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Most attempts at discovering the next big innovation fail, but some succeed at such a scale that they more than make up for the setbacks. This extreme ratio of success and failure is the “power law” that drives venture capital, all of Silicon Valley, and thus the global economy, explains Sebastian Mallaby in his new book, The Power Law: Venture Capital and the Making of the New Future.
Mallaby, the Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations (CFR) and award-winning author of four previous books, parlays access to some of the top venture capitalists of our time—at Sequoia, Kleiner Perkins, Accel, Benchmark, and Andreessen Horowitz, as well as Chinese partnerships such as Qiming and Capital Today—into a wide-ranging history of tech incubation in Silicon Valley and ultimately worldwide.
Mallaby illustrates the most iconic triumphs and infamous disasters in Silicon Valley history and examines how venture capital's relentless search for the next billion-dollar idea has allowed the Valley to remain the top incubator of business innovation around the world.
Innovations rarely come from those who are experts in their fields, Mallaby explains. While “experts may be the most likely source of incremental advances,” he writes, “radical rethinks tend to come from outsiders.” Elon Musk, for example, was not an “electric car person” before he started Tesla. When it comes to improbable innovations, Mallaby shows that the future cannot be predicted, but it “can be discovered by means of iterative, venture-backed experiments.”
However, Mallaby warns, the relentless search for home-run investments can brew an obsession with the ideal of the lone entrepreneur-genius, and companies seen as potential “unicorns” can be given intoxicating amounts of power and money, leading to sometimes troubling results, as in the cases of WeWork and Uber.
As Mallaby demonstrates, venture capital has a strong history of funding fledgling start-ups, but a less successful track record of governing these start-ups when they grow into multibillion-dollar companies.
Furthermore, the need to make outsized bets on unproven talent can reinforce bias, with women and minorities still represented at woefully low levels. China’s homegrown venture capital sector, having learned from Silicon Valley, is expanding and now has more women venture-capital luminaries than the United States.
Mallaby concludes by placing venture capital in its geopolitical context. He views Silicon Valley venture capital as an important pillar of U.S. power and warns that it faces serious competition from China. To this end, the author outlines several steps that U.S. policymakers can take to help safeguard U.S. leadership on innovation. These include:
- Invest more in scientific education and research. The United States should stay on the cutting-edge of technological development and “[seed] the ground for venture-backed innovation.” There should be “better collaboration between the Valley and the Pentagon so that venture-backed firms win major defense contracts.”
- Resist the temptation to overly regulate venture capital. Much of the success of Silicon Valley venture capital has been due to its “freewheeling entrepreneurial spirit.” U.S. policymakers should “resist populist pressure to burden venture partnerships with higher taxes” and should not allow the current backlash against big tech to lead them to overly regulate venture capital.
- Restrict Chinese venture investment in the United States. “Allowing Chinese investors into the [U.S.] venture-capital tent,” risks allowing China to “gain intelligence on emerging technologies.”
- Guard against Chinese commercial espionage and protect U.S. intellectual property. “China is a military competitor bent on siphoning intellectual property out of other advanced economies.” While the United States should remain open to Chinese scientific talent, it should “[fight] Chinese commercial espionage with vigorous counterespionage.”
Above all, Mallaby writes, “remember...the logic of the power law: the rewards for success will be massively greater than the costs of honorable setbacks. This invigorating set of axioms has turned America’s venture-capital machine into an enduring pillar of national power” and “it remains unwise to bet against it.”
Read more about The Power Law: Venture Capital and the Making of the New Future and order your copy at https://www.cfr.org/book/power-law.
To interview the author, please contact CFR Communications at 212.434.9888 or [email protected].