The Power Law: Venture Capital and the Making of the New Future - Softcover

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Sebastian Mallaby is the author of several books, including The Power Law, More Money Than God, The Man Who Knew, and The World's Banker. A former Financial Times contributing editor and two-time Pulitzer Prize finalist, Mallaby is the Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations.

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Introduction

Unreasonable People

Not far from the headquarters of Silicon Valley's venture-capital industry, which is clustered along Palo Alto's Sand Hill Road, Patrick Brown strode out into his yard on the Stanford University campus. Atop a little hill behind his house, Brown got down on his hands and knees, a shaggy fifty-four-year-old professor in a T-shirt, peering at the vegetation through rounded glasses. Proceeding delicately, like a detective collecting samples that might yield a vital clue, Brown began digging out the roots of some wild clover plants. It might impress the ordinary gardener to know that those roots would soon yield $3 million.

Brown was one of the world's leading geneticists. In 1995, his lab had published pioneering work on DNA microarrays, which help distinguish between normal and cancerous tissue. He had been elected to the National Academy of Sciences and the National Academy of Medicine. He was the recipient of a Howard Hughes award, which guaranteed no-strings-attached research funding. But his objective on that hilltop had nothing to do with genetics. The year was 2010, and Brown was using a sabbatical to plot the downfall of the meat-industrial complex.

A friend had set him on this path by means of a stray comment. Possessed of a keen environmental conscience, Brown had been worrying that animal husbandry occupied one-third of the world's land, causing significant greenhouse gas emissions, water degradation, and a loss of biodiversity. The planet was clearly going to need a better kind of food for the growing population of the twenty-first century. Then Brown's friend mentioned that if you could make a vegetarian burger that tasted better than a beef burger, the free market would magically take care of the problem. Adventurous restaurants would serve it, and then McDonald's would serve it, and pretty soon you could eliminate meat from the food system.

The more Brown pondered this, the more he grew agitated. If you could make a yummier vegetarian burger? Of course you could make a yummier vegetarian burger! Why was nobody treating this as a solvable problem? "People just figured we have this insanely destructive system and it's just never going to go away," Brown fumed. "They thought, 'Bummer, but there you are.'"

In most places and at most points in human history, Brown's epiphany would have been inconsequential. But, as Brown himself reflected later, he had "the very good fortune of living in the epicenter of venture capital." Because Stanford sat at the heart of Silicon Valley, its golf course laid out along the edge of Sand Hill Road, Brown was digging up his yard with a clear purpose. Those clover roots contained heme, an iron-carrying molecule found in hemoglobin, which gives blood its red color. If Brown could show how this plant molecule could mimic the properties of bloody meat, there was a good chance that a venture capitalist would fund a plantburger company.

Brown dissected the clover roots with a razor blade and blended them up to extract and culture the juices. Pretty soon, he had what he needed to fashion a vegetarian burger that smelled and sizzled and dripped and squished like 100 percent Grade A beef. "I got to a point where, though I didn't have much data, I'd enough to go and talk to some venture-capital companies-of which there are a ridiculous number in Silicon Valley-and hit them for some money."

A scientist friend mentioned that Vinod Khosla, a venture capitalist who ran the eponymous Khosla Ventures, was interested in environmentally friendly, "cleantech" projects. What he didn't mention was that Khosla was also a preacher of the Valley's most bracing creed: the belief that most social problems can be ameliorated by technological solutions, if only inventors can be goaded to be sufficiently ambitious. "All progress depends upon the unreasonable man," the "creatively maladjusted," Khosla declared, borrowing eclectically from George Bernard Shaw and Martin Luther King Jr. "Most people think improbable ideas are unimportant," he loved to add, "but the only thing that's important is something that's improbable." If you were going to pitch Khosla an invention, it had better not fall into the incremental category he called "one sheet of toilet paper, not two." Khosla wanted radical dreams, the bolder and more improbable the better.

Brown rode a bicycle to Khosla's office, a sleek designer building of glass and wood. He had prepared a slide deck that he admitted "in retrospect was ridiculous." The first slide laid out his goal: rendering the entire meat industry redundant. Those rounded glasses-the John Lennon, Steve Jobs, visionary look-seemed altogether appropriate.

Khosla has large eyes and chiseled features and thick, cropped gray hair. He fixed his visitor with an impish stare.

"That's impossible!" he said, delightedly.

Silently, Khosla was thinking to himself, "If there is a one-in-a-hundred chance that this works, this is a shot worth taking."

Brown explained how he proposed to out-beef the beef industry. He would break the challenge down into its component parts: how to replicate the smell, the consistency, the taste, and the appearance of a real beef burger. Once you analyzed each question separately, an apparently impossible ambition became a set of soluble problems. For example, the clover-root juices would drip like blood onto hot coals; they would turn from red to brown as they sizzled on a barbecue. Dr. Frankenstein had met Ray Kroc. Nobody would eat ground cow flesh again.

Khosla ran through a test that he applied to supplicants. The onus was not on Brown to prove that his idea would definitely work. Rather, the question was whether Khosla could come up with a reason why it obviously could not work. The more Khosla listened to his visitor, the less he could rule out that he was onto something.

Next, Khosla sized up Brown as a person. He was fond of proclaiming a Yoda approach to investing: empower people who feel the force and let them work their magic. Brown was evidently brilliant, as his credentials as a geneticist demonstrated. He was gate-crashing a new field, which meant he was unburdened by preconceptions about what conventional wisdom deemed possible. Moreover, Brown was clearly as determined as he was bright: he was ready to leave his academic perch-the prestige of a Stanford professorship, the blank check from the Howard Hughes foundation. All in all, Brown fitted Khosla's archetype of the ideal entrepreneur. He had the dazzling intellect, the willingness to put his own neck on the line, the glorious hubris and na•vetŽ.

There was one last test that Khosla cared about. If Brown managed to produce a yummy plantburger, would he generate profits that would be commensurately succulent? Khosla routinely put capital behind moon shots with a nine-in-ten chance of failure. But the low probability of a moon landing had to be balanced by the prospect of a large payout: if the company thrived, Khosla wanted to reap more than ten times his investment-preferably, much more than that. There was no point gambling for success unless the success was worth having.

Brown had gotten to his final slide, where he stuck all the mundane market data that failed to interest a scientist. He noted matter-of-factly that "it's a trillion-and-a-half-dollar global market being served by prehistoric technology."

Khosla latched on. If plant patties could mimic the experience that customers expected from beef-the taste, the consistency, the browning, and the bleeding as you flipped the burger on the grill-the potential was cosmic.

Brown looked Khosla in the eyes. "I promise to make you even more insanely rich than you already are, if you give me this money," he told him.

At that, Khosla bet $3 million on Impossible Foods, as Brown fittingly named his company. Recounting this...