Mountain
and Mountain
View,View,
picking
picking
up a up
newa new
conspirator
conspirator
at each
at each
stop.stop.
ThenThen
they they
mademade
theirtheir
way to
way
the
toClift
the Clift
hotelhotel
in downtown
in downtown
San Francisco
San Francisco
and pro-
and pro-
ceeded
ceeded
to the
togrand,
the grand,
art deco
art deco
Redwood
Redwood
RoomRoom
where
where
RockRock
and Coyle
and Coyle
werewere
waiting.
waiting.
When
When
the meeting
the meeting
got under
got under
way, way,
RockRock
understood
understood
that that
the deal’s
the deal’s
weakness
weakness
had been
had been
fi xed.fiThis
xed. This
newcomer,
newcomer,
Robert
Robert
Noyce,
Noyce,
was awas
natural
a natural
bornborn
leader.
leader.
His eyes
His eyes
blazed
blazed
fiercely. His83 colleagues
fiercely.
83
His colleagues
werewere
content
content
to lettohim
let him
speak
speak
for them.
for them.
84 84
ARTH
ARUT
R HRUORC R
K OACNKD ALNI B
DELRI A
There
There
werewere
no more
no more
reasons
reasons
not to
not
gotoforward.
go forward.
Bud Bud
CoyleCoyle
pulled
pulled
out out
ten crisp
ten crisp
dollar
dollar
bills bills
and proposed
and proposed
that every
that every
man man
present
present
should
should
sign each
sign each
one. The
one. bills
The would
bills would
be “their
be “their
contracts
contracts
with with
each each
other,”
other,”
CoyleCoyle
said.85 It was
said. 85
It was
a premonition
a premonition
of theoftrust-
the trust-
basedbased
contracts—
contracts—
seemingly
seemingly
informal,
informal,
yet founded,
yet founded,
literally,
literally,
on money—
on money—
that were
that were
to mark
to mark
the Valley
the Valley
in theinyears
the years
to come.
to come.
Unlike
Unlike
Doriot’s
Doriot’s
American
American
Research
Research
and Development,
and Development,
the brokers
the brokers
fromfrom
Hayden,
Hayden,
StoneStone
lacked
lacked
a ready
a ready
pot of
pot
money
of money
to fund
to fund
startups.
startups.
Instead,
Instead,
they they
backed
backed
companies
companies
by assembling
by assembling
coalitions
coalitions
of willing
of willing
investors
investors
on anonadan ad
hoc basis,
hoc basis,
with with
the Hayden
the Hayden
partners’
partners’
capital
capital
accounting
accounting
for a for
small
a small
shareshare
of of
the total.
the total.
Now,Now,
to raise
to raise
the $1
the
million–
$1 million–
plus plus
that he
thathad
he promised
had promised
the eight
the eight
traitors,
traitors,
RockRock
jotted
jott
down
ed down
the names
the names
of around
of around
thirtythirty
-five -potential
five potential
back-back-
ers. ARD
ers. ARD
and Rockefeller
and Rockefeller
Brothers
Brothers
werewere
on the
onlist. So86were
the86list. So were
technology
technology
companies
companies
that might
that might
havehave
an interest
an interest
in a semiconductor
in a semiconductor
investment.
investment.
RockRock
quickly
quickly
discovered
discovered
how how
radical
radical
his vision
his vision
was. was.
The investment
The investment
groups
groups
such such
as ARD
as ARD
and Rockefeller
and Rockefeller
camecame
up with
up with
excuses.
excuses.
The rebels
The rebels
had had
no management
no management
experience;
experience;
the idea
the idea
of writing
of writing
suchsuch
a large
a large
checkcheck
mademade
themthem
queasy.
queasy.
Meanwhile,
Meanwhile,
the technology
the technology
companies
companies
RockRock
contacted
contacted
citedcited
a diffaerent
different
objection:
objection:
they they
wouldwould
consider
consider
putting
puttup
ing
the
upcapital
the capital
to create
to create
a a
new subsidiary,
new subsidiary,
muchmuch
as Beckman
as Beckman
had done
had done
for Shockley,
for Shockley,
but they
but they
werewere
not not
inclined
inclined
to back
to back
eighteight
scientists
scientists
without
without
the right
the right
to control
to control Besides,
them.them.
87 87
Besides,
backing
backing
the Shockley
the Shockley
defectors
defectors
and allowing
and allowing
themthem
to own
to own
stakes
stakes
in their
in their
new new
enterprise
enterprise
would
would
set aset
disruptive
a disruptive
precedent:
precedent:
WhatWhat
if theifbacker’s
the backer’s
own own
employees
employees
demanded
demanded
company
company
stock,
stock,
too?88 Where
too? 88
Where
RockRock
saw justice
saw justice
in in
young
young
scientists
scientists
owning
owning
the fruits
the fruits
of their
of their
own own
enterprise,
enterprise,
others
others
saw trou-
saw trou-
ble. The
ble. whole
The whole
pointpoint
of the
oforganization
the organization
man man
was that
was he
that
was
he instinctively
was instinctively
obedient.
obedient.
WhyWhy
buy workers’
buy workers’
loyalty
loyalty
with with
stockstock
options
options
whenwhen
the culture
the culture
of of
the 1950s
the 1950s
provided
provided
it foritfree?
for free?
AfterAfter
approaching
approaching
thirtythirty
-five -potential
five potential
investors,
investors,
RockRock
had failed
had failed
to to
raiseraise
a single
a single
cent.cent.
ThenThen
Bud Coyle
Bud Coyle
suggested
suggested
Sherman
Sherman
Fairchild,
Fairchild,
a playboy
a playboy
with with
an inherited
an inherited
fortune
fortune
who who
was awas
self-
a described
self-described
“putt“putt
erer”erer”
and science
and science
enthusiast. Like
enthusiast.
89 89
Like
the Whitneys
the Whitneys
and the
andRockefellers,
the Rockefellers,
Fairchild
Fairchild
had enough
had enough
money
money
to yawn
to yawn
at theatprospect
the prospect
of more
of more
of it.of
Unlike
it. Unlike
the Whitneys
the Whitneys
and the
and the
36 36 T H E TPH
OEWPEO
RWL EAW
R L AW
Rockefellers,
Rockefellers,
he might
he might
be tickled
be tickled
by the
by notion
the notion
of a of
newa new
semiconductor
semiconductor
venture.
venture.
In late
In August
late August
1957, 1957,
Bob Bob
Noyce
Noyce
and Eugene
and Eugene
Kleiner
Kleiner
flew fltoew
New
to New
York.York.
TheyThey
mademade
theirtheir
way to
way
Sherman
to Sherman
Fairchild’s
Fairchild’s
Manhatt
Manhatt
an town
an town
house,
house,
which
which
was fiwas
ttedfiout
ttedwith
out with
glassglass
wallswalls
and whizzy
and whizzy
blinds
blinds
that opened
that opened
and shut
and shut
elec-elec-
tronically. After
tronically.
90 90
After
somesome
initial
initial
pleasantries,
pleasantries,
NoyceNoyce
uncorked
uncorked
the flthe
air fl
that
air that
RockRock
had seen
had seen
in him.
in him.
Fixing
Fixing
Fairchild
Fairchild
with with
thosethose
blazing
blazing
eyes,eyes,
he explained
he explained
that the
thatfuture
the future
wouldwould
be built
be built
on silicon-
on silicon-
and-wire
and-wire
devices,
devices,
meaning
meaning
on sim-
on sim-
ple sand
ple sand
and metal,
and metal,
materials
materials
that cost
that cost
almost
almost
nothing.
nothing.
HugeHuge
profiprofi
ts would
ts would
flow fltoow
the
tocompany
the company
that fashioned
that fashioned
transistors
transistors
fromfrom
thesethese
basicbasic
elements,
elements,
and Fairchild
and Fairchild
couldcould
be the
bevisionary
the visionary
who who
backed
backed
the winner. It was
the winner.
91 91
It awas
ver-a ver-
sion of
sion
theof“call
the “call
to greatness”
to greatness”
speech
speech
that charismatic
that charismatic
entrepreneurs
entrepreneurs
wouldwould
deliver
deliver
repeatedly
repeatedly
in theinValley.
the Valley.
Fairchild
Fairchild
was sold.
was sold.
NowNow
all that
all that
remained
remained
was was
to close
to close
the terms
the terms
of the
of deal.
the deal.
RockRock
had had
promised
promised
the defectors
the defectors
the chance
the chance
to own
to own
theirtheir
own own
company,
company,
and he
anddid
he did
his best
his best
to deliver.
to deliver.
EachEach
of theofeight
the eight
founders
founders
was invited
was invited
to put
toup
put$500
up $500
in in
return
return
for 100
forshares
100 shares
in theinstartup.
the startup.
The men
The men
scraped
scraped
together
together
the money,
the money,
but not
butwithout
not without
difficulty
difficulty
; $500; $500
was tw
was
o or
twthree
o or three
weeks’
weeks’
salary,
salary,
and Noyce
and Noyce
had to
had
call
tohis
callparents
his parents
to ask
toifask
hisifgrandmother
his grandmother
couldcould
lend lend
him the
himfunds.
the funds.
92 92
For its
Forpart,
its part,
Hayden,
Hayden,
StoneStone
bought
bought
225 shares
225 shares
at the
at same
the same
priceprice
as the
as the
founders,
founders,
and 300
and more
300 more
shares
shares
werewere
set aside
set aside
in a kitty
in a kitty
to help
to help
recruit
recruit
se- se-
nior nior
managers;
managers;
despite
despite
Noyce’s
Noyce’s
charisma,
charisma,
Fairchild
Fairchild
saw him
saw as
himmerely
as merely
the the
interim
interim
chief.chief.
EachEach
founder
founder
was therefore
was therefore
left with
left with
just under
just under
10 percent
10 percent
of of
the company,
the company,
with with
the prospect
the prospect
that that
this share
this share
would
would
fall to
fall7.5topercent
7.5 percent
whenwhen
new new
management
management
materialized.
materialized.
Meanwhile,
Meanwhile,
Fairchild’s
Fairchild’s
company,
company,
Fair-Fair-
childchild
Camera
Camera
and Instrument,
and Instrument,
was stumping
was stumping
up just
up about
just about
all ofall
theofinitial
the initial
capital—
capital—
somesome
$1.4 million,
$1.4 million,
dwarfi
dwarfi
ng the
ng$5,125
the $5,125
put up
putbyup
the
byscientists
the scientists
and and
Hayden.
Hayden.
But because
But because
Fairchild’s
Fairchild’s
moneymoney
camecame
in the
inform
the form
of a loan
of a loan
rather
rather
than than
equity
equity
, the ,founders’
the founders’
ownership
ownership
was not
wasbeing
not being
diluted.
diluted.
93 93
On the
Onface
the face
of it,of
theit,eight
the eight
scientifi
scientifi
c founders
c founders
had landed
had landed
a great
a great
deal.deal.
But, anticipating
But, anticipating
the opacity
the opacity
of later
of later
venture
venture
financings,
financings,
somesome
of these
of these
num-num-
bers bers
werewere
not what
not what
they they
seemed.
seemed.
AfterAfter
all, Sherman
all, Sherman
Fairchild’s
Fairchild’s
negotiators
negotiators
had ahad
powerful
a powerful
handhand
to play:
to play:
thirtythirty
-five -other
five other
investors
investors
had rejected
had rejected
RockRock
outright.
outright.
If Georges
If Georges
Doriot
Doriot
of ARD
of ARD
couldcould
seizeseize
77 percent
77 percent
of Digital
of Digital
Equip-
Equip-

Sample

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Sample

Uploaded by

Copyright:

Available Formats

The

SHORTLISTED FOR THE

SEBASTIAN MALL ABY THE POWER L AW

J O H N T A M M Y, F O R B E S S PINE W IDTH: 28.5 MM

countries, this is an invaluable guide’ Regular Coated

important industry’ • Wet proofs

9780141988948_ThePowerLaw_COV.indd 1,3 01/02/2023 11:32

The Power Law

Abou t the Au thor

Penguin Books is part of the Penguin Random House group of companies

First published in the United States of America by Penguin Press,

Copyright © Sebastian Mallaby, 2022

The moral right of the author has been asserted

Printed and bound in Great Britain by Clays Ltd, Elcograf S.p.A.

The authorized representative in the EEA is Penguin Random House Ireland,

NotesNotes 415 415

IndexIndex 469 469

You might also like