by Sebastian Mallaby · 1 Feb 2022 · 935pp · 197,338 words
Getty Images; 25, right: PETER EARL MCCOLLOUGH/The New York Times/Redux LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Names: Mallaby, Sebastian, author. Title: The power law : venture capital and the making of the new future / Sebastian Mallaby. Description: New York : Penguin Press, 2022. | “A Council on Foreign Relations Book.” | Includes
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met Patrick Brown, everything about Khosla—his risk appetite, his love of hubris, his quest for improbable ideas—made him the living embodiment of the power law, the most pervasive rule in venture capital.[14] Many phenomena in life are normally distributed: nearly all the observations in a data set cluster
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the outliers can have a dramatic effect. If Jeff Bezos walks out of the cinema, the average wealth of those who stay behind will plummet. Power Law Distribution This sort of skewed distribution is sometimes referred to as the 80/20 rule: the idea that 80 percent of the wealth is held
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people hold 80 percent of the wealth, or perhaps 90 percent of it. But whatever the precise numbers, all these distributions are examples of the power law, so called because the winners advance at an accelerating, exponential rate, so that they explode upward far more rapidly than in a linear progression.
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further citations. Anytime you have outliers whose success multiplies success, you switch from the domain of the normal distribution to the land ruled by the power law—from a world in which things vary slightly to one of extreme contrasts. And once you cross that perilous frontier, you better begin to
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, an outcome he would view as “fabulous.”[22] But if venture capitalists embarked on the same quest, they would almost guarantee failure, because the power law generates relatively few startups that merely double in value. Most fail completely, in which case the value of their equity rounds to zero—an unthinkable
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them.[23] When today’s venture capitalists back flying cars or space tourism or artificial intelligence systems that write film scripts, they are following this power-law logic. Their job is to look over the horizon, to reach for high-risk, huge-reward possibilities that most people believe to be unreachable.
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of the Ethernet cables that hooked personal computers together, usage picked up gradually and then exploded upward in an exponential curve; this was the innovation power law that underlay the financial one observed in venture-capital portfolios. Khosla was willing to bet that the internet would follow a similar pattern: steady adoption
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in the first half of the 1990s, a breathtaking acceleration as the power-law curve went almost vertical. The result was a set of Khosla companies that did more than just succeed. By inventing a new generation of
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proved workable, Cisco made two offers for the firm: $300 million in December 1998; $700 million the following April. But Khosla, believing in the power law, knew that winners often carry on winning: he took the risk of turning Cisco down and watched Cerent’s revenues take off exponentially. Four months
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painful irony. Whatever his faults, Doriot assembled stakes in thrilling growth enterprises over his twenty-five years in business; thanks to Digital Equipment and the power law, he multiplied his original investors’ stake some thirty times over, trouncing the S&P 500.[68] And yet throughout ARD’s existence, its own
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more than 200x.[101] Together with Tandem, the Genentech bonanza turned the first Kleiner Perkins fund into a legend, and a dramatic illustration of the power law. As of 1984, the fourteen investments in the first fund showed a combined profit of $208 million; of that, fully 95 percent came from
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zippiness of later startup names—think Zoom or Snap or Stripe or Spotify.[24] Yet UUNET is worth recalling because, in addition to illustrating the power law, it illuminates two features of venture investing. First, it showcases the distinct roles of government-backed science and VC-backed entrepreneurs in driving technological progress
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would change the way that people accessed information, communicated with one another, and collaborated. Mosaic also marked a new stage in the evolution of the power law. Venture-capital returns are dominated by grand slams partly because of the dynamics of startups: most young businesses fail, but the ones that gain
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grow exponentially. This is true of fashion brands or hotel chains as well as technology companies. But tech-focused venture portfolios are dominated by the power law for an additional reason: tech startups are founded upon technologies that may themselves progress exponentially. Because of his experience and temperament, Doerr was especially attuned
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’t matter how many Kleiner bets went to zero. In the internet age, it was worth paying whatever it might take for stakes in turbo-power-law companies. Chapter Seven Benchmark, SoftBank, and “Everyone Needs $100 Million” At the start of 1995, somebody mentioned a strange name at a UUNET board
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web. The winner would capture the lion’s share of online ad dollars. The also-rans would collect pennies. Confronting this extreme version of the power law, Yahoo did not have the option of behaving like traditional tech companies. It could not simply invent a product, market it, and count on
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flotation in the summer had shown how the coming of the internet had changed the game: given the astronomical returns to be had from turbo-power-law companies, it was crazy not to gamble on them. What’s more, jackpots like Netscape and UUNET had been noticed by university endowments and
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to the market’s upward momentum.[17] Seeking to explain the public’s bottomless appetite for tech stocks, Wall Streeters pointed to the spread of power-law thinking. “There has been a fundamental shift in American capitalism,” marveled Joseph Perella, the chief investment banker at Morgan Stanley. “Basically, the public is
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I’m wrong on nineteen and the twentieth one is Yahoo it doesn’t matter.’”[18] Once the stock market embraced the logic of the power law, nothing checked the venture capitalists. Private financing deals were done at ever higher valuations, and startups raised capital in ever greater quantities. In 1997
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monarchism was subtler. It connected to an unusually clear view of how venture capital functioned. Thiel was the first VC to speak explicitly about the power law. Past venture investors, going back to Arthur Rock, had understood full well that a handful of winners would dominate their performance. But Thiel went
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which they backed failures, because it took only one or two big hits for a fund to generate a profit. But Thiel saw in the power law an additional lesson. He argued, iconoclastically, that venture capitalists should stop mentoring founders. Venture investors from Rock onward had taken great pride in coaching
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the evolution of venture capital from an art into a business,” he suggested.[40] The way Thiel saw things, this evolution was misguided. The power law dictated that the companies that mattered would have to be exceptional outliers: in all of Silicon Valley in any given year, there were just a
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use the old distinction between Accel and Kleiner Perkins, they were saying that the prepared mind was better than the open one. But if the power law dictated that only a handful of truly original and contrarian startups were destined to succeed, it made no sense to suppress idiosyncrasies. To the
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followed that Soros should speculate aggressively on the self-reinforcing booms and busts that imperfect cognition generated.[50] Likewise, having absorbed the implications of the power law, Thiel imprinted them methodically on his venture firm. Founders Fund resolved that it would never eject founders from their startups, no matter how strangely they
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felt a truly strong conviction, he acted on it more courageously.[53] Likewise, Thiel had the guts to act on his understanding of the power law by betting big at the right moments. Because only a handful of startups would grow exponentially, there was no point getting excited about opportunities that
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and Pincus. Other investors, seeking to manage risk through diversification, lacked the stomach for such concentrated wagers. But in a field ruled by the power law, Thiel was certain that a small number of huge, high-conviction bets was better than a large spread of halfhearted ones.[54] Thiel liked to
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into a bidding war. His friend and mentor Warren Buffett had schooled him in the discipline of value investing, and he regarded Silicon Valley’s power-law mentality with suspicion. Rather than promising Zuckerberg a better financial deal, he pitched a better psychological one. “You know that taking their money will
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of dollars at risk while forgoing any say over the company. And whereas Thiel’s deference to founders was grounded in his understanding of the power law, Milner framed his concession more simply. He was investing in a company whose size and sophistication qualified it to go public. Therefore he would
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of Benchmark’s investment, Neumann’s inspired marketing was filling his glassed-off cubicles with a buzzy clientele, and his grandiloquent ambition was catnip to power-law investors. At one point during his negotiations with Benchmark, Neumann asked for a preposterously high valuation. “You only have three buildings,” Dunlevie objected. “What
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surprising degree, Salganik concluded, blockbusters are random.[1] For star venture capitalists, of course, this verdict encourages humility. Because of the feedback effects in a power-law business, some venture capitalists will dominate the sector, raising the lion’s share of the dollars, getting the best access to the hot deals, and
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trip becomes simpler, the startup performs better.[8] As the story of Sixto Rodriguez tells us, early luck and path dependency are at play in power-law businesses. Of course, venture capital is no exception, and sometimes it is better to be lucky than smart: think of Anthony Montagu, the toothbrush
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. If others are daunted by a problem, go there. Try and fail, don’t fail to try. Remember, above everything, the logic of the power law: the rewards for success will be massively greater than the costs of honorable setbacks. This invigorating set of axioms has turned America’s venture-capital
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initial investment was $3 million. BACK TO NOTE REFERENCE 12 Khosla, author interviews. BACK TO NOTE REFERENCE 13 Asked how conscious he is of the power law, Khosla responded, “I think about it all the time.” He added that he had taken a sabbatical at the Santa Fe Institute in order
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to study complex systems with power-law outcomes. Khosla, author interviews. BACK TO NOTE REFERENCE 14 A further gauge of the stability of the S&P 500 is that between 1985
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risk large losses when extreme events happen, they are popular because the distribution of price changes is much closer to a normal one than a power-law one. BACK TO NOTE REFERENCE 16 Benedict Evans, “In Praise of Failure,” Aug. 10, 2016, ben-evans.com/benedictevans/2016/4/28/winning-and
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to One: Notes on Startups, or How to Build the Future, with Blake Masters (London: Virgin Books, 2014), 86. Thiel adds, with some hyperbole, “The power law . . . is the law of the universe.” Ibid., 83. BACK TO NOTE REFERENCE 20 Griffin, Dozen Lessons for Entrepreneurs, 146. BACK TO NOTE REFERENCE 21 Sebastian
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by the author, April 7, 2018. The multiple realized on Apple was provided by Sequoia. BACK TO NOTE REFERENCE 36 For Venrock, Apple was the power-law investment that transformed its performance from solid to outstanding during the 1970s. Tom Nicholas, VC: An American History (Cambridge, Mass.: Harvard University Press, 2019),
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Accel commented. (Swartz, email to the author, May 11, 2020.) Rather, the distinctive thing about KP was that it was so enthusiastic about the compounding power-law effects that it was price insensitive. BACK TO NOTE REFERENCE 72 The partner was Frank Caufield. See Kaplan, Silicon Boys, 243. BACK TO NOTE REFERENCE
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unproven or loss-making companies, avoided outfits that were venture backed, and aspired to returns of 3x or 5x. In short, they were not power-law investors. BACK TO NOTE REFERENCE 23 The following scene is reconstructed from interviews with Moritz and with Ron Fisher and Gary Rieschel, who attended the
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Bentinck, Alice, 221 Berners-Lee, Tim, 19–20 Beyond Meat, 263 Bezos, Jeff. See also Amazon Google, 179–80, 184, 186 Kalanick and Uber, 353 power law and, 7 Trump’s criticism of, 402 Big Tech, 15, 380, 388 Bill, Jobs., 82 BlackBerry, 331 Black Lives Matter, 385 “blitzscaling,” 357, 362, 364
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Forbes Midas List, 263, 449n GO Corp. investment, 122, 124 Google investment, 182 at Kleiner Perkins, 5–6, 9–11, 265, 303 Mosaic investment, 148 power law and, 9–11 Khosla Ventures, 2, 415n Khosrowshahi, Dara, 316, 370–71, 372, 459n Kim Jong-Un, 347 King, Martin Luther, Jr., 3 Kirby,
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, 98 Maverick Capital, 289 Mayfield Fund, 51, 377 Netscape investment, 145, 146, 148 3Com investment, 100, 102, 103, 105–6 Mayflower, 61 median wealth and power law, 6–7 MedVenture, 341 Meeker, Mary, 266–67, 287–88, 289, 298 Meituan, 242–48, 304 Melchor, Jack, 103, 105–6 Menlo Ventures Uber,
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444n, 445n Musk and, 205–6, 211, 214–15 opposition to VC mentoring, 209–11, 290 PayPal, 198, 201–4, 206–9, 211, 214, 444n power law and, 8, 9, 209, 210–11, 221, 277 Stripe investment, 378, 455n 3Com, 100–107, 114, 138, 390 Tickle, 252 Tiger Global, 278–88, 337
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a string of hit ventures, including Facebook and Musk’s company, SpaceX. He went further than other VCs in expounding on the significance of the power law. The youngest woman to make partner at Goldman Sachs, Shirley Lin brought the U.S. venture playbook to China, backing a slew of internet
by Olivier Cure and Guillaume Blin · 10 Dec 2014
is stored. Default distribution of triples is hashing on the node IDs—that is they are randomly partitioned. Other partitioning methods can be used. The power law distribution is taken into account to model RDF data with the main objective of preventing communication between cluster nodes at query time. Because the data
by Chris Fehily · 1 Feb 2011 · 106pp · 22,332 words
. It’s not hard to find BitTorrent search engines but keep in mind that file-sharing traffic, like most types of internet traffic, follows a power law (also called the 80-20 rule): only a few sites get the vast majority of pirate visits while the rest fight for scraps. Try any
by James Pustejovsky and Amber Stubbs · 14 Oct 2012 · 502pp · 107,510 words
the corpus. Let’s assume that a is 1; then we can quickly see how frequency decreases with rank. Notice that the law is a power law: frequency is a function of the negative power of rank, –a. So the first word in the ranking occurs about twice as often as the
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of that word. The frequency spectrum of the word gives the number of word types that have a given frequency. Zipf’s law is a power law stating that the frequency of any word is inversely proportional to its rank. Constructing n-grams over the tokens in a corpus is the first
by Femi Anthony · 21 Jun 2015 · 589pp · 69,193 words
cases, a linear relationship only occurs among log-transformed variables. This is a log-log model. An example of such a relationship would be a power law distribution in physics where one variable varies as a power of another. Thus, an expression such as results in the linear relationship. For more information
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see: http://en.wikipedia.org/wiki/Power_law To construct the best-fit line, the method of least squares is used. In this method, the best-fit line is the optimal line that
by Andrew B. King · 15 Mar 2008 · 597pp · 119,204 words
(picture by Hay Kranen/PD) ora: Playing the Long Tail Given enough choice and a large population of consumers, search term selection patterns follow a power law distribution curve, or Pareto distribution. The first part of the curve contains 20% of the terms, which are deemed to be the most popular, and
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for Execution Speed and File Size, Avoid Optional Constructs and Kill Dead Code Fast, Bundle Your Scripts POST request, Addressing the Caching Quandary of Ajax power law distribution curve, Reinforce the theme of your site PPC (pay-per-click) advertising/optimization, Unprofessional design, Pay-per-Click Optimization, Pay-per-Click Optimization, Pay
by Paul Wilmott · 3 Jan 2007 · 345pp · 86,394 words
between the variables. A generalization that is important in finance applies to distributions with infinite variance. If the tails of the individual distributions have a power-law decay, |x|−1−α with 0 < α < 2 then the average will tend to a stable Lévy distribution. If you add random numbers and get
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> 0 shape. Its probability density function is given by Student’s t Pareto Commonly used to describe the distribution of wealth, this is the classical power-law distribution. Mean Variance Note that the nth moment only exists if b > n. Uniform Bounded below and above. It has two location parameters, a and
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the least useful of the ten derivation methods, requiring that we value from the perspective of an investor with a utility function that is a power law. This idea was introduced by Rubinstein (1976). The steps along the way to finding the Black-Scholes formulæ are as follows. We work within a
by Ivan Idris · 30 Sep 2012 · 197pp · 35,256 words
will be discussing these functions through the following recipes: Summing Fibonacci numbers Finding prime factors Finding palindromic numbers The steady state vector determination Discovering a power law Trading periodically on dips Simulating trading at random Sieving integers with the Sieve of Eratosthenes Introduction This chapter is about the commonly used functions. These
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elements. eig Returns the eigenvalues and eigenvectors of an array. See also The Installing Matplotlib recipe in Chapter 1, Winding Along with IPython Discovering a power law For the purpose of this recipe, imagine that we are operating a Hedge Fund. Let it sink in; you are part of the one percent
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now! Power laws occur in a lot of places, see http://en.wikipedia.org/wiki/Power_law for more information. The Pareto principle (http://en.wikipedia.org/wiki/Pareto_principle) for instance, which is a
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power law, states that wealth is unevenly distributed. This principle tells us that if we group people by their wealth, the size of the groups will vary
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rich people, and there are even less billionaires; hence the one percent. Assume that there is a power law in the closing stock prices log returns. This is a big assumption, of course, but power law assumptions seem to pop up all over the place. We don't want to trade too often, because
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bin edges. The polyfit function fits data to a polynomial of given order. In this case, we chose for a linear fit. We "discovered" a power law—you have to be careful making such claims, but the evidence looks promising. See also The Installing Matplotlib recipe in Chapter 1, Winding Along with
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The Installing Matplotlib recipe in Chapter 1, Winding Along with IPython The Installing SciPy in Chapter 2, Advanced Indexing and Array Concepts The Discovering a power law recipe Simulating trading at random In the previous recipe, we tried out a trading idea. However, we have no benchmark that can tell us if
by David Easley, Marcos López de Prado and Maureen O'Hara · 28 Sep 2013
participation rate during the execution interval and asset-specific attributes, such as spread and volatility. Price impact is either modelled using parametric functional forms involving power laws and decay kernels (Gatheral 2010; Obizhaeva and Wang 2013) or estimated non-parametrically for various buckets of order size and participation rate. We shall not
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is due primarily to algorithms splitting large client orders (Tóth et al 2011). The log–log plot in Figure 2.5 provides evidence of a power law decay of the correlation ρ at lag h as ρ ∝ h−γ . We estimate the decay exponent γ = 0. 50 for MSFT and γ = 0
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occasional executions of large volumes (Figure 5.7), we adapt this estimator for a parametric model for the Pi that has the form of a power law with a separate parameter for zero shares. 119 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 120 — #140 i i
by Gabe Zichermann and Christopher Cunningham · 14 Aug 2011 · 145pp · 40,897 words
total 5720 Remember that in environments such as games and websites, participation is rarely a bell curve. Thus, your level design should recognize that the power law of distribution (e.g., the 80/20 rule of active users to passive users) is probably more relevant in anticipating possible usage. You don’t
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