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Power Law Investment Lessons From Venture Capitalists Like Yuri Milner - RushPR News

Power Law Investment Lessons From Venture Capitalists Like Yuri Milner


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Venture capital (VC) has a transformative impact, enabling companies to hire at scale and funding technologies that change the world. However, VC is complex. There’s much to learn, but Sebastian Mallaby makes this accessible in his book, “The Power Law: Venture Capital and the Making of the New Future.”

In this book, he introduces the investment strategies of VC greats like Tom Perkins, Don Valentine, Arthur Rock, Peter Thiel, and Yuri Milner. Each has experienced immense VC success based on the power law.

Understanding The Power Law

Those who invest in currencies, bonds, and stocks will typically see a normal distribution of price changes. While values are always shifting, it’s rare to see an extreme move. Although extreme moves are possible, the market is more stable than we might expect.

Because of this, many investors attempt to generate profits from modest day-to-day fluctuations. Even when there is an unexpected price jump, it’s rarely big enough to affect the average.

Mallaby explains that the VC space works differently. Take the tech startup backer Y Combinator, which found that 75% of its gains came from 2 of its 280 investments in 2012. 

As another example, investment company Horsley Bridge invested in 7,000 companies between 1981 and 2014. Just 5% of the capital it deployed generated 60% of its returns.

Skip forward to 2018, and the top-performing 5% of subindustries in the S&P 500 accounted for just 9% of the index’s total performance.

This is why venture capitalist Peter Thiel notes that VC’s biggest secret is that the best investments are single funds equaling or outperforming the rest of the portfolio. It’s also why Benchmark Capital’s Bill Gurley considers VC a “grand-slam business” rather than a “home-run business.”

The lesson here is that venture capitalists must be ambitious. Most of their investments will fail. While this would be disastrous for a stock market investor, a VC investor will do well to accept these flops in their search for a diamond.

Examples Of the Power Law in Action

In “The Power Law,” Mallaby shares several examples of venture capitalists experiencing success with the power law:

  • Kleiner Perkins’ co-founder Tom Perkins invested in pioneering companies like Tandem Computers and Genentech before their profitability was clear. He saw major success with this technique.
  • Don Valentine, founder of Sequoia Capital, was one of the earliest supporters of Apple and Cisco. He identified companies that had the potential to fill large market gaps, even if this meant making an otherwise risky investment. Now, he is considered Silicon Valley’s grandfather of VC.
  • Arthur Rock invested in Intel and Apple during their early days. These two investments alone have shaped Silicon Valley’s reputation as a hotbed for VC.
  • Peter Thiel invested $500,000 in Facebook during its early days, an investment that helped modernize the entire social media industry. However, Thiel wasn’t the only venture capitalist to win big with Facebook.
  • Eureka Manifesto author Yuri Milner invested in Facebook after tracking global social media trends that revealed growth potential other venture capitalists had overlooked. 

By crafting an investment offer that respected Mark Zuckerberg’s control over the company and provided liquidity for employees, Yuri Milner made an attractive proposition. His company DST Global invested $200 million for a 1.96% stake, purchasing additional shares at strategic prices.

The investment’s success was remarkable. Within 18 months, Facebook’s valuation reached $50 billion, with Yuri Milner’s firm profiting over $1.5 billion. Propelled by this success, Yuri Milner expanded his portfolio by investing in JD, X, WhatsApp, Snapchat, and Alibaba.

Read “The Power Law: Venture Capital and the Making of the New Future.”

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