Engineer Nolan Bushnell was not even 30 years old when he founded Atari. He was a typical innovator for Silicon Valley startups. The fate of the company, which would become synonymous with video games, was decided at a meeting inside the Bushnell bathtub located at his Sunnyvale, California office.
There’s not much of a problem for a company that has made an effort to woo their employees by always keeping a barrel of beer on hand and hiring beautiful secretaries – all within the youthful, masculine script of electronics geeks.
The video game Pong, embarrassingly primitive by today’s standards, was a huge hit in arcade games in the early 1970s. Atari needed capital to develop its own console, which would put video games not just in bars but in everyone’s homes, and onto the radar of venture capital investors.
Don Valentine, the legendary founder of Sequoia Capital, didn’t bother stripping and jumping into the bathtub to discuss working with Bushnell. Meanwhile, another investor, from Boston, chose to stay outside in his white shirt and tie.
The episode, which took place in 1974, summarizes why Silicon Valley, with its strengths and weaknesses, can only exist in California – and why venture capital It could only have originated in Silicon Valley.
Goofy East Coast CEOs, in their creepy, dark-wood-walled offices, lived on a planet thousands of light years away from the world of the new generation of Valley entrepreneurs—a trench much wider than the 4,000 km separating New York from San Francisco.
Intel, Yahoo, Google, Facebook, Uber and countless other companies that have revolutionized the economy and life in society in recent decades had their beginnings with the support of venture capitalists whose offices are, to this day, dotted around Sand Hill Road. The heart of Silicon Valley.
Inventions may happen elsewhere, but when it comes time to turn ideas into blockbuster movies, “The Valley is where the magic happens,” writes Sebastian Mallaby in The Law of Power: Venture Capital and Creating the New Future (Johari, 608 pages). The journalist tells the story of Silicon Valley from a new angle, starting not with startups and their founders, but with the investors who poured money into these companies when they were in their infancy.
These unicorn hunters don’t just borrow capital. They become business partners and help structure them. Not many startups survived, a few became unicorns and a select few would one day reach the stratospheric values of Apple or Amazon.
These really successful few multiply their seed capital so overwhelmingly that they largely offset the losses that investors incur on their other bets. It is this law of force that gives the book its name. As Malaby summarizes, “winners are advancing at an accelerated pace.”
An example is the Y Combinator accelerator: Three-quarters of its profits came from two of the 280 startups it invested in. This is not a standard Wall Street banking business.
“Most financiers allocate capital based on quantitative analysis. Venture capitalists rarely worry about spreadsheets,” says Mallabi. Most financiers estimate a company’s value by forecasting cash flow. Venture capitalists often finance startups before they even have cash flow. Other financiers trade millions of dollars in Paper assets in the blink of an eye. Venture capitalists take relatively small stakes in real companies and secure their positions.”
Valentine, who is the person from the Atari bathtub, has the typical appearance of capital project. He didn’t come from the financial sector and he wasn’t a start-up builder. He made his career as a sales representative for technology companies. He founded Sequoia in 1972 and was one of the pioneers of this new way of financing the birth of large corporations. He was among the first to invest money in Apple, Cisco and YouTube.
Mlaby has acknowledged the efficiency in formally revealing the history of venture capital. Not only does it report facts and anecdotes, but it seeks to analyze the origins and broad implications of this financial innovation that emerged in the 1950s.
The journalist who was the editor-in-chief of the newspaper economic he is from financial timesHe’s got a great book on the history of hedge funds, More money than Goda biography of Alan Greenspan, The man who knew.
Venture capital, according to Mallabi, has made it possible to overcome the obstacles of the so-called “innovator’s dilemma”. Large companies tend to fund business development only in their areas of expertise. At the same time, the big banks only finance what they can estimate the future value.
Take the case of Xerox. He got close to creating the PC, but put the project on hold because it might spoil camera sales. But Steve Jobs and Steve Wozniak had nothing to lose when they brought the Apple 2 to market – with the support of Valentine.
This, unfortunately for him, left his involvement with Apple relatively early. He earned a 13-fold return, selling his shares in 1979. Another legendary venture capitalist in the valley, Arthur Rock remained until the company’s initial public offering at the end of the following year and generated a return of 378 times.
Despite its virtues, the world of venture capitalists bears similar original sins to the tech industry itself. She recently went through a controversy involving two of her most promising stars, Uber and WeWork. Diversity isn’t their strong point either. It is rare for women to be in positions of society or even in leadership positions. Only 3% of the partners in these companies are black. “Given the importance of venture capital in shaping society, it should be more diverse,” says the author.
But, as Mallabi asserts, venture capitalists, driven by a paranoid desire to save humanity or the earthly ambition to buy a new Ferrari, are actually helping to create a new future.
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