CTech’s Book Review: Measuring and understanding the 80/20 rule

“The Power Law” tells the story of the venture capital industry. From its early days in post World War II America, through the modern days of astronomic valuations and an abundance of capital, “The Power Law” analyzes both the macro investment philosophies that govern the decision making of a venture capitalist as well as the micro attributes that formed the most famous firms and investors. The book is written in narrative form and chronological order, thereby tracing the lineage of VC as we know it today all the way back to its humble beginnings.

The most important theme in this book is the understanding of the eponymous “Power Law”. The Power Law, which is perhaps more colloquially known as the 80-20 rule, is a statistical concept that refers to the phenomenon that the majority of outcomes result from a relatively small number of instances. In the case of VC/startups, this is something that we all intuitively know – a very small portion of all of the startups in the world actually succeed, but those that do tend to have dramatic economic impact. Mallaby explains however just how critical it is to understand this concept, both as investors and founders.

Furthermore, he explains that this phenomenon is not just true of startups, but is also true of VC firms – the vast majority of VCs are mediocre whereas a small percentage of them actually perform well. But those that do, perform extraordinarily, which in and of itself helps establish an impressive flywheel effect. A second theme that this book grapples with is the role that VCs actually play, or phrased differently, if VCs actually provide value. The author takes readers through various firms’ and their style of work, and I think makes a quite compelling argument that VCs have a very important role to play (aside from simply providing capital), and that there are several different ways to play that role. Of course, as an investor myself, I’m biased and may have misinterpreted that point.