Note: While reading a book whenever I come across something interesting, I highlight it on my Kindle. Later I turn those highlights into a blogpost. It is not a complete summary of the book. These are my notes which I intend to go back to later. Let’s start!

  • Khosla ran through a test that he applied to supplicants. The onus was not on Brown to prove that his idea would definitely work. Rather, the question was whether Khosla could come up with a reason why it obviously could not work. The more Khosla listened to his visitor, the less he could rule out that he was onto something. Next, Khosla sized up Brown as a person. He was fond of proclaiming a Yoda approach to investing: empower people who feel the force and let them work their magic. Brown was evidently brilliant, as his credentials as a geneticist demonstrated. He was gate-crashing a new field, which meant he was unburdened by preconceptions about what conventional wisdom deemed possible. Moreover, Brown was clearly as determined as he was bright: he was ready to leave his academic perch—the prestige of a Stanford professorship, the blank check from the Howard Hughes foundation. All in all, Brown fitted Khosla’s archetype of the ideal entrepreneur. He had the dazzling intellect, the willingness to put his own neck on the line, the glorious hubris and naïveté. There was one last test that Khosla cared about. If Brown managed to produce a yummy plantburger, would he generate profits that would be commensurately succulent? Khosla routinely put capital behind moon shots with a nine-in-ten chance of failure. But the low probability of a moon landing had to be balanced by the prospect of a large payout: if the company thrived, Khosla wanted to reap more than ten times his investment—preferably, much more than that. There was no point gambling for success unless the success was worth having. Brown had gotten to his final slide, where he stuck all the mundane market data that failed to interest a scientist. He noted matter-of-factly that “it’s a trillion-and-a-half-dollar global market being served by prehistoric technology.” Khosla latched on. If plant patties could reproduce the properties of beef—the taste, the consistency, the browning, and the bleeding as you flipped the burger on the grill—the potential was cosmic. Brown looked Khosla in the eyes. “I promise to make you even more insanely rich than you already are, if you give me this money,” he told him.

  • Venture capital was not merely a business; it was a mindset, a philosophy, a theory of progress. Seven hundred million people enjoyed the lifestyle that seven billion wanted, Khosla liked to say. Bold innovators goaded by even bolder venture capitalists offered the best shot at satisfying human aspirations.

  • The future can be discovered by means of iterative, venture-backed experiments. It cannot be predicted.

  • Experts may be the most likely source of incremental advances, but radical rethinks tend to come from outsiders. “If I’m building a health-care company, I don’t want a health-care CEO,” Khosla says. “If I’m building a manufacturing company, I don’t want a manufacturing CEO. I want somebody really smart to rethink the assumptions from the ground up.” After all, he continues, retail innovation did not come from Walmart; it came from Amazon. Media innovation did not come from Time magazine or CBS; it came from YouTube and Twitter and Facebook. Space innovation did not come from Boeing and Lockheed; it came from Elon Musk’s SpaceX. Next-generation cars did not come from GM and Volkswagen; they came from another Musk company, Tesla. “I can’t think of a single, major innovation coming from experts in the last thirty, forty years,” Khosla exclaims. “Think about it, isn’t that stunning?”

  • Other financiers extrapolate trends from the past, disregarding the risk of extreme “tail” events. Venture capitalists look for radical departures from the past. Tail events are all they care about.

  • Bill Younger, who joined Sutter Hill in 1981, set himself the task of taking the smartest people in his Rolodex to lunch; at the end of every meal he’d ask, “Who is the absolutely best guy you’ve worked with?” Younger then made it his mission to meet that best guy—it was almost never a woman—and toward the end of the meeting he would repeat the question: “Who is the absolutely best guy out there?” After a year of moving from one best guy to the next one, Younger had a list of about eighty superstars, and he cultivated each of them methodically. He would send one luminary a technical article that might be relevant to his research; he would call another to mention that an old colleague was asking after him. In this way, Younger spun a web of loose connections that would form the basis for productive startups when the right opportunities beckoned. The social capital that Saxenian stressed did not arise by accident.

  • Metcalfe began to take venture capitalists to lunch and solicit their guidance. “If you want money, you ask for advice. If you want advice, you ask for money,” he reflected shrewdly. His goal was to absorb the VCs’ way of thinking, and before long he noticed a pattern. At some point in each conversation, the venture guy would launch into a lecture on the three reasons startups failed: the excessive ego of the founder, too little focus on the most promising products, and too little capital. Having recognized this mantra, Metcalfe started to preempt it. “Here are the three mistakes I am not going to make,” he would announce, before the unsuspecting venture capitalist got a chance to lodge the standard caveats. “A, I have decided that it’s more important that this company succeed than that I run it. Two is, even though I have this business plan that shows a million products, trust me, we’re going to focus on a few of them. And three, I’m here raising money, because we’re not going to be undercapitalized.”

  • Metcalfe’s first promise was particularly intriguing. Precisely because he had staked his ego on getting a $20 share price, he was willing to subordinate his ego when it came to who would run the company. He had penetrated the venture capitalists’ mindset well enough to understand the Qume formula: he knew that if he accepted the VCs’ money, they were bound to bring in outside managers. Given this inevitability, Metcalfe figured, why not flip the sequence on its head? If he hired an outside executive before he raised capital, his company would appear stronger and his shares would sell at a higher valuation. 3Com’s tiny founding team did not love this prospect. They thought they could build the company themselves, with Metcalfe as their leader. One of them gave Metcalfe a cartoon showing a king and a queen looking out over their domain. King, appearing doubtful: “I’m not sure I can do this.” Queen, looking stern: “Shut up and rule.” Despite this teasing, Metcalfe stuck with his plan to hire an outside executive. Toward the end of 1980, he used a speech at Stanford to announce a new kind of venture-capital auction: he would accept funding, he declared, from whichever investor brought him the best operational guy with grown-up management experience. By demanding that the venture capitalists find him a company president before they invested, Metcalfe aimed to make them boost 3Com’s prospects and then pay him for the value that they had created.

  • A graduate of the Citadel, a military college in South Carolina, Krause was an orderly, process-oriented adult; in fact, he was too orderly for most people. He was in his element when composing a MOST memo—“Mission, Objectives, Strategy, and Tactics.” He was precise about the distinction between a product-marketing manager and a director of product marketing. Levity was not his thing. But with the wing-tipped hippie by his side, his dogged style would generate the ideal balance.

  • Doerr, a hyperkinetic evangelist of whom we will hear much, grew so keen on such collaborations that he spoke of a “keiretsu model”: mimicking Japan’s formidable industrial networks, Kleiner would turn its portfolio of firms into a web of fertile associations. Hard-pressed company founders necessarily had their heads down, fixing engineering glitches and worrying about sales. But venture capitalists could see the map and the territory and tell founders how to navigate it.

  • Fostering collaborations among startups required some sensitivity. Silicon Valley’s culture of “coopetition” involved cooperating on some days and competing on others. It was up to the venture capitalists to supervise this balance—to ensure that secrets would be shared and yet confidences not violated.

  • “VCs are always walking this fine line between competition and cooperation,” one of Ungermann’s colleagues later reflected. “The whole identity of a VC partnership revolves around managing the relationship between their portfolio companies—around taking advantage of that when it is appropriate and not causing a problem when it is not appropriate.” Kleiner Perkins’s business hinged on its reputation for ensuring fair play. To preserve the deep trust on which its franchise depended, half a million dollars was a bargain.

  • Spurned by investors, the Cisco team soldiered on tenaciously. They kept the lights on by maxing out credit cards and deferring salaries; Lerner took a side job to help pay the bills, and one co-founder made a personal loan to the company. Bosack’s ferocious work ethic kicked into overdrive. “Sincerity begins at a little over a hundred hours a week,” he said. “You have to get down to eating once a day and showering every other day to really get your life organized.” The team’s determination deepened as customers began to order its products. Brown delivery trucks started to show up regularly outside the suburban home that the couple shared with Bosack’s parents.

  • The upshot for the Valley was not merely that it gained a successful company. It acquired a whole industry. Through the 1990s and into the 2000s, Cisco dominated the networking business, and Don Valentine, who had set out a decade earlier to develop a flotilla of companies to service the PC, now found that the scrappy startup he had backed became its own aircraft carrier. A fleet of switching and routing companies sailed around Cisco, and Valentine stood on the deck of the flagship, remaining its chairman long after an IPO had multiplied Sequoia’s investment nearly forty times over. From this privileged vantage point, Valentine could see which sorts of innovative networking technology Cisco might want to acquire. As a result, Sequoia backed a series of startups that it sold profitably to the mother ship. The partnership’s reputation swelled, and Silicon Valley flourished.

  • Accel embraced an approach that it came to call “the prepared mind.” Rather than looking anywhere and everywhere for the next big thing, the partnership carried out management-consultant-style studies on the technologies and business models that seemed to hold promise. But alongside this deliberative culture, there were still plenty of venture investors who led with their gut, believing that breakthrough ideas were by definition so shocking that no amount of mental preparation could anticipate them. This tension between the planners and the improvisers tested the industry’s identity.

  • Doerr and his friend Vinod Khosla set the pace at KP, and they were out to back truly revolutionary startups that could spawn entirely new industries. Magnetic and messianic, Doerr in particular became the go-to investor for fearless founders, who loved him for championing their visions even more passionately than they did. He had “the emotional commitment of a priest and the energy of a racehorse,” one entrepreneur marveled. “The number of different things about which John Doerr has said, this is the greatest thing ever, is a big number,” a rival investor noted, with a mixture of respect and cynicism.

  • As a parable of venture capital, the GO story exposed Doerr’s swashbuckling overreach. He had invested on the basis of an improvised presentation unsupported by a business plan, doing so because he believed that he could will huge technological leaps into being. By embracing maximum ambition, he had probably harmed Kaplan’s prospects, steering him away from the sort of incremental advance that could have been achievable. “They should have got the thing to work in a small area like UPS delivery guys,” Mitch Kapor reflected later. “GO showed me the downside for entrepreneurs of Kleiner’s approach. If it couldn’t be a home run, Kleiner did not care if the company struck out. It was like, go big or go home. . . . There is an arrogance to the KP approach. All that ego about changing the world.”

  • Doerr also trumpeted a string of technological prospects that turned out to be busts: human gene screening, anti-aging drugs, designer chemicals. He seemed to have forgotten the old Tom Perkins dictum: when you invest in a company facing a technical challenge, the first thing you do is take the white-hot risks off the table.

  • If Kleiner Perkins embodied the swashbuckling spirit of the Valley, the upstart challenger Accel was deliberately different. The two founders, Arthur Patterson and Jim Swartz, were already veterans of the business, and they were planners rather than improvisers, strategists rather than evangelists. Patterson, in particular, was self-consciously cerebral. The scion of a Wall Street rainmaker, the product of both Harvard College and Harvard Business School, he was less narrowly focused on the next technology than some of his engineer rivals, and more broadly interested in financial markets, business models, and even government policy. He read widely, theorized fluently, and wrote a series of internal papers codifying the Accel approach. It was he who had come up with the Accel watchword, “prepared mind,” having borrowed it from the nineteenth-century father of microbiology, Louis Pasteur. “Chance favors only the prepared mind,” Pasteur had observed sagely.

  • Accel liked to say that its strategy of specialization helped it to avoid faddish distractions. Borrowing an analogy from the oil industry, its partners would not be wildcatters, drilling wells almost at random. They would be methodical explorers who studied the geological properties of the territory. Pen computing was a case in point. By the early 1990s, dozens of startups were imitating GO, and there were conferences to celebrate this gold rush. Swartz dutifully attended one of these jamborees to see what the hype was about. But when subjected to Accel-style scrutiny, neither the pen technology nor the associated business plans seemed auspicious, and Swartz refused to waste capital on them. Perhaps because of this indifference to fashion, relatively few Accel investments turned out to be busts. Around the partnership’s tenth birthday, a tally showed that of the forty-five Accel investments that had experienced an exit, only seven had lost money.

  • Specialization also helped Accel when it went on the offensive. Because the partners were experts in the sectors they invested in, they could quickly grasp the essence of an entrepreneur’s pitch and come to a rapid decision. If they resolved to make the investment, the next challenge was to persuade the entrepreneur to choose Accel over rivals, and specialization helped with this step also. Starting a company is an isolating experience—founders invest life and soul into niche projects that, at least at the outset, strike most people as quixotic—so entrepreneurs can’t help warming to investors who appreciate their plans: who “get it.” Accel partners aimed to comprehend entrepreneurs so thoroughly that they could complete their sentences and predict the next slide in their pitches. They spoke internally of the “90 percent rule.” An Accel investor should know 90 percent of what founders are going to say before they open their mouths to say it.

  • Accel’s specialist approach made it particularly adept at identifying what venture capitalists call “adjacent possibilities.” By embedding themselves in their respective sectors, sitting on boards of portfolio companies, and blending their direct observations with management-consultant-style analyses, Accel partners could anticipate the next logical advance in a technology. “Every deal should lead to the next deal,” was another Accel saying. Swartz in particular liked to invest in successive iterations in a single product class. He backed a videoconferencing startup in 1986, another in 1988, and a third in 1992; on two of these three bets, he made fourteen times his money. Admittedly, this incrementalism involved a potential cost. Accel shrank from KP-style paradigm breakers that were not adjacent but rather two leaps ahead: this might mean missing some gargantuan winners. Likewise, having embedded themselves among the intellectual leaders in their sectors, Accel partners tended to pass over uncredentialed challengers of the sort favored by Don Valentine. Thus Accel missed the mother of all 1980s telecom deals—Cisco—despite being aware of the company and having a dedicated telecom fund. Still, Accel was making a deliberate choice. It would push the boundaries of engineering enough to create value but not so much as to be guilty of overreach. Its motto was “if you go for singles, the home runs will take care of themselves.” Some of those intended singles would sail off your bat more powerfully than you expected.

  • Accel’s performance in its first few funds left no doubt that it was onto something. The specialist telecom fund multiplied its capital 3.7 times, generating an annualized return that was more than twice as high as the median venture fund of its vintage. Taking the first five funds together, Accel generated an even better performance: the average multiple was eight times capital. And yet the striking thing about Accel was that despite the partners’ firm intention not to chase hubristic grand slams, it was grand slams that dominated performance. Accel Telecom more than conformed to the so-called 80/20 rule: a whopping 95 percent of its profits came from the top 20 percent of its investments. Other early Accel funds exhibited similar power-law effects. In the firm’s first five funds, the top 20 percent of the investments accounted for never less than 85 percent of the profits, and the average was 92 percent.

  • In short, the power law was inexorable. Even a methodical, anti-Kleiner, prepared-mind partnership could not escape it.

  • 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 traction can 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 to this phenomenon. As a young engineer at Intel, he had seen how Moore’s law transformed the value of companies that used semiconductors: the power of chips was doubling every two years, so startups that put them to good use could make better, cheaper products. For any given modem, digital watch, or personal computer, the cost of the semiconductors inside the engine would fall by 50 percent in two years, 75 percent in four years, and 87.5 percent in eight. With that sort of wind at a tech startup’s back, no wonder profits could grow exponentially.

  • Khosla duly visited the founders at their office on the corner of El Camino and Castro in Mountain View. He liked to think of venture bets as financial options. You could never lose more than your initial stake, but the upside was unbounded. Given what the power law meant for startups, what Moore’s law meant for computing power, and what Metcalfe’s law meant for networks—and given how each law compounded the effect of the others—Mosaic Communications was one of those options you just had to have. After the meeting, Khosla called Doerr. “We should just do it,” he told him.

  • A few days later, Clark and Andreessen returned to pitch to the full Kleiner Perkins investment committee. There had been no Accel-style prepared-mind planning, but that did not matter: it took the Kleiner Perkins partners all of forty-five minutes to approve the investment. “We knew it was a high price,” said one partner, “especially with what seemed like a twelve-year-old as the technology guru behind it.” But everybody around the table remembered another one of Tom Perkins’s dictums: you succeed in venture capital by backing the right deals, not by haggling over valuations.

  • At a telling point in their courtship, Yang asked Moritz if the company should change its name, maybe to something more serious. Moritz retorted that if Yang did that, Sequoia would not back him. Moreover, Moritz had a rationale for his retort—one that Yang himself had never thought of. In his years as a journalist, Moritz had written a perceptive book about Steve Jobs. Now he insisted that Yahoo was that precious thing, an inspired and memorable company name. Like Apple. Whether by instinct or cunning, Moritz had given the perfect clincher of an answer. Because he understood Jobs as well as anybody in the Valley, he had the credibility to imply a connection between two unknown grad students and a storied Silicon Valley legend. Like all great venture capitalists, he knew how to amplify the sense of destiny of even the most confident founders. It was the ultimate seduction.

  • To build Yahoo’s momentum, Moritz helped to position Yang as the face of the Valley—a sort of second coming of Steve Jobs, even though Yang himself resisted the comparison. As a tribune of the 1970s counterculture, the barefooted Jobs had kick-started the PC business. At a time when immigrants, and especially Asian immigrants, were starting to make their mark on the Valley, the Taiwanese American Yang emerged as the evangelist for a new style of startup. His picture appeared frequently in magazines: a broad, toothy grin, thick black hair, collegiate chinos. He held forth at tech conferences on Yahoo’s strategy for building an audience online; he was part geek, part marketing guru. After Yang wowed one gathering in June 1995, no less a figure than Bob Metcalfe turned to his neighbor. “This is going to be the first great Internet brand,” he pronounced confidently.

  • The dirty secret was that Yahoo had no choice but to build a brand, because it was not much of a technology company. It boasted no patents and not much of an engineering edge: its directory was put together by surfing the web and classifying sites, and much of the work was done manually. As a result, it presented a negative illustration of Tom Perkins’s dictum: because Yahoo entailed no technological risk, it involved a huge amount of market risk, because no technological moat protected it from competitors. What’s more, competition was bound to be especially ferocious because of the winner-takes-all logic of Yahoo’s business. Internet users were likely to gravitate to a single way of searching for information on the 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 technological novelty to bring in sales and profits. Rather, it had to remain buzzier than its rivals, which meant that it had to project an aura of momentum. Anticipating the dynamics of future internet companies, a precarious circular logic took hold: the key to Yahoo’s growth was that it had to keep growing. As a result, Yahoo’s early success in generating revenues did not translate into profits. Every dollar of advertising income had to be plowed back into marketing expenditures to keep expanding the business. Indeed, recycling advertising income soon proved not to be enough. Eight months after securing $1 million from Sequoia, Yahoo set out to raise another round of capital.

  • Traditional venture capitalists, observing a cash-burning business with no technological moat and nothing more substantial than a brand, might have refused Yahoo the lifeline that it needed. But by late 1995, tradition was passé. Netscape’s 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 pension funds, which responded by pouring extra capital into venture. In 1995, U.S. venture partnerships raised $10 billion, up from $3 billion five years before. There was so much money in the Valley, and so much faith in the logic of the power law, that Yahoo was almost bound to be funded.

  • After Son dropped his bombshell, Yang, Filo, and Moritz sat in silence. Disconcerted, Yang said he was flattered but didn’t need the capital. “Jerry, everyone needs $100 million,” Son retorted. There was little doubt that Son was right—at least in the new era of online brands fighting for attention. Yahoo was preparing to go public precisely because it did need capital. “How much do you have to pay Netscape to feature you?” Son continued. He was referring to the fact that Netscape, as the leading web browser, was auctioning off the right to be the featured search engine on its site. If Excite or Lycos had deeper pockets than Yahoo, one of them would seize the advantage. Yang admitted that Netscape charged a lot. It followed, as he also admitted, that $100 million would actually be useful. In the new world of winner-takes-all brand competition, Yahoo’s future growth depended on its immediate growth. Therefore it needed growth capital. The question was who would provide it. The normal way for a young company to raise tens of millions was to go public, which was just what Yahoo was planning. But now here came Son, this Korean Japanese outsider, who appeared to have some kind of magic coolant in his veins. Politely, without swagger, he was offering the scale of money that usually came from public markets, coupled with the simplicity of a private deal. He was ready to shake hands on his audacious bid immediately. It took Moritz and the Yahoo founders some time to formulate an answer. The certainty of Son’s offer was seductive: there was always a risk that an IPO might flop. On the other hand, Goldman Sachs was suggesting a listing price that would value Yahoo at fully twice as much as Son was proposing. If Goldman could deliver on this, a successful IPO would leave Sequoia, Yang, and Filo a lot richer. Before the Yahoo team arrived at a decision, Son made a second move that defied all convention. He asked Moritz and the founders to name Yahoo’s main competitors. “Excite and Lycos,” they answered. Son turned to one of his lieutenants. “Write those names down,” he commanded. Then he turned back to Moritz and the founders. “If I don’t invest in Yahoo, I’ll invest in Excite and I’ll kill you,” he informed them. For Yang and Filo, and particularly for Moritz, Son’s threat was a revelation. There would be only one victor in the race to be the go-to internet guide, so the investor who could write a $100 million check could choose who won the competition. Like a digital Don Corleone, Son had made Moritz an offer that he could not refuse. Moritz later resolved never to be in this position again.

  • On April 12, 1996, Yahoo went public. The shares took off on a wild ride, closing the first day at fully two and a half times what Son had paid for them. It was a breathtaking bonanza: Son had made an instant profit of more than $150 million. Years later, Moritz recalled the psychological impact of this spectacle. Until the Yahoo flotation, no single deal had earned Sequoia more than $100 million, the record set by Don Valentine’s bet on Cisco. “How are we ever in a month of Sundays, years of Sundays, decades of Sundays, ever, ever going to be able to beat $100 million from one investment?” he remembered thinking.But by buying into Yahoo on the eve of its flotation, Son had blown past the $100 million mark in a matter of weeks, and without any of the heartache of building a management team from nothing. The business of venture capital was forever altered.

  • The alteration took two forms, the first flashy and obvious, the second slow-burning and subtle. The obvious transformation was in Son himself: he was famous now not just in Japan but everywhere. Leveraging his new reputation as a digital Midas, he followed the Yahoo bonanza with a dizzying investment blitz, barely pausing to sort gems from rubbish. To borrow the language of hedge funds, he didn’t care about alpha—the reward a skilled investor earns by selecting the right stock. He cared only about beta—the profits to be had by just being in the market. One young investor who managed Son’s funds recalls betting on at least 250 internet startups between 1996 and 2000, meaning that he had kept up an insane rate of around one per week, ten or maybe even twenty times as many as a normal venture operator. Meanwhile, that same cowboy sat on more than thirty boards. “I did not have the experience to know it was crazy,” one Son lieutenant recalled later.

  • There was almost no arena in which Son did not play. He launched venture funds in South Korea, Japan, and Hong Kong. He partnered with Rupert Murdoch’s News Corp to invest in Australia, New Zealand, and India. In Europe, he linked up with the French media conglomerate Vivendi. In Latin America, he maintained venture offices in Mexico City, São Paulo, and Buenos Aires. With this hurricane of activity, Son anticipated changes in the venture industry that emerged more obviously a decade later. As we shall see presently, growth investing became a Silicon Valley staple from around 2009, and venture partnerships transformed themselves from hyper-local businesses to more globally minded operations. It all followed logically from the shift that Yahoo marked. Branded internet companies faced an imperative to grow, creating an opportunity for investors to provide growth capital. Branded internet companies were not built on cutting-edge technology, so they could flourish far away from the tech hub in Silicon Valley. As often happens in finance, the player who first sees a shift in the landscape, and who has the ready capital to match the novel need, can make bumper profits before competitors wake up. By one reckoning, Son expanded his personal fortune by $15 billion between 1996 and 2000. This was at a time when no other venture capitalist even appeared on the Forbes billionaires’ list: not John Doerr, not Don Valentine, not anyone.

  • Moritz came to see the Yahoo experience as a tipping point for Sequoia. It coincided with Don Valentine’s retirement and Moritz’s emergence, together with a hard-charging contemporary named Doug Leone, as the leader of the partnership. The old guard had been born into the Depression and had grown up during the world war; their families had lived in fear of losing everything. “If you are afraid of losing everything, you tend to take your chips off the table too early,” Moritz reflected. In the case of Apple, for example, Valentine had sold out before the IPO, realizing a quick profit but depriving his limited partners of the bounty from Apple’s flotation. Moritz, in contrast, was a child of the postwar boom and had experienced little but success in his own life: he had risen from Wales, to Oxford, to Wharton, to Sequoia; and now, a short time after his fortieth birthday, he had made his golden bet on Yahoo. He and his contemporaries were far less inclined than the older generation to worry about stuff that could go wrong. “I think one of the huge changes at Sequoia is that we’ve been trying, without getting giddy about it, trying to imagine with some of these companies, what can happen if everything goes right?” Moritz reflected.

  • Thanks to the Yahoo experience and Son’s example, Moritz came to see that a venture partnership must adapt constantly. He learned that huge, growth-capital checks conferred kingmaker powers and that it paid to think bigger than just the Valley. Later, Sequoia would apply these lessons with clinical efficiency, achieving a position of unrivaled strength in the business of financing technology.

  • With its professional capital so geographically concentrated, Benchmark’s strength was local rather than global: it was the anti-Softbank. Further, the Benchmark model was about being nimble rather than large: the partnership made a virtue of the deliberately small size of its first fund, which weighed in at $85 million, or less than a single check that Son might write to one company. “God is not on the side of the big arsenals, but on the side of those who shoot best,” Benchmark’s prospectus insisted.

  • Benchmark’s founding partners believed that by staying lean and focused, they had developed a “fundamentally better architecture.” The small fund size meant that they would carefully evaluate each deal: they aimed for alpha, not beta. Small would also ensure that each partner sat on just a handful of boards, and so added value to each portfolio company. Small would promote camaraderie among the four partners: the venture industry was masculine and monocultural, but the Benchmark team exhibited an especially intense case of jocular male uniformity. Finally, small was emphatically not a sign of weakness. Benchmark could have raised more capital if it had wanted to, and to underscore their strength, the Benchmark guys announced that they would keep an aggressive share of their fund’s profits, more than the 20 percent industry standard. Benchmark also charged a relatively low management fee on the capital in its care. The partners wanted to be paid for results, not merely for amassing money.

  • Some venture firms believed that selecting the right deal was nine-tenths of the job; coaching entrepreneurs was an afterthought. Benchmark partners tended toward a more fifty-fifty attitude. Knowing with confidence which deal to do was generally impossible; it was in the nature of the venture game that many bets went to zero. Therefore, to be sure of creating alpha, Benchmark had to descend into the trenches with the entrepreneurs; “I’m so far down, I can’t see much sky,” one Benchmark partner said with a chuckle. Skeptics might counter that the best entrepreneurs, the ones who generated the home runs that drove a fund’s performance, needed little input from investors and that lavishing time on lesser founders would never move the needle on a portfolio. But Benchmark rejected this defeatism. Apparent laggards could turn into winners if you dug in and helped them. “Sometimes magic happens,” a Benchmark partner insisted. Moreover, if you acquired a reputation for sticking by your hard cases, your loyalty would be repaid. Word would get around, and entrepreneurs would flock to you.

  • Getting down into the trenches was an exercise in empathy. You had to give advice while knowing that you might be wrong, and you had to communicate it tactfully. Picking the right moment was part of the technique: there was no point offering counsel when it would fall on unreceptive ears, so you had to seize the openings when guidance was really wanted. “What’s venture capital?” Benchmark’s co-founder Bruce Dunlevie mused. “It’s sitting at your desk on Friday at 6:15 p.m., packing up to go home when the phone rings, and the CEO says, ‘Do you have a minute? My VP of HR is dating the secretary. The VP of engineering wants to quit and move back to North Carolina because his spouse doesn’t like living here. I’ve got to fire the sales guy who’s been misreporting revenues. I’ve just been to the doctor and I’m having health problems. And I think I need to do a product recall.’ And you, as the venture capitalist, you say, ‘Do you want me to come down now or get together for breakfast in the morning?’”

  • Physically imposing but approachable in manner, Dunlevie was a walking vindication of the Benchmark thesis that helping struggling founders would pay off in the future. He took hands-on counseling so seriously that he compared going on a board to having a child: for the next several years, your life would be different. One time, coaxed to tell a story that he might like to be remembered by, Dunlevie spoke of a chief executive whom he had felt obliged to fire because the firm had outgrown him. Several years later, that same CEO readily accepted an invitation to run another Benchmark startup, saying he had always appreciated Dunlevie for treating him fairly. Omidyar, whose company had been through a dark tunnel before Dunlevie helped it out into the light, had even more positive feelings. He checked in with Dunlevie regularly.

  • The contest between these two models would persist into the future. The Benchmark partners practiced venture capital the way that traditionalists loved, intelligently assessing startups, empathizing with founders, and serving as enlightened counselors. Son stood for a less elegant but still formidable approach. He shot from the hip, seemed indifferent to risk, and delegated the detailed work of monitoring companies to others. Yet while Benchmark deployed capital more carefully, it generated less wealth, and even though Son’s portfolio collapsed spectacularly when the tech bubble burst in 2000, the setback proved temporary. Moreover, Son’s methods had a way of forcing others to follow. As Moritz realized, you had to match Son’s techniques or he would pull a Corleone on you. Even the Benchmark partners could feel the pull of Son’s example. After raising three deliberately small funds—the biggest had weighed in at $175 million—the partners found themselves contemplating a radical break with their tradition. In the summer of 1999, Dave Beirne broached the issue at a partners’ meeting. “I think we should raise a billion dollars. Seriously.” Rachleff sympathized. “SoftBank is raising more money,” he noted. “If we’re not prepared to fight, we’re going to get our clocks cleaned.” “You don’t go on the lacrosse field without a fuckin’ stick,” Beirne carried on. “You’ll get killed.” Kagle wasn’t sure. A big fund could cause trouble: if you gave founders too much money, they would lose focus, attempt too many things, and the resources would be wasted. “We might overcapitalize companies,” he said. “I don’t want to follow everyone else into big-check-dom.” “We need money to play,” reiterated Rachleff. SoftBank and the bull market more generally were pushing up the quantity of capital that startups expected to raise. “Every one of my telecom deals is ten million. Table stakes.” Dunlevie pointed out that if the price of individual deals went up, a small fund would be able to afford positions in just a handful of companies. The loss of diversification would be dangerous. He leaned in favor of a billion-dollar fund because even though “we know size doesn’t matter, there are some who will regard it as leadership.” In the end, Benchmark went ahead and raised $1 billion for its 1999 fund, more than ten times as much as it had accepted for its first fund four years earlier. The partnership also experimented unsuccessfully with offices in London and Israel, and attempted a Son-style pre-IPO bet of $19 million on an e-tailer called 1-800-Flowers.com, quickly losing money. But while Benchmark could close its foreign satellites and give up on pre-IPO wagers, the dilemma about sizing persisted. In the years that followed, Benchmark repeatedly found that reckless later-stage investors seized effective control of its portfolio companies by stumping up tens of millions of dollars. Unable to muster equivalent sums, Benchmark lacked the muscle to protect startups from the hubris that came with so much capital. In two notorious cases—the ride-hailing company Uber and the office-rental giant WeWork—Benchmark lived through the painful spectacle of its wards going off the rails. Such was the limitation of the cottage-industry model.

  • Bechtolsheim ran to his Porsche and returned carrying something. “We could discuss a number of issues. Why don’t I just write you a check?” he said ebulliently. With that, he presented Brin and Page with $100,000, payable to “Google Inc.” Brin and Page explained that Google hadn’t been incorporated yet. It didn’t have a bank account to deposit the check into. “Well when you do, stick it in there,” Bechtolsheim said cheerfully. Then he disappeared in his Porsche without saying what share of Google he imagined he had bought. “I was so excited I just wanted to be part of it,” he said later. Bechtolsheim’s impromptu investment signaled the coming of a new kind of technology finance, as significant as Masayoshi Son’s $100 million check two years earlier. Before the mid-1990s, semiretired technology executives had sometimes turned their hands to investing: Mike Markkula had backed and shepherded the fledgling Apple; Mitch Kapor had financed and counseled GO and UUNET.[9] But it took the booming tech market of the middle and late 1990s to turn this “angel investing” into a serious force. Thanks to the IPO bonanza, multimillionaires sprouted all around the Valley, and angel investing became the new elite pastime, like cosmetic surgery in Hollywood. In 1998, the year that Bechtolsheim backed Google, a prolific angel named Ron Conway went so far as to raise a $30 million fund to amplify his personal investing, and the “institutional angel,” or “super angel,” became the newest cylinder in the Valley’s startup engine. All of a sudden company founders had an alternative to traditional VCs, much as Son’s growth-capital checks offered a partial alternative to going public. To raise a first round of capital, aspiring entrepreneurs just needed a few introductions to established ones. Bechtolsheim’s extraordinary investment style was becoming almost ordinary.

  • By the end of 1998, Brin and Page had raised a bit over $1 million from the four angels—more than Yahoo had raised from Sequoia. But they had done so without speaking with a venture capitalist, without giving away more than a tenth of their equity, and without signing up for the performance targets and oversight on which venture capitalists insisted. Angel investors like Bezos and Bechtolsheim were too focused on their own companies to worry about how Brin and Page were getting on. And so, in John Little’s formulation, the Google guys were able to raise “money like that, kind of for nothing.” The old idea of liberation capital had been taken to the next level. Never in the history of human endeavor had young inventors been so privileged.

  • In 1999, the boom turned wild: venture partnerships filled their war chests with $56 billion. The number of venture partnerships in the United States hit 750, up from 400 a decade earlier. The Valley seemed to hum with the adrenaline of fortunes being made, not least by venture capitalists. To traditional venture investors, the boom was disconcerting. “It was evident that we were in a bubble,” an old-timer recalled. “All of the things you think about as creating fundamental value were getting punished. And all of the things you think about as bad behavior were being rewarded.” The trend that had started with Yahoo—the financing of early movers because of their momentum—could obviously be pushed too far: in many cases, the finance itself was creating the momentum, and many dot-coms would never actually earn profits. But however high the market spiraled, the boom was impossible for the old hands to resist. Unlike hedge funds, which can bet against a bubble by using derivatives or other tricks, venture capitalists can only bet on values going up. They have one simple business, which is to buy equity in startups, and they have no choice but to pay the going price for it. Moreover, this mechanical difference between hedge funds and venture capital is compounded by a psychological one. Hedge funders tend by nature to be self-contained. When the trader Louis Bacon bought a private island in the 1990s, people joked that it made no difference: he was already an Oz-like figure hidden behind a bank of screens, as insular as he could be. But venture capitalists inhabit the opposite extreme. They maintain offices near each other. They sit on startup boards with each other. They negotiate follow-on financings with each other. Geographically and mentally, they cluster. Because they are first and foremost networkers, it is costly for venture capitalists to even speak of a bubble. An investor who publicly questions a mania is spoiling the party for others. In ordinary times, the bubbly bias of the venture crowd is balanced by the stock market. VCs know that when startups seek to go public, they will face a tougher audience, less willing to pay up for dreams, freer to denounce a company or bet that its stock will tumble. This prospect disciplines venture behavior: it deters VCs from bidding private valuations up so high that public exits won’t be profitable. But in the late 1990s, the stock market stopped performing this disciplinary function. A new breed of amateur trader loaded up on internet stocks, goaded on by the financial hype on TV channels such as CNBC, which tripled its viewership during the second half of the 1990s. Sophisticated hedge funders who bet against the mania suffered excruciating losses until they flipped position, whereupon they added to the market’s upward momentum. 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 saying, ‘I want to own every one of these companies. If I’m wrong on nineteen and the twentieth one is Yahoo it doesn’t matter.’”

  • 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 an online grocer called Webvan landed $7 million from Benchmark and Sequoia, even though it was less a company than a concept. In 1998, Webvan raised a further $35 million, this time from SoftBank, to finance the building of its first distribution center. In 1999, with the distribution center still barely up and running, investors were persuaded to part with an astonishing $348 million. By this point, venture speculators had assigned Webvan a paper value of more than $4 billion, even though it was losing money. In sum, Webvan looked like GO on steroids, a fantastical venture-capital ego trip. And yet, given the euphoric stock market, the VCs were not the only culprits in this tale. Webvan staged a successful IPO in the fall of 1999, and its value shot up to $11 billion. With public-market investors prepared to value companies this way, the venture-capital frenzy was at least partly rational.

  • The greatest mark of Doerr’s prowess was his investment in Amazon. In 1996, Doerr had snagged 13 percent of Bezos’s startup for $8 million; by the spring of 1999, Amazon was a public company with a valuation of more than $20 billion. But what was most remarkable was the way that this had come about and what it said about Doerr’s stature. Founded in 1994, Amazon was already going gangbusters by the time it sought venture funding. Would-be investors were calling so often that the company joked about resetting its voice mail: “If you’re a customer, press ‘one.’ If you’re a VC, press ‘two.’”[23] General Atlantic, a respected technology investment house in New York, pursued Amazon especially assiduously, presenting Bezos with a formal term sheet. But far from chasing after Amazon, Doerr himself became the object of a chase: his reputation was such that Amazon came after him. At first, Doerr was too busy to notice; the pager and the cell phone on his belt buzzed constantly. Eventually, after a CEO at a Kleiner portfolio company persuaded him to have dinner with Amazon’s marketing chief, the penny dropped: Doerr flew to Seattle, bonded instantly with Jeff Bezos, and stole the deal from under General Atlantic’s nose, even while offering a less generous valuation. Asked why he had accepted the lower bid, Bezos explained, “Kleiner and John are the gravitational center of a huge piece of the Internet world. Being with them is like being on prime real estate.”

  • Given Doerr’s investment in Amazon, and Bezos’s investment in Google, it was only a matter of time before Brin and Page landed a meeting with Kleiner’s celebrity rainmaker. They took this coup almost for granted. Other entrepreneurs, visualizing their Ferraris, might have stayed up all night preparing their pitch decks. But the Googlers did not strain themselves too hard: they showed up to see Doerr with a PowerPoint presentation consisting of just seventeen slides, three of which displayed cartoons and only two of which had actual numbers.Yet what they lacked in presentational formality they made up for in sheer poise. Primed by Shriram, they had boiled their mission statement down to just eight words: “We deliver the world’s information in one click.” Doerr loved nothing more than a bold, high-concept presentation. He was an engineer by background; he was a dreamer by vocation. Besides, Google had used the time afforded by the angel financing to develop traction: it was now handling half a million searches daily. Doerr privately calculated that if Google muscled its way into the top tier of search firms, it could attain a market capitalization of as much as $1 billion. Seeking to gauge the founders’ ambition, Doerr asked, “How big do you think this could be?” “Ten billion,” Page answered. “You mean market cap, right?” “No, I don’t mean market cap. I mean revenue,” Page declared confidently. He pulled out a laptop and demonstrated how much faster and more relevant Google’s search results were compared with those of its rivals.

  • Doerr was flabbergasted and delighted. Revenue of $10 billion implied a market capitalization of at least $100 billion. This was fully one hundred times more than Doerr’s estimate of Google’s potential; it implied a company as big as Microsoft and much bigger than Amazon. Whether or not this goal was plausible, it certainly telegraphed audacity. Doerr seldom met entrepreneurs who dreamed bigger than he did.

  • As they courted Doerr, the Googlers went after their second quarry. They had recently met the “super angel” Ron Conway and proposed a deal: Conway could invest in Google if he helped get them to Sequoia. Conway had happily accepted. Even by the exalted standards of the Valley, he was a grand master of networking.

  • For Doerr, an engineer who backed engineers, Google’s technical edge was the main attraction. Plenty of skeptics argued that with eighteen rivals jostling for position, search would be a low-margin commodity business. But Doerr had enough faith in technological advance to believe that a latecomer with a better algorithm could stand out from its competitors. His partner, Vinod Khosla, explained the point this way: If you thought existing search technology was 90 percent as good as the best possible version, then pushing performance up to 95 percent was not going to win you customers. But if you thought there was more headroom—that existing search technology represented only 20 percent of the potential—then Google might be three or four times as good as its rivals, in which case its margin of engineering excellence would attract a flood of users. Khosla himself had made a fortune in the 1990s by investing in successive generations of internet routers, each radically better than the previous one. The lesson was that engineering products could improve more than non-engineers imagined.

  • In 1999, the idea that Google would eclipse Yahoo, or that Amazon would eclipse every other e-commerce contender, was by no means obvious.

  • “We like Steve Jobs!” Brin and Page reported. Jobs not being available, Doerr hustled for an alternative. He sometimes described himself as a “glorified recruiter.” “We’re not investing in business plans, we’re not investing in discounted cash flows, it’s the people,” he insisted, revealing how the essence of the venture craft remained unchanged since the days of Arthur Rock and Tommy Davis. Doerr duly worked his network to identify an executive with a computer science background, but his first choice refused to see a future in the umpteenth search engine. Then, in October 2000, Doerr fastened on another computer scientist turned manager. His name was Eric Schmidt, and he was running a software company called Novell.

  • Schmidt felt simultaneously excited about the prospect of joining Google and anxious about entrusting his future to two mercurial twentysomethings. In the end, the balance was tipped by the trusted guardians of the Valley’s networks. “I had the surety that the venture guys would be kind to me if Larry and Sergey bounced me out,” Schmidt said. If Google did not work out, Doerr and Moritz would slot him into an equally good job elsewhere. With the venture capitalists’ safety net stretched out beneath him, Schmidt took the leap. At last, Google had the experienced direction it needed to become a global company.

  • With the recruitment of Schmidt in 2001, the Googlers taught the venture-capital tribe the second of three lessons. The first had concerned the pricing of the deal: as Doerr had said, it was the most Kleiner had ever paid for a modest share in a startup. The second concerned the revolt against the Qume model: Schmidt was hired only after a long period of foot-dragging, and even then he functioned as just one voice in the triumvirate that led the company. The third lesson came in 2004, as Google prepared to go public. Defying Valley tradition, and ignoring protests from Doerr and Moritz, Brin and Page insisted on maintaining their power even after they sold shares to the public. Following a precedent set mainly by family-owned media firms, they decreed that Google would issue two classes of shares. The first, to be held by the founders and the early investors, conferred ten votes on big company decisions. The second, to be held by outside stock market investors, conferred only one vote. Collectively, outside investors would receive shares bestowing only a fifth of all votes. Insiders, chief among them Brin and Page, would retain control over the company.

  • As the most celebrated Valley star of the era, Google had a profound influence on the way startups raised money. Other entrepreneurs increasingly turned to angels for their early capital. They forced Series A investors to pay through the nose. They rejected the Qume model in favor of running their own show. They dispensed with shareholder democracy. In sum, entrepreneurs used every trick at their disposal to secure more of the wealth and—crucially—power. Venture capital confronted a new challenge.

  • In the first years of the twenty-first century, Google’s significance was not yet obvious. The venture community was fixated instead on the ruin of its investment performance. As of 2003, Sequoia was struggling to prop up a venture fund that had lost around 50 percent of its value; the partners felt honor-bound to plow their fees back into the pot to eke out a return of 1.3x. The equivalent Kleiner Perkins fund performed even worse, never making it into the black. Masayoshi Son, who had briefly become the richest person in the world, lost more than 90 percent of his fortune. Having loaded up with capital during the boom years, many venture partnerships saw no way of deploying the money. Some returned uninvested dollars to outside partners, others stopped raising fresh funds, and the few that tried to raise money were rebuffed by their backers.At the peak in 2000, new capital commitments to VC firms had hit $104 billion. By 2002, they were down to around $9 billion.

  • Like Google, Facebook had raised a round of angel financing. Unlike in the case of Google, the financiers were all entrepreneurs who focused on Facebook’s business niche of online social networking. They formed a tight-knit group, united by the shared experience of founding a particular kind of software startup in a particular moment. Recalling the atmosphere of this period, Mark Pincus remarked, “There were about six people that I knew who were interested in doing anything in the consumer internet, and we all kind of went to the same two coffee shops.”

  • Given the currents of the times, this new cluster of entrepreneur-angels was naturally skeptical of the traditional venture community. The Googlers had shown how to stand up to VCs, and Paul Graham had emphasized the tensions between ever larger venture funds and the limited need for capital at software startups. There was a generational factor at work, too. The extraordinary VC profits of the 1990s had encouraged senior venture partners to stay on, and because the boom made everyone look good, nobody was forced into retirement. As the average age of VC partners drifted up, the average age of company founders was falling: small wonder that a cultural gap was opening. Google’s angel backers, notably Ram Shriram and Ron Conway, had served to connect the startup to venture investors. But the new cohort of entrepreneur-angels had no equivalent bonds with traditional VCs. They were more likely to spout some variation on Paul Graham’s unified theory of VC suckage. Partly by coincidence, and partly because success comes at a price, this general hostility to venture capital was concentrated on Sequoia. Sean Parker, as we have seen, had a particular resentment of Michael Moritz: Zuckerberg’s strange pajama act was Parker’s elaborate way of getting even after Plaxo. But Parker was not alone. Peter Thiel, the angel who had backed Zuckerberg, also held a grudge against Moritz.

  • Founders Fund explicitly ruled out the Qume formula of bringing in an outside CEO. Entrepreneurs should control their own companies, period. The Googlers had pioneered this path, accepting Eric Schmidt as one member of a triumvirate rather than as the outright boss. Facebook had gone further: Zuckerberg reigned unchallenged. Now Founders Fund set out to spread this kingly model to every startup that it backed. Thiel felt that all great startups had a “monarchy aspect,” as one of his lieutenants put it. “It’s not the libertarian part of Peter that made Founders Fund. It’s the monarchist part.”

  • Past venture investors had seen the home-run nature of their business as a justification for risk: their limited partners should forgive the many instances in 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 and advising startups; for a firm like Benchmark, this was the bread and butter of the business. One survey in 2000 found that coaching and advising were growing more important, not less so: a venture partnership called Mohr Davidow retained five operating partners whose full-time job was to parachute into portfolio companies to provide managerial support, and Charles River Ventures in Boston retained no fewer than a dozen staff to help startups with executive search, equipment leasing, contract law, and other functions. Paul Gompers of the Harvard Business School described these developments as progress. “It’s the evolution of venture capital from an art into a business,” he suggested. 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 handful of ventures that were truly worth backing.The founders of these outstanding startups were necessarily so gifted that a bit of VC coaching would barely change their performance. “When you look at the strongest performers in our portfolio, they are, generally speaking, the companies that we have the least amount of engagement with,” one Founders Fund partner observed bluntly. It might flatter venture investors’ egos to offer sage advice. But the art of venture capital was to find rough diamonds, not to spend time polishing them.

  • As if this were not sufficiently provocative, Thiel went further. To the extent that VC coaching did make a difference, he contended, it might well be negative. When venture capitalists imposed their methods on founders, they were implicitly betting that tried-and-tested formulas trumped outside-the-box experiments. To 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 contrary, venture capitalists should embrace contrarian and singular founders, the wackier the better. Entrepreneurs who weren’t oddballs would create businesses that were simply too normal. They would come up with a sensible plan, which, being sensible, would have occurred to others. Consequently, they would find themselves in a niche that was too crowded and competitive to allow for big profits. It was surely no coincidence, Thiel continued, that the best startup founders were often arrogant, misanthropic, or borderline crazy. Four of the six early PayPal employees had built bombs in high school. Elon Musk spent half the earnings from his first startup on a race car; when he crashed it with Thiel in the passenger seat, all he could do was laugh about the fact that he had failed to insure it. Such extremes and eccentricities were actually good signs, Thiel contended; VCs should celebrate misfits, not coach them into conformity. A few years into its existence, Founders Fund made an expensive error by refusing to invest in the ride-hailing startup Uber; its bratty founder, Travis Kalanick, had alienated both Howery and Nosek. “We should be more tolerant of founders who seem strange or extreme,” Thiel wrote, when Uber had emerged as a grand slam. “Maybe we need to give assholes a second and third chance,” Nosek conceded contritely.

  • If Thiel opposed VC mentoring of founders lest it suppress quirky genius, he also disliked it for another reason. From the investor’s point of view, there was a hefty opportunity cost. Venture capitalists who spent their days mentoring portfolio companies would not be seeking out the next batch of investment opportunities. At one point, Luke Nosek allowed himself to be sucked into the troubles at a portfolio company called Powerset: the CEO had left, and the company was desperate to sell itself to an acquirer. “I put tons of effort into this and I made like $100,000,” Nosek remembered ruefully. And because he was preoccupied with Powerset, Nosek failed to pursue opportunities elsewhere, including in Facebook and Twitter. “I was just too busy, and I never ended up meeting with the people.”

  • Founders Fund resolved that it would never eject founders from their startups, no matter how strangely they behaved; fifteen years later, it had stuck faithfully to this principle. Indeed, Founders Fund never once sided against a founder in a board vote, and was generally content to do without a board seat. It was a bold reversal of the hands-on tradition established by Don Valentine and Tom Perkins.

  • Thiel acted on his faith in mavericks by recruiting investing partners who themselves tested convention. His first-ever conversation with Luke Nosek had been about how Nosek wanted to be frozen upon death in hope of medical resurrection. This did not stop Thiel from welcoming Nosek into his partnership. Likewise, Sean Parker had been in trouble with the law, not to mention with power brokers such as Moritz; Thiel nonetheless embraced him. To banish consensual thinking, Founders Fund broke with the industry practice of Monday partnership meetings, replacing the Sand Hill Road tradition of collective responsibility with radical decentralization. Founders Fund investors sourced deals independently, even writing some small checks without consulting one another. Bigger bets required consultation—the bigger the check, the more partners had to assent—but even the biggest investments did not require a majority to vote in favor. “It usually takes one person with a lot of conviction banging their fist and saying, ‘This needs to be done,’” one partner explained.

  • Like Soros’s, Thiel’s philosophical interests convinced him of the case for unusually aggressive risk-taking. Soros’s longtime partner and alter ego Stanley Druckenmiller observed that huge and well-timed gambles were the essence of Soros’s genius. Soros was right about the market’s direction no more often than other traders. What distinguished him was that when he felt a truly strong conviction, he acted on it more courageously. 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 seemed merely solid; in venture, the median investment was a failure. But when he encountered a potential grand slam, Thiel was ready to pile his chips onto the table. In 1998, his $300,000 bet on Max Levchin had been three times bigger than Andy Bechtolsheim’s bet on Brin and Page, even though at that time Bechtolsheim had more money to play with. In 2004, Thiel’s angel check to Facebook was thirteen times larger than the checks written by Hoffman 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.

  • Thiel liked to tell a story about Andreessen Horowitz, another upstart venture shop of which we shall hear more later. In 2010, Andreessen Horowitz invested $250,000 in the social-networking app Instagram. It was by some metrics a spectacular home run: two years later, Facebook paid $1 billion for Instagram, and Andreessen netted $78 million—a 312x return on its investment. And yet by other measures this was a debacle. Andreessen Horowitz made the Instagram investment out of a $1.5 billion fund, so it needed fully nineteen $78 million payouts merely to break even. To have backed a winning company was nice for the ego. But the brutal truth was that Instagram had been a wasted opportunity. In contrast, when Founders Fund got excited about a follow-on opportunity to invest in Facebook in 2007, Nosek went all in. He called up the Founders Fund limited partners and persuaded them to plow extra capital into a Facebook-only special purpose vehicle. Then he invested his parents’ entire retirement fund in the company.

  • As time went by, Thiel embraced an extra source of risk. As well as writing big checks, he backed increasingly audacious projects. A couple of years after launching his venture fund, he explained that he intended to go after the “somewhat riskier, more out-of-the-box companies that really have the potential to change the world.” Rather than confining himself to fashionable software, he would underwrite moon shots in less obvious fields that might be more important and lucrative.

  • In July 2008, right after SpaceX’s third attempted rocket launch had failed, Nosek persuaded Thiel to bet fully $20 million on Musk, receiving in exchange about 4 percent of his company. One decade later, SpaceX had achieved a heady valuation of $26 billion. Through this and other high-risk wagers, Founders Fund established itself as a top-performing venture shop, a vindication of its hands-off, high-risk, radically contrarian approach to startup investing. For the traditional VC industry, the warning was clear. The youth revolt—started by the Googlers, dramatized by Zuckerberg’s pajama prank—was now being institutionalized by Thiel and his fund. And the Thiel effect was compounded by a second venture upstart, launched almost simultaneously by another cultish critic of the venture establishment.

  • Rieschel would climb into his car and drive past endless construction teams, at work on the next skyscraper or subway extension. His meeting might get going at around ten in the evening and could carry on until one the next morning. There were hardware startups, software startups, medical startups, and all manner of e-commerce. With China’s economy growing at 10 percent per year, and with internet usage expanding roughly twice that quickly, the opportunities were everywhere.[3] Ordinary Chinese had computers, modems, cell phones, and more disposable income than their parents could have fathomed. “All you had to do,” Rieschel said later, “was sprinkle capital on that and stir.”

  • In 2005, Xu quit Hong Kong to establish Capital Today, her own Shanghai-based venture fund. She raised $280 million and went out to hunt for startups. Her plan was to make just a handful of investments, as few as five or six per year, and ride the winners for as long as possible. “There are not many great companies in the world,” she reflected, sounding like a Chinese version of Peter Thiel, who launched Founders Fund in the same year. “If you’re lucky enough to find one, hold on. That’s how you make money.”

  • From the day he attended his first Accel meeting, Efrusy was expected to participate in the decisions. He could propose an investment to the partnership, and if he convinced colleagues of his case, the investment would go forward. He could vote against proposals from others; even if the project was not in his wheelhouse, he was supposed to have a view on it. Nor was it enough to comment usefully; he was required to express a verdict, yes or no, and take responsibility for it. “There is a saying in our business, ‘If you are treated like an analyst, you are going to act like an analyst,’” Efrusy explained later. An analyst could point out the arguments on both sides of an issue, but that was different from taking a stand, and this difference defined the psychological gulf between being a venture capitalist and not being one. In the end, venture investing came down to that scary jump from messy information to a binary yes-or-no call. It came down to living with the reality that you would frequently be wrong. It was about showing up at the next partners’ meeting, rising above your wounded pride, and mustering the optimism to make fresh bets on a bewildering future.

  • A few months into Efrusy’s tenure, in October 2003, Accel conducted one of its “prepared mind” exercises. The investment team gathered at the Casa Madrona, an upscale place across the Golden Gate Bridge from San Francisco, in the pretty town of Sausalito. There was mountain biking in the afternoon, and a room was arranged to house the bikes of the two keenest young cyclists. But the serious reason for the meeting was that Accel had closed only four deals so far that year, fewer than most of its rivals. A series of slides listed sixty-two software or internet investments done by other top firms; next to some there were notes saying, “Aware—lost?” or “Aware—didn’t evaluate,” signifying that Accel had failed to invest despite knowing of the opportunity. The slides also noted the particular promise of a new kind of online business. If Internet 1.0 had been about selling stuff (Amazon, eBay), Internet 2.0 was about using the web as a communications medium. “‘2.0’ frenzy around social networking; Accel may have missed the boat,” one slide read. Having recognized Internet 2.0 as a hot field, the partnership’s leaders encouraged Efrusy and other junior members of the team to go after it. The way Accel’s founders saw things, there was a link between deliberately choosing a promising investment space, thereby reducing risk, and empowering the novices, thereby embracing risk. “It is a lot easier to turn young investors loose if you know they are working fertile ground,” Jim Swartz said later. With his mandate thus clarified, Efrusy began to look around. The first prospect to excite him was the internet telephony startup Skype. Here was a product that slashed the cost of long-distance calls, saving people real money.

  • Accel’s London office was also tracking Skype, and Efrusy set up a video call to introduce the startup’s Swedish creators to a London-based partner named Bruce Golden. For reasons of geographic proximity, Golden now became Accel’s point man in pursuing the possibility of an investment. Efrusy remained in the loop, rooting for the deal from California. Jim Swartz, who had assumed responsibility for the cultural fit between Accel’s California and London teams, helped to keep everybody on the same page. He shuttled back and forth each month, prompting and nudging to ensure that the two offices collaborated productively. Golden was impressed by Skype’s innovation and its exploding popularity. But he soon understood that Skype would be a challenging investment; there was more “hair on the deal” than he had ever seen before, as he wrote in his investment note. Accel was accustomed to backing solid, straight-arrow entrepreneurs, but Skype’s founders had been sued by the entertainment industry over online music theft. Accel favored startups that developed intellectual property that entrenched their market leadership; worryingly, Skype licensed its IP from a separate company and did not actually own it. Finally, Skype’s founders were ruthless and inconstant in the negotiations over the term sheet. “I felt I was being jerked around,” Golden said later. “The commitment that they had expressed to work with us seemed to mean little to them.” In the end, “Skype looked too weird to us,” Efrusy recalled. “We decided not to do it. And then it proceeded to take off, up, up, up every month.” As Skype’s value soared, the Accel partners recognized the magnitude of their error. In venture, backing a project that goes to zero costs you one times your money. Missing a project that returns 100x is massively more painful. “There were some colleagues who said we should have locked the Skype guys in a room and not let them out until they signed,” Golden remembered, perhaps with Efrusy in mind. “There was a lot of frustration within the partnership.” But the good news was that Accel’s distinctive culture gave it a way of processing its miss. It could build on the prepared-mind exercise begun in Sausalito.

  • Accel had also offered term sheets to a quiz company called Tickle and a photo-sharing site called Flickr. Just as with Skype, Accel had felt concerns about both firms and lost out to rival bidders. Now, as they extended the prepared-mind exercise, Efrusy and his colleagues turned these experiences into a pair of lessons. First, Accel must reach beyond the reassuring engineers whom it was used to backing. Experience showed that consumer internet companies were often founded by unorthodox characters: Yahoo and eBay had been founded by hobbyists. Second, the good news about consumer internet companies was that you could judge their prospects in a different way: you could look past the founders and analyze the data on their progress. The next time Accel came across an internet property that customers turned to multiple times per day, it should seal the deal no matter what. In a world of power-law returns, the costs of missing out were higher by far than the risk of losing one times your money. As one of the keenest proponents of the Skype deal, Efrusy could see that the partnership’s mindset had evolved. Accel would not be weirded out by the next Skype-type opportunity. “When I first arrived at Accel, I thought prepared mind was bullshit,” Efrusy recalled later. “It isn’t.”

  • For Sean Parker, the Accel-Facebook deal brought two kinds of reckoning. On the positive side, it cemented his reputation as a master negotiator. He played the venture suitors skillfully, securing a string of additional victories in the last phase of the talks, leaving Zuckerberg with more wealth and control over his company.

  • Kleiner’s descent was especially striking because of the path dependency in venture performance. VCs who back winning startups acquire a reputation for success, which in turn gives them the first shot at the next cohort of potential winners. Sometimes they get to buy in at a discount, because entrepreneurs value the imprimatur of renowned investors. This self-reinforcing advantage—prestige boosts performance, and performance boosts prestige—raises a delicate question. Is there really skill in venture capital, or are the top performers merely coasting on their reputations? The story of Kleiner Perkins illustrates what academic study has confirmed. Reputation matters, but it cannot guarantee outcomes. Success has to be earned afresh by each successive generation.

  • Astonishingly, the firm that had minted money during the first internet wave, preaching the power of Moore’s law and Metcalfe’s law, rushed into a sector that lacked these magical advantages. And yet there is another side to the story—one that reveals a subtler truth about the venture business. As Accel’s Facebook deal suggested, and as many other case studies confirm, venture capital is a team sport: it often takes multiple partners to land a home-run deal, and the investors who lead the chase are not always the same as the stewards who guide the portfolio companies after the deals have been completed. For a venture team to work productively, the culture of the partnership has to be right. This is what Kleiner Perkins mismanaged spectacularly.

  • From the late 1980s through the early 2000s, Kleiner attained an equilibrium that was even more successful. John Doerr and Vinod Khosla emerged as the two successors to Perkins: they were both domineering, difficult, and wildly successful. Having two superstars at the table was much better than one: each could be a healthy intellectual check on the other. But, as in Kleiner’s early period, there were also less celebrated partners who were essential to the team. One named Doug Mackenzie was known for asking hard questions: in venture investing, the optimists get the glory, but the pessimists keep people grounded. Another partner named Kevin Compton was the keeper of Kleiner’s ethical flame. “Kevin was the moral compass,” a younger Kleiner investor remembered. “I adored him. Low ego. A great mentor,” said another.

  • When Doerr decided to bet the franchise on a challenging sector, nobody was there to check him. Compton and Mackenzie were especially missed: they were openly skeptical of cleantech, regarding it as too capital intensive, too slow to mature, and too hostage to the whims of government regulation. With the benefit of hindsight, Compton even argued that the cleantech error violated the lessons handed down by Tom Perkins himself. Far from going all in on high-stakes bets, Perkins had used small amounts of capital to eliminate the main risks in a venture—the “white-hot risks,” as he called them. Moreover, far from swooning over new technologies, Perkins often cautioned that for an innovation to matter, it had to be radically better than what came before. “If it’s not 10x different, it’s not different,” went his mantra. If Kleiner had not suffered a brain drain, Compton and Mackenzie would have been on hand to make these arguments. But without the old gang at the table, “John became impossible to challenge,” an insider recalled, probably exaggerating only slightly. Tom Perkins’s firm went from being a white-hot-risk eliminator to a Hail Mary risk-taker.

  • An email arrived, and Shleifer clicked on the promised spreadsheet. There were tabs for internet infrastructure, dot-com consumer companies, and companies that provided online services such as search engines or job postings. Shleifer homed in on the part of his friend’s spreadsheet listing the Chinese web portals that had gone public just before the bubble burst: Sina, Sohu, and NetEase. All three had taken off with the help of venture capitalists like Shirley Lin and Kathy Xu, who had bet on the character of the founders and the potential of their markets. But now Shleifer would apply a different kind of investment skill. The three portals had matured to the point where they had customers, revenues, and costs. An analyst with twelve hundred hours of training at Blackstone could model their fair value. Shleifer began by applying a technique that was standard at Blackstone but foreign to most Valley investors. Rather than looking at profit margins—that is, the share of revenues remaining after costs are deducted—he looked at incremental margins, meaning the share of revenue growth that falls to the bottom line as profits. Any amateur could see that the three Chinese portals all had negative margins; put simply, they were losing money. But a pro would know to focus on the incremental picture, and this looked spectacularly positive. As revenues grew, costs grew much less, so most of the additional income showed up as profits. It followed that growth would soon drive the three portals into the black. By thinking incrementally, Shleifer could see into the future.

  • Encouraged, Shleifer set out to discover more about the companies. This was a challenge. After the tech crash, the Wall Street investment houses had ceased to write reports on the portals; often they would not even release their old reports, because they were mired in post-crash lawsuits. But fortunately for Shleifer, the CEOs and finance chiefs of his three Chinese investment targets were all comfortable in English. He set up a string of phone appointments, then stayed in the office overnight to make the calls during Chinese work hours. On each call, Shleifer mentioned breezily that the portals’ rapid growth should be expected to slow. He was inviting his interlocutors to confess weakness. No, came the reply. The growth of China’s online ads was only just getting started. “What about costs?” Shleifer probed. If revenues grew, wouldn’t costs grow also? Sure, costs would grow, the answer came. But much more slowly than revenues. Shleifer registered this good news: incremental margins were going to remain juicy. But he also fixed on something unexpected. One after another, the voices on the phone declared that he was the first western financier they had spoken to in ages. In Silicon Valley, investors pursue deals because other investors are pursuing them. There is a logic to this pack mentality, as we have seen: when multiple prestigious venture capitalists chase after a startup, the buzz is likely to attract talented employees and important customers. But Shleifer’s East Coast training had taught him the opposite instinct. Recently, he had read an investment bible by the Fidelity fund manager Peter Lynch that described how to identify potential 10x bets. “Stalking the Tenbagger,” Lynch called this process. The way Lynch explained things, if you liked a stock but other professional investors did not own it, this was a good sign; when the others woke up, their enthusiasm would drive your stock higher. By the same logic, if you liked a stock and Wall Street analysts did not cover it, this too was a good sign: shares were most likely to be mispriced when nobody was scrutinizing them. Finally, in an uncanny premonition of Shleifer’s China calls, Lynch listed a third important buy signal. When chief financial officers tell you that they haven’t talked to an investor in ages, you really may be onto something. Feeling his excitement build, Shleifer took his notes from the phone calls and fed them into his earnings model. For now, of course, the portals were losing money. But because revenues were growing much faster than costs, profits in 2003 were set to surge: they would come in at around one-third of the companies’ market capitalization. In 2004, Shleifer calculated, the profits might equal two-thirds of market cap, and for 2005 he penciled in a one-for-one ratio. Said differently, an investor could buy these portals almost for free. If Tiger Global put in, say, $10 million, it would acquire a claim on $3.3 million of profits the first year and $6.7 million the second year, so it would have earned its cost of acquisition back. In the third year it would have a claim on another $10 million in earnings, with the out-years promising exponential bonanzas.

  • Quieter and less impulsive, Coleman was the perfect check on Shleifer’s rational exuberance. But in this case Shleifer took him through the numbers and quickly won him over. The fact that Shleifer was proposing to place bets in a country he hadn’t visited did not bother Coleman in the least. Julian Robertson, the founder of Tiger Management, taught that the best investments were often to be found abroad, where Wall Streeters were thin on the ground and local investors were unsophisticated. “Why would I sit here and try to hit major-league pitching, if I can go to Japan or Korea and hit minor-league pitching?” Coleman remembered Robertson saying. It was the inverse of the traditionally parochial outlook of Silicon Valley investors. During September and October 2002, Tiger Global duly bought $20 million worth of Sina, Sohu, and NetEase, committing a bit under a tenth of the fund’s $250 million portfolio. A tiny team of New Yorkers became the largest public shareholder in China’s digital economy.

  • Shleifer now acted on another Julian Robertson dictum: to assess the outlook of a company, you talk to its customers. He found out who was buying ads on the Chinese portals, contacted the purchasers, and probed them on whether they were likely to spend more. The good news, Shleifer discovered, was that the e-commerce players that accounted for most of the ad buying were extremely satisfied with the results: more ads meant more sales for them. What’s more, their own businesses were booming, meaning that they would surely buy even more ads in the future; therefore, the stocks of Sina, Sohu, and NetEase were still worth holding. But the booming growth of the e-commerce companies also meant that they needed to raise capital. Sensing another round of ten-baggers, Shleifer resolved to take a trip to China.

  • For most traditional hedge funds, the illiquidity of Shleifer’s proposed China bets would have made them a nonstarter. The freedom to dump positions at a moment’s notice was central to the hedge-fund style: George Soros was famous for responding to stray comments at meetings by springing out of his chair to reverse one of his wagers. The ability to go “short” as well as “long”—that is, to bet on the decline of stocks as well as their advance—was another prized hedge-fund freedom; if Tiger moved into private assets, there would be no way to short them. But fortunately for Shleifer, his boss, Chase Coleman, was ready to rethink the standard formula. When he had worked for Julian Robertson, Coleman’s job had been to look for short and long ideas amid the dot-com bubble of the late 1990s, and he had discovered firsthand why long bets are superior. A great short position could make you a maximum of 100 percent, if the company went to zero. A great long position could make you five or ten times capital. “Why do twice as much work to make half the profit?” Coleman ended up thinking. Besides, the synergies from investing in both public and private companies would be a boon. Understanding public companies would help Tiger to identify good private companies, as Shleifer was demonstrating in China. The more he considered Shleifer’s proposed bets, the more Coleman wanted to do them. But he still had to manage the liquidity risk—the danger of holding unsellable positions using capital that could be withdrawn at short notice. In July 2003 he came up with a fix: he would set up a separate pool of capital to make private investments. The analytical techniques of hedge-fund investing would be married to the structure of a venture-style fund, with the limited partners locked in for long periods. True to the hedge-fund tradition, Tiger Global would rely on its facility with earnings models; it would not make subjective VC-style bets on an entrepreneur’s character or vision. True to that same hedge-fund tradition, Tiger would also take a global view; it had no interest in embedding itself in a dense local network, the way that VCs did. But borrowing from the venture-capital tradition, Tiger would use locked-in long-term funding to invest in private tech. It would just sit out the first stages of a startup’s life, allowing it to see which entrepreneurs were really good rather than which talked a good game at pitch meetings.

  • Coleman went on to explain that Tiger’s top-down analysis had singled out China as the world’s most promising digital market. The share of Chinese citizens who had internet connections was set to triple in the next five years, and other forces would compound this leap. Improving bandwidth would increase time spent online; China’s economic growth was stunning. Already, Coleman told the investors, Tiger had visited China and identified five promising bets: the country’s top two online travel sites, its top two e-commerce sites, and a business marketplace called Alibaba.

  • In a testament to the difference between venture thinking and the hedge-fund mindset, the one that Tiger chose to drop was Alibaba. Shleifer had negotiated a term sheet to buy 6.7 percent of the company for $20 million; it was a bet that could have earned the partners billions. But Tiger was put off by the fact that Jack Ma was difficult to pigeonhole: he had a site that helped western businesses find Chinese suppliers, but he was planning to pivot to the different field of eBay-style auctions. An investment in Alibaba was not simply a bet on “the this of the that”; it was a bet on an entrepreneur who proposed to conquer a new market. By gauging Ma’s character and the quality of his team, a venture investor might have gotten comfortable with this gamble. But Tiger’s method, which in many instances brought glory, led it astray this time. Its focus on metrics such as incremental margins could not capture the value of entrepreneurial genius.

  • To mark themselves out, Andreessen and Horowitz proposed a fresh approach to technical founders. They promised not to displace them, as traditional VCs had often done. But they also promised not to abandon them, as newer VCs might do. Rather, they would coach technical founders as the tough questions arose: how to motivate executives, how to rally sales teams, how to sideline a loyal friend who has poured all his energy into your company. At the same time, Andreessen and Horowitz would supply technical founders with the sort of Rolodex that a seasoned CEO would have—connections to customers, suppliers, investors, and the media. Accel had differentiated itself by specializing in certain fields; Benchmark had pitched its “better architecture” of high fees and small funds; Founders Fund had pledged to back the most original and contrarian companies. For their part, Andreessen and Horowitz promised to smooth the learning curve for scientists who wanted to be chief executives. As Andreessen and Horowitz cheerfully admitted, brazen PR was a large part of their strategy. Horowitz was something of a Paul Graham figure, but on a grander scale: a computer scientist turned entrepreneur who wrote a blog on business and life that attracted a cult following. Andreessen, for his part, had an even stronger brand, and he and Horowitz were keen to exploit it. Known as the genius behind Netscape, memorable for his six-foot-five-inch frame and towering bald skull, Andreessen juggled ideas at intoxicating speed, nailing his conclusions with a rat-a-tat-tat of stories, facts, and numbers. Around the launch of his new venture firm, Andreessen appeared on the cover of Fortune and sat for an hourlong television interview. “Our claim to fame is ‘by entrepreneurs for entrepreneurs,’” he declared confidently.

  • Of course, Andreessen’s pitch was less original than he pretended. Many venture capitalists—nearly all the early Kleiner Perkins partners, not to mention Thiel, Graham, Milner, and others—had entrepreneurial experience. The idea of coaching founders was not original, either. When Michael Moritz helped to turn Jerry Yang into a celebrity, or when he persuaded Max Levchin of PayPal not to sell his firm prematurely to eBay, he was coaching technical founders to be business leaders. Nor was it even clear that entrepreneurship was the best background for a venture capitalist. An entrepreneur typically had worked at just one or two outfits, whereas VCs who had joined the investment business young had been in a position to see under the hood of dozens of startups. A couple of years earlier, in 2007, no less a figure than Andreessen himself had mused, “There’s probably still no substitute for the VC who has been a VC for twenty years and has seen more strange startup situations up close and personal than you can imagine.”

  • In June 2009, the month after Milner closed his Facebook deal, Andreessen Horowitz announced it had raised $300 million from investors. To make good on the promise of coaching founders, the partnership promised to recruit a much larger head count than other VC outfits. In the past, other VCs had hired “operating partners” who focused on helping portfolio companies rather than making investments, but Andreessen Horowitz aimed to build an extensive consultancy under its roof. There would be a team to help startups find office space, another to advise on publicity, and yet others to source key recruits or provide introductions to potential customers. Up to a point, this promise of coaching corresponded to the reality. Andreessen Horowitz—its name frequently abbreviated to a16z—backed a string of technical founders and helped them to learn the rules of business. Often, the key interventions came not from the elaborately staffed consulting service but from Andreessen and Horowitz themselves.

  • Jason Calacanis, an entrepreneur who saw the inside of many venture shops, recalled how Moritz and Leone instilled a culture that made the partnership stand out. “I would show up at Sequoia at 8:30am for an appointment and see the top partners in conference rooms, meeting with startups. I would swing by Sequoia for coffee at 4pm and see the same partners still there, still meeting with startups.” Stamina was just the start of the Sequoia formula. Moritz and Leone focused uncompromisingly on the culture of the firm: external investment hits would flow from an internal quest for excellence. Moritz once enumerated the challenges that this 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.” From this long list, team building and the development of young talent were particular priorities. Sequoia believed in “nurturing the unknown, the homegrown, and what becomes the next generation,” as Moritz put it. Of course, this was a fair description of what Accel had done by training Kevin Efrusy. But Sequoia nurtured new recruits even more purposefully.

  • Like all recruits to Sequoia, Botha began by shadowing his experienced colleagues. He sat in on board meetings with different senior partners and at different types of companies, absorbing a range of contrasting startup cultures. He soaked up tips from old-timers: Don Valentine told him right away that the best founders are the ones who are the most difficult. After a few months at the office, Botha brought in one of his first investments, a remittances company called Xoom, and an older partner proposed a win-win arrangement. To begin with, the senior partner would go on Xoom’s board, bringing Botha to the meetings as an observer. Then, if Xoom succeeded, the two would switch roles, so that Botha would gain professional standing as a director of a buzzy startup. “Look, if the company doesn’t work out, the stain is on my name, not yours,” the senior partner said. Botha agreed, Xoom ultimately flourished, and Botha duly completed his apprenticeship and stepped up to be a board member. It was the inverse of the experience at Kleiner, where senior partners grabbed the best opportunities off the plates of younger investors. It was superior even to Accel, where the managing partner, Jim Breyer, had occupied the Facebook board seat. It took several years before Xoom turned good, and in the meantime Botha’s partners helped him through the inevitable dark periods. Unsuccessful startups generally fail faster than good ones succeed, so demoralizing losses materialize before the winners. The first time Botha had to report that one of his companies was a zero, he teared up at the partners’ meeting: normally, he was composed and certain of his judgment; failure was acutely painful. Then, three years into his tenure, Botha shifted from anguish to elation. In 2005 he led Sequoia’s Series A investment in the video platform YouTube, and in 2006—after a freakishly brief gestation—the company was snapped up by Google, delivering a return of around 45x on Sequoia’s investment. Another three years later, Botha was in the dumps again. He began torturing himself not about the investments that went wrong but about the great ones that escaped him. He had passed on Twitter when it had been a crude messaging technology. He had gone after Facebook, only to suffer through that strange pajama performance. Even the YouTube triumph turned sour in Botha’s mouth: in retrospect, Sequoia had sold out too early. For any venture investor, these swings of fortune can play havoc with judgment. A dark period lumbers you with excess caution as you size up the next deal; inversely, joy can lead to hubris. Looking back on this period, Botha credits his partners with keeping him centered. When he was down, they encouraged him to take the shot. When he was up, they saved him from getting starry-eyed about a startup’s prospects.

  • Despite Sequoia’s cerebral and disciplined culture, the firm’s team-building efforts included a surprisingly soft side. Partnership off-sites began with something called “check-ins”: colleagues opened up to one another about marital tensions, insecurities at work, or a sickness in the family. “If you’re willing to expose yourself and nobody takes advantage of it, it creates a trusting atmosphere,” Doug Leone reflected. The off-sites also featured poker tournaments: Partners competed for the “Don Valentine tartan,” a monstrously garish red, yellow, and black jacket. At one retreat, during an intensely muddy game of flag football, Botha allowed his South African childhood to seize control of his instincts. He barreled toward a muscular opponent and felled him with a rugby-style tackle. “It was one of the moments that unlatched our friendship,” Botha remembered later.

  • The team building extended to the way that Sequoia celebrated its successes. When a portfolio company achieved a profitable exit, the newspapers would profile the named partner on the board, as though venture were a lone-wolf business. Sequoia itself went out of its way to ascribe the triumph to the group; successful investments were nearly always a collective effort. For example, when Sequoia toasted the second-biggest windfall thus far in its history, the sale of the messaging service WhatsApp, the partnership’s internal “milestone memo” began by saluting Jim Goetz, the partner who had led the deal and who had been Botha’s flag-football victim. But the memo pivoted quickly to a different message: WhatsApp had been a “classic Sequoia gang tackle.” More than a dozen partners had contributed to this win: Sequoia’s in-house talent scouts had helped WhatsApp quintuple the size of its engineering team; Botha and Moritz had advised the company on its distribution and global strategy; Sequoia’s teams in India, Singapore, and China had provided on-the-ground intelligence; the partnership’s communications chief had prepared Jan Koum, WhatsApp’s introverted CEO, to be a public figure. The milestone memo gave a special shout-out to an office assistant called Tanya Schillage. At 3:00 the previous morning, Koum’s car had broken down en route to finalizing the sale documents, and Schillage had sprung into action and found Koum a new ride. Somehow, in a flourish of nocturnal overachievement, she had managed to supply Koum with nearly the same model of Porsche that he’d been driving.

  • The main innovation pushed by Jim Goetz was an emphasis on proactive thinking. He had begun his investing career at Accel, where he had absorbed the idea of the “prepared mind,” and he saw that this top-down, anticipatory approach could be especially useful at Sequoia. Because of Sequoia’s status as the Valley’s leading venture firm, most startup founders were eager to pitch to it; by the partnership’s own reckoning, it was invited to consider around two-thirds of the deals that ended up getting funded by the top two dozen venture shops. But this privileged deal flow was both a blessing and a curse. The partners’ days were crammed with meetings organized at the visitors’ request. It was easy to become reactive.

  • To manage this danger, Goetz brought Accel’s prepared-mind approach to Sequoia, leading the partners in mapping out tech trends and anticipating which sorts of startups would prosper from them. He was early to sketch out a detailed picture of the mobile internet landscape, laying out the base stations that phone carriers would have to build, the chips that would go into the handsets, and the software that would run on them. Another prepared-mind “landscape” showed the shift of data from customer devices to the cloud, anticipating the new hardware configurations, software business models, and security vulnerabilities that would flow from it. Yet a third landscape focused on “the rise of the developer.” Worldwide, a mere twenty-five million coders—one-third of 1 percent of the global population—were writing all the software that was transforming modern life. Anything that boosted the productivity of this small tribe would be immensely valuable. Predating Marc Andreessen’s declaration that “software is eating the world,” this last prepared-mind exercise became the springboard for a raft of Sequoia investments: Unity, a software development platform for 3-D movies and games; MongoDB, a database company; and GitHub, the leading repository for open-source code. By late 2020, Sequoia’s stakes in these three firms were worth a combined $9 billion. While Goetz led on the prepared mind, Botha pioneered the application of behavioral science to venture capital. This was a radical idea, and Botha’s colleagues came to regard it as transformative for Sequoia. At other venture partnerships, investors often boasted about relying on instinct. They claimed to have “pattern recognition,” an investment sixth sense; “I’ve had this my entire career, and I do not know why,” one successful VC said happily. But Botha pointed out that in well-known experiments stretching back to the 1970s, psychologists had shown how human reflexes distort rational decisions, and he set out to apply the resulting insights to Sequoia’s Monday partners’ meetings. The goal, at a minimum, was to make the investment process consistent from one week to the next. “Sometimes we felt that if a particular company had been there the previous Monday, or the subsequent Monday, our decision would have been different,” Botha explained. “That didn’t feel like a recipe for sustainable success.”

  • Botha’s focus on behavioral science grew partly out of the premature sale of YouTube. In accepting Google’s acquisition offer, the founders had behaved precisely as behavioral experiments predict: people are often willing to gamble in order to avoid a loss, but they are irrationally risk averse when it comes to reaching for the upside. Examining the pattern of Sequoia’s exits, Botha determined that premature profit-taking occurred repeatedly at the firm, despite Moritz’s earlier efforts to extend the partnership’s holding periods. The behavioral literature also drew attention to another tendency that Botha observed: VCs suffered from “confirmation bias,” the practice of filtering out information that challenges a position you have taken. At Sequoia, the partners sometimes missed attractive Series B deals because they wanted to make themselves feel good. They hated to admit they had been wrong in saying no to the same startup at the Series A stage.

  • The first step toward overcoming cognitive bias is to recognize it. Botha arranged for outside psychologists to present to the partnership. He led his colleagues through painful postmortems of past decisions, homing in on times when they had weighed evidence irrationally. Previously, the partners had tried to extract lessons from portfolio companies that had failed. Now Botha was equally focused on the times when Sequoia had declined to invest in a startup that subsequently succeeded. To enable scientific postmortems, the partners kept a record of all votes at investment meetings. “It’s not about scapegoating,” Botha explained. “It’s just ‘What did we learn as a team?’ If we can get better at decisions, that is a source of advantage.”

  • As well as running postmortems, Botha began to build new habits into real-time decision making. To overcome the risk-aversion identified by decision science, the partners included a “pre-parade” section in each investment memo—a description of how the company would turn out assuming everything went perfectly. By building this exercise into their process, the partners gave themselves permission to voice their excitement about a deal, and to do so with a fullness that would otherwise have been uncomfortable. “We all suffer from the desire not to be embarrassed,” Jim Goetz reflected. “But we’re in the business of being embarrassed, and we need to be comfortable enough to say out loud what might be possible.” Sequoia also began to design around the problem of “anchoring”—that is, basing a judgment on other people’s views rather than wrestling with the evidence and taking an independent position. At most venture firms, partners chat with one another about the startups they are sizing up, partly to solicit advice and partly to recruit allies ahead of the vote at the Monday meeting. At Sequoia, the partners resolved that to arrive at the most rational decision possible, this vote canvassing should stop. Ahead of a decision, each of them would read the investment memo with an unpolluted mind; they should do their utmost to avoid groupthink. Then they would come to the Monday meeting prepared to take a stand. “We don’t want passive ‘do it if you want,’” Leone said. “The sponsor needs help. It’s a very lonely place to be the lead on an investment.”

  • In 2010, acting on an idea from Moritz, Botha began to build Sequoia’s “scouts program,” an inspired variation on the idea of angel investing. The insight was that most angel investors were yesterday’s leaders. They had cashed out from their startups; they had money to play with; but their understanding of the business landscape was dated. Meanwhile, active entrepreneurs had their wealth tied up in their firms, so they lacked the ready cash to make angel investments. With the advent of growth investing, this was becoming more of a problem, because entrepreneurs were delaying the moment when they took their gains out of their companies. “You’re Drew Houston in 2012 and you’re worth $100 million but you can’t make rent, never mind have the luxury of investing in other companies,” Botha explained, using the example of one of Dropbox’s two founders. So Botha and his partners came up with a fix. “We give you $100,000 to invest. We take half of the gains, but you as the scout get to keep the rest.” Of course, the effect of this arrangement was to generate investment leads for Sequoia. Today’s top entrepreneurs were identifying the brightest stars in the next cohort.

  • Toward the end of the 2010s, Sequoia began to lay on workshops for entrepreneurs: an event called Base Camp gathered founders for weekends in the mountains, featuring campfires, wigwam tents, and speakers on everything from technology to architecture. Another offering called the Company Design Program featured courses taught by the firm’s partners. Amid the coronavirus pandemic of 2020, the partnership launched a founders’ app called Ampersand. Sequoia-backed entrepreneurs used it to stay in touch with one another and test management ideas. Should they adjust compensation when workers went remote? How to help team members whose mental health deteriorated?

  • The best venture capitalists consciously create their luck. They work systematically to boost the odds that serendipity will strike repeatedly. Most of the modern Sequoia’s venture triumphs can be traced to this sort of systematic work, put in place in the first years of the new century. By recruiting the young Roelof Botha and deliberately building his credentials, Sequoia laid the groundwork for billions of dollars of profits. After his wins in YouTube and Xoom, Botha followed up with a string of grand slams: the fintech company Square, the genetics testing outfits Natera and 23andMe, the social-media hit Instagram, and the database innovator MongoDB. When Forbes published its Midas List in April 2020, Botha ranked third. Five months later, he celebrated the stock market debut of the 3-D software platform Unity and a gain for Sequoia of more than $6 billion. A skeptic might object that this story sounds too simple. Did Sequoia’s coaching of Botha really generate those outsized wins, or was Botha himself unusually talented—or lucky? If Botha’s story is taken in isolation, it might be hard to say. But if you consider Sequoia’s efforts to cultivate each one of its recruits, the role of systematic groundwork becomes obvious. It was not just Botha who got an early chance to sit on the board of a successful startup: this was common practice at Sequoia. It was not just Botha who was paired with an experienced mentor: this too was standard. In a mark of the priority assigned to training, Doug Leone made a point of meeting new recruits for one-on-ones. What had the novice taken away from the most recent partners’ meeting, he’d ask, and what had been the subtexts? Sameer Gandhi, a junior partner at Sequoia before moving to Accel, remembers Moritz taking the trouble to coach him on time management. “Let’s look at your calendar for the last year, let me see where you’re going,” Moritz said. “Where did you spend time? Well, did you have to do that? Was that useful?” In sum, the success of Roelof Botha no doubt reflected his talent and fortune. But he worked in a culture that pumped up talent and manufactured extra luck. Small wonder that so many of his teammates flourished.

  • In the first half of the 2010s, Sequoia’s most successful U.S. bet was WhatsApp, the messaging service later sold to Facebook. Most accounts of this investment emphasize the hustle that Goetz showed. Jan Koum, the WhatsApp founder, was hiding in a building in Mountain View with no sign on the door and initially refused to answer Goetz’s emails. When Goetz finally landed a meeting, he was greeted by an unsmiling figure in a beanie and a fearsome stare. “I’m definitely in trouble,” Goetz remembered thinking. It took two months for Goetz to talk Koum into visiting Sequoia, and even then he trod with care. Rather than asking the introverted Koum to stand up and present to the full firm, he led him through a casual Q&A with a subset of the partnership. In the end, Goetz overcame Koum’s shyness and earned his trust. It was the perfect venture-capital fairy tale. Yet behind this fable of the hunt and the seduction, there was another story. As part of his focus on proactivity, Goetz had conceived a system he called “early bird”: seeing in the advent of the Apple App Store a trove of useful investment leads, Sequoia had written code that tracked downloads by consumers in sixty different countries. It was this exercise in digital sleuthing that alerted Goetz to WhatsApp: the messaging service was the first or second most downloaded application in around thirty-five of the sixty markets. Even though the service was not yet famous in the United States, it seemed only a matter of time before that changed, so Goetz made it his business to get to WhatsApp before his rivals spotted it. Of course, this early-bird system was not directly the cause of Goetz’s investment, but it boosted the chances of its happening. If you ballparked that boost in probability at, say, 10 percent, the value of creating the web crawler ran into the hundreds of millions, because Sequoia’s bet on WhatsApp generated $3.5 billion for the partnership.

  • McAdoo’s visit to the YC building was not at all casual. He was there because Sequoia had deliberately made itself the incubator’s primary ally, investing in multiple YC graduates and providing capital for YC’s own seed fund. McAdoo was able to wow the Airbnb founders because he had foreseen that the rental business was ripe for digital disruption, and he had spent time studying the ways in which incumbents could be challenged. Other VCs looked at Airbnb, then looked away: the idea that homeowners would take in strangers seemed wacky. The Sequoia investor arrived with a prepared mind. The habits encouraged by Goetz were paying dividends.

  • At any given time, Wang and his team focused on about five “themes”—waves of innovation that would shuffle the deck, creating winners and losers. The boom in cloud software was a fruitful example. In 2018, nine years after Pat Grady had first addressed his partners on the shift of software to the cloud, the hedge funders noticed something strange: most types of code had completed the predicted migration, but communications software was lagging. This anomaly seemed bound to end. The increasing acceptance of remote working would make video calls and messaging systems part of everyday life. The recent bankruptcy of a hardware-based communications software company, Avaya, suggested that the cloud’s moment was arriving. The hedge funders duly made three cloud-communications bets: Twilio, RingCentral, and the videoconferencing company Zoom. The first two generated 4x and 5x over the next two years. Assisted by the coronavirus pandemic, Zoom emerged as one of the breakout tech companies of 2020, generating 9x. Meanwhile, Sequoia’s hedge fund was short legacy telecom companies that would lose out from the transition to the cloud. One thematic insight had generated multiple winning positions.

  • At one point during his negotiations with Benchmark, Neumann asked for a preposterously high valuation. “You only have three buildings,” Dunlevie objected. “What do you mean?” Neumann shot back. “I have hundreds of buildings. They’re just not built yet.”

  • The news of Son’s gargantuan fund sent shock waves through the venture business. At Sequoia, Michael Moritz intervened forcefully in the firm’s strategy for the second time since his retirement from the helm in 2012. Having earlier insisted that Sequoia persevere with its hedge fund, he now urged his partners to raise a supersized growth fund: the firm had to fortify itself against the SoftBank bullying tactics that Moritz had experienced at Yahoo. “There is at least one difference between Kim Jong-Un and Masayoshi Son,” Moritz wrote to his top colleagues, referring to North Korea’s missile-wielding dictator. “The former has ICBMs that he lobs in the air while the latter doesn’t hesitate to use his new arsenal to obliterate the hard-earned returns of venture and growth-equity firms.” Armed with almost $100 billion, Son would distort the market for technology investments, driving up the value of some companies to the point that they might later crash, destroying the value of others that were forced to compete against his capital. Sequoia had to change its plan of action because Son was doing violence to the rules. “As Mike Tyson once said, ‘Everyone has a plan until they get punched in the face,’” Moritz wrote. “It’s time to bite some ears,” he added.

  • 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 generating the best performance. The rest of the industry will struggle: counting venture funds raised between 1979 and 2018, the median fund narrowly underperformed the stock market index, whereas the top 5 percent of funds trounced it. But, at least theoretically, the winners in this contest may merely be lucky: an initial run of success, possibly random, could set the network flywheel in motion.

  • Early hits for venture firms boost the odds of later hits: each additional IPO among a VC firm’s first ten investments predicts a 1.6 percentage point higher IPO rate for subsequent investments. After testing various hypotheses, the authors conclude that success leads to success because of reputational effects. Thanks to one or two initial hits, a VC’s brand becomes strong enough to win access to attractive deals, particularly late-stage ones, where a startup is already doing well and the investment is less risky.

  • Luck and path dependency appear to explain who wins in venture capital.

  • Despite his powerful reputation, Arthur Rock was unsuccessful after his Apple investment. Mayfield was a leading force during the 1980s; it too faded. Kleiner Perkins proves that you can dominate the Valley for a quarter of a century and then decline precipitously. Accel succeeded early, hit a rough patch, and then built itself back. In an effort to maintain its sense of paranoia and vigilance, Sequoia once produced a slide listing numerous venture partnerships that flourished and then failed. “The Departed,” it called them.