The Power Law is the title of Sebastian Mallaby’s spectacular history of venture capital (review here). For those who haven’t read it, they would be wise to. Conservatives in particular.
A read might wake them up to just how easily they’re playing into the hands of the very technology firms they’d like the State to neuter. The great Peggy Noonan is the latest (in her can’t miss Saturday Wall Street Journal column) to call for politicians to get involved when it comes to limiting the allegedly excessive influence of technology companies like Facebook, Twitter, Google, and Amazon.
To see why, it’s useful to think about what Mallaby is talking about with the power law. He’s essentially saying that the 80/20 principle whereby the “vital few” drive all progress in life has a steroid quality when it comes to venture capital. It’s easy to see why that’s true.
With venture capital, investors are matching capital to entrepreneurs who are in many cases trying to pull off the impossible. VC investors are not copycats. They are directing precious resources toward frequently fringe and oddball entrepreneurs who see a commercial future that is near-totally unlike the present.
How we know the above is true concerns the valuations of the “Big Tech” companies mentioned above. Valued in the tens of billions all the way to trillions, their enormous market caps today speak loudly to how very much their innovations took the markets and the existing commercial order by surprise. Think about it. Efficient market theory is clear that a $20 bill dropped on the ground won’t last long. And with the latter a statement of obvious, how is it that multi-billion and even trillion dollar business concepts weren’t snapped up in the early days by existing commercial giants, and why is it that Sand Hill Road is similarly littered with all sorts of VC giants that passed on the companies mentioned?
The answer yet again is that while the commercial concepts perhaps seem obvious in hindsight, at the time the founders of Facebook, Twitter, Google, and Amazon were eager to develop ideas that the word “outlandish” doesn’t do justice to. These companies weren’t put out of business by established players, purchased by them, or realistically both precisely because so few could see their potential valuations at the time.
Indeed, to take this basic narrative further it’s useful to consider PayPal. Valued at over $100 billion today, it nearly died several times from its founding in 1998 to when it went public in 2002. Capital access is challenging for businesses aiming to alter the existing order. All of this leaves out how easily banks, credit-card companies, eBay, along with commercial giants in general could have taken PayPal out well before it became a payments force. Why didn’t they put it out of business, or at least buy it? PayPal was yet again pursuing what was seen as impossible.
As Jimmy Soni makes plain in his spectacular new book The Founders (review here), PayPal began pursuing internet payments at a time when the vast majority of internet commerce was still conducted via regular mail through checks sent. What’s obvious today wasn’t then. Which means the giants missed, and missed again. PayPal’s valuation is yet another example of how supremely outlandish technology concepts are at their birth, and usually well beyond.
All of which speaks loudly to the importance of Mallaby’s power law. Precisely because most of these technology companies will die and do so in smoldering fashion, it’s essential that the very few make it. They pay for all the failures. Call the 80/20 Rule that applies to life the 98/2 Rule that applies to technological progress. Realistically every technology concept is a moon shot, and since it is, the home runs must be of the multiple grand slam variety or else the investment model that underlies such innovation suddenly makes no sense.
Back to Noonan and her recent column decrying “Big Tech,” some who disagree with her will focus on Noonan’s lament that these giants know so much about us, and them supposedly violating our property rights for knowing. Others will want to rebut her assertion that parents need help from the State in shrinking the influence of these giants. A critique of each argument won’t be offered here as the arguments have already been made.
Arguably the more important truth is that attempts to chop Big Tech off at the knees will paradoxically play into the hands of Big Tech. Think about it all in terms of the power law.
It’s yet again the very rare successes that pay for all the flameouts. Crucial about these successes is that it’s their nosebleed valuations that exist as a powerful lure for new investment in the space. Success begets investment in future giants, and an ever-changing “Team Picture” at the top of technology. The main thing is that with the near-term technology powers, there’s little incentive to invest in their replacements if the State intends to limit their ascent in the future. Really, why put wealth to work on concepts that will mostly fail if conservatives (and to be fair, liberals) are lobbying the State to cripple the big players?
Which is why efforts to neuter Big Tech paradoxically play into the hands of the very corporations at which Noonan looks askance. If the State is going to step in to break today’s giants up or put age limits on usage (Noonan), either move will limit the valuation of today’s dominant players. That’s the seen. The “unseen” will be the investment in tomorrow’s replacements that doesn’t happen as a consequence.
In short, the Right and Left attack Big Tech at their peril. If they succeed, their success will reveal itself through a slower-changing team picture at the top. In other words, if you fear market power, you should love market power.
