The Chris Voss Show - The Chris Voss Show Podcast – The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby

Episode Date: February 24, 2022

The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby From the New York Times bestselling author of More Money Than God comes the astonishingly frank and intimate story of Silicon Valley’s dominant venture-capital firms—and how their strategies and fates have shaped the path of innovation and the global economy Innovations rarely come from “experts.” Elon Musk was not an “electric car person” before he started Tesla. When it comes to improbable innovations, a legendary tech VC told Sebastian Mallaby, the future cannot be predicted, it can only be discovered. It is the nature of the venture-capital game that most attempts at discovery fail, but a very few succeed at such a scale that they more than make up for everything else. That extreme ratio of success and failure is the power law that drives the VC business, all of Silicon Valley, the wider tech sector, and, by extension, the world. In The Power Law, Sebastian Mallaby has parlayed unprecedented access to the most celebrated venture capitalists of all time—the key figures at Sequoia, Kleiner Perkins, Accel, Benchmark, and Andreessen Horowitz, as well as Chinese partnerships such as Qiming and Capital Today—into a riveting blend of storytelling and analysis that unfurls the history of tech incubation, in the Valley and ultimately worldwide. We learn the unvarnished truth, often for the first time, about some of the most iconic triumphs and infamous disasters in Valley history, from the comedy of errors at the birth of Apple to the avalanche of venture money that fostered hubris at WeWork and Uber. VCs’ relentless search for grand slams brews an obsession with the ideal of the lone entrepreneur-genius, and companies seen as potential “unicorns” are given intoxicating amounts of power, with sometimes disastrous results. On a more systemic level, the need to make outsized bets on unproven talent reinforces bias, with women and minorities still represented at woefully low levels. This does not just have social justice implications: as Mallaby relates, China’s homegrown VC sector, having learned at the Valley’s feet, is exploding and now has more women VC luminaries than America has ever had. Still, Silicon Valley VC remains the top incubator of business innovation anywhere—it is not where ideas come from so much as where they go to become the products and companies that create the future. By taking us so deeply into the VCs’ game, The Power Law helps us think about our own future through their eyes.

All right, folks. This is Voss here from thechrisvossshow.com, thechrisvossshow.com. Hey, we're coming here with another great podcast. We certainly appreciate you tuning in. As always, I mean, is there ever a day that you ever tune in to The Chris Voss Show and go, Chris Voss doesn't appreciate us today? There's never a day like that. You know why?

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And using a special coupon code of clicking the bell on the notification thing for free, you can get like thousands. I think it's like almost 5,000 videos over there at the Chris Voss Show. You can go watch them and enjoy them all at your leisure and comfort of your home or office or your car, wherever. Just go watch the damn videos already, please. Don't make me sell it anymore. Go to all of our groups, Facebook, LinkedIn, Twitter, Instagram. Go see the new LinkedIn newsletter. I think it's killing it over there. It's crazy over there. And our LinkedIn 132,000 member group. Today, we have an amazing author on the show. And I know everyone's going to be surprised by that.

They're like, Chris, you always have amazing authors. Where do you come from? Where do you get them? And we put them in the Google machine and they just pop up and go, wow, we should have these people on the show. They have these minds that are much larger than the rest of our brains. And they come share the tens of thousands of hours that they put into the research of their book. So the setup, uh, setups, setup is completely over.

Now we will announce the book. Uh, we just improv this every time, uh, Sebastian, uh, he is the author of the new book just came out, uh,

February 1st, 2022, the power law venture Capital and the Making of the New Future, I should say. Sebastian Malaby is on the show with us today. He's going to be talking about his amazing book and everything that went into it. He is the Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations, CFR, and an experienced journalist and public speaker, Malibu contributes to a variety of publications, including Foreign Affairs, The Atlantic, The Washington Post, and The Financial Times,

where he spent two years as a contributing editor. He is the author of five books, and most recently, the newest one that just came out. Welcome to the show, Sebastian. How are you? I'm so happy because I've been listening to you for the last three minutes. It cheered me up. Thank you. That's our job here.

We've got to sell the energy, if we will. That or a good cup of coffee. I mean, either one will get you places. So give us your plugs. Where can people find you on the interwebs and get to know you better? On the interwebs? You know those tubes in the sky? Not as many as you do, Chris,

but I do have a Twitter account which I do a bit. I've got a bit of LinkedIn. Find my webpage on cfr.org. That's like the vessel on foreign relations, cfr.org. Those are the main places. And you're the official second guest from CFR.

We had Dr. Richard Haas on, I think, about a year or two ago on his wonderful book. So what motivated you to want to write this book? Because you've written five, so what motivated you to want to do this one? It's a great question because I always take a long time doing these books. And so my kids say I'm lazy. I'm just an actionist. You have to make a calculation before I commit that amount of time. And in this case, there were two things that really got me into it.

The first is that venture capital, the business of investing in early stage technology companies is a mystery. I mean, how do you even start to do it? Like most investing, you can do a price earnings ratio or some other quantitative measure of whether this stock or bond is worth buying. With venture capital, you've got two-legged mammals who walk into your office with a dream and they say, we're going to build such and such. There's no quantitative nothing. I mean, price-earnings ratio, there's no earnings to measure, right? So how do you even begin to invest in the face of that kind of uncertainty? That was number one. And then number two is venture capital clearly has a massive, massive impact on how we live, right?

How we communicate with each other, how we entertain ourselves, how we work. In a way, if you think about it, it's like even how you find information and therefore how you arrive at an opinion, how you think. So this is pretty fundamental stuff and it's growing like anything. I mean, it's growing geographically to china and india and south east asia and europe and israel and latin america and then it's also growing along the life cycle of companies until they're way bigger than they used to be they still remain in venture capital hands they're going public when they're not worth very much like amazon did back in the day these echoicorns running around

with a valuation of $50 billion or whatever. And then they're doing it in terms of which technologies they get involved in. So food technology, e-batteries for new vehicles, all that stuff. So this is just all over the place. You can't walk out of your front door without

tripping over it. So I wanted to understand that. So you went in and interviewed a lot of different access to the book is billed as Parley'd Unprecedented Access to the Most Celebrated Venture Capitalists of All Times. A lot of my friends

are in the VC community in Silicon Valley. Some of them may work for some of these places. Sequoia Kleiner Perkins Excel, Benchmark, it was a very huge company, Andreessen Horowitz, of course which

A16s, you know funded so much stuff as well as Chinese partnerships such as I'm not sure I'm going to pronounce this correctly Qiming yeah, and so you got access to all these venture capitalists to talk to them about their concepts, their outlook on life, and how they're potentially making a new future.

Yeah. I mean, it was a real journey. It took a while to get introduced to the people who knew the real people, to build enough trust that people were open to talking. Once I did, it was really fascinating to understand the answer to that question of how do you allocate your capital when there are no objective measures of what to invest in. It's just like, do you believe this person's vision or that person's vision?

Yeah. There are some cool ideas around, for example, decision science, how you take behavioral distortions, ways that our brains are wired, and try and correct those so you make better decisions. Mm-hmm. The title of the book, The Power Law, what does that refer to? That refers to, some people call it the 80-20 rule.

In other words, 80% of the profits are going to come from 20% of your investments. Many startups that get backed will fail. That's just the rule of how it works. But a couple in a portfolio of 10 will take off and do 10x or 20x the amount of capital invested. That's a power law return and hence the title of the book. Yeah. It is an interesting business that they're in. And I remember early on, I forget who the early investor was in Twitter, and he used to talk a lot during the launch of social

media. And when we were all kind of in the launch of Twitter and Facebook, Facebook had been around for a while. LinkedIn came around to that time. Um, and, uh, Fred Wilson, uh, of union square partners. I don't know if he's still with them, but I think it's his company. Um, but, uh, I remember him talking about the VC game and how they were playing it. And yeah, it was really interesting to me, the extraordinary amount of failures that are, that are in the portfolio that they've taken by. You know, we're friends with Dan Lyons who wrote the Rose at Disrupted. And, you know, we've heard some of the fallouts of the WeWork story from authors we've had on the show. And the blowouts of like Uber's original CEO and things of that nature.

And it's interesting how much sort of craziness can go on and still they can make incredible profits off of the unicorns. Yeah, I mean, it's creative destruction and there is a lot of destruction mixed in with the creation. You know, startups do fail or they sometimes succeed, but then they go right off the moral rails. And, you know, you get an Uber situation which has got all kinds of sexual harassment scandals, low evasion scandals, just general bad behavior scandals. You've got WeWork, as you say, where, you know, the founder was doing crazy stuff and blew everybody's money. It had to be reined in and eventually kicked out.

So these things do go wrong sometimes, but at the same time, this is the messy process in which you get new technologies deployed in the society and in a way drive the productivity forward, change the way we live. And sometimes it's for better, sometimes it's for ill, but I think on balance it's good. Yeah, there's a, I mean, they seem to be succeeding in it in everything they've done, and they brought some of the latest technologies to us

and innovations. You know, one of the key watchwords that always seems to be an animal that comes out of, I don't know if animal is the right word, but a thing that comes out of Silicon Valley is, you know, we're disrupting something. So everything has to be an animal that comes out of, I don't know if animal is the right word, but a thing that comes out of Silicon Valley is, you know, we're disrupting something. So everything has to be disrupted. And of course, it was interesting that a lot of the key unicorns actually were just categories in for sale items or for sale services in Craigslist at one time.

Have you ever seen that reporting on that? It's kind of interesting. I'm not sure. I mean, I don't know specifically what you mean, but I think in general, that insight is that, you know, in some ways innovation is a case of taking one general service and then producing specialized improvements on particular parts of it and biting off parts of the original business vision.

So I think that happens a lot with innovation. You get a general semiconductor company and then you get spinoffs that only do, you know, GPU chips for graphical processing or they only do artificial intelligence chips. And you get specialization as part of what Adam Smith described as the way capitalism progresses. That's true in innovation as well. One thing I've always looked at their model, and that was a question I had for you.

I've always looked at their model and thought, to me, I've been an entrepreneur since 18. I'm 54 now. One of the big complaints that we have with the Silicon Valley market is a bit of ageism. They'll give a lot of money to very young people who do, like I said, it was disrupted. You hear about the alcohol cart being wheeled around every day at the office. And I built a lot of successful multimillionaire companies and I did it with my own money. I had most of them profitable within six months, uh, because it was my own money. I didn't have to do it. And we built a great, nice little empire of

companies that way. Uh, I think what I would have done if I would have had some of the stupid money that some of these people were handed to and given, uh. And on the one hand, I go, well, that business model they have at VC of investing in these young people that don't seem to have any sort of really good solid experience of background, where some of us that are older, they have an extensive amount of business experience that, Jesus, if somebody would give us the right amount of money, we could do it. I've often sat and looked at the model and thought, I wonder if they really spread that out with some really good people with some really good experience, if there might be a difference in their success rate as opposed to what they currently have now in their portfolio. And maybe I'm wrong.

It's an open question that I've never – it's just one of those things that I ponder, if you will. Yeah. I mean, I think there's something about youth which is seductive to the venture capitalists. And there maybe is a bit of ageism. But I think part of it is that if you're going to build one of these power law companies that returns 10 or 20 times capital,

it has to be pretty different to everything else that's going on. Because if you think about it, if you do something that's a little bit obvious then other people will do it too and it might be a good business but there'll be competitors the margins you can charge to the customer will be constrained by that competition to do something that's really path-breaking and therefore really profitable you you need to come at it with a sort of kind of wacky, eccentric almost approach. And young people who are not encumbered by experience

are more likely in a way to kind of march up, you know, totally innocent and say, hey, I've got this whole completely new crazy idea. And an older person with experience will say, oh, that's not gonna work and the young person is too dumb and naive to understand that it probably won't work so it's like that anyway and then sometimes it does work and that becomes you know the shocker so like airbnb right who'd have thunk it yeah that you could persuade people to take total complete strangers and have them sleep in their spare room or on their couch and thereby upend the global hotel business. I mean, it's a wacky idea, but it made it work.

And that's a good example. Yeah. Rooms for an on Craigslist. And some of the biggest ones come from that. So rooms for rent on Craigslist. So it's quite interesting when you look at it. You're like, wow, that made sense. They just took, you know, I used to do auctions back in the day before eBay of sales on boards, I think on CompuServe boards and stuff like that.

I would sell Rush records and Rush collectibles. I'm a big fan of the band Rush. And I said to my partner, I says, you know, since I'm doing this really well with this and there's people selling everything on these boards, someone should come up with something where they can have an auction site. And we were, you know, in the midst of two startups that we had, our mortgage company, our career company, and didn't have any bandwidth to do it. And within, I think, two years, the eBay popped up and resolved that thing. So it's kind of interesting. What were some things that you found that really stuck out at you, really maybe surprised you in the book that you can tease out about? So one thing that really surprised me was the result of going to China.

I had expected to find that venture capital would be at the center of the reasons why Silicon Valley did so well. I wasn't quite expecting to find the same story in China. But when I got there and I started talking to folks and I asked about the early origin story of Alibaba or Baidu or Tencent or Sina, Sohu, NetEase, you name it. All of these early Chinese digital companies got American venture investment. Amazing. And then they also had American lawyers who showed up and structured these deals

just like you would structure a Silicon Valley deal. For example, these companies like Alibaba could give stock options to their early employees and therefore hire better people. And that enabled them to hire world-class characters like the guy called Joe Tsai. He was making $700,000 at his American investment company, and he switched for a salary of $600. I didn't say $600,000.

$600 at Alibaba, and he made that switch because he got the stock options that made it worth it. And then he became the CFO and the COO of Alibaba and really helped to build that company. It would be impossible without the stock options that the American venture capitalists provided, because in China, there were no stock options there. So it turns out that both in creating the Silicon Valley innovation cluster and in the Chinese one, which is the biggest rival to Silicon Valley, venture capital was the machine for manufacturing courage that turned people into taking that step to be an entrepreneur,

into an entrepreneurial company. You need some help to make it worth your while, and that's what VC provides. And are you seeing this sort of model spread everywhere across the world or just mostly in the U.S. and China? No, that's right. It's a good question because I am seeing it. And I just got off the phone this morning with an Indian venture capitalist

who had read my book and he got in touch, and I was chatting with him and I said, so how do you see India changing in the last 12 years since you began? He said, you know, when I began doing venture deals around 2010, 2011, being an entrepreneur in India was such a weird thing, so unrecognized by the society that when I had an entrepreneur that I was investing in and backing, in one case, he asked me, hey, will you do me a favor? I'm trying to marry this woman, and her dad won't let us get married because he thinks being an entrepreneur is being a loser. So can you please call up this guy and say to him, look, you know, you're a big shot investor.

You went to Harvard Business School or whatever it was. You've worked in the United States for 10 years. You know what's big and what's small. And this is big. Entrepreneurship is big. So this VC gets on the phone and basically makes it possible for the entrepreneur to get married. That was 12 years ago. That was how weird it was to be an entrepreneur.

The whole environment has changed. Everyone's watching Shark Tank in Hindi, right? Wow. It's like totally central to the culture now. And I think that just shows how this way of building businesses and taking risk and doing innovation is spreading globally. That's pretty amazing. And, yeah, Shark Tank. I mean, I love Shark Tank because I would sit there and go,

would I invest in that? Or is that a good idea? Is that a bad idea? And sometimes you're like, that's stupid. And then later you'll see it's gone really huge. Right. And by the way, the same is true. I'm talking to you now from London.

And it's taking off in London and Europe. People think of Europe as a place that just doesn't take risk, like you drank the wrong kind of water and they don't understand how to take a risk. Actually, if you have venture capitalists show up and you have some reluctant European who's got an idea but doesn't want to do the company, the VC says, what's the problem? You can do this and I'll back you. And the guy says, well, yeah, you'll back me with money, but I don't know how to hire the first five engineers I'm going to need. The company says, no problem. I have a whole, you know, database with tens and 20 engineers

that you could hire. I'll help you hire them. And, oh, but how do I find the first customers? I'll make the introduction. We often say in life that someone who succeeds, sure that person was smart or driven or whatever. Oh, they really succeeded because they had money and connections. That's how they started.

They were lucky. They had money and connections. Well, venture capital is a system for finding somebody with an idea and then tacking on the money and the connections and transforming that person's possibility of doing a successful business.

Yeah, it's really interesting how... I imagine with the propagation of Shark Tank, I think there's a few other ones. I think Woz has got a show that he's doing that's kind of like a Shark Tank thing. I forget the name of it. Woz from Apple, or previously from Apple, I should say. If you don't know who he is, you should go read a book, I suppose, or Google him. But it's interesting to me how it seems to be propagating more entrepreneurship, and that's the real future of, I guess, the world as it goes. Yeah, I believe that's really, really true because I think there are phases of capitalism.

Sometimes the world is going to be driven by big, big companies because you're doing super capital-intensive, big manufacturing. It's the age of steel or the automobile. And for that, you need big companies. Yeah. Go ahead. I'm sorry. Yeah, we're into the idea.

I was going to say we're into the age of ideas, where it's all about creating a new business process, a new piece of software, a new drug patent, whatever, that's what you do with small companies, and they tend to be venture capitalized. Yeah. You know, I wrote about this in my book last year, and I was taught this

by a great CEO, and he taught me that if you can take and build a model that's fairly small, a widget, if you will, basically. And it's just like Kentucky Fried Chicken. I forget the name of the founder. He did it with chicken. He made a recipe that was really appealing to people.

And he finally got a store to sell it and market it. And once they found that, hey, this is a kind of a hit, you can explanation, explain it everywhere. And so he taught me that, how to build models, especially with a profitable skew to them, that you could see that once you scaled it, you could make it more profitable or profitable. You could achieve profitability through scale. And you just had to make sure that widget was a pretty good widget. And I talked about how, you know, I never thought you could innovate paperclips.

Like, you know, I grew up in the era of the steel paperclip, and I used that example. And I didn't know you could ever innovate it. And I'm like, yeah, you've probably done everything you can with that staple or that paperclip. You know, it turns out you can paint it multiple colors. You can make it different sizes. You can put grids on it to make it grasp better. You can make plastic ones. I mean, the thing I talked about in my book is there's an endless possibility of what you can improve something.

And even once you improve something, you can improve it again. And, again, there's an endless sort of thing. And so when you mentioned that we live in this age of, of where ideas and brainpower can go to the next level, I think one of the other things that I liked, I saw a gal who, who recognized that there wasn't enough power tools for women and says more women are single now in our marketplace. She came up with a set of power tools, uh, that were pink colored. So they were more appealing in color and more kind of designed towards women. And the brilliance of seeing, you know,

that niche in the market and being able to target and expand on it is pretty amazing. And then, of course, they can get the funding from the VCs for this sort of stuff. Yeah, that's a great example. It shows, by the way, that diversity can be a very good thing

in venture investing. If you only have men, they're going to basically make products which are targeted at men. It takes a woman to see that power tool idea you just described. And so I think if you're trying to invent the future of society for all of society, you don't like society. Otherwise, you're going to miss a few tricks. Yeah. The beautiful part about being an entrepreneur is you, a lot of times you have a problem yourself. You're like, this stupid thing doesn't work as a way we could have made this better.

Like this company, you know, there might be a multi-billion dollar company. It might be IBM or they might be, you know, whatever. And then you'll be like, ah, you know, this could be made better. And you know, they don't care. You write them and go, I'm not saying IBM, but you know, you write people and go, Hey, you know, whatever. And then you'll be like, ah, you know, this could be made better. And, you know, they don't care. You write them and go, I'm not saying IBM, but, you know, you write people and go, hey, you know, you should make this. I've been guilty of that. I've wrote people and said, you could make this better. And they'll be like, yeah, yeah, we're fine with it. We're making lots of money.

Don't worry about it. And then, you know, you go off and you make it better and it becomes a hit. There's a million of those stories. But, yeah, having the VC funding thing is really interesting. Did you get a chance to talk to him about how they feel about, you know, the massive losses and their mentality behind it? I've always often wondered that, you know, things like Theranos, you know, huge, huge money sink failure. Did they even talk about that? Sure. I mean, part of the answer is that, you know that in this power law idea, the 80-20 rule idea, it does say that 80% of the profits are going to come from 20% of the bets, and the rest are probably

going to fail. Losing money is normal, and pointing out that a company failed is just not news. As VCs like to say, you can only lose one times your capital. You put in 100 bucks, you can only lose 100 bucks, but you might make 10,000 or even 50,000 if it really goes well. So the upside is way bigger than the downside. Fairness is a special case because they didn't just lose money. They actually committed fraud. And it was a totally different level of problem. And it was dangerous fraud because they

were lying about the results of blood tests. So patients who had their blood tested were depending on those results to be truthful and making health decisions for themselves based on fake news. And that's not acceptable. And that's why there was a whole trial and the founder was deemed guilty. So, you know, I think Theranos is a sort of extreme case. But the element of failure and messiness that we were talking about before is perfectly normal. And VCs encountered that the whole time.

Even I was surprised that the CEO of WeWork got away without any sort of things. I mean, I don't think there was all-out fraud there, but there definitely was some misaccounting that you could maybe call as fraud. And SoftBank just seemed to go, we're just going to put all this under the bus. We're going to pay everybody off. Of course, I think they're still fighting over his payout. But, you know, we're just going to eat it. We're going to buy out the other partners,

and we're just going to try and make this model work and get our money back on the long-term investment. So it's an interesting game. Anything more you want to tease out about the book that can entice readers to go buy it? Well, I liked your story about the, you know, you find something that you think, oh, this doesn't really work. And I could make it better because it reminded me

of the origin story of Stripe, which is a $95 billion company right now. It's the biggest, I think it's the biggest private tech company out there. You know, and it's just been going for about 10 or 12 years and it's created all this amazing value. And the origin of that, this is a payments company that makes it easy for app developers to collect payments for their app. And the reason it got built is that one of the founders, Patrick Collison, was a student at MIT, and he built kind of for fun I think I think it was an encyclopedia

but it was some sort of downloadable app that gave you something that people wanted. So people downloaded this thing but Patrick couldn't connect payments for it. There was no credit card technology or other

technology that actually worked if you wanted to connect 99 cents from each customer. And he said, well, that's stupid. And that got him thinking, and now the result is a $95 billion company. It's just extraordinary. And, you know, I love the entrepreneur process because they take and you're usually fixing your own problem. And so you kind of have a passion for it. You're like, I, I, I know when I see, I go in the stores, I forget the

name of them, but they're, they're a redesign of the, of a, of a thing. You put your child, your young child in a cart and they're much safer. You can strap them in. Uh, and it, it appears to if I recall, it was designed by a woman. Um, and, and now they're everywhere. And so much improvement over, you know, uh, you know, those old seats that you and I were probably in when we were kids that you could fall out and crack your head open in shopping carts. And then once they solve that problem for themselves, they go, hey, you know what? There's probably a whole lot of other people that don't like this either, and I should sell my product to them. You know, one thing that's interesting that seems

to be happening with Silicon Valley, you tell me if it's right or wrong, but originally from the last, I don't know, 10, 15 years, however long it's been, that the Silicon Valley really erupted with Twitter, Facebook, social media and stuff. There was this real kind of gold rush of going, every one of my friends around the country, especially those that were coders or had idea for apps or products you know you would have to fly out to silicon valley and and try and meet with vcs and and integrate with them and stuff get funding it seems like now the vc business has been starting to really spread throughout the nation where you you don't have to go to silicon valley they seem to be establishing in places like Texas and other places across the nation where you don't have to go to New York or Silicon Valley to get money anymore. Because a lot of times you would get told back in the old days,

well, unless you're here in San Francisco, we're not going to fund you. So you'd have to set it up here. You can't have it in Alabama. And now things seem to be changing. Did you see that in your interviews? Yeah, totally. That's a big, big trend. And, you know, partly just Silicon Valley is kind of full up. It's gotten very expensive because big companies like Google, like Facebook, like Apple, you know, they just command a lot of real estate and they're clogging up the highways with all the people who work there. And there's only so many big companies you can fit into a small space so naturally it's attractive to go build

companies elsewhere where the cost of living is lower yeah and venture capitalists understand that so they're willing to invest outside of silicon valley and that was the first thing that happened and then they started to actually set up offices outside Silicon Valley. And as you say, Austin, Texas, Miami, New York, Boston, but also some other places, Denver, Colorado. I mean, there's stuff happening everywhere and including, as I was saying, spinning abroad. So Sequoia, one of the maybe the leading venture partnership out there recently reconfigured its fund to call it not the US venture fund but the US Europe venture fund because they figured

that they could actually find the category killer in a new type of business in Europe it might not be in the US and there's a story around that where they were looking for the semiconductor manufacturer that would build the best AI chip that would supersede everything that already exists. It's kind of like your paperclip story, but it's for semiconductors. What would be the company that makes the AI chip? And so they began by looking at stuff in Silicon Valley. There were some options. They were quite good. But as they asked around the AI community, there was a name of a British company in Bristol,

of all places, in South England, that kept on coming up. So they flew over to Britain. They went to visit this company. It had amazing designs. And so they picked to invest in this British company instead of an American one. And it shows that this is a geographically spreading phenomenon that's kind of taking over the world economy. Venture capital used to be a Silicon Valley thing. It's becoming a global thing. There you go. Do you start the book back in the early days

of San Jose and I forget the name of the early investors that kind of started the ball or do you start kind of more recently? I started, you know,

my very first story because I want to kind of land with my feet in the present day a bit is about Impossible Foods. This, you know, meaturger Company, which is amazing. It makes these things that when you put it on the barbecue, it sort of sizzles and turns from red to brown like a real hamburger would too.

But it's all made of plants. So that was built with Veggie Capital backing, and it's a neat story about the kind of crazy ideas that that get built but having explained the basic idea and given a good example of what VC does I then go back in time and say well where did this come from and so I tell the stories about the early venture capital companies that funded things like you know Fairchild Semiconductor funded Intel funded the first gaming company, which was called Atari. Atari, yeah.

And made a game called Pong. Then Genentech, the first biotech company in the late 70s. Apple. I have a chapter about the early funding of Apple, which was kind of a crazy story. Everybody's saying they wouldn't fund it because Steve Jobs wouldn't

wear shoes or socks. He would walk into the office and they would, you know, the investors would go, hmm, this guy's trying to look like Ho Chi Minh. I don't think so. And I think they smelt too, if I recall rightly from the biographies. Yeah, right. He wasn't good on bathing. I go back in time a bit.

But basically, it's a way of partly,rating the basics of what the venture capital toolkit is. Because if you describe venture capital in the 70s, you're seeing the invention of the idea of activist capital, where the investor goes on the board of the company, tries to help the company, rolls the sleeves up, is involved in making the first hires, is involved in introducing the company to the first customers. All of those attributes in venture capital, which are normal today, were originated in the 70s. And when you describe that process, people go, oh, OK, so now I see what the core of venture capital is.

Another example is stage-by-stage financing. If there's a new company, you don't give all the capital it needs in one big amount. Instead, you say, we'll give you some. Let's see if you can get past the first hurdles. And if you de-risk your idea a bit, then we'll give you some more money. But if you fail, you'll fail cheaply, and that's going to be better for both of us. Yeah. it is interesting to how we talked earlier about how they invest in people. And if it loses, a lot of the mindset seems to be that, you know, if you invest in some young guys, and they have some ideas, they might fail. But what you've done is you put an investment in those guys, and they're going to learn from that experience. And sometimes two or three startups down the line, they'll hit a unicorn.

Clubhouse is one that I saw recently that kind of looked like it was going to turn into something. I think it's fizzled now, the Clubhouse app. But originally, and Andreessen Horowitz is a big investor in that. And the kids that were involved in that, they took in and started some other things that hadn't really worked out. And so sometimes it's just kind of getting with an entrepreneur that you see some potential in. And you don't know if maybe one, two or three startups later of failures that they're going to, boom, hit money. And when they do, you know, you're there. Exactly. That's right. And so it's a repeat game.

And I think that's part of what builds trust in Silicon Valley and in venture ecosystems is that everybody knows that, you know, startups can fail. And so, therefore, there's a lot of churning where you're working. One year you might be working for startup A and your rival is the guy over at startup B. But last year, probably you were both in the same startup working alongside each other and you became friends.

And next year, maybe you'll be in the same startup again. And so that's why there is this culture of what they call co-opetition. Ah. In some sort of value. Sometimes you cooperate, sometimes you compete, but there's kind of idea sharing. And the effect of that is that ideas and people and money are constantly circulating through the Silicon Valley ecosystem, finding the best use.

And so it's a highly creative system for multiple experiments. And the venture capitalists are right at the center of that system. And that's what's really inventing the future in a way that if you just have big companies and people were stuck inside one big company, and then they had an idea, but their boss didn't like it. So the idea gets killed. And it's a secretive company, so they don't go to the bar afterwards and tell somebody from another company so that they can do it. Silicon Valley, everybody's meeting everybody all the time.

And I think that's true in startup ecosystems which are now developing, whether it's in Austin or Miami or London or whatever. Yeah. In fact, most of my friends list on Facebook. They're all competitors in Silicon Valley, but they're all friendly and know each other. And there, there is that, that atmosphere that's there. Do you write in your book, anything

at all about how, uh, VC capitalists end up being the adult in the room? You know, like Eric Schmidt was brought in to be the adult in room with, with the, uh, with Google. Um, I remember early on privately talking with Fred Wilson over Twitter and didn't realize most of the things I was telling him they needed to fix were causing board fights between the three founders. And now that's all been exposed how crazy that was between the three of them. Did you talk about that in the book?

Yeah, absolutely. I mean, venture capital is sort of a marriage of the youthful inexperience, but driving ambition and energy of the founders with the experience and judgment and connections and money that is provided by the venture capitalists. origin. You had these two students, Jerry Yang and David Finer, operating out of a porter cabin on the Stanford campus. And it was Michael Moritz, the investor, who came in and said, look, you know, I actually wrote a book about Apple. I know how Steve Jobs became a personal brand. He kind of was the face of the PC revolution, I think you can be the face of the internet directory revolution and I'll help you to make that happen. And the founders of Yahoo said,

that's great, but do you think our name, Yahoo, is that kind of dumb? And the investor goes, no, Apple was a cheeky name and that works. So you've got the perfect name. And so it's that kind of, you become a sounding board as the experienced player in the room.

And as you say, Google was also that, right? You know, Eric Schmidt was the older guy. He'd been a CEO of Intuit, another company before that. And he was brought in to be paired up with the two young founders, you know, Larry and Sergey, and together they made a good combination, which would not have happened if the venture capitalists hadn't kind of forced Eric Schmidt onto them. And by the way, a really cool story about this is that Eric Schmidt told me he would not have joined Google if it hadn't been for the fact that he knew the venture capitalists had his back larry and sergey were these young punks and they had contempt for people who were over the age of 30 and they might well

have fired um eric schmidt they had the power to do that so eric was kind of you know doubtful about whether he wanted to go and do this young company called google and the thing that got him over the line uh that got him comfortable with taking the risk, is that the venture capitalist, John Doerr, said, Eric, you know, yeah, you're right. These guys are punks. They might kick you out. If they kick you out, I'll get you a great job at some other startup that I'm backing. So go do it. And then if it fails, I'll help you. And that's another example of how, you know, venture capitalists are the machine for manufacturing courage. They are creating the courage that Eric Schmidt needed to go join Google.

Yeah, I think they were the guys who held the, you know, the VCs that held Twitter together, a few different other startups that I can probably think of in helping them really become successful and kind of being the adult in the room. And so that's kind of interesting, but they do provide resources. I mean, they, they, you know, a lot of startups or entrepreneurs, they have a great idea, but they don't understand accounting or the marketing or, you know, product development or how to, how to, you know,

distribute something through, you know, infrastructure and things of that nature. You know, you just, you have this beautiful idea and you're like, Hey, this is really cool. I think people like it, but you know, you can have the greatest idea in the world as an entrepreneur, but if you can't tell other people about it, you can't advertise, you can't do everything you need to do to scale it, it's never going to see the light of day.

It could be the greatest idea in the world and no one's going to care. Yeah, that's right. A good example is PayPal, actually. PayPal was a kind of funky idea that we're going to have electronic money that you can sort of email to each other, and maybe that will get rid of the need for the dollar system. It was quite libertarian.

It was proto-crypto, actually. And the founders, Peter Thiel and Max Levchin, were quite libertarian in their political beliefs. So they were drawn into it for that set of reasons. But I think the venture capitalists helped to turn it into a company that really wound up making money. And partly they did that by brokering a merger with a rival called X.com, which was Elon Musk's company. And the two were going at it hammer and tongs. They were bleeding each other to death by competing.

And, you know, they couldn't agree to a merger because they hated each other. They were competing. And to shift from competition to cooperation, the other side of that, co-opetition, double act, right? It took the venture capitalists to come in and, you know, literally sit down,

look in the eyes of the young punks and say, you're killing your own company. But if you do this merger and get over your ego problems with accepting a split of the equity with those other guys that you hate, you will build a company that will make Silicon Valley history

and it will be remembered. And do this. Do you want to make an impact on the world or don't you? And Max Levchin, the co-founder of PaperPal, told me the story about how the investor, Michael Moritz again, was sitting on this chair. He hadn't even taken his coat off. He was leaning forward.

He steepled his fingers, put his chin on his fingers, and looked him in the eyes and just gazed in there and said, do you want to make history? And it was that call to greatness speech from an experienced player that changed the company founder's mind and persuaded him to go ahead with a merger that saved PayPal. And you see everything that came out of that from the PayPal, what they dubbed the PayPal mafia.

Elon Musk and I forget the other gentleman's name who... Peter Thiel. Peter Thiel, yeah, and I forget the other gentleman's name, Peter Thiel, and everybody else, and created so many other interesting startups and everything else. Well, this has been really insightful. Sebastian, anything you want to tease out on the book before we go? I think I'd like to just end with this idea that it's way bigger than people realize. It's a new phase of capitalism. There's been a phase of big company capitalism.

There's been a phase of unbundling the lean company, all that Jack Welch stuff at GE, which was still big companies, but they were kind of re-engineering themselves. And now we're into a totally new phase where it's just tons of startups that are really the exciting game in time. And they are being enabled and shaped and guided and sort of, you know, the network that makes them all work together. At the heart of that network is venture capital. And it's the form of finance that is spreading around the world, spreading into new kinds of industry and really shaping how capitalism

functions. Awesome sauce. So give us your plugs. So people would find you on the interwebs as we go out. Well, you know, go buy the book, the power law,

venture capital in the making of the new future, any place that you buy books. Sebastian Malaby is my name, and you can find my webpage at the Council on Foreign Relations website, cfr.org. There you go. Thank you for coming on the show, Sebastian. We really appreciate it.

Great discussion. Thank you, Chris. It was fun. Thank you. And thanks, Manas, for tuning in. Go over to the book, The Power of Law, Venture Capital, and the Making of the New Future.

I think entrepreneurs are just going to keep expanding. They always talk about how we're going to live in a world someday where we're just all brains coming up with cerebral ideas. So it'll be interesting what the future brings. Go to youtube.com forward slash chrisfoss, goodreads.com forward slash chrisfoss, all our groups on LinkedIn, Twitter, Instagram, and all those places. Thanks for tuning in. Stay safe, and we'll see you guys next time.