Sebastian Mallaby > Quotes

“All new markets are inefficient at first,”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“Years later, (Paul) Jones described the mental gymnastics that went into writing these scripts. "Every evening I would close my eyes in a quiet place in my apartment ... I would visualize the opening and walk myself through the day and imagine the different emotional states the market would go through... Then when you get there, you are ready for it. You have been there before. You are in a mental state to take advantage of emotional extremes because you have already lived through them.”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“He read Adam Smith, Thomas Hobbes, and Niccolò Machiavelli.”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“He commuted to his Canadian office in a Ferrari, though sometimes snowy conditions forced him to use Bentley.”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“Investors who focus on currencies, bonds, and stock markets generally assume a normal distribution of price changes: values jiggle up and down, but extreme moves are unusual. Of course, extreme moves are possible, as financial crashes show. But between 1985 and 2015, the S&P 500 stock index budged less than 3 percent from its starting point on 7,663 out of 7,817 days; in other words, for fully 98 percent of the time, the market is remarkably stable.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Capitalism works only when institutions are forced to absorb the consequences of the risks that they take on.”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“This book has pushed back against the randomness thesis, emphasizing instead the skill in venture capital. It has done so for four reasons. First, the existence of path dependency does not actually prove that skill is absent. Venture capitalists need skill to enter the game: as the authors of the NBER paper say, path dependency can only influence which among the many skilled players gets to be the winner. Nor is it clear that path dependency explains why some skilled operators beat other ones. The finding that a partnership’s future IPO rate rises by 1.6 percentage points is not particularly strong, and the history recounted in these pages shows that path dependency is frequently disrupted.[5] Despite his powerful reputation, Arthur Rock was unsuccessful after his Apple investment. Mayfield was a leading force during the 1980s; it too faded. Kleiner Perkins proves that you can dominate the Valley for a quarter of a century and then decline precipitously. Accel succeeded early, hit a rough patch, and then built itself back. In an effort to maintain its sense of paranoia and vigilance, Sequoia once produced a slide listing numerous venture partnerships that flourished and then failed. “The Departed,” it called them. The second reason to believe in skill lies in the origin story of some partnerships. Occasionally a newcomer breaks into the venture elite in such a way that skill obviously does matter. Kleiner Perkins became a leader in the business because of Tandem and Genentech. Both companies were hatched from within the KP office and actively shaped by Tom Perkins; there was nothing lucky about this. Tiger Global and Yuri Milner invented the art of late-stage venture capital. They had a genuinely novel approach to tech investing; they offered much more than the equivalent of another catchy tune competing against others. Paul Graham’s batch-processing method at Y Combinator offered an equally original approach to seed-stage investing. A clever innovation, not random fortune, explains Graham’s place in venture history.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“you succeed in venture capital by backing the right deals, not by haggling over valuations.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Art of Disruption

“Was this luck, or was it more than that? Proving skill is difficult in venture investing because, as we have seen, it hinges on subjective judgment calls rather than objective or quantifiable metrics. If a distressed-debt hedge fund hires analysts and lawyers to scrutinize a bankrupt firm, it can learn precisely which bond is backed by which piece of collateral, and it can foresee how the bankruptcy judge is likely to rule; its profits are not lucky. Likewise, if an algorithmic hedge fund hires astrophysicists to look for patterns in markets, it may discover statistical signals that are reliably profitable. But when Perkins backed Tandem and Genentech, or when Valentine backed Atari, they could not muster the same certainty. They were investing in human founders with human combinations of brilliance and weakness. They were dealing with products and manufacturing processes that were untested and complex; they faced competitors whose behaviors could not be forecast; they were investing over long horizons. In consequence, quantifiable risks were multiplied by unquantifiable uncertainties; there were known unknowns and unknown unknowns; the bracing unpredictability of life could not be masked by neat financial models. Of course, in this environment, luck played its part. Kleiner Perkins lost money on six of the fourteen investments in its first fund. Its methods were not as fail-safe as Tandem’s computers. But Perkins and Valentine were not merely lucky. Just as Arthur Rock embraced methods and attitudes that put him ahead of ARD and the Small Business Investment Companies in the 1960s, so the leading figures of the 1970s had an edge over their competitors. Perkins and Valentine had been managers at leading Valley companies; they knew how to be hands-on; and their contributions to the success of their portfolio companies were obvious. It was Perkins who brought in the early consultants to eliminate the white-hot risks at Tandem, and Perkins who pressed Swanson to contract Genentech’s research out to existing laboratories. Similarly, it was Valentine who drove Atari to focus on Home Pong and to ally itself with Sears, and Valentine who arranged for Warner Communications to buy the company. Early risk elimination plus stage-by-stage financing worked wonders for all three companies. Skeptical observers have sometimes asked whether venture capitalists create innovation or whether they merely show up for it. In the case of Don Valentine and Tom Perkins, there was not much passive showing up. By force of character and intellect, they stamped their will on their portfolio companies.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“The great thing about alpha was that it could be explained:”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“By now Soros had melded Karl Popper’s ideas with his own knowledge of finance, arriving at a synthesis that he called “reflexivity.” As Popper’s writings suggested, the details of a listed company were too complex for the human mind to understand, so investors relied on guesses and shortcuts that approximated reality. But Soros was also conscious that those shortcuts had the power to change reality as well, since bullish guesses would drive a stock price up, allowing the company to raise capital cheaply and boosting its performance. Because of this feedback loop, certainty was doubly elusive: To begin with, people are incapable of perceiving reality clearly; but on top of that, reality itself is affected by these unclear perceptions, which themselves shift constantly. Soros had arrived at a conclusion that was at odds with the efficient-market view. Academic finance assumes, as a starting point, that rational investors can arrive at an objective valuation of a stock and that when all information is priced in, the market can be said to have attained an efficient equilibrium. To a disciple of Popper, this premise ignored the most elementary limits to cognition.”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“Accel’s culture of training and trusting young investors seemed to hold the secret of success.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Son arrived at Yahoo’s office looking as slight and uncommanding as ever. But he brought a bazooka. In a bid without precedent in the history of the Valley, he proposed to invest fully $100 million in Yahoo. In return he wanted an additional 30 percent of the company. Son’s bid implied that Yahoo’s value had shot up eight times since his investment four months earlier. But the astonishing thing about his offer was the size of his proposed check: Silicon Valley had never seen a venture stake of such proportions.[21] The typical fund raised by a top-flight venture partnership weighed in at around $250 million, and there was no way it would put 40 percent of its resources into a single $100 million wager.[22] Private-equity investors and corporate acquirers sometimes made investments in the $100 million range, but in return they expected to take full control of companies.[23] Son, in contrast, would be a minority investor and on an unheralded scale. Because he had SoftBank’s corporate balance sheet behind him, he could pump in fully one hundred times more capital than Sequoia had provided when Yahoo got started. After Son dropped his bombshell, Yang, Filo, and Moritz sat in silence. Disconcerted, Yang said he was flattered but didn’t need the capital.[24] “Jerry, everyone needs $100 million,” Son retorted.[25]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Edward Crosby Johnson II, who in the 1950s established Fidelity as a dominant investment firm and made the same point in his own way: “The market is like a beautiful woman—endlessly fascinating, endlessly complex, always changing, always mystifying. I have been absorbed and immersed since 1924 and I know this is no science. It is an art…. It is personal intuition.”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“The funding of the Traitorous Eight and their company, Fairchild Semiconductor, was arguably the first such adventure to take place on the West Coast, and it changed the history of the region. After Fairchild got its $1.4 million in financing, it became evident that any team in the Valley possessed of grand ideas and stiff ambition could spin itself out, start itself up, and generally invent the organizational form that best suited its fancy. Engineers, inventors, hustlers, and artistic dreamers could meet, combine, separate, compete, and simultaneously collaborate, all courtesy of this new finance. Adventure capital could sometimes be defection capital, or it could be team-building capital, or almost just experimental capital.[1] But whichever way you looked at it, talent had been liberated. A revolution was afoot.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Jones was like a boy atop a mountain after a fresh snowfall; if a great mass of powder was ready to tumble down the slope, he could throw a well-aimed stone and set off an avalanche of money. Of course, as Jones insisted, he could no more move a market against fundamental economic forces than a boy on a mountain can cause snow to fall uphill. But the ability to start an avalanche is a formidable thing. If he could judge a market’s potential for a move, Jones could set off a chain reaction at a time of his choosing—and be the first to win from it.”
― Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite

“In a famous essay in Esquire, the master storyteller Tom Wolfe presents Robert Noyce, the charismatic leader of Fairchild’s eight traitors, as the father of Silicon Valley.[51] Noyce came from a family of Congregational ministers in Grinnell, Iowa, the very middle of the Midwest, where the land was as flat as the social structure. When Noyce moved out to California, he brought Grinnell with him, “as though sewn into the lining of his coat.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Today, if VCs are to finance capital-intensive projects, they need to recall their past. They can supply large sums of capital if they are allowed to own a large share of the resulting company.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Art of Disruption

“The way you do this is you start your own company,” Rock said simply.[74] By striking out on their own, the scientists would be able to work independently in the location of their choosing. But more than that, they would be company founders. They would own the fruits of their creative wizardry. A self-made loner from outside the establishment, Rock felt strongly on this last point. A certain kind of justice would be served.[75]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“By force of character and intellect, they stamped their will on their portfolio companies.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“In the place of a few smart individuals, there was now a thick web of startup connoisseurs, significant because the combined force of their actions was greater than the sum of their separate endeavors. It was like going from a system driven by genius to one driven by evolution. A brilliant person can do great things. A large group of people can try many things. Through an evolutionary process of trial, failure, and occasional breakthroughs, the group may advance faster than the individual.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Thus, even though VC-backed firms accounted for 47 percent of IPOs, they accounted for 76 percent of the market value at the end of the study. They also accounted for fully 89 percent of R&D spending.[35”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Besides, Musk’s rockets had blown up, but Musk’s engineers understood why they had blown up: failure was a bonus if you learned from it.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Art of Disruption

“Do not suffer your good nature . . . to say yes when you ought to say no,”
― Sebastian Mallaby, The Man Who Knew: The Life and Times of Alan Greenspan

“Metcalfe began to take venture capitalists to lunch and solicit their guidance. “If you want money, you ask for advice. If you want advice, you ask for money,” he reflected shrewdly.[27] His goal was to absorb the VCs’ way of thinking, and before long he noticed a pattern. At some point in each conversation, the venture guy would launch into a lecture on the three reasons startups failed: the excessive ego of the founder, too little focus on the most promising products, and too little capital. Having recognized this mantra, Metcalfe started to preempt it. “Here are the three mistakes I am not going to make,” he would announce, before the unsuspecting venture capitalist got a chance to lodge the standard caveats. “A, I have decided that it’s more important that this company succeed than that I run it. Two is, even though I have this business plan that shows a million products, trust me, we’re going to focus on a few of them. And three, I’m here raising money, because we’re not going to be undercapitalized.”[28]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“There were no more reasons not to go forward. Bud Coyle pulled out ten crisp dollar bills and proposed that every man present should sign each one. The bills would be “their contracts with each other,” Coyle said.[85] It was a premonition of the trust-based contracts—seemingly informal, yet founded, literally, on money—that were to mark the Valley in the years to come.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“They were dealing with products and manufacturing processes that were untested and complex; they faced competitors whose behaviors could not be forecast; they were investing over long horizons. In consequence, quantifiable risks were multiplied by unquantifiable uncertainties; there were known unknowns and unknown unknowns; the bracing unpredictability of life could not be masked by neat financial models. Of course, in this environment, luck played its part. Kleiner Perkins lost money on six of the fourteen investments in its first fund. Its methods were not as fail-safe as Tandem’s computers.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“By September 2004, Zuckerberg was referring to Parker as Facebook’s president, and Parker was steering Zuckerberg away from conventional venture capitalists. He told Benchmark and Google to back off, preferring to take a leaf out of Google’s own book; he wanted to raise capital from angels. His first port of call was an entrepreneur named Reid Hoffman, who had coached him through the Plaxo denouement. Hoffman declined to lead an investment in Facebook; he had himself founded a social network called LinkedIn, and there might be some rivalry. So Hoffman put Parker in touch with a Stanford friend named Peter Thiel, the co-founder of an online payments company called PayPal. Pretty soon, Thiel agreed to kick in $500,000 in exchange for 10.2 percent of the firm, with Hoffman providing a further $38,000.[11] A third social-networking entrepreneur named Mark Pincus also wrote a check for $38,000.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“In May 1976, a California securities regulator wrote to Kleiner Perkins, expressing concern about the riskiness of the Genentech investment. “Kleiner & Perkins realizes that an investment in Genentech is highly speculative, but we are in the business of making highly speculative investments,” Kleiner wrote back calmly.[90]”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future

“Having secured the introduction, Valentine packed Bushnell off to Sears with instructions to wear one of his “nonclown suits” and avoid being too “humorous.”[33] Bushnell did as he was told, and a buyer from Sears soon returned the visit.[34] By the middle of March, Sears had placed an order for seventy-five thousand Home Pong machines.[35] Atari now had what Valentine had been waiting for: a promising new product and a powerful distributor.”
― Sebastian Mallaby, The Power Law: Venture Capital and the Making of the New Future