Disruption as a business process

The Power Law: Venture Capital and the Art of Disruption

Author: Sebastian Mallaby

Publisher: Penguin

Pages: 404

Price: Rs 899

How did Silicon Valley become the hub of the world’s most disruptive and innovative start-ups? The setting up of Stanford University definitely can claim some credit for that. Other things that had a role in making Silicon Valley what it is today includes the fortuitous decision of William Shockley, father of the semiconductor, to set up a campus there. In turn, the exit of his brightest researchers — forever dubbed “the Traitorous Eight” — to set up their own company as a revolt against Shockley’s erratic and maniacal management style played a big role, too. Some members of the original Traitorous Eight, led by Gordon Moore and Robert Noyce would then form Intel, adding lustre to the story of the Valley.

Mr Mallaby makes a compelling case. He points out that MIT produces exceptional engineering talent, too, and many breakthrough inventions have come from research in that university. In fact, a lot of government project funding and projects went to MIT. Even the invention of the transistor by Shockley, John Bardeen and Walter Brattain did not take place in Silicon Valley. It was invented in Bell Labs where the trio were working.

Mr Mallaby argues that Cambridge and Boston had a real shot at becoming the hub of start-ups because a prototype of a venture capital firm was set up by Georges Doriot there. Doriot, who would later go on to set up INSEAD, had founded American Research and Development Corporation (ARDC), to provide capital to innovative engineering start-ups. The rise of the now defunct but once fabled Digital Equipment Corporation (DEC), which kicked off the mini-computer revolution, was only possible because of the funding provided by Doriot’s ARDC.

But, Mr Mallaby writes, ARDC was not a real venture capital firm, though Doriot is often dubbed as one of the fathers of the venture capital industry. His fund imposed far too many conditions, and did not give inventors and entrepreneurs quite as much freedom as was needed. It was not structured like a proper venture capital partnership either, nor was it bothered about making inventors and partners unimaginably rich.

The real credit for setting up what later became the venture capital industry, he says, goes to Arthur Rock, who helped the Traitorous Eight move out of Shockley’s company and set up Fairchild and later also funded Intel. It was his breakthrough ideas — including letting founders and early employees make money through stock ownership of their creations — that led to the modern venture capital industry.

Mr Mallaby’s book is fascinating for the immense amount of research he has put in, the picture of start-ups, founders and venture capitalists he paints, and the context in which he places them. There are stories of eccentric founders and ruthless venture capitalists and the tug of war between them. Of gambles — or moon-shots — that paid off as well as foolish bets that sank with the money. But as he points out, venture capitalists stopped worrying about the bets that did not work — they focused on the one that would pay off so richly and the losses of a dozen others could be ignored.

He traces the development and evolution of both the entrepreneurs as well as their funders. He looks at the power shift when venture capitalists started kowtowing to powerful founders who ran their companies like fiefdoms without any control from people who were providing the money. How Zuckerberg of Facebook (now Meta) or Travis Kalanick of Uber would bully or simply ignore the money men. Of later-stage venture capitalists such as Masayoshi Son of SoftBank, who would throw obscene amounts of money without bothering to keep an eye on maverick founders such as Adam Neumann of WeWork.

Though Mr Mallaby tries his best to be even-handed about the venture capital industry and also cover its negatives, it is pretty clear where his sympathies lie. And while he writes about tyrannical and frankly toxic entrepreneurs, it is with an indulgent tone. He is clear that without the long rope and loose supervision of venture capital firms that were willing to back outrageous ideas, a lot of the innovation would not have got off the ground.

Mr Mallaby’s book is rich in detail, especially of Silicon Valley companies and personalities, and carries a great many interesting nuggets about behind-the-scenes negotiations. It is an enjoyable book to read, though it goes over easy on the darker side of both the Valley and its movers and shakers. It is a good pick for anyone interested in start-ups and venture capital.

The reviewer is Editor, Prosaicview.com, www.prosaicview.com, and former editor, Business Today and Businessworld.