Review

Venture Capital has played a massive part in shaping the history of technology. This book helped me understand why the VC format has been so successful, and how it’s evolved over time.

I enjoyed the chronological story telling. The author does well to put you in the room for some of the more bizarre negotiations in the history of the valley.

I didn’t think it was necessary for the book to drift into foreign policy - that felt like a reflection of the author’s interest - not the natural place to end the story.

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Key Takeaways

The 20% that gave me 80% of the value.

• All progress depends on the unreasonable man. Bold improbable ideas - are the ones that matter.
• There’s no glory in projects that will probably succeed → they’re not going to be transformative to the human predicament
• Questions VCs ask when evaluating an investment:
• If everything goes right - what happens?
• Could this return 10-100x on initial investment?
• Can you think of a reason why this can’t work?
• Can you think of a reason why the founder can’t do it?
• Experts do incremental innovation. Outsiders make step changes.
• The Power Law is a truth in venture capital. The majority of the success comes from just a few of the investments.
• 5% of capital generated 60% of returns (study of 7000 startups)
• Winners use their advantage to grow at an accelerated rate - this results in a world of extreme differences.
• The VC game is one of asymmetrical risk. Bets that go to zero lose 1x, bets that succeed can give multiples of 100x
• Winners emerge from forces that are too hard to forecast. You can experiment but you can’t predict.
• VCs combine the strengths of the corporation (allocate and attract capital, people and customers) with the strengths of the market (ideas are tested in the market quickly, allowing survival of the fittest)
• VC funding expanded into new geographies, new sectors, new stages of lifecycle
• The VC magic is in the network. Connecting entrepreneurs, ideas, customers and capital results in more value than the sum of the parts.

• Funding created a liberation of talent. Liberation Capital → Freeing talent to convert ideas into products - marrying unconventional experiments with commercial targets
• But the combination of the counter culture + commercial ambition made Silicon Valley the right place for innovation.

• 1961 Davis and Rock → the first recognisable VC model
• The old procedure was to identify deals first → then call around to find capital
• Such money was scarce - power lay with investors
• They decided to raise a fund first. Raised $3.2m from 30 limited partners.
• D&S put their own money into the fund too - so they were incentivised to invest well
• Promised liquidation after 7 years - so they had to deploy capital with aggression
• Money wasn’t raised from debt - and investors knew not to expect dividends - equity allowed the startups to use every $ for expansion.
• D&R’s compensation was 20% of the funds capital appreciation
• Partners, general partners and entrepreneurs were all compensated in equity
• Founders could expect to keep about 45% of their startups, employees get 10% and the VC getting 45% (80% would go back to the partners)
• Making concentrated bets on a few companies went against the diversification philosophy of the time - it was OK for two reasons:
• They got a seat on the board of the companies
• They invested only in companies they hoped would experience rapid growth
• Most startups would fail - so the winners would have to win big enough to make a success of the portfolio.
• The central principle of venture business: Back the right people. The most important factor in the long run for any company is management. The only asset of tech startups is human talent.
• Rock would evaluate the entrepreneurs motivation, character and fibre.
• People > product and market

• 1972 - Atari (run by eccentrics) invented pong. If you invested in them - it wasn’t just technology risk you were taking
• The new wave of VCs had a combative and forceful activist investment style
• Dom Valentine (Sequoia Captial)
• Tom Perkins (Kleiner Perkins Caufield & Byers)
• VCs shaped entrepreneurs. Getting involved. Telling them who to hire, making sure they were doing their finances.
• VCs gave out funding in tranches - related to milestones.
• Tom Perkins - met Eugene Kleiner (aimed to start a venture fund)
• Agreed the firm would carry their name
• Fund should be time limited
• Each should commit some of their own savings
• Emphasise a robust activist approach
• We are entrepreneurs ourselves - we will work with entrepreneurs in an entrepreneurial way - we’ll be in it up to our elbows
• Setup on Sandhill Road → would become the epicentre of the VC industry
• They made a few disappointing investments and then decided to double down on activism.
• Perkin’s Law: Market-risk is inversely proportional to technical risk, because if you solve a truly difficult technical problem, you will face minimal competition.
• Perkin’s wanted entrepreneurs to identify the biggest risks - then find the cheapest way of neutralising them
• Entrepreneurs had to hit the milestones to release funding.
• The virtue of stage-by-stage financing became increasingly obvious. As successive risks were eliminated, each financing round valued companies higher than the previous. Founders could raise larger sums by giving away less equity.
• They were investing in human founders with brilliance and weakness. Dealing with products and manufacturing processes that were untested and complex. They faced competitors.
• Early risk elimination + stage-by-stage financing + activist investing/helping
• Skeptical observers sometimes asked whether VCs create innovation or show up for it.
• Valentine and Perkins - by force, character and intellect stamped their will on portfolio companies.

• The playbook:
• Swing for home runs
• Activism
• Stage-by-stage financing
• Liberate talent - create new industries
• VC’s wanted to invest because others were investing. The grapevine - was saying that Apple would be a winner. Apple didn’t need more capital, but the investors were queuing up
• Often persistence was rewarded - Montagu said he’d sit in the Apple lobby until he was able to invest.
• Introductions were everything - to get funding and then attract funding and then open doors
• Capital gains was cut - no other country was so friendly to the venture industry

• Why do some clusters (like SV) pull ahead of others?
• Large Japanese firms → tight relationships internally - few links
• Transient startups → some internal bonds - but enriched looser external connections
• 1973 - Mark Granovetter - A plethora of weak ties generates a greater circulation of information that a handful of strong ones.
• Information spillovers and social networks were really important - the loose ties between people. What created those conditions in the valley? California law? Stanford allowing professors to take sabbaticals? Nope → VCs are relentlessly focused on cultivating such ties!
• Bill Younger of Sutter Hill → took the smartest people to lunch that he knew - he’d ask them who’s the smartest person they knew and get an intro - he’d keep everybody warm by sharing research, news and taking them for lunch
• The surge of venture dollar flushed out the capable entrepreneurs out of safe nests of large corporations
• If you seek investment from a VC they offer advice. If you seek advice they offer investment.
• Qume formula: Using activist venture capital you could make a business out of a new technology
• VC’s found out from engineers which protocols (for connecting components) were going to win. Then they backed the companies that backed those protocols. VCs began to know the landscape better than some of the engineers and founders, and helped them navigate the technological changes
• VCs brokered technical alliances between companies - some secrets were more valuable when shared. VC’s also helped sort out disputes between firms - when knowledge was moved freely. VC’s walk the fine line between competition and cooperation.
• Valentine used his position as a VC to back startups that would be acquired later by the Cisco mothership. Protecting Cisco and de-risking his investments

• Different styles of VC can be successful
• Kleiner Perkins - improvised and shot from the hip
• Accel - were planners they had a specialisation strategy (e.g. Telecoms will be huge)
• Have a thesis → announce a fund → get quoted in the press → organise a conference → make a noise
• Specialisation helped when it went on the offensive - partners were experts, quickly asses an entrepreneurs pitch
• Embedded themselves as intellectual leaders in the sector → Entrepreneurs warmed to people who ‘get it’
• The 90% rule: An Accel investor should know 90% of what founders are going to say - before they open their mouths to say it
• Made spotting adjacent possibilities easier. They could anticipate the next logical advance in technology. Accel saying → every deal should lead to the next deal
• They passed on the uncredentiolised challengers that Don Valentine (Klieiner Perkins) valued
• Paradox at the heart of venture capital’s impact on society: Being in the venture game matters more than the quality of your due diligence
• Kapor: As long as a startup flourishes - venture investors will defer to the founder.
• Companies were breaking the law to use the government internet. The demand was that strong.
• Venture capital can feel like a relay - being passed from one to the other.

• VC returns are dominated by grand slams - partly because of the dynamics of startups: most young businesses fail, but the ones that gain traction grow exponentially
• Tech startups have a power law for additional reasons. They’re also founded on technologies that may themselves progress exponentially.
• Metcalfes law: rapid growth in usefulness
• Moores law: falling cost of modems and computers
• Ventures are like financial options. You could never lose more than your initial stake, but the upside was unbounded.
• Tom Perking Dictum: You succeed in venture capital by backing the right deals - not haggling over valuations.

• Masayoshi Son and Softbank:
• To penetrate the valley he bought a technology publisher and an organiser of computer conferences to acquire the information and connections he needed
• Son offered $100m to Yahoo, founders said they didn’t need it … Son said “everyone needs $100m”
• Son asked them who their competitors were (Excite and Lycos). Son → “If I don’t invest in Yahoo, I’ll invest in Excite and I’ll kill you”
• Son, could write a $100m cheque, so he could choose the winner
• No single deal had earned anyone more than $100m until this point
• Son became famous and briefly the richest person in the world ($15b). He invested in 250 startups in 4 years (1996-2000), one per week.
• Son personally made $15bn between 1996 and 2000 - before a single VC was on the billionaires list.
• King-maker cheques could change the game
• When companies grow exponentially, they don’t suddenly stop.
• Andy Rachleff - The second derivative (the changes in the rate of growth of sales) tells a venture investor whether to back it

• Bechtolsheim wrote a cheque to the Google founders for $100k made it out to Google.inc → They didn’t have a bank account and weren’t incorporated → he didn’t say what % he wanted either!
• Bezos invested early too.
• The Google guys were able to raise money like that, kind of for nothing
• Given the capital rich environment, Sergey and Larry were determined to get a good deal.
• VCs can only bet on things going up - they can’t really short → so they tend to participate in bubbles. VCs can’t publicly question the bubble - like a hedge fund could.
• Power Law thinking built the bubble → I want to own every one of these companies. If I’m wrong on 19 and the 20th is Yahoo it doesn’t matter
• WebVan → losing lots of cash grew to a value of $11bn
• Moritz - thought brands would dominate the web, not technologies
• Vino Khosla explained → if you thought existing search technology was 90% as good as the best possible version, then pushing performance to 95% was not going to win you customers
• BUT if you thought existing search technology was only 20% of the potential - then google might be 3 or 3x as good as its rivals - it’s edge could attract a flood of users.
• Brin and Page had enough control to fire Eric if it didn’t work out. The VCs promised that they’d look after Eric if that happened! Making it risk free (for Eric).
• Google went public with two classes of shares so that Larry and Sergey would maintain control
• Facebook copied the dual class structure.
• The Google approach made ‘Angel investing’ more popular and made it harder to get a great deal at Series A for VCs

• Paul Graham - sold Viaweb to Yahoo for $45m and started writing essays
• Told founders to Standup to VCs - you’re doing them a favour by letting them invest
• It’s not hard - build something users love, and spend less than you make
• VC problems identified by Graham
• Founders might be happy with modest multiples. But VCs aren’t
• Courting VCs took too long - raising was a distraction from coding
• VCs got nervous and installed MBA managers - stifling innovation
• Called them greedy, sneaky and over baring
• When startups need less money, investors have less power

• Thiel setup a Venture Firm → Founders Fund
• Entrepreneurs should run their companies - They’d never eject a founder
• Differentiated from the existing VCs
• He spoke about the power law → citing the Pareto principles or 80/20 rule.
• A startup that monopolised a worthwhile niche would capture more value that millions of undifferentiated competitors
• VC coaching might be negative - he thought the open mind was better than the prepared one
• There’s an opportunity cost to spending time coaching founders if you’re a VC - you’re not looking for the next thing
• Paul Graham - YCombinator Model:
• Founders get $6k to sustain them for 3 months
• Practical and emotional help (bank accounts, patents)
• Feedback from Graham and friends
• YC would take 6% in each micro-company that incorporated
• Batch processing was efficient, the cohort could support each other.
• YC could help them as a group, with speakers coming in to speak to everyone.
• Acceptance rate was 3.5%
• Micro-investments was a different approach to big cheques. He was recruiting teenage coders. A stream of new startups.
• Freedom for hackers.
• Work for yourself - capture the value of your own ideas - grow a ladder don’t climb one -
• He believed in the networks of small companies.
• Imitators started up - SeedCamp in London / Entrepreneur first.

• Opportunities were abundant in China in 2005
• A generation of giants would be produced → Baidu, Alibaba, Tencent and Xiaomi
• The first wave of China venture deals was by a mix of investors, many offshore. The next wave would feature mainstream VCs from new offices based in China
• China’s founders had few funding options → despite having access to a huge market
• Three phases of Silicon Valley and China:
1. Capital scarce, few investors, entrepreneurs struggled to raise (China in the late 1990s)
2. Money flowed, # of VCs grew, # startups grew, startup ambition grew (China around 2010)
3. Competition becomes hectic and costly, VCs perform a coordinating function. brokering mergers, acting as super connectors (China around 2015)
• 2010 in China - the war of a thousand Groupons → VC’s intervened to stop mindless spending
• Money splurged on cheaper discounts to attract users
• Meitun spent $700m vs Dianping who spent $850m (subsidising restaurant meals)
• VCs refused to fund the feud → but would invest in a merger
• Two massive ride hailing apps were forced to merge too (Didi and Kuaidi)

• Backing a project that goes to zero costs you 1x. Missing a project that goes 100x is massively more painful
• Accel was able to invest in Facebook because it modernised in a way that Kliener Perkins didn’t. It evaluated it mistakes, hired and trained younger talent, proactively identified investment areas, was prepared to work with difficult founders and found ways to connect with them
• Accel paid Stanford grads to tip them off about startups on campus
• Getting to Zuck to accept Accel capital was the challenge. Showed up at Facebook in person without an invite.
• Zuck arrived in shorts and flip flops. Partners weren’t rattled - they knew ‘unorthodox’ was the likely founder profile.
• Accel got the deal done and made $12bn from Facebook
• Despite winning VC’s having a self-reinforcing advantage - Kliener declined quickly:
• John Doerr pursued clean tech too early → betting big, but returns were low and slow. The firm that benefited most from Moore’s law and Metcalfe’s law came unstuck investing in a sector that lacked those advantages
• They grew too quickly
• Doerr didn’t have a peer to keep him in check - he was impossible to challenge
• Run by mature stars - who lacked hustle to connect with young founders - missed the home runs of the era
• Doerr hired women but failed to create a safe environment for them
• A Russian Yuri Milner became un unlikely investor in Facebook.
• Yuri knew Facebook was undervalued. He’d monitored and compiled metrics from similar companies across the worlds markets. He’d seen them monetise their users. He’d seen them burst through perceived ceilings (like Facebooks 100m users). Facebooks metrics were better by comparison. Facebook was dominant in the entire world excluding China, for a lower valuation than Tencent was available for in the public market - dominant in countries with a combined GDP 11x of China.
• Yuri structured the deal to give Mark the two things he needed:
• Control → he’d give Zuck his board seat concentrating his power
• Allow employees to take cash out → early employees were keen to sell stock. Yuri would by it (at a discount)
• Yuri could outbid his competition - few shared his international insight. People wrongly said it was ‘A crazy Russian. Dumb money… this is insane’
• The Facebook deal showed tech companies could delay going public for an additional three years. More wealth would now be created for private investors outside of public markets
• Looking at incremental margins allows you to see past firms that were losing money. Look for those where revenues were growing fasting than costs.
• Peter Lynch Fidelity on three ways to spot a 10x investment:
1. Others haven’t noticed yet - Less competition meant suppressed valuations
2. Your stock isn’t covered by analysts - likely to be miss-priced
3. CFOs tell you they haven’t spoken to an investor in ages
• Shleifer flew to Moscow because he’d heard that Russia had two Yahoo’s and a Google
• Andreesen Horowitz differentiated themselves by:
• Promising not to replace or abandon founders. Keep control but get coaching.
• Built an extensive consultancy to help founders
• They combined early stage bets - with larger growth investments
• Invested in Skype, Zynga, Foursquare, Facebook, Twitter, Groupon, AirBnb
• It worked - they got early success

• From 2009 to 2019 Venture Capital expanded into new industries, into new geographies and along the lifecycle of startups.
• Sequoia has the best sustained performance level of all the VCs - but why?
• Culture was strong, on a quest for internal excellence entailed…
• “Recruitment, team building, setting of standards, questions of inspiration and motivation, avoiding complacency, the arrival of new competitors and the continual need to refresh ourselves and purge under-performers.”
• Each venture investment can seem serendipitous - but Sequoia were experts at creating their own luck - systematically boosting their odds. They’d work out how to get to founders and how to get the investment-
• They noticed two investment companies were using Shopify - They invested and made a 35x return.

• Theranos was a fraud disguised as a revolutionary blood-testing machine. It’s value went from $9b to zero. The valley didn’t really back Theranos. A number of family offices funded them (Walmart, Murdoch, DeVos and Oppenheimer) to the tune of nearly $500m. The amateurs failed and the pros stayed out of it - there was no evidence that their technology was working
• WeWorks initial business model was sensible - take cheap long term lease office space, then resell it at a premium for shorter leases (with some cheap perks)
• Captial came overwhelmingly from nonstandard players
• JP Morgan invested partly to secure the IPO and sell other services
• Softbank’s Son invested $4.4b in the back of his car after just 28 minutes - more than Benchmark had raised in it’s 22 year history
• Neumann consolidated his power. He would buy stakes in buildings before signing a lease with them and increasing their value. His interests weren’t closely aligned to the shareholders of WeWork
• Neumann went into wild expansion mode - bought a corporate jet
• It unraveled at the attempted IPO - the public markets didn’t buy the vision.
• Three problems of private unicorns (essay from Gurley @ Benchmark about Uber):
• They were overvalued
• Later investors insisted on liquidation protection clauses - with their downside protected, they’d press unicorns to grow recklessly
• Big valuations fed the hubris of tech founders
• There was so much money in Venture Capital - Sand Hill Road VC’s couldn’t stop new entrants making reckless late-stage investments (playing poker with unicorns)

• Salganik’s 2005 experiment showed participants were more likely to listen to songs that others had downloaded. He separated the virtual environments though, and different songs came out on top each time. To a surprising degree, he concluded that blockbusters are random.
• Sometimes it is better to be lucky than smart - but smartness is still a major driver of results
• Venture capitalists as a group make a positive impact on the economy. Individuals make errors and band judgements, but the effect as a whole is positive
• Arguments against venture capital (and if they’re true)
‣
1) VCs are good at getting richer, not solving societies big problems
• they don’t just invest in software
• they’re pushing green technologies
• solve inequality through taxation - not stifling innovation
‣
2) VCs are dominated by a narrow club of white men
• true - women account for just 16% of partners - and some of those don’t enjoy a safe or fair environment
• the race story is worse, Asian representation is OK but not black. 13% of the American labor force are black, they attract just 1% of the funding
• US GDP would be 2% higher if inequality were addressed
‣
3) VCs encourage out-of-control disrupters, with no regard for those that get disrupted
• they often eject reckless founders
• if entrepreneurs want to grow at a measured pace, VC funding isn’t for them. It will create pressure to grow and grow quickly
• there is a concern that VC money results in things being sold below cost, putting incumbents out of business and creating monopoly replacements. There aren’t many examples of this though - and it’s the governments job to protect consumers from monopolies
• Policy lessons
• Tax breaks are better than subsidies for encouraging innovation. Creates better incentives.
• Tax breaks should be coupled with incentives for employees at startups
• Governments must invest in science training to create engineers, and invest in university labs (and allow them to commercialise discoveries)
• Governments need to hand out visa liberally to entrepreneurs
• The logic of the power law: the rewards of success will be massively greeter than the costs of honourable setbacks.
• Don’t bet against venture capital

Deep Summary

Longer form notes, typically condensed, reworded and de-duplicated.

SV is gripped by the cult of the individual, but those individuals represent the triumph of the network Matt Clifford

The biggest secret in VC is that the Best investment in a successful fund, outperforms the entire rest of the fund. Peter Theil

Introduction: Unreasonable People

• All progress depends on the unreasonable man. Bold improbable ideas - are the ones that matter.
• There’s no glory in projects that will probably succeed → they’re not going to be transformative to the human predicament
• Ethan Brown wanted to disrupt the entire meat industry by building a vegetable burger that had the same properties as the real thing. It’s the sort of idea that you have to take to a VC.
• VCs don’t mock big ideas - they look for them
• Khosla (who backed impossible foods) was an unreasonable man - he had an impatience and thought that everything should be possible
• Khosla CV: Stanford → Sun Microsystems → Joined Kliener Perkins as a VC
• Khosla bet on bandwidth increasing exponentially
• Juniper Networks investment returned 1400x $5m → $7
• He was a contrarian → why can’t you have the lifestyle you want
• Questions VCs ask when evaluating an investment:
• If everything goes right - what happens?
• Could this return 10-100x on initial investment?
• Can you think of a reason why this can’t work?
• Can you think of a reason why the founder can’t do it?
• Being an outsider can be advantage: “You want somebody smart from outside the industry to rethink the assumptions from the ground up”
• Experts do incremental innovation. Outsiders make step changes.
• The Power Law is a truth in venture capital. The majority of the success comes from just a few of the investments.
• 5% of capital generated 60% of returns (study of 7000 startups)
• 75% of gains from YC came from 2 of 280 startups
• An NBA star walks out of a cinema - the average height drops slightly. Jeff Bezos walks out of a cinema - the average wealth drops hugely.
• Winners use their advantage to grow at an accelerated rate - this results in a world of extreme differences.
• The private markets are more stable. 98% of the time, the market moves less than 3% a day.
• VCs are high risk / huge reward. Most startups fail completely. What matters is having a piece of the outliers that succeed.
• The VC game is one of asymmetrical risk. Bets that go to zero lose 1x, bets that succeed can give multiples of 100x
• Winners emerge from forces that are too hard to forecast.
• You can experiment but you can’t predict.
• VCs combine the strengths of the corporation with the strengths of the market
• Can help startups attract capital, people and customers → replicating what happens in corporations
• Their network is fluid - they have the flexibility of the market, shape it and expand it
• Startups are tested in the market quickly. Making VC’s good at failing early, and doubling down on early signs of success
• VC funding has expanded in three dimensions:
• new geographies, new sectors, new stages of lifecycle (e.g. growth investing in late stage startups - 480 $1b unicorns are still private)
• The VC magic is in the network. Connecting entrepreneurs, ideas, customers and capital results in more value than the sum of the parts.

Chapter 1: Arthur Rock and Liberation Capital

• Early venture capital started a new era. An era where you could leave your employer to work on an idea.
• Funding created a liberation of talent.
• In 1957 8 PHD researchers left Shockley’s government funded semiconductor lab to start Fairchild Semi-Conductor.
• Shockley was a Nobel price winner but a terrible boss.
• They attracted $1.4m in funding and became known as the traitorous eight.
• By 2014 70% of the publicly traded companies in the valley could trade their lineage to Fairchild
‣
Traitorous 8 - Shockley Rebels
• Initially hoped to be acquired by a company with good management
• Arthur Rock encouraged them to start a new company instead. Jotted down names of 35 potential backers.
• They asked for $750k → Rock said they should start with $1m
• The Pitch: the future would be built on silicon and wired devices (sand and metal) → the first to work out the process would clean up
• Each founder had just 10% of the company
• Fairchild’s company stumped up $1.5m in a loan (not equity)
• Fairchild loan came with an option to buyout the rest of stock at $3m
• 8 scientists → started in a garage → things went well → first sales was to IBM for 100 transistors → massive margin. Trying out new materials for semi-conductors. They spoke early to customers, before they developed anything. They were focused on the market
• $6.5m in revenue in year 2, $2m profit, Fairchild exercised option to buy
• Liberation capital was about unlocking human talent, sharpening incentives and a fostering a new type of applied science

• Why did Silicon Valley become the innovation capital of the world?
• It wasn’t Stanford → the east coast had Harvard and MIT
• It wasn’t government technology defence contracts → there was more of that in Boston
• It wasn’t the West Coast counter culture → The hippie movement and Douglas Englebarts LSD experiments weren’t major contributors
• It wasn’t the free sharing of ideas → The hacking movement started at MIT. Tim Berners-Lee gave away the internet. Linux was given away for free too
• Inventions happened elsewhere (Transistors, PC, Browser, Social Networks) - but the magic happened in Silicon Valley
• But the combination of the counter culture + commercial ambition. Echoes of the The Gold Rush.
• Liberation Capital → Freeing talent to convert ideas into products - marrying unconventional experiments with commercial targets

Chapter 2: Finance without finance

• Two advances happened in the next decade
• Equity only time limited fund (rejecting other formats)
• New risk management, suited to venture portfolios.
• Diversification was all the rage, but venture funds had to hold lumpy concentrated bets on a small number of tech stocks

• The Private Limited Partnership → Davidson and Rock partnership raised $30m - started an equity culture. Founders could expect to keep about 45%.
• Davis and Rock (1961) → the first VC model
• The old procedure: identify deals first → call around to find capital
• Such money was scarce - power lay with investors
• They decided to raise a fund first. Raised $3.2m from 30 limited partners.
• D&S put their own money into the fund too - so they were incentivised to invest well
• Promised liquidation after 7 years - so they had to deploy capital with aggression
• Money wasn’t raised from debt - and investors knew not to expect dividends - which allowed the startups to use every $ for expansion
• D&R’s compensation was 20% of the funds capital appreciation
• Partners, general partners and entrepreneurs were all compensated in equity
• Founders could expect to keep about 45% of their startups, employees get 10% and the VC getting 45% (80% would go back to the partners)
• Making concentrated bets on a few companies went against the diversification philosophy of the time - it was OK for two reasons:
• They got a seat on the board of the companies
• They invested only in companies they hoped would experience rapid growth
• Most startups would fail - so the winners would have to win big enough to make a success of the portfolio.
• The central principle of venture business: Back the right people. The most important factor in the long run for any company is management. The only asset of tech startups is human talent.
• Rock would evaluate the entrepreneurs motivation, character and fibre.
• People > product and market
• Invested in SDS - that took on IBM. £260k went to $60m.
• In the 7 years - the fund returned 22.6x ($3.4m to $77m)
• Rock laid out his people-led theory of investing.
• Rivals started up with the same model (including the Rockefeller family with Venrock)
• In SF - the informal investing club known as the group - morphed into the Western Association of Venture Capitalists
• By 1969 $171m of venture capital flowed into the sector (about 50x the original size)

Chapter 3: Sequoia, Kleiner Perkins, and Activist Capital

• 1972 - Atari (run by eccentrics) invented pong. If you invested in them - it wasn’t just technology risk you were taking
• VCs shaped entrepreneurs. Getting involved. Telling them who to hire, making sure they were doing their finances.
• VCs gave out funding in tranches - related to milestones.
• The new wave of VCs had a combative and forceful activist investment style
• Dom Valentine (Sequoia Captial)
• Tom Perkins (Kleiner Perkins Caufield & Byers)

• Valentine wasn’t put off by the weed smoke clouds at Atari. Joined Bushnell in a hot tub.
• Valentine knew that expanding pong to the home market would be key
• He gave them the business plan (’Home Pong) - but didn’t immediately invest
• Introduced them to Sears who placed on order for 75,000 of them
• With a product and a distributor sorted - Valentine placed a seed investment in Atari. $62,500 for 62,500 shares
• Having got the dress code wrong during the day. The Atari team changed into suits for dinner, and the Sears team dropped their suits for t-shirts.
• 1975 Valentine led a Series A - for $1m → Atari used the money to manufacture Home Pongs
• Atari needed $50m to build the first games console. Valentine couldn’t raise that cash
• Warner Brothers sent a jet and a limo to collect Valentine and Bushnell for a meeting. Bushnell agreed to sell Atari for £28m
• By 1980 Valentine’s first fund had made annual returns of 60%.

• Tom Perkins - met Eugene Kleiner (aimed to start a venture fund)
• Agreed the firm would carry their name
• Fund should be time limited
• Each should commit some of their own savings
• Emphasise a robust activist approach
• We are entrepreneurs ourselves - we will work with entrepreneurs in an entrepreneurial way - we’ll be in it up to our elbows
• Raised $8.4 million from a tycoon and Rockefeller University.
• Setup on Sandhill Road → would become the epicentre of the VC industry
• They made a few disappointing investments and then decided to double down on activism.
• They decided to incubate startups in house (entrepreneurs in residence) - vs funding outside entrepreneurs
• Idea to build a computer with a redundant processor - ‘Tandem’
• Failed to raise money - so they bet on it anyway - investing $1m
• Tandem demonstrated what became known as Perkin’s Law:
• Perkin’s Law: Market-risk is inversely proportional to technical risk, because if you solve a truly difficult technical problem, you will face minimal competition.
• By 1984 - Tandem was worth $150m - dwarfing the $10m return on the other 9 investments in the fund
• Genentech wanted to make insulin using a gene-splicing technique. Needed $500k.
• Perkin’s wanted them to identify the white-hot risks - then find the cheapest way of going after them (short-term consultants)
• For $100k he acquired 25% of Genentech stock.
• The virtue of stage-by-stage financing became increasingly obvious. As successive risks were eliminated, each financing round valued Genetech higher than the previous round. Founders could raise larger sums by giving away less equity.
• 26% cost $850k next year, and 9% was $950k the year after
• Entrepreneurs had to hit the milestones to release funding.
• Perkins was the frontman for taking Genentech public. Starting price was $35- they’d risen to $89 in 20 minutes.
• A powerful demonstration of the power law:
• 14 investments in the first fund profit of $208m
• 95
• Without them, the fund would have generated 4.5x.
• With them, the return was 42x.
• 6 of 14 investments lost money
• They were investing in human founders with brilliance and weakness
• They were dealing with products and manufacturing processes that were untested and complex
• They faced competitors
• Early risk elimination + stage-by-stage financing + activist investing/helping
• Skeptical observers sometimes asked whether VCs create innovation or show up for it. Valentine and Perkins - by force, character and intellect stamped their will on portfolio companies.

Chapter 4 - The Whispering of Apple

• The playbook:
• Swing for home runs
• Activism
• Stage-by-stage financing
• Liberate talent - create new industries
• Venture Networks were born - the group could learn faster than any individual
• It was clear that PCs were going to be important
• Xerox - thought it might harm their photocopier business
• Intel - feared offending their existing customers
• HP - feared it would undercut their more expensive machines
• Apple set out to raise money → Perkins and Kliener refused to meet with Jobs. Draper wrote them off.
• Jobs offered Atari one third of Apple for $50k - Bushnell said no, but made an introduction to Valentine of Sequoia
• This is the power of the Silicon Valley Venture Capital Network

• VC’s wanted to invest because others were investing. The grapevine - was saying that Apple would be a winner. Apple didn’t need more capital, but the investors were queuing up
• Montagu said he’d sit in the lobby until he was able to invest.
• Valentine sold early - for 13x
• Introductions were everything - to get funding and then attract funding and then open doors
• Apple went public - and by December 1980 was $1.8 billion.
• Rock’s stake went up 378x - taking a board seat at Apple (as well as intel)
• Rock was the father of West Coast Venture Capital - but this was his last hit - he wasn’t the right person to carry it forward
• Capital gains was cut - no other country was so friendly to the venture industry
• 1973 - 1977 → $42m annually
• 1978 - 1983 → $940m annually
• The hot IPO market was exciting, VCs were making 30-50% yearly returns
• The size of Valentine and Perkins funds grew

Chapter 5 - Cisco, 3Com, and the Valley Ascendant

• SV’s success wasn’t down to government interventions.
• Sematech was a $100m government initiative to help drive improvements in manufacturing quality of memory - but ultimately had to give it up to Japan
• SV funnelled its energy into new areas - like micro-processor design, and networking gear. Building on the research coming out of government backed labs.
• The electronics business in Japan and Boston was dominated by large vertically incorporated companies. SV was made up of a bunch of small firms
• vigorous because of the ferocious competition between them
• formidable because they were capable of alliances and collaborations
• Boundaries between small companies of SV were porous.
• The valley ran on ‘coopetition’ it’s more create and self-contained than those big companies
• Big companies bottle up ideas and waste them - shifting coalitions of small ones conduct a myriad of experiments until they find the best path forward.
• Why do some clusters (like SV) pull ahead of others?
• Large Japanese firms → tight relationships internally - few links
• Transient startups → some internal bonds - but enriched looser external connections
• 1973 - Mark Granovetter - A plethora of weak ties generates a greater circulation of information that a handful of strong ones.
• Information spillovers and social networks were really important - the loose ties between people
• What created those conditions in the valley?
• California Law → no non-compete agreements
• Stanford allows professors to take sabbaticals and work on startups - deepening relationships between business and academia
• THE REAL REASON - VCs are relentlessly focused on cultivating such ties!
• Networking genius!!!!
• Bill Younger of Sutter Hill → took the smartest people to lunch that he knew - he’d ask them who’s the smartest person they knew and get an intro - he’d keep everybody warm by sharing research, news and taking them for lunch
• The surge of venture dollar flushed out the capable entrepreneurs out of safe nests of large corporations
• Founder of Adobe wasn’t scared of failure - as he saw that failure often meant that you were able to raise more capital next time
• Much of the East coast capital didn’t invest if they thought they could lose. They insisted on rights to seize a startups assets if it fared badly. East coasters often sold after a 5x gain.

• Bob Metcalfe - worked at Xerox Parc, invented ethernet. Xerox weren’t interested so he quit and founded freecomm.
• Metcalfe took VCs out to lunch. He asked for advice - and so they wanted to invest. If you seek investment they offer advice. He got a higher price
• He also knew if he got funding, VC’s would hire an outside manager. So he did that before investment - and looked further along because of it
• Qume formula: “That model of financing where you could turn a technology that didn’t really have a business around it into a business by having very hands-on venture capital, that was very important,” Mallaby said.
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Fidelity would value his company at $21 a share - but demanded he have another investor from the Valley with a significant position enter alongside them.
• Couldn’t do it at that price - the valley cut fidelity out of the deal and closed at a lower valuation.
• ‘Fidelity: we supported you when nobody else would’
• Metcalfe: no you lied to me when nobody else would’
• Went public and returned 15x to investors
• VC’s found out from engineers which protocols (for connecting components) were going to win. Then they backed the companies that backed those protocols
• VCs brokered technical alliances between companies - some secrets were more valuable when shared.
• VCs began to know the landscape better than some of the engineers and founders, and helped them navigate the technological changes
• VC’s also helped sort out disputes between firms - when knowledge was moved freely. VC’s walk the fine line between competition and cooperation.
• Kleiner Perkins business hinged on its reputation for ensuring fair play.
• Lerner and Bosack connected their two labs at Stanford using ethernet - they created the concept of packets of information to do it.
• They founded Cisco Systems (despite Stanford saying no)
• Valentine (Sequoia) connected them with HP - who’s engineers were super excited by the products
• Sequoia invested $2.5m for a third of Cisco
• Valentine took control of the firm. Eventually firing the founders. VC revealed that it could be ruthless.
• Valentine used his position as a VC to back startups that would be acquired later by the Cisco mothership. Protecting Cisco and de-risking his investments

Chapter 6: Planners and Improvisors

• Different styles of VC can be successful

• Kleiner Perkins = Improvisors
• Accel = planners
• Less focused on technology
• More focused on understanding financial markets, business models and government policy
• Wrote a series of papers codifying the Accel approach
• “prepared mind” was the watchword of Accel
• Swartz → liked founders with character, discipline, sobriety, integrity and realism
• Accel had a specialisation strategy (Second fund was telecoms)
• the offering document would lay out the thesis: In an information-based economy, virtually every electronic system will communicate with other systems’ - the market for models would be enormous.
• They would hold telecoms conferences and invite the best speakers
• Strategy: announce a fund → get quoted on telecoms in the press → organise a conference → make a noise
• 45 investments had an exit - only 7 had lost money
• Specialisation helped when it went on the offensive - partners were experts, quickly asses an entrepreneurs pitch
• Entrepreneurs also warm to people who ‘get it’
• The 90% rule: An Accel investor should know 90% of what founders are going to say - before they open their mouths to say it
• Accels specialist approach - made it particularly adept at identifying what venture capitalists call adjacent possibilities. They could anticipate the next logical advance in technology.
• Accel saying → every deal should lead to the next deal
• Embedded themselves as intellectual leaders in the sector.
• They passed on the uncredentiolised challengers that Don Valentine (Klieiner Perkins) valued
• Accels first five funds did 8x capital.
• Still conformed to the power law or 80/20 rule.

• UUNET - Pronounced You You Net
• Distinct roles of government-backed science and VC firms in driving progress
• Paradox at the heart of venture capital’s impact on society
• Being in the venture game matters more than the quality of your due diligence
• BUT its’ a formidable engine of progress - more so that is acknowledged
• UUNET - set out to be the first internet service provider - until then, it was a government thing - and some scientists were excluded from it
• Only 100k online at this time 1987
• Al Gore outlined a vision for the internet superhighway - fibre optics
• Mitch Kapor (of GO fame - stylus startup) thought it would be cheaper to use the copper wire for internet - not to rip it up and use fibre - UUNET was turning voice lines into data lines
• 1992 Kapor knew it was going to happen. He want to UUNET. Adams needed capital but didn’t want to lose control.
• Kapor “as long as a startup flourishes, venture investors will defer to the founder”
• BUT - If things are not going well, the VCs will punish you
• Doerr refused to meet - there was no IP and lots of capital was required
• Accel → knew companies were breaking the law to use the government internet. The demand was that strong
• McLean from Accel noticed that all the business cards started to have email addresses on them - the internet was spreading fast.
• Venture capital can feel like a relay - being passed from one to the other.
• Mosaic - was the first point and click interface for the internet - it was the beginning of the usable internet
• UUNET went to $2b - 54x from Accel’s perspective.
• There were a number of errors along the way - but the VC system helped UUNET spread the internet to millions.

• Mosiac had come out of a government backed lab - Andreessen left them when they wanted him to cease involvement in the browser, they wanted credit and control.
• Andreessen thought that a new better browser could capture the market - he poached 7 engineers from his old teams - promising them they’d make $10m in equity
• That company became Netscape
• VC returns are dominated by grand slams - partly because of the dynamics of startups: most young businesses fail, but the ones that gain traction grow exponentially
• True of fashion brans, hotel chains and technology companies
• Tech startups have a power law for additional reasons. They’re also founded on technologies that may themselves progress exponentially.
• Doerr had seen Moore’s law in action - like a wind on startups back
• True also for network effects
• Internet traffic would be fuelled by:
• Metcalfes law: rapid growth in usefulness
• Moores law: falling cost of modems and computers
• Ventures are like financial options. You could never lose more than your initial stake, but the upside was unbounded.
• Tom Perking Dictum: You succeed in venture capital by backing the right deals - not haggling over valuations.
• Netscape went 100x. In the internet age - it was worth paying whatever it might take for stakes in turbo-power-law companies

Chapter 7: Benchmark, Softbank, and Everyone Needs $100m

• Draper - Invested in Yahoo - curating the internet
• Yahoo - a free directory - how would they make money?
• Yahoo was the first company to raise VC money - to give a product away for free
• Mortiz from Sequoia got business model of the future might be advertising
• Mortiz connected with the founders of Yahoo - didn’t want to change the name (told them it was memorable - like Apple)
• Invested $975k for 32% (Founders split 50% - the remainder reserved for staff)
• The innovation of backing companies that charged little or nothing for their products spread -
• Startups started to be assessed on momentum, traction, audience or brand (vs current revenue) - things that could be monetised in future
• Yahoo had to build a brand - because there was no IP or amazing tech.
• Yahoo depended on growth - they had to keep spending money on advertising
• It took 8 months to burn through the first $1m from Sequoia
• In 1995 VC was up to $10 a year, up from $3bn five years before (driven by pension funds and university endowments noticing the outsized return)
• There was so much capital and so much faith - that Yahoo was always going to get funding

• Son was famous now. He invested in 250 startups in 4 years (1996-2000), one per week.
• 20x more than a traditional investor
• Note from me - speed and number of deals was his innovation here. Later it would be sheer volume of capital -
• Sat on 30 boards
• Son put $100m into GeooCities - doubled his money in a year, and held on for a gain of over $1bn
• Son bought $400m of e-trade → 12 months later it was worth $2.4bn
• Son then raised $1bn fund for growth investing (late stage stakes). Inventing a new type of investing. Growth investing.
• Launched venture funds in other international markets
• Son personally made $15bn between 1996 and 2000 - before a single VC was on the billionaires list.
• Mortiz thought Sequoia (and Valentine) were too conservative - afraid of losing, so they took their chips off the table too early
• Tried to get Sequoia to imagine what would happen if everything were to go right with one of these companies
• Mortiz argued that most of the gains happened in the late stages, so they shouldn’t exit too early
• They waited on Yahoo and sold their stake after it was 14x higher than the IPO price
• Mortiz lessons learned
• VC’s must adapt
• Hold for longer
• Be more ambitious
• King-maker cheques could change the game

• Benchmark
• Four founding partners - Dunlevie, Kagle, Rachleff, Harvey
• Local, nimble, $85m first fund,
• Carefully select deals, add value on boards
• Small was not weak - they could raise more
• They demanded more than the standard 20% of profits and a management fee
• Philosophy was about digging in and helping founders. That loyalty would win founders.
• Kagle tried to get his previous partnership to invest in Starbucks
• Omidyar was building Ebay. Taking home $400k a month.
• Growth was 40% a month with no marketing - network effects were driving it
• Ebay owned the network, and it was growing due to the network effect (other network effects like the telephone and internet were shared)
• Ebay was self funding - making a 50% profit margin from nearly day one.
• Omidyar was focused on the community. Kagle loved the people and community side of deals.
• When companies grow exponentially, they don’t suddenly stop. Andy Rachleff - second derivative, the changes in the rate of growth of sales that really ell a venutre investor whether to back it.
• Omidyar went with the VC that he liked most (Benchmark) - based on the people . Omidyar left the VC funding in the bank - he didn’t need it
• Kagle - found an outside CEO for Ebay (Hasbro CEO)
• September 1998 - IPOd at $18 → November 1998 $200 → April 1999 $600
• Market value in 1999 was $21bn → Benchmark’s stake was worth $5.1bn (from just $6.7m risked)
• Benchmark had other successes (Red Hat → $500m, Ariba → $1bn,
• Benchmark raised 3 funds, deploying $267m → value surpassed $6bn
• 25x capital
• Summer of 1999 Benchmark raised $1bn
• $10m was becoming table stakes for a deal size - they needed bigger funds to diversify
• Benchmark found taht reckless later-stage investores seized effective control of its portfolio companies - by stumping up 10s of millinos of dollars.
• Benchmark lacked the muscle to protect startups from the hubris that came with such capital.
• Uber and WeWork → were two examples
• That was the limitation of the cottage industry model

Chapter 8: Money for Google, Kind of for Nothing

• Sergey and Larry → Google (1998)
• Demoed early search to Andy Bechtolsheim → ranked websites based on how many sites had linked to them. Bechtolsheim saw the analogy to citations in academia
• There was no business plan.
• Wrote them a cheque for $100k made it out to Google.inc → They didn’t have a bank account and weren’t incorporated → he didn’t say what % he wanted either!
• Jeff Bezos met Brin and Page too → fell in love with them (made an investment)
• Brin and Page had raised $1m without speaking to VCs or giving away more than 10% of equity - and had
• The Google guys were able to raise money like that, kind of for nothing
• Total VC funding: 1998: $30bn, 1999: $56bn
• It was evident we’re in a bubble - all the things that you thought of as creating fundamental value were getting punished - all of the things that you thought of as bad behaviour were being rewarded
• VCs can only bet on things going up - they can’t really short → so they tend to participate in bubbles
• VCs can’t publicly question the bubble - like a hedge fund could
• Power Law thinking built the bubble → I want to own every one of these companies. If I’m wrong on 19 and the 20th is Yahoo it doesn’t matter
• WebVan → losing lots of cash grew to a value of $11bn

• Given the capital rich environment, Sergey and Larry were determined to get a good deal.
• John Doerr and Kleiner Perkins → Was the investor to get
• Doeer got 15% of Amazon for $8m in 1996. Share was worth $3bn in 1999.
• Doerrs reputation was such that companies would chase him (like Amazon)
• Why did Bezos accept a worse deal from John Doerr?
• Kleiner and John are the gravitational centre of a huge piece of the internet world. Being with them is like being on prime real estate.
• Google Mission Statement: We deliver the world’s information in one click.
• Page told Doerr that he thought it could get to a revenue of $10bn
• Doerr rarely met entrepreneurs that dreamt bigger than he did
• Googler’s also presented to Sequoia → Moritz wanted to invest too
• Doerr thought they had the technical edge
• Some argued search would be a commodity - Google had 18 other rivals
• Vino Khosla explained → if you thought existing search technology was 90% as good as the best possible version, then pushing performance to 95% was not going to win you customers
• BUT if you thought existing search technology was only 20% of the potential - then google might be 3 or 3x as good as its rivals - it’s edge could attract a flood of users.
• Moritz - thought brands would dominate the web, not technologies
• Sequoia and Kleiner declined to co-invest. Google said they’d either sell 12.5% equity to each or decline to sell any to either. June 7th, 1999 the deal was signed.
• Moritz forced an outside CEO - Asked them to speak to previous founders about the value.
• Brin and Page wanted Steve Jobs to be CEO of Google - they settled for Eric Schmidt from Novell
• Schmidt → “I can’t imagine that Google would be worth that much, Nobody really gives a shit about search”
• Brin and Page had enough control to fire Eric if it didn’t work out. The VCs promised that they’d look after Eric if that happened! Making it risk free.
• Google went public with two classes of shares so that Larry and Sergey would maintain control
• Founders said their mission would be corrupted if shareholders had control
• Stock market investors weren’t long term thinkers
• Facebook copied the dual class structure.
• The Google approach made ‘Angel investing’ more popular and made it harder to get a great deal at Series A for VCs

Bubble Bursting

• Masayoshi Son - who’d breifly became the richest person in the world lost 90% of his fortune
• Many VCs saw no way of deploying the money they’d raised.
• From 2000 - 2002 yearly VC funding committed dropped 90%
• Money for nothing - was replaced by a freeze on all risky new projects
• Silicon valley lost 200k jobs between 2001 and 2004
• Google went public in 2004 - ending the dark period

• Paul Graham - sold Viaweb to Yahoo for $45m → started writing essays
• Standup to VCs - you’re doing them a favour by letting them invest
• Paul Graham: Build something users love, and spend less than you make
• VC problems identified by Graham
• Founders might be happy with modest multiples. But VCs aren’t
• Courting VCs took too long - raising was a distraction from coding
• VCs got nervous and installed MBA managers - stifling innovation
• Called them greedy, sneaky and over baring
• When startups need less money, investors have less power

Chapter Nine: Peter Thiel, Y Combinator, and the Valley’s Youth Revolt

• 2004 Sequoia met Zuckerberg → he arrived late in pyjamas → Valentine knew it was a test - and ran ahead to tell his colleagues not to comment
• Zuckerberg instead gave a parody pitch: ‘The top ten reasons you should not invest in Wirehog’
• We have no revenue - We will get sued by the music industry - because Sean Parker is involved
• Partners couldn’t get through to Zuck.
• Zuckerberg wouldn’t accept capital from them ever. Moritz had invested in Sean Parkers viral email startup - he didn’t show up for work - they fired him to the relief of his partners
• Google wanted to buy shares in Facebook. Parker was doing investor relations for Zuck. He steered Zuck away from VCs and Google - raised capitals from Angels
• Reid Hoffman initially declined to invest (even though offered, as he’d started LinkedIn)
• Hoffman put them in touch with Thiel → $500k for 10.2%, Hoffman putting in $38,000
• Mark Pincus also put in $38,000
• They were all social angels
• VCs were getting older, and founders were getting younger. A gap opened up.
• Theil had a grudge with Moritz at Sequoia.
• Theil wanted to invest in an encryption company - but nobody would invest. Worked with the founder on pitches, and realised that encrypting money transfers would be smarter. Founded Paypal with him.
• VCs had shunned Paypal - which left Theil with a grudge and he questioned their brilliance when PayPal took off
• Nokia were the ones that invested $4.5m
• Confinity (Paypal) started competing with a Sequoia backed company x.com run by Elon Musk. They merged. Musk wanted x.com to own 92% of the resulting merged company. Theil got Musk from 92% to 60%.
• Musk nearly torpedoed the deal by insulting the other Paypal founder Levchin
• Musk had to go to 50/50 to get the deal done
• Theil butted heads with Mortiz - who chose Musk to run the company. When Musk was ousted whilst on his honeymoon, Theil was given only ‘interim CEO’.
• Peter felt abused by Moritz → wouldn’t get permission to hedge the NASDAQ and secure the future of PayPal
• Moritz had alienated Zuckerburg, Thiel and Parker

• Setup a Venture Firm → Founders Fund
• Parker joined them
• Entrepreneurs should run their companies - They’d never eject a founder
• Differentiated from the existing companies
• Thiel was the first VC to speak about the power law → citing the Pareto principles or 80/20 rule.
• A startup that monopolised a worthwhile niche would capture more value that millions of undifferentiated competitors

• Founders Fund - didn’t do Monday meetings - partners could make small investments without telling each other, bigger investments required more partners to agree.
• Thiel thought a small number of high conviction bets was a better strategy
• Thiel and Nosek invested in SpaceX - July 2008 → $20m on Musk. A decade later SpaceX was worth $26b.

• Paul Graham - YCombinator
• How to start a startup ‘lecture’ → March 2005
• Started YCombinator
• Founders get $6k to sustain them for 3 months
• Practical and emotional help (bank accounts, patents)
• Feedback from Graham and friends
• YC would take 6% in each micro-company that incorporated
• Batch processing was efficient, the cohort could support each other.
• YC could help them as a group, with speakers coming in to speak to everyone.
• Acceptance rate was 3.5%
• Micro-investments was a different approach to big cheques. He was recruiting teenage coders. A stream of new startups.
• Freedom for hackers.
• Work for yourself - capture the value of your own ideas - grow a ladder don’t climb one -
• He believed in the networks of small companies.
• Imitators started up - SeedCamp in London / Entrepreneur first.
• Exits → Reddit, Cruise, Twitch, Product Hunt,

Chapter 10 - To China, and Stir

• Opportunities were abundant in China in 2005
• yearly growth in GDP was 10%, internet usage 20%
• Rieschel and Kuang founded Qiming to take advantage
• A generation of giants would be produced → Baidu, Alibaba, Tencent and Xiaomi
• Alibaba’s VC deal in 2000 was one of the first VC deals in China
• Syarui Shirley Lin convinced Goldman to take a stake in Jack Ma’s Alibaba (£5m for 50%)
• Goldman made her offload one third of their stake immediately to reduce risk
• Softbank’s Son would invest $20m at a $100m valuation after invitation from Lin. He said yes immediately - ‘He just accepted the number I said”
• Son told Ma to spend the money fast and expand rapidly (2 months before the collapse of 2001)
• Companies had to work around Chinese law to get deals done - incorporating in the Cayman Islands
• Ma recruited some great technology talent in California, and setup an office for them in Fremont.
• Lin left Goldman - who would exit early, in one of venture’s most expensive exits (a forgettable 6.8x)
• The first wave of China venture deals was by a mix of investors, many offshore. The next wave would feature mainstream VCs from new offices based in China

• 2005 Kathy Xu raised $280m for her new Chinese VC Capital Today
• She was taught be Donda West (Kanye’s mother) who told pupils: “You are unique, you are a marvel. There has been no person like you in the last 500 years and there will be no person like you in the next 500 years”
• She prescribed to the Thiel doctrine: ‘there are not many great companies in the world’
• China’s founders had few funding options → despite having access to a huge market
• Xu invested in JD.com and designed the employee stock option plan
• The founder Liu told employees that 100 employees would make $15m and a thousand employees would make $1.5m
• Xu later raised much larger funds.
• 2005 Sequoia successfully setup a new China office - scaling their practice
• Shen and Zhang were given autonomy but Sequoia invested in training them and teaching them everything the American partners had learnt.
• 2010 - China Venture Captialists had raised $11.2b - capital became easily available in China

• Three phases of Silicon Valley and China:
1. Capital scarce, few investors, entrepreneurs struggled to raise (China in the late 1990s)
2. Money flowed, # of VCs grew, # startups grew, startup ambition grew (China around 2010)
3. Competition becomes hectic and costly, VCs perform a coordinating function. brokering mergers, acting as super connectors (China around 2015)
• 2010 in China - the war of a thousand Groupons → VC’s intervened to stop mindless spending
• Money splurged on cheaper discounts to attract users
• Meitun spent $700m vs Dianping who spent $850m (subsidising restaurant meals)
• Investors refused to fund the feud → but would invest in a merger
• Two massive ride hailing apps were forced to merge too (Didi and Kuaidi)

Chapter 11: Accel, Facebook, and the Decline of Kleiner Perkins

• Backing a project that goes to zero costs you 1x. Missing a project that goes 100x is massively more painful
• Accel was able to invest in Facebook because it modernised in a way that Kliener Perkins didn’t. It evaluated it mistakes, hired and trained younger talent, proactively identified investment areas, was prepared to work with difficult founders and found ways to connect with them
• In 2003 the Accel reflected on a bad year. Analysing competitor deals - categorising them as: ‘Not aware’ or ‘Aware lost’ or ‘Aware didn’t evaluate’
• They pre-identified promising spaces to invest in. The next being ‘Internet 2.0 - Social Networking.’ They expected founders would be unorthodox characters. They expected that early usage data would show the winners.
• Accel paid Stanford grads to tip them off about startups on campus
• He mentioned ‘Thefacebook’
• Accel partner Efrusy went to campus - interviewed people himself - they were all obsessed
• Facebook were getting a lot of things right:
• Academic emails stopped face accounts and created exclusivity
• They were capturing campuses one by one
• Colleges would provide emails, class lists and club details to jump the queue. This allowed facebook to sign up huge numbers of people quickly.
• Getting to Zuck to accept Accel capital was the challenge
• Parker and Zuck didn’t thing VCs would understand their firm
• They also didn’t want to give up control
• Efrusy (Aceel Partner) didn’t take no for an answer. Showed up at Facebook in person without an invite.
• Got a sight of the early engagement metrics - they were off the chart
• Was told Mark and Sean were busy - but he found them and convinced them to come to a partner meeting on Monday
• Zuck arrived in shorts and flip flops
• Partners weren’t rattled - they knew ‘unorthodox’ was the likely founder profile
• Parker would helped Zuck broker better deals and retain power. Parker was ousted after being arrested for cocaine alongside an underaged woman (his assistant at Facebook)
• Accel got the deal done and made $12bn from Facebook
• Despite winning VC’s having a self-reinforcing advantage - Kliener declined quickly:
• John Doerr pursued clean tech too early → betting big, but returns were low and slow
• The firm that benefited most from Moore’s law and Metcalfe’s law came unstuck investing in a sector that lacked those advantages
• By 2016 brand conscious investors and founders drifted away
• VC is a team sport - VC’s need a strong culture and a strong team
• They grew too quickly
• Doerr didn’t have a peer to keep him in check - he was impossible to challenge
• Run by mature stars - who lacked hustle to connect with young founders - missed the home runs of the era
• Doerr didn’t reinvent Kliener fast enough - he hired women but failed to create a safe environment for them
• Pao filed a gender discrimination law suit
• The strong VC partnerships were sorted from the weak ones by:
• The tech bust
• China
• Clean techs false dawn
• Gender dynamics
• Ageing old guard

Chapter 12: A Russian Tiger, and the Rise of Growth Equity

• A Russian Yuri Milner became un unlikely investor in Facebook
• CFO of Facebook felt obliged to meet after he flew to California
• 2009 - Facebook needed funding, but the environment was tough after the financial crisis
• Facebook might have to have a down round - previously $15b, Yuri initially offered investment at $5b
• Yuri knew Facebook was undervalued
• He’d monitored and compiled metrics from similar companies across the worlds markets. He’d seen them monetise their users. He’d seen them burst through perceived ceilings (like Facebooks 100m users)
• Facebooks metrics were better by comparison
• Facebook was dominant in the entire world excluding China, for a lower valuation than Tencent was available for in the public market - dominant in countries with a combined GDP 11x of China.
• Yuri structured the deal to give Mark the two things he needed:
• Control → he’d give Zuck his board seat concentrating his power
• Allow employees to take cash out → early employees were keen to sell stock. Yuri would by it (at a discount)
• Yuri could outbid his competition - few shared his international insight. People wrongly said it was ‘A crazy Russian. Dumb money… this is insane’
• Milner through DST bought $300m of Facebook, $100m was discounted employee stock.
• He made a profit of $1.5b in the following 18 months.
• The Facebook deal showed tech companies could delay going public for perhaps an additional three years
• More wealth would now be created for private investors outside of public markets
• Investing more capital at a later stage (Growth investing) became more common
• Milner showed companies sophisticated and large enough to go public - could be invested in as if they were public → passively

• Tiger Global (New York Hedge Fund investing in China) - Shleifer
• Might have been the pre-cursor to Milners Facebook deal
• Looked at incremental margins. Allowing them to see past firms that were losing money, but identify those where revenues were growing fasting than costs. The incremental picture was more positive. It was clear that for many companies, their growth would drive them them into the black.

Incremental Margin

The Incremental Margin measures the change in a profit metric per unit change in revenue, so conceptually it reflects the profit margin of growth. A profit margin measures the percentage of a company's net revenue remaining once certain expenses have been deducted. Most profit margin metrics are a ratio between a profitability metric to revenue, i.e.



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• VCs in Silicon Valley thought a pack mentality was good for business. High profile VCs investing together attracted talent, funding and customers.
• Shleifer was happy investing alone. Trained on the Fidelity school of investing:
• Peter Lynch Fidelity on three ways to spot a 10x investment:
1. Others haven’t noticed yet - Less competition meant suppressed valuations
2. Your stock isn’t covered by analysts - likely to be miss-priced
3. CFOs tell you they haven’t spoken to an investor in ages
• Shleifer → why invest in the competitive California when there was so much untapped opportunity in China
• Shleifer also spoke to the customer of each company. They were more than happy with the service and their companies were growing quickly too.
• Shleifer took advantage of SARS - closing deals when others were too scared to travel
• A great short position could make a maximum of 100% - A great long position could easily make you 5-10x
• Tiger started a VC fund - but for later stage companies. Ideas didn’t have to be original. They preferred the ‘This of that’ model - a proven business model in a new market.
• However - They dropped Alibaba as Jack Ma had a slightly different unproven business model that was harder to classify
• Tiger Toolkit:
• Global tabulation of tech business segments (top down - comparative approach)
• Modelling of earnings and fair value
• Rapid intercontinental opportunism (SARS or Financial Crisis)
• Shleifer flew to Moscow because he’d heard that Russia had two Yahoo’s and a Google
• He met Milner who decided to clone Amazon, Yahoo and Ebay in Russia. His Yahoo worked
• Milner - all of a sudden, this whole world opened up to me - Tiger was an inspiration

• VC investments jumped from $11b in 2009 to $75b in 2015. Most of the increase was driven by late stage investments

• In 2005 - Andreesen Horowitz entered the VC market (A16z)
• They knew early momentum was key - they had to vault to the top
• They differentiated themselves (with some less than original ideas) and brazen PR:
• Promised they wouldn’t replace or abandon founders. Keep control but get coaching.
• By entrepreneurs for entrepreneurs
• Built an extensive consultancy to help founders
• Find space, hire people, get advice, introduce potential customers
• Horowitz and Andreesen were great mentors. Some lessons from them:
• How you price is one of the most important decisions you make
• Don’t take the first high offer you get from an acquirer - run a process
• Their computer science background helped them understand software businesses and connect with founders
• They launched at a great time - a decade long boom in equities
• They combined early stage bets - with larger growth investments
• Invested in Skype, Zynga, Foursquare, Facebook, Twitter, Groupon, AirBnb
• It worked - they got early success
• Later funds were less successful - some of their entrepreneur partners weren’t great
• VCs that launch with a splash typically have two things:
• A story about why they’re different
• A famous founder - with a strong network (which is actually the reason they’re successful)

Chapter 13: Sequoia’s Strength in Numbers

• From 2009 to 2019 Venture Capital expanded into new industries, into new geographies and along the lifecycle of startups.
• # of VC’s doubled
• # of startups backed doubled
• Full spectrum of funding was covered: avuncular angels, factory-batch incubators, entrepreneur-centric early-stage sponsors, and data driven growth investors
• VCs with specialisms emerged: AI, biotech, crypto, AgTech, big data and cloud software
• Sequoia has the best sustained performance level of all the VCs - but why?
• Ferocious discipline → business, family and staying in shape
• Stamina → because of their reputation, deal flow was relentless
• Moritz on what the quest for internal excellence entailed:
• “Recruitment, team building, setting of standards, questions of inspiration and motivation, avoiding complacency, the arrival of new competitors and the continual need to refresh ourselves and purge under-performers.”
• Nurturing homegrown talent → the next generation. Quick to give them management responsibility and leadership. Mortiz would help partners look through their calendars and assess how they were spending their time
• Partners helped keep each other centred through the psychological challenges of investment. In dark periods you feel excess caution and you need encouragement to take a shot. Success can lead to hubris so you need to be challenged.
• Partners shared insecurities at off-sites and bonded over poker
• Sequoia ascribed successful investments to the team (in an industry that idolised individuals)
• Sequoia hired Botha (ex PayPal CEO) partly to forge links with the PayPal mafia. Helped return 45x on Youtube in just 12 months
• Sequoia adopted Accel’s prepared-mind approach. They identified the mobile internet, the shift to the cloud and the rise of the developer.
• Botha pioneered the application of behavioural science to venture capital.
• Made investment decisions more uniform
• Looked to address early profit-taking
• Confirmation bias → they were missing out on Series B opportunities because they didn’t want to admit they were wrong not to invest in the A rounds.
• Conducted painful post-mortems → identifying irrational decisions
• All votes in investment meetings were recorded - to learn as a team
• To overcome risk aversion - they’d always state what were to happen if the company would succeed - getting comfortable to say out loud what might actually happen
• Started helping entrepreneurs - created the basecamp summit
• Each venture investment can seem serendipitous - but Sequoia were experts at creating their own luck - systematically boosting their odds. They’d work out how to get to founders and how to get the investment
• Created a network of scouts - giving them seed capital but taking 50% of the gains
• Goetz built a system that tracked downloads → which alerted him to WhatsApp (which was dominating outside the US)
• An Iranian Sequoia scout created the opportunity to invest in Dropbox. They believed in immigrant grit.
• A sequoia partner stayed close to YC - and saw the AirBnB founders pitch.
• Sam Altman was a Sequoia scout - he secured an angel investment in Stripe. Moritz turned up to John Collisons flat in the valley as a billionaire, John only had milk and water to offer him.
• Serendipity on the surface → systematic effort deeper down
• Sequoia dominated the venture business. 2000-2014 it generated 11.5x (net of fees and its share of profits). The rest of venture funds achieved just 2x in the same period.
• It was no fluke due to big home runs either. If you removed their top three performers - they’d still have returned 6.1x
• they placed 155 US venture bets, 20 ‘went beyond 10x AND a profit of at least $100m’
• Sequoia’s greatest achievement was to replicate their success in China in 2005 and beyond. Creating the Surge program which helped founders more. They’d have to calculate CAC and retention for naive founders.
• Sequoia created a hedge fund to profit from shorting companies (Research in Motion)
• They noticed two investment companies (Charlotte Tilbury and Glossier) were using Shopify. One of the few companies in thier tech stack they hadn’t invested in. They invested and made a 35x return.
• Even the average VC fund launched in 2011 outperformed the S&P by 7% a year, the best outperformed it by more

Chapter 14: Unicorn Poker

• Theranos was a fraud disguised as a revolutionary blood-testing machine. It’s value went from $9b to zero.
• The valley didn’t really back Theranos. A number of family offices funded them (Walmart, Murdoch, DeVos and Oppenheimer) to the tune of nearly $500m.
• The amateurs failed and the pros stayed out of it - there was no evidence that their technology was working
• WeWork attracted an early investment from Benchmark of $17m in 2012 (at a valuation of $100m)
• The initial business model was sensible - take cheap long term lease office space, then resell it at a premium for shorter leases (with some cheap perks)
• Captial came overwhelmingly from nonstandard players. Benchmark were less than 1% of the $1.7bn raised pre Softbank.
• JP Morgan invested partly to secure the IPO and sell other services
• Softbank’s Son invested $4.4b in the back of his car after just 28 minutes - more than Benchmark had raised in it’s 22 year history
• Neumann consolidated his power. He would buy stakes in buildings before signing a lease with them and increasing their value. His interests weren’t closely aligned to the shareholders of WeWork
• Neumann spouted platform, network effects, first mover a thriving ecosystem, digitally enhanced, scalable.
• Historically - a company of this size would be public and have a good governance structure, or VCs could have wrestled the CEO from power.
• Neumann went into wild expansion mode - bought a corporate jet
• It unravlled at the attempted IPO - the public markets didn’t buy the vision.
• Benchmark saw the power of perfect information and network effects through their investment in eBay and then later in OpenTable (more restaurants → more diners → more restaurants)
• Benchmark invested in Uber early → they were actually looking for a network effects company to disrupt the taxi industry (due to inefficiency in pairing riders with drivers)
• Benchmark noticed an Uber was at Sequoia’s office before the first meeting. They knew it was Travis - so they ordered it, Travis was late having had to do the journey on foot
• $12m for 20%. Bezos also invested.
• A16z got cold feet. Menlo Ventures invested $25 at a $290m valuation alongside Bezos and Goldman.
• Uber grew aggressively. Got a Series C of of $258m to go to war (with Lyft and Hailo)
• Lyft raised a $250m C, Uber countered with a $1.2b Series D.
• Kalanick consolidated his power, arranging super-voting power for himself.
• Kalanick was becoming a celebrity, and Benchmark had less and less say. Benchmark felt trapped - they couldn’t exit but didn’t like the way Kalanick was spending money.
• Three problems of unicorns (essay from Gurley @ Benchmark about Uber):
• They were overvalued
• Later investors insisted on liquidation protection clauses - with their downside protected, they’d press unicorns to grow recklessly
• Big valuations fed the hubris of tech founders
• Uber got involved in a huge battle in China - Didi raised $1bn from Apple. Saudi’s invested $3.5b in Uber - giving Kalanick more board seats and more power.
• Kalanick had a bad news month.
1. Sexual harassment at Uber
2. Google sued for stealing driverless-car technology
3. Kalanick was filmed in the back of an Uber flanked by women berating the driver
4. Uber also stopped law-enforcement from hailing Ubers to impound cars (in territories where they were operating illegally)
• Kalanick was forced to resign, Son invested with Softbank, the IPO went well. Benchmark made 270x.
• There was so much money in Venture Capital - Sand Hill Road VC’s couldn’t stop new entrants making reckless late-stage investments (playing poker with unicorns)

Chapter 15: Conclusion

• Salganik’s 2005 experiment showed participants were more likely to listen to songs that others had downloaded. He separated the virtual environments though, and different songs came out on top each time. To a surprising degree, he concluded that blockbusters are random.

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• Feedback effects in Venture Capital meant that the the best funds should be able to sustain their advantage. Studies confirmed it. Each additional IPO among a firms first 10 investments predicts a higher IPO rate for subsequent investments
• The author doesn’t believe that the winners in Venture Capital are random:
• The existence of path dependency doesn’t prove skill is absent
• Occasionally a newcomer breaks into the elite in a way that’s attributable to skill
• Brand strength is dampened by fierce competition for signatures
• The anti-skill hypothesis underplays VCs contributions to portfolio companies
• Sometimes it is better to be lucky than smart - but smartness is still a major driver of results
• Venture capitalists as a group make a positive impact on the economy. Individuals make errors and band judgements, but the effect as a whole is positive
• Arguments against venture capital (and if they’re true)
‣
1) VCs are good at getting richer, not solving societies big problems
• they don’t just invest in software
• they’re pushing green technologies
• solve inequality through taxation - not stifling innovation
‣
2) VCs are dominated by a narrow club of white men
• true - women account for just 16% of partners - and some of those don’t enjoy a safe or fair environment
• the race story is worse, Asian representation is OK but not black. 13% of the American labor force are black, they attract just 1% of the funding
• US GDP would be 2% higher if inequality were addressed
‣
3) VCs encourage out-of-control disrupters, with no regard for those that get disrupted
• they often eject reckless founders
• if entrepreneurs want to grow at a measured pace, VC funding isn’t for them. It will create pressure to grow and grow quickly
• there is a concern that VC money results in things being sold below cost, putting incumbents out of business and creating monopoly replacements. There aren’t many examples of this though - and it’s the governments job to protect consumers from monopolies
• VC backed firms are an order of magnitude more likely to make it to IPO. They also account for 76% of market value.
• In the past - most traditional investment was in tangible things. VCs are better suited to evaluating intangible investments
• VCs exhibit skill. Generate wealth and R&D. Create fertile networks.
• VCs role in China might have benefited the China more than the US. China now has many companies with technologies that could have powerful military applications (AI, Drones, etc)
• Policy lessons
• Tax breaks are better than subsidies for encouraging innovation. Creates better incentives.
• Tax breaks should be coupled with incentives for employees at startups
• Governments must invest in science training to create engineers, and invest in university labs (and allow them to commercialise discoveries)
• Governments need to hand out visa liberally to entrepreneurs
• China’s latest clamp down on tech giants might drive talent away
• The logic of the power law: the rewards of success will be massively greeter than the costs of honourable setbacks.
• Don’t bet against venture capital