How Venture Capital Made the Future.

• Author: Wolfe, Liz
• Position: BOOKS

"LIBERATION CAPITAL," AS investor Arthur Rock called it, "was about much more than keeping a team together in the place where its members happened to own houses." In 1957, Rock took a gamble on the "traitorous eight"--a team of promising engineers at Shockley Semiconductor Laboratory--and counseled them to free themselves of their authoritarian boss by quitting en masse and striking out to form Fairchild Semiconductor.

Rock was an amalgamation of consigliere and connector. He helped the group secure funding, cementing his place in history as the father of modern venture capital, which offered an alternative to stuffy East Coast financial institutions that were leery of lending to tech ventures they perceived as risky.

In The Power Law: Venture Capital and the Making of the New Future, journalist Sebastian Mallaby draws on interviews with scores of high-profile venture capitalists (V.C.s)--and other sorts of reporting, including four years of sitting in on firms' meetings--to tell the story of Rock's new paradigm: a form of financing that centers on funding high-risk, highreward companies in their early days. Mallaby, who similarly embedded himself in the world of hedge funds when writing his 2010 book More Money Than God, smartly details the well-placed V.C. interventions that produced technologies too many industry critics take for granted today.

While detractors frequently downplay how much public policy can help or hinder innovation, Mallaby never neglects the subject. A reduction in the maximum individual capital gains tax rates in the late 1970s and early '80s--from 35 percent for most of the '70s to 20 percent by 1982--left venture capitalists flush with cash and eager to invest. Without these preconditions, Apple and Atari might not have flourished; Leonard Bosack and Sandy Lerner's Cisco, which pioneered multiprotocol routers, might not have received enough investment; and advances in computing might not have taken off at the time and speed that they did. As Silicon Valley competed with larger, more established investing firms in Boston and Japan, its nimble spirit--a "bubbling cauldron of small firms, vigorous because of ferocious competition between them, formidable because they were capable of alliances and collaborations'--made it rich with creative ferment, especially when compared with the "self-contained, vertically integrated" cultures of its faraway competitors.

Three decades later, public policy was still shaping Silicon...