“The Washington Post” describes Sebastian Mallaby’s “The Power Law: Venture Capital and the Making of the New Future” (2022) as “a must-read for anyone seeking to understand modern-day Silicon Valley and even our economy writ large.”

The book provides an intimate look at Silicon Valley’s investment history and the venture capitalists that have shaped its evolution. Mallaby dives into the investment stories of key players like Andreessen Horowitz, Yuri Milner’s DST Global, and Tiger Global.

Each of these investment companies has embraced the power law, a core concept in venture capital. The law states that one or two investments will outperform every other investment in a portfolio. A normal distribution of returns is rare. Instead, venture capitalists must secure a stake in several high-risk companies to find the diamonds that bring big returns.

A Chain Of Inspiration Between Venture Capitalists

Chapter 12 of “The Power Law” provides an in-depth analysis of the tech investment strategies that venture capital firms Tiger Global, Yuri Milner’s DST Global, and Andreessen Horowitz, have seen success with.

Tiger Global’s Investments In Asian Tech Companies

Having worked at Julian Robertson’s Tiger Management, Tiger Global’s founder Chase Coleman remembered Robertson saying, “Why would I sit [in the U.S.] and try to hit major-league pitching if I can go to Japan or Korea and hit minor-league pitching?”

With this in mind, Chase decided to invest in Asia’s established technology companies, departing from the traditional selection out of the Silicon Valley pool.

Moving its focus to overseas markets allowed Tiger Global to capitalize on high-growth opportunities that domestic investors overlooked, even though Coleman hadn’t visited China.

Yuri Milner’s International-Scale Data Collection

Yuri Milner saw the value in Tiger Global’s approach and took his investment strategy overseas too. He knew he wanted to invest in Facebook and started analyzing international social media platforms. Collecting data from around the world allowed him to see a big-picture view of opportunities Facebook could leverage.

Presenting these opportunities to the social media platform, Milner crafted a pitch that Mark Zuckerberg couldn’t say no to. Zuckerberg accepted Milner’s investment offer of $200 million. At the time, this was considered a shockingly high amount as many other investors were unsure of Facebook’s growth potential.

However, Milner was confident that his research had pinpointed opportunities that would maximize Facebook’s success, and he was right. In just 18 months, Facebook was worth $50 billion.

The Eureka Manifesto author also made his investment proposal particularly appealing by offering to buy employee stock and not take a board seat. This meant Zuckerberg could maintain control over the company and vote Milner’s shares however he liked.

Andreessen Horowitz’s Founder Protection Approach

Milner’s success led to Andreessen Horowitz implementing “Milner-style growth deals” involving similar late-stage investments. The company invested in Skype, Facebook, X (formerly Twitter), Pinterest, Groupon, and Airbnb.

While many traditional venture capitalists replaced a company’s founders with their chosen CEOs, Andreessen Horowitz assured all founders that they wouldn’t be replaced. This approach emulated Milner’s Facebook investment, which saw Zuckerberg retain control over the company. Similarly, Andreessen Horowitz promised to help founders solidify their CEO roles and show them how to make well-informed decisions.

Andreessen Horowitz’s co-founder Marc Andreessen has attributed some of their success to the ideas of Milner, who has gone on to become a venture capital icon. Since Facebook, Milner has invested in Snapchat, Alibaba, Twitter (now X), WhatsApp, and JD.

Finding The Extraordinary In The Unexpected

In the venture capital world, success hinges on embracing bold, unconventional strategies. Playing it safe is unlikely to work out like taking informed risks will. Investors who achieve the most success recognize potential where others see uncertainty. They often do this by tapping into international markets and conducting comprehensive data analysis.

Whatever the approach, the power law often comes into play: The extraordinary returns often come from unexpected opportunities.

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