Three history lessons from The Power Law

Lesson 2: The emergence of hands-on activism and stage-by-stage financing

Where Rock and Davis began by doing away the conventional wisdom of finance, younger investors sought to build on their early success in additive ways. In the 1970s, new venture investors who’d watched Rock and Davis succeed at deploying more capital to fewer, riskier bets, decided to go a step further: rather than “merely identifying entrepreneurs and monitoring them, the new venture capitalists actively shaped them: they told the founders whom to hire, how to sell” (59). How did this second era of VC’s enforce the type of management oversight that even Rock and Davis would have considered unthinkable just a decade earlier? By doling out capital in tranches, ensuring the entrepreneurs they invested in reached agreed milestones before they could receive the next cheque. The earliest adopters of this new activist ethos? None other than Don Valentine (Sequoia Capital) and Tom Perkins (Kleiner Perkins Caufield & Byers), now household names in venture capital.

Lesson 3: The emergence of the network effect – how the venture community can fix its own errors

In investor Peter Thiel’s famous tome on building startups, Zero to One, the concept of the network effect was popularized in the context of rapidly growing companies – it is the phenomenon whereby a product becomes intrinsically more valuable as it acquires more users. But in the earliest days of venture capital, Silicon Valley itself had to first establish its own ecosystem version of a network effect, in order to ensure that the tools and methodologies that Rock, Davis, and next wave of activist investors had established, would grow on sustainable footing and not simply disappear after a few misses. The earliest roots of this network effect thinking took place in late 1976, when Steve Jobs and Steve Wozniak could not find – even amongst the bold-betting dreamers and activist risk takers in the new VC elite – anyone to write a cheque into a new computing company they called ‘Apple’. Famously, “Tom Perkins and Eugene Kleiner refused to even meet with Steve Jobs” (82), and the rest of Silicon Valley’s new elite followed suit. Jobs and Wozniak could not even convince a single investor to take on 10% of the company for a mere $10,000. However, Silicon Valley had by this time become large enough, and developed a big enough network effect, that oversights like this could self-correct by way of the consolation prize: personal introductions. Some of the same VCs that refused to write a cheque, did help Jobs and Wozniak with several introductions, eventually leading the pair to meet the engineer Mike Markkula, who had recently retired at the age of 33 on the back of his lucrative Intel stock options (84). Markkula was not a traditional venture investor, or an investor at all. But he became Silicon Valley’s first and archetypal angel investor – “someone grown rich from the success of one startup who recycles his wealth and experience into more startups” (85) – when he took Steve Jobs under his wing. With Markkula playing the role of well-connected sherpa, he helped Jobs unlock help in several key areas in which Apple was previously rebuffed, simply on the strength of his personal network – including asking a designer friend to take on creating Apple’s now famous logo as a personal favour; persuading his close friend Mike Scott to quit a stable job to become Apple’s first president (brilliantly, by copying the Intel stock option structure that had generated his own fortune); and even cajoling the venerable Venrock to invest at a $3 million valuation only a year after no investor would value the company at $100,000 (87). The venture capital network effect was complete, and Apple was arguably its first big winner.   This is a TechTo feature article, contributed by OneEleven Managing Director Matthew Lombardi.