Multiple Silicon Valley venture capitalists like Yuri Milner and Vinod Khosla have achieved remarkable success through various strategies. However, they all share a common belief in the power law. This principle is the subject of Sebastian Mallaby’s 2022 book: “The Power Law: Venture Capital and the Making of the New Future.”
Understanding The Power Law
Mallaby begins “The Power Law” by explaining why many consider venture capital (VC) “a grand-slam business,” distinct from other forms of investment. While a “fabulous” outcome for a hedge-fund stock picker might be doubling shares in three years, venture capitalists are much more ambitious.
Venture capitalists understand that relatively few startups merely double in value. Most fail entirely and become worthless — a disaster for stock market investors. However, every year, a few outliers will hit it big. In VC, the only thing that matters is to have a stake in those rare successes. The power law underpins this approach.
According to the power law, most bets will fail or generate minimal profits. Meanwhile, a few monumental wins account for the bulk of returns.
This skewed distribution also means that once a venture capitalist achieves significant success, their opportunities for further gains often multiply. For those willing to gamble on breakthrough ideas and bold innovations, the power law has reaped staggering wealth.
The Art of Late-Stage Venture Capital
“The Power Law” recounts the stories of various venture capitalists and funds, highlighting visionaries who placed transformative bets on the tech giants that now shape our world. These visionaries include Yuri Milner, who invested in Facebook in 2009 and, along with Tiger Global, “invented the art of late-stage venture capital.”
Traditionally, VC was a form of financing for startups with long-term growth potential. However, in the early 2000s, a small hedge fund called Tiger Global started approaching established Asian tech companies like NetEase, Sina, and Sohu, which had the potential for substantial growth.
Tiger Global’s strategy included global tracking of tech sectors, earning and value modelling, and swift international moves to capitalize on market disruptions. They used this approach to discover and invest in Mail, Milner’s European email service. A few years later, Milner used the same strategy to win over Mark Zuckerberg.
Yuri Milner’s Landmark Investment in Facebook
Facebook launched in 2004. Five years later, during a new funding round, Milner made an initial offer of $5 billion. He collected data about social media platforms outside the U.S. and capitalized on the 2008 financial crisis, which had shaken investor confidence.
Yuri Milner ultimately raised his offer to meet Zuckerberg’s desired pre-money valuation of $10 billion, outbidding other investors. This bold move paid off, as by late 2010, Facebook’s value had soared to $50 billion.
Mark Zuckerberg and the Youth Revolt
Mallaby also examines how “the youth revolt” forever changed the VC industry. He credits Google founders Larry Page and Sergey Brin with kickstarting this revolution in the late 1990s to the early 2000s.
This shift saw a new generation of founders reject traditional corporate norms and demand more control over their companies. Young tech entrepreneurs like Zuckerberg prioritized long-term vision and innovation over short-term financial gains. Mallaby writes that Zuckerberg and Facebook’s former President Sean Parker “liked nothing better than to snub prestigious venture partnerships.”
Milner supported this revolt by empowering young founders. When he approached Zuckerberg with his offer for Facebook, Milner knew that the young CEO cared deeply about maintaining control over the company. Milner offered to forgo a board seat and gave Zuckerberg the right to vote Milner’s shares as he wished.
Milner and Zuckerberg have continued to collaborate, including on the Breakthrough Prize. This set of awards honours top researchers in fundamental physics, life sciences, and math. As in the world of tech, Milner believes that investing in leading minds can drive groundbreaking discoveries that radically reshape our future.
Read more about Milner’s vision for advancing science and technology in his short book “Eureka Manifesto: The Mission for Our Civilization.”