You can roam Silicon Valley and collect countless versions of this story.
But if you dig a little deeper, the real mechanics of venture capital emerge. In the case of Sequoia’s Stripe investment, the key was an early warning system that flagged Mr. Collison as a hot prospect when he was just 21 years old. Sequoia has built this system with care. He doled out capital to young technologists and invited them to make “angel” investments in promising members of their cohort, getting new prospects on his radar. A year before he met Mr. Moritz, Mr. Collison had raised $30,000 from two angels connected to Sequoia. This, much more than his cool bike, was key to the Stripe-Sequoia partnership.
Spend time with other sophisticated venture capital shops and their deliberate methods become clear. Accel, the partnership best known for backing Facebook, has developed an approach known as a “prepared mind.” You are investigating an upcoming technology change, such as migrating customer device data to the cloud. You determine the implications: new hardware configurations, new software business models, new security vulnerabilities. Then, when you come across a start-up that is about to ride the new wave profitably, you are ready to react quickly.
Human beings, in this case, are wired to approach the world in the opposite way. We will play to avoid a loss, but we are irrationally reluctant to go higher. “Failures don’t matter,” Kleiner Perkins executives told themselves. “You can only lose your capital once.”
Vinod Khosla, a former kingmaker at Kleiner Perkins who now runs his own venture capital firm, once told me about his decision to bet on meatless burger company Impossible Foods, a start-up whose ambitions seemed once exaggerated. like that of Theranos. Patrick Brown, the founder of Impossible, had devised a plan to eliminate the meat industrial complex. It was an incredibly messianic vision. If he fails, Mr Khosla remembers thinking, “we’ll laugh at him”.
Mr Khosla put that worry aside and made a bet on Impossible, believing that even if Mr Brown only had a one in a hundred chance, it was a shot worth taking. Eleven years later, while the meat industry complex may not have been overthrown, Impossible is worth $7 billion. Which is better, Mr. Khosla observed: to try and fail, or to fail to try?
Sebastian Mallaby is a Senior Fellow at the Council on Foreign Relations and author of “The Power Law: Venture Capital and the Making of the New Future”.
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