Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang Flashcards
(231 cards)
1
Q
Reid Hoffman, founder of LinkedIn, observed that an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
2
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VCs acting in concert with entrepreneurs function as an essential and powerful engine of the U.S. economy.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
3
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the students seem almost completely unaffected by the economic ups and downs raging around them.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
4
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in the minds of the graduates of American business schools, it is always “morning in America”
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
5
Q
successful entrepreneurs put themselves in a position to “get lucky” by developing relationships with relevant people and taking advantage of promising opportunities.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
6
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certain kind of visionary optimism; tremendous confidence in oneself that can inspire confidence in others; huge passion for an idea or phenomenon that drives them forward; and a desire to change the game, so much so that it changes the world.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
7
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Entrepreneurs tend to genuinely believe that their brilliant vision can make the world a better place.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
8
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the entrepreneur’s incredible optimism that everything will go right is often accompanied by a raging fear that, in fact, everything will go totally wrong.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
9
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it was as much a story as it was a vision,
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
10
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Paranoia is part of what drives a lot of entrepreneurs in a positive direction, just worrying that everything is going to go wrong and trying to mitigate every possible risk.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
11
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Much of entrepreneurship is making people feel confident about something in which they really have no basis to believe, because it doesn’t exist, and for which there is no proof that it will succeed. To achieve this, entrepreneurs need to demonstrate passionate, authentic leadership, not simple bravado or good salesmanship.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
12
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An advisory board is a useful mechanism to attract outstanding people with deep domain knowledge to your company.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
13
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In creating a strong advisory board, an entrepreneur can create a self-fulfilling prophecy, giving the company an aura of success even before it has proved anything.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
14
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There’s a saying that technology companies should eat their own dog food—that is, use their own technology for the purpose it was developed
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
15
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‘Look, they are a huge company. It’ll take them five years to get organized.’ ”
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
16
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Sirtris was built on Christoph’s confidence, sold on his confidence, and brought confidence to those around him—even the leaders of a much older, larger, and more established company than his own. For an entrepreneur, being able to project and inspire confidence is critical.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
17
Q
However, more than confidence is required. Another element that is critical for successful entrepreneurs is an unwavering passion for what they’re doing. In the face of obstacles, distractions, and naysayers, great entrepreneurs follow their passion no matter what the odds.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
18
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The concept for Twitter came out of Jack’s lifelong fascination with mapping the real-time movements of people and things within complex environments.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
19
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Jack so loved the idea of digitally mapping interactions around a city and the notion of couriers as a physical manifestation of these interactions that he decided to start a bicycle courier service of his own at the age of sixteen.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
20
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“I had to get into that!” Jack enthused, as our conversation took him back in time. “I got in contact with the chairman, Greg Kidd, the guy who had built the company and taken it public. I said, ‘I’m writing some dispatch software, and I’d really love to come to New York and work with you all.’ ” Jack pursued Greg hard, and within a couple of weeks, he moved to New York, transferred to NYU, and started writing dispatch software for DMSC.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
21
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Don’t hide what you’re doing. If you think you’re doing something interesting, get it out in the open, shout it out from the rooftops, and solicit as much feedback and input as possible.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
22
Q
“The way the company and the product gained traction was that we got the best people we could think of and we worked with them. And we wanted the same thing from our VC. We wanted the best person across the table from us. It was not where he comes from, but ‘Is this guy fun to work with? Is he going to challenge us? Is he smart?’ This person was going to take a seat on the board. I viewed it as a hire that we could never fire.”
A
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
23
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the subject of money was always in the background, of course, but never the most important factor in their deciding to become an entrepreneur.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
24
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the entrepreneurial drive usually stems from something quite personal and individual.
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Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
25
For Reid, the driving force behind entrepreneurship is to do good for the world.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
26
“Today, every individual is a small business,” Reid told me. “The idea that you will work for one company for forty years is dead. It’s even dead in Japan. It’s dead everywhere. Now, you’re your own small business charting your own path, and there are entrepreneurial aspects to that. How do you get your next gig? How do you manage the brand of yourself?” As Reid sees it, educators don’t understand that the world has changed in this way.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
27
“Starting from scratch, building something, a whole company and product, is a very different experience than iterating on something that’s already there. The whole entrepreneurial thing is that you kind of jump off a cliff and assemble your airplane on the way down. And financing, by the way, is a thermal draft,
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
28
It is always more impressive to investors when you are so confident in your idea and your ability to build it that you just go ahead and do it on a shoestring budget and have something tangible to show investors.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
29
That’s how the great entrepreneurs think. The money is nice and appreciated, but, as mentioned before, it’s almost never about the money. It’s about passion, following a dream, and changing the world (with plenty of craziness along the way). And to help them along with advice and capital, many entrepreneurs turn to the venture capitalist. 2
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
30
being a VC entails a very different kind of excitement than entrepreneurship does.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
31
As a VC he would rather be the enabler and facilitator than the builder or onstage performer. The best VCs are people who tend to get bored working on one business at a time in an in-depth fashion.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
32
The National Venture Capital Association (NVCA) estimates that there were 882 venture capital firms in existence in 2008 in the United States.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
33
To reiterate—the decisions that lead to the funding for and aiding of the companies that account for over 20 percent of the gross domestic product of the United States and, in addition, provide medical care for one in three Americans are made by only about one thousand individuals.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
34
According to the NVCA, approximately $84 billion of the $200 billion of total VC capital under management resides in California. Thirty-six billion dollars is managed in Massachusetts and $18 billion in New York. Those three states alone represent 70 percent of all capital under VC management.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
35
Many entrepreneurs gravitate to angel investors when they require less capital than a typical VC might be interested in investing (say, less than $2 million),
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
36
Typically, at least one partner in the VC firm will take a seat on the board of the company in which it invests.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
37
The typical start-up that is a good fit for VC money may not generate any revenue for two to four years, if ever.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
38
the typical entrepreneur who is a good fit for VC money wants and needs the very active participation of the capital provider in the oversight of the business.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
39
there are very precise and distinct roles in the VC world: general partners, principals, associates, entrepreneurs in residence, and limited partners.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
40
General partners (sometimes called managing directors or, simply, partners) are the most senior investment professionals in the firm. They decide which start-ups to invest in and sit on the boards of the companies once they’re funded. They are often the owners of the firm,
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
41
Associates support the general partners and principals and have no authority to make investment decisions themselves.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
42
“There’s no school for it. Every truly successful venture capitalist has been mentored in turn by another successful venture capitalist over a long period of time.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
43
“It took me a while to really get going in the venture business. I think for my first ten years, I didn’t know what I was doing.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
44
I think that the VCs who have been entrepreneurs, if they can truly make the switch to being a VC, are the best VCs.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
45
Ted Dintersmith of Charles River Ventures warned me, “Remember, you don’t run these companies; you invest in great people to run these companies. If you think they work for you like divisional presidents, you have it all wrong. In truth, you want to invest in people who are better than you, and make sure you work for them. The entrepreneur is your boss and customer combined.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
46
The EIR is generally a former start-up CEO or a would-be CEO who has a special relationship with the VC firm. The EIR may be hired by the VC firm for a six- to twelve-month period with the express purpose of starting up a new company (which the VC firm will be backing) or joining a fledgling start-up as one of the senior executives to help it get rolling and catalyze the firm’s investment.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
47
Nitzan met with eight venture capital firms and discovered that there were “nine different definitions to the term EIR. Boiling it down, there are three areas EIRs typically focus on: identifying new investment opportunities, helping portfolio companies, and ultimately launching or joining a new investment (the ‘exit’ event for an EIR).”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
48
To succeed as an EIR in the eyes of the VC firm, Nitzan discovered there is just one metric that counts: “Bring at least one investment into the firm that they would not have made otherwise!”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
49
One very important figure whom you won’t actually meet in the office of the VC, but whose presence looms above all proceedings, is the limited partner, or LP. The LP is so important because he, she, or it is the source of the VC’s money.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
50
The VC has two loyalties that may occasionally conflict: a fiduciary duty to generate the maximum return for their LPs, and a fiduciary duty to protect the interests of all shareholders in the companies they’re investors in, and for which they serve on the boards.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
51
at Flybridge, we typically are approached or learn about approximately two thousand businesses seeking capital each year.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
52
We all try to express some creativity because, as a general matter, the job of the VC involves creativity only by proxy.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
53
board meetings should be collections of smart people trying to figure out the best path for a company,
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
54
some argue there are diseconomies of scale and that the business is still very much an art more than a science, which depends on the judgment of gifted individual investors who see value where others do not.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
55
VC firms are extensions of their founders and leaders and pursue the strategy that best fits them and their culture.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
56
The one lesson that I would say for all entrepreneurs is, ‘If you’re going to fail, fail quick and cheap.’ There’s no stigma in failing that way. But if you blow a hundred million bucks, big stigma.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
57
the Goldilocks Rule applies to VCs and fund size: not too big, and not too small, but just right for your company and its capital requirements.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
58
The size of a VC fund influences the strategy and focus of the firm.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
59
If you’re an entrepreneur with a start-up idea looking to raise $3 million to $6 million dollars, then a firm with roughly $50 million in capital per general partner is the right fit for
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
60
An early-stage firm would typically allocate about $50 million per general partner, which is what we have done at Flybridge Capital Partners, where we have five general partners investing out of our third fund of $280 million and would typically allocate about $50 million per general partner. This allows each of us to lead an investment in four to six companies over the three-year life of a fund, with $8 million to $12 million allocated per company. Usually at least half of this investment amount would be reserved for future rounds of financing, so $2 million to $8 million might be the initial investment, with another $5 million to $10 million reserved for follow-on financings—a common profile for firms with $50 million per general partner.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
61
When two VC firms with different fund sizes and investment strategies are co-investors in the same company, it yields a natural tension.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
62
VC firms charge management fees, and partners in a VC firm draw salaries from these fees. But the potential for really big money lies in the “carried interest,” that is, the percentage of profits—usually in the 20 to 25 percent range—that a VC fund earns if their fund performs well.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
63
So what’s the VC business model? Raise a fund, get paid 2 to 2.5 percent annually in fees to manage that fund, cover salaries and expenses, and make investments that you hope will generate large capital gains.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
64
Because VC funds are treated as separate economic entities, once the VCs have finished investing in a particular fund, they need to raise another one from their limited partners.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
65
Funds do have long shelf lives—typically ten years—because the companies they invest in usually do not achieve liquidity for five to seven years. So the initial investment period of three or four years in which the fund is deployed is really the start-up phase during which the new investments are made. The harvest phase of the fund is over the next five to ten years when the investments mature and are sold or liquidated by going public. Thus, VC funds are often layered on top of each other.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
66
I would encourage entrepreneurs to ask the VCs with whom they’re talking how the carry is divided within the partnership. It is a reasonable question to ask and will provide revealing insights into the partnership’s culture and division of decision-making authority.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
67
“Getting venture and financing is like a marriage, but one that you know is not supposed to be for a lifetime,”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
68
VCs invest in only one out of every three hundred companies to which they are exposed.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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many of the best VC firms, instructs their support staff to treat entrepreneurs like superstars rather than peons begging for money (which we were).
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
70
I didn’t know the underlying drivers of the financials as well as I should have.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
71
I resolved never to walk into a pitch, or any meeting with a VC, without knowing every number and every detail inside and out. And, as a VC, that is what I have come to expect of every entrepreneur who pitches me.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
72
some people argue that the VC pitch process is analogous to dating, but to me it’s more like car shopping. Most people date in a serial fashion before they find the right person (at least that’s the old-fashioned way in which I operated before I got married), but they shop for cars in parallel—checking out multiple dealers and multiple brands before making a choice.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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Scoping out VC firms also means learning as many details as you can about their current situation. It’s important to know where the firm is within its own business cycle.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
74
Partners typically sit on the boards of the companies they have funded, and there is a limit to how many boards a partner can handle. At the time of this writing, I currently sit on eight boards. Tim Draper at DFJ is on six, and Fred Wilson of Union Square Ventures is on seven. Ten is usually the maximum, with five to ten the norm.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
75
So when an entrepreneur makes a cold approach to a VC, it marks him as an outsider. The guy doesn’t know anybody?
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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“Thirty minutes is enough to see if the passion is there,” First Round Capital’s Howard Morgan told me. “It’s enough to get a sense of the person, to see if he knows what he’s doing.” As DFJ’s Tim Draper put it to me bluntly: “If I can’t figure it out in thirty minutes, then I’m an idiot, and we won’t invest.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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I advise entrepreneurs to pause fifteen minutes into the meeting and check in with the VCs to see if they think the pitch is interesting and has a chance of going anywhere.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
78
Many VCs joke that there are two phrases you always hear in every pitch: “This is the only (or last) money we will ever need” and “These projections are very conservative.” I would estimate that out of the five thousand business plans I’ve reviewed in the last eight years as a VC, only 1-2 percent performed better than the numbers in the plan.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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don’t oversell. “I’ve learned the hard way that it’s better to say, ‘Look, this is a gamble. It’s a risk. I believe I can do it successfully, but it hasn’t been done yet, so we’re going to see if it plays out.’ That’s better than articulating it as ‘We’ll succeed.’
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
80
The process by which VCs consider deals—known as processing the “deal flow”—is
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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“The biggest lesson I learned,” Gail said, “is to get better and better at knowing whether you’re in the VC sweet spot.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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in the end, the VCs cared about the people behind the idea as much as, if not more than, the idea itself. And people are perhaps the most important attribute required in order to attract VC money.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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Sweet spot + compelling vision + wrong people = no
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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Ideas are a dime a dozen. Having a world-class team that can uniquely execute on the ideas is golden.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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VCs are looking to back entrepreneurial teams that can effectively execute on the big vision and bring it to life.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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“We VCs love to invest in the serial entrepreneur who’s done it before, knows the playbook, and won’t make any of the rookie mistakes. And when those people come back, if they still have the fire in their belly to do it again, we’re likely to say ‘yes’ almost every single time.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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the singular focus of the young entrepreneur is very powerful.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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The powerful combination of these three forces—finding the right VC match, having a compelling vision, and assembling a uniquely strong team—can
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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“What kind of entrepreneurial mentors have you had in your career? How did you approach them?”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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a key entrepreneurial trait: an ability to quickly change directions and pursue a more attractive opportunity.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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A scenario like this—where the VC and entrepreneur get to know each other over time and learn each other’s preferences, biases, and perspectives—is so much more compelling than a one-hour pitch or thirty-minute conference call.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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One way to think about start-ups like Brontes and Sirtris is as giant experiments. In such cases, VCs much prefer to invest in experiments that are (1) specific and discrete; (2) have very clear assumptions; (3) are not too costly; and (4) have outcomes that can be easily measured over a reasonably short period of time.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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improved her odds by painting a big vision, explaining it in a clear, straightforward fashion, and then having the deep science to back it up, with well-articulated milestones.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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the odds are stacked against the entrepreneur. It can seem hard to get access to a member of the VC club and convince its members that your story is a compelling one and that you have the right team to execute against it. But with good preparation and thoughtful planning, a warm introduction, and a set of well-defined experiments and milestones, you can improve your odds considerably.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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To ensure you will get the value you are paying for, always check references, even with big name-brand VC firms, and even with individual venture capitalists with well-known track records.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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The best way to check references of a VC firm or an individual venture capitalist is to talk to entrepreneurs the firm has funded and worked with.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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need to not only check the ones they give you, but also the ones they don’t provide. You do this by leveraging your connections in the community to find people who know them well professionally and personally.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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“We are always much more inclined to invest in entrepreneurs who spend time looking into us,” Fred Wilson told me. “We think that is the right thing for an entrepreneur to do. Due diligence shows well for the entrepreneur.”
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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When you boil down what value a VC will provide you, there are, in essence, four important areas: (1) strategy; (2) recruiting; (3) business development; and (4) future financing.
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The best VCs are those who are skilled at serving as strategic counselors.
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“The biggest challenge for a young entrepreneur,” Gail Goodman told me, “is having the skill to listen and be open to what the VC is saying, but know when they’re wrong, and have the conviction to say when they’re wrong.
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Keeping your VC in the loop on what you decide is critical, as most VCs I know identify the best CEOs as the ones that bring them in to get their advice on major decisions rather than struggle to keep them out. But the best entrepreneurs know how to make, and take responsibility for, the final call.
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why is recruiting such a fundamental part of the VC value-added equation? One word: execution. There are a lot of people with good ideas out there trying to start businesses, but very few execute them successfully. Those that can are typically led by an outstanding team that many investors would back in almost any situation. A good team doesn’t make a company 10 percent better than a mediocre team; it makes it 1,000 percent better (at roughly the same cost).
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I want a VC who is always thinking a few steps ahead of me.
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VCs can often act as valuable salespeople, rainmakers who can help bring in the “make the company” deal alongside the management team.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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If your VC isn’t serving as one of your best executive-level door openers, you have chosen the wrong VC.
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the VC can be a helpful coach during the follow-on fund-raising process. The most obvious thing a VC can do is to write another check from his fund. The less obvious ones are to make introductions to other potential investors and serve as a coach during the due diligence and negotiation process. VCs have been on the receiving end of pitch after pitch and, therefore, once they are on your side, they can be a great resource for determining the best way to position your company to the market.
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“The real value-add from a VC comes down to future financing,” Reid Hoffman told me. “The principal thing that a firm can bring you is ease in the next round of financing.”
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one particularly tricky area to navigate for the VC and the entrepreneur is whether the follow-on round should be an “inside round,” where the current investors make the full investment without any outside participation, or an “outside round,” which is led by an outside investor and some or all of the existing investors participate alongside the new lead investor.
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the “VC buddy pass,” and warned me when I got into the business to run for the hills when it comes your way.
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How can an entrepreneur avoid these land mines while trying to successfully conduct the outside-in, inside-out dance? First, be proactive and have a frank discussion with your VCs about the next round the day after you close the first round. Something like: “If I hit these milestones, will you continue to support the company? If so, what is the price increase that we will deserve? What if we exceed the milestones by 20 percent? What if we miss the milestones by 20 percent?” Also, it’s perfectly normal and appropriate to have some tension around price. The entrepreneur is always going to think her start-up is worth more than the VC. Therefore, it may make sense for the entrepreneur to go outside to validate what is a fair, market-based price and terms. Besides, cultivating additional VC relationships for future rounds of financing can often be a good time investment for the entrepreneur.
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the most essential element in the relationship between the entrepreneur and the VC boils down to one word. Chemistry.
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Picking a VC who can operate as a part of the team is a theme Tim emphasized over and over
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Being an entrepreneur is a lonely and stressful job. A good VC helps make it less lonely, providing an open ear and strong support.
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A VC has to show me right away that I can trust them.
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During their courting period, Fred showed Jack he could provide more than just money; he could contribute to the product’s vision and direction to help lead the company to success. If your VC doesn’t show you that passion for your product and your own personal success, as well as an ability to add value during the due diligence process through their strategic or product insight, then he and his firm may not be the right business partner for you.
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DO THE DEAL
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This negotiation can be the first real test of how well the entrepreneur and the venture capitalist are going to work together. One of my favorite sayings at our firm is, “You learn a lot about entrepreneurs when you’re in the crucible of a deal with them.”
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One VC friend of mine likes to tell entrepreneurs that if he doesn’t add value in some way during the due diligence process—either through valuable introductions, good strategic advice, or simply helping sharpen their fund-raising pitch—he tells them they shouldn’t do business with him.
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CONTRACT: THE TERM SHEET
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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The term sheet is essentially a preliminary, nonbinding document between the entrepreneur and the VC that outlines the material provisions of the financing deal.
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Most VCs issue a term sheet to the entrepreneur only when they have made a final decision—the
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In the case where the term sheet is duly issued, the financing closes and the money is wired, typically within thirty to forty-five days from signing the term sheet.
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bad behavior on the part of VCs is the “exploding term sheet”—here’s our term sheet but only if you decide to accept it within twenty-four hours. This should be a red flag for the entrepreneur. The VC-entrepreneur relationship is one that needs to be entered into with great thought and deliberation. Neither side should pressure the other to rush in.
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“definitive documents” (i.e., the detailed closing contract
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there are two issues that really matter to the VC in a financing transaction: economics and control.
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The discussion of price centers around the pre-money valuation—what is the company worth prior to the VC’s investment? This pre-money valuation is known in shorthand as “the pre-money” or just “the pre,”
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Determining the pre-money valuation is an art, not a science, and many entrepreneurs get frustrated with what seems like an opaque process. Unlike what you learn in a finance class in business school, where you calculate discounted cash flows and apply a weighted average cost of capital, there is no magic formula. The valuation for entrepreneurial ventures is set in a back-and-forth negotiation based on three factors: (1) the amount of capital that the entrepreneur is trying to raise in order to prove out the first set of milestones; (2) the VC’s target ownership (often 20-30 percent); (3) how competitive the deal is (that is, if the entrepreneur has numerous VCs chasing them, they can drive up the price.
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In most situations today, the initial pre-money valuation is under $10 million. In the end, the VC has to be convinced that he can make five to ten times his money in three to five years
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The post-money plays a part as well. The post-money is the pre-money plus the money raised.
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Another term that impacts the price is the size of the option pool.
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In anticipation of those hiring needs, many VCs will require that an option pool with unallocated stock options be created, thereby forming a stock option budget for new hires that will be set aside to avoid further dilution. The stock option pool typically comes out of the management team allocation (i.e., the option pool is included in the pre-money valuation), independent of the VC investment ownership. In the example above of $4 million invested in a $6 million pre-money valuation (known in VC-speak shorthand as “4 on 6”), if the VCs insist on an unallocated stock option pool of 20 percent, then the VC investors still own 40 percent and the remaining 60 percent is split between a 20 percent unallocated stock option pool at the discretion of the board and a 40 percent stake owned by the management team. In other words, the existing management team/founders have given up 20 percentage points of their 60 percent ownership in order to reserve it for future management hires.
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The “promote,” as we have called it, is the founding team’s ownership percentage multiplied by the post-money valuation.
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Another nuanced element of the economic equation of a term sheet is the liquidation preference. The liquidation preference is the governing formula for how the proceeds from a liquidity event are divided (i.e., who gets preference over whom when dividing the pie). The two pieces of the liquidation preference formula are (1) the preference calculation and (2) participation. The preference calculation is typically straightforward—those who have invested capital get preference in any liquidation over other claim holders, e.g., common stockholders who haven’t invested capital, but have a stake in the company through their ownership of common stock. In some cases, preferred stockholders seek more than simply 1x their invested capital (where “x” is the amount of capital invested) and demand a 2x or 3x liquidation preference. That is, if an investor invests $5 million in a company and the company sells for $10 million, the investor gets all $10 million in the case of a 2x liquidation preference and other stockholders (i.e., common stock owners) get nothing. Under normal market conditions, multiple liquidation preferences are rare in the early stage or very competitive deals, but quite common in recapitalizations or distressed situations. The participation feature of the preferred shares is the other part of the preference equation that the entrepreneur needs to factor in when evaluating the economics of the deal. Preferred stock participation governs what happens to the remaining proceeds after the initial preference is paid out to the investors. There are three general flavors of participation: fully participating, non-participating, and (in between) capped participation. Fully participating preferred stock means that the preferred shareholders will share in the liquidation proceeds, after the payment of the liquidation preference, on a pro rata basis as if they had converted their preferred shares into common stock. For example, let’s assume the preferred shareholders own 60 percent of the company for a $5 million investment and they have a 1x liquidation preference that is participating. If the company sells for $15 million, then the first investors get their liquidation preference ($5 million) and also get to participate in their 60 percent share of the remaining $10 million of the proceeds, or $6 million, for a total of $11 million in return to the investors.
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One useful technique for clarifying the various scenarios is to have a simple spreadsheet with the entrepreneur-VC split laid out under different exit outcomes.
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This distribution of proceeds in the event of a sale is often called the “waterfall,” evoking an image of sale proceeds cascading like a river to various shareholders, and I recommend entrepreneurs be clear about what the waterfall calculations look like for each of the preferred and common shareholders.
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In between the two extremes of fully participating and non-participating is a technique many VCs like to use, which is called capped participation. In capped participation, the VCs set a certain price per share threshold, under which the preferred shares are participating, but over which they are non-participating. The logic behind this provision is simple: VCs aren’t in the business of giving entrepreneurs capital to make one or two times their money. Their objective, and the entrepreneur’s vision, is that the company will be so successful that investors will make more than ten times their money. If a company doesn’t live up to its promise, investors want to get their money out first, if there is a sale, and they want to make a little extra in exchange for their capital being tied up over the years. This scenario is sometimes called the “sideways scenario,” and VCs feel as if they deserve a preferred return under this scenario. But if things go well and the company sells for five or ten times the original purchase price, then everyone should simply get their share.
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Many early-stage VCs are advocates for “clean terms,” which usually means capped or no participation and few bells and whistles around the edges to maintain alignment.
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The other reason early-stage VCs argue for clean terms is that they are savvy enough to know that the early-stage terms carry forward in the later stages of a company’s life. Later-stage investors are likely to punish early-stage investors disproportionately if the terms are onerous, layering capital on top of the early-stage investors while inheriting all the privileges and preferences that the early-stage investors put in place. Further, if there are too many encumbrances on management, they will be negotiated away in later stages if the entrepreneurs get more leverage as a result of good performance.
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if the VC doesn’t detect much competitive pressure and if the deal is somewhat controversial within the partnership, he will take a harder line on terms.
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Some investors play the game of “your price, my terms” where they accede to an entrepreneur’s pre-money demands, but load up the option pool and the liquidation preference in such a way that the economic equation would be more favorable if the entrepreneur took a lower price in exchange for what is known as a “clean deal.”
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So those are the key elements of the economics—pre-money price, option pool, and participation.
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there are three control elements for the entrepreneur to focus on in a term sheet. First is the composition of the board of directors. The board has the power to fire and hire the CEO and decide on major transactions, such as when to sell the company and what follow-on financings should look like. The entrepreneur who doesn’t think through the board composition carefully can often find himself on the short end of these decisions. The composition of the board is often a reflection of the ownership split between the entrepreneur and the VC.
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The board is likely to be a five-member board. Typically, the smaller the board, the better, as it will be far more efficient in making important decisions. In such cases, the board is typically split as follows: two board seats for the two VC investors; one board seat set aside for the CEO (who may or may not be the founder); one board seat for the common shareholders (i.e., the founders); and one independent board seat, typically an industry expert and/or CEO in a related field whose Rolodex, experience and sage advice can add value to the company.
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In practice, the CEO is unlikely to go against the VCs’ will if the VCs are the only source of funding (i.e., the company is still not cash-flow-positive and needs… Some highlights have been hidden or truncated due to export limits.
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The second control element VCs insert in term sheets is the list of protective provisions. These are the provisions that require approval from the VCs, not just the board, to make certain decisions. The list can be long in typical VC term sheets, but the net of it is: You won’t make any major decisions (buy any companies, sell your company, make major investments, go into debt) without VC approval. Sometimes the protective provisions are worded such that the… Some highlights have been hidden or truncated due to export limits.
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Some VCs may feel comfortable with a more independently structured board making some of the major decisions, but the control of other major decisions (e.g., when to sell the company or when to accept a new financing with new terms that change the control elements) is typically held very closely by the investing VC firms. If the VCs can… Some highlights have been hidden or truncated due to export limits.
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A third important control element in the term sheet is the combination of voting threshold and drag-along rights. Voting threshold means that more than a majority vote, or the preferred stock vote, is required for major actions. If the VCs own most of the preferred stock, and the preferred stock vote is required for major transactions, then the VCs exert control through this vehicle. Drag-along rights mean that it doesn’t matter how you vote your shares; if the majority or a defined supermajority vote is required for a certain action (a threshold typically set to ensure that the VCs’ vote carries the day),… Some highlights have been hidden or truncated due to export limits.
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Typically, VCs negotiate deals and make investments only when they can “control their capital”—a euphemism for controlling major decisions, particularly financial ones, in the companies in which they invest their capital. The reason many entrepreneurs are paranoid about the control elements in a term sheet… Some highlights have been hidden or truncated due to export limits.
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“All that we feel, as an entrepreneur, is the negative side. ‘They want to get control of my company. They want to mettle. They want to second-guess me if things go bad… Some highlights have been hidden or truncated due to export limits.
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When VCs start invoking control provisions in investment documents, it is almost never a happy scenario and usually the root cause is a breakdown in trust between the VC and entrepreneur.
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Let me reiterate an important piece of advice: Find a good lawyer, the earlier in the process the better.
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raising less money in a more capital-efficient fashion reduces your dilution while increasing your exit options.
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That’s the downside of taking in too much money—the more money you raise, the more pressure there is to generate a large return.
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Many entrepreneurs prefer to have two firms as investors to provide twice the value-add (recruiting, strategy, business development), deeper pockets for future financing rounds, and simply to balance each other out so that no one firm or individual can dominate the board. Others prefer to work with only one firm to keep things simple and streamlined (one decision maker) and to minimize the amount of capital and therefore dilution they will face (multiple firms will, in aggregate, typically prefer to own and invest incrementally more than one firm alone). Some VCs prefer to control the process of choosing the co-investor, and some are open to the entrepreneur driving the process.
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When raising money and considering syndication, simply make sure you find out whether the firm is open to syndication or not—many have an explicit policy on such matters—and think through what might be the best approach for your particular situation.
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“Don’t be a victim. It’s not the VC’s fault. Don’t look at [the drama and conflicts] personally, look at them structurally.” By learning from the mistakes of other entrepreneurs, you can avoid making their mistakes (and make your own new ones instead!)
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One of the hardest things about getting a new company off the ground is the challenge of achieving so many fundamental things at the same time.
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In a start-up, nothing coasts along. Everything has to be done, fast, and at the same time.
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There are typically three phases to the start-up company process: (1) the jungle; (2) the dirt road; and (3) the highway.
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In the jungle, the entrepreneurs have no set path to follow and must hack at the foliage to get from point A to point B, diving into different parts of the jungle with reckless abandon. No one has been there before them and they simply have to make it up as they go along. There are some casualties along the way, but the determined entrepreneurs change direction, adjust plans, and figure out a way to get out of the jungle. While in this stage of their growth, the entrepreneur’s metric for success is how much “buzz” or positive word of mouth they can generate about the company. One of my former bosses liked to joke that at this early stage of development, the company’s PR (public relations) ratio was far more important than its PE (price to earnings) ratio.
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Once they are out of the jungle, the entrepreneur finds a dirt road. At this stage, they are shipping product, generating revenue, and have a clear sense of strategic direction. Their goal is to begin to increase their momentum along their chosen path. There may be a few twists and turns and plenty of bumps, but it’s not nearly as chaotic as things were in the jungle—target customers are established, competitors are well known and understood, and fewer surprises intrude on their progress. At this stage, the success metric for the company is revenue growth. The absolute revenue number matters less than the ongoing growth. The more promotionally minded entrepreneurs will refer to that growth in every conversation possible.
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After reaching the end of the dirt road, the entrepreneur discovers the highway. Suddenly, the company is no longer entrepreneurial. You’re charging ahead with such a speed that you now have less room or ability to maneuver. You pray you don’t slam into a wall (i.e., run out of cash) but instead continue to progress on a smooth path to an IPO and beyond. To succeed in this stage the company needs to be profitable, and so now the entrepreneur cites cash flow figures rather than describing the arc of revenue growth.
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Different management teams are better suited for different parts of the process. The entrepreneur who is well suited for hacking through the jungle and avoiding pitfalls may not be the right executive to lead the company when it is firmly rolling down the highway. The people, organization structure, communication processes, and everything else that make up a business thus all evolve rapidly during these phases. For high-growth businesses, that can mean high tension between the people making these frequently awkward transitions. That’s when it becomes a soap opera.
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the primary mission of the board is to increase the value of the equity on behalf of shareholders.
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they are bound by two important factors: the duty of care (be informed, diligent, and prudent) and the duty of loyalty (serve the interests of the company and its shareholders). The board of directors does not run the company. The CEO runs the company.
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While sitting on the board of directors, the VC is always weighing how to make their investors the most money possible—that’s his job.
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The entrepreneurs and the VCs have to trust each other to be open about their motivations.
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VC Archetype 1: The Domain Expert.
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VC Archetype 2: The Cheerleader.
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VC Archetype 3: The Truth Teller.
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Although the Domain Expert may provide value in assisting with certain valuable introductions and the Cheerleader makes you feel good by telling you what you want to hear, most experienced entrepreneurs will tell you to choose the Truth Teller every time.
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Board members that hold you accountable force you to elevate your game
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Classic Plot 1: Fall from Grace. At the beginning of this show, the CEO—usually the founding entrepreneur—is seen by one and all as the hero of the company, the visionary leader who holds the future in his hands. The VC firm is delighted to be in business with this innovator and crows to its peers, limited partners, and anyone else who will listen to how brilliant the entrepreneur is and how big an impact the company will make. Then, little by little, things go wrong. The CEO fails to make good on a promise to the board.
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In retrospect, it would have been better if the entrepreneur had never picked that VC as a co-investor or, alternatively, worked harder to ensure alignment of strategy and leadership.
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Classic Plot 2: High Noon Shoot-out. In this case, part of the original VC deal is that the company will be run by a professional CEO, approved by the board, and the founder will stay on as a key member of the management team. The founder agrees to this deal in order to secure funding, but never fully buys into the notion that he will need to “let go.” From the day the CEO first arrives at the company, it is obvious the two will never get along. The founder questions the CEO’s every decision.
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Classic Plot 3: VC Mutiny. In this scenario, one or two of the venture capitalists that sit on the board become irritated when the company consistently fails to achieve its performance goals. After being disappointed three quarters in a row, they announce they’re going to abandon their investment and leave the board.
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The best way to avoid such soap operas is for the entrepreneur to be candid and honest with the VCs. The VCs, in turn, must earn the entrepreneur’s trust in order for everyone to benefit from this open dialogue.
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I’m a sponge, so I’d just get the smartest people in the room to tell me how to do something and then I’d go do it. And so, I was able to let go of thinking that I had to come up with all the answers myself.
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Many entrepreneurs sit at their desk or lie awake in bed at night wondering what they’re supposed to do and never quite figure it out.
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Learning to survive and thrive when you’re in way over your head is one of the most thrilling parts of the entrepreneurial journey.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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Be Honest with Yourself: Following the 80/20 Rule
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It’s almost impossible for an entrepreneur not to get in over his head,
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The key is to know when you’re in over your head in a healthy and challenging way and when you’re in so far you’re in danger of getting overwhelmed. One entrepreneur suggests applying the 80/20 rule. You’re in good shape if you feel in command of the business about 80 percent of the time and sitting in your office wondering what to do only about 20 percent of the time.
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I often encourage my portfolio CEOs to retain an executive coach. The coach should be an outsider, not a board member,
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I also recommend CEOs insist that their board complete an annual, written performance review and solicit input for it from all board members and management team members.
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I want to always find someone who is better than me to replace me in whatever I’m doing.
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Surrounding yourself with the right help is a critical skill for entrepreneurs who want to scale their businesses beyond their own personal abilities and efforts.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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Manage the Board Before It Manages You
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
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“The single most important thing to do with a board is to keep them really up to date on the business,” Gail said. “The good and the bad.
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We wanted to be unbelievably clear about what was working and what wasn’t working, then asking for advice and listening to the good parts.”
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give you far more advice, some of it conflicting, than you need or can ever use. “That’s a little bit of a secret with boards,”
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The solution to that is board alignment and a high frequency of communication. So, when we were doing board meetings every six weeks, I was talking to each director between the board meetings. They always knew exactly what was going on, what was working, what wasn’t working, which ideas I was pursuing and which ones I wasn’t. I was very honest with them.” “No secrets. No surprises,”
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If something new is going to come up in a board meeting that’s not good,
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So I would say that you cannot over-invest in board management. In the early days, I estimate I spent fifteen to twenty percent of my time managing my board—seeking their advice, preparing for the meetings, following up on action items. I needed it. Because I was going to need their money.”
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THE LONGEST-RUNNING SHOWS ARE ENSEMBLES The most successful start-ups operate like good ensembles. The attitude is, “We’re all in this together. We don’t want to upstage each other. We want to make each other look good. We want to put on a really great show.”
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“I think venture capitalists, first and foremost, need to feel like their job is to make entrepreneurs successful. So I think of venture capital as a service business. The entrepreneur is your client. It’s a very weird relationship because the entrepreneur is not exactly paying you, even though they really are paying you. But they absolutely can’t fire you. In fact, you can fire them. So it’s among the weirdest kinds of service relationships that one could come up with.”
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the people who understand that everyone is in it together are going to be the ones who understand that there is an alignment of incentives.”
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An investment in a start-up company, however, is very, very illiquid.
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VCs typically get their investment capital back by selling their shares in one of two ways: by taking the company public in an initial public offering (IPO) or by selling the company to another entity—usually another company, but it could also be another group of investors—for cash or stock.
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I made a note to myself: Don’t ever become a public company CEO. It’s not as glamorous as it seems.
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EXIT CONSIDERATIONS: WHO, WHAT, WHEN, AND HOW
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the “exit strategy” is one of the main considerations VCs analyze before they make an investment in a start-up.
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the entrepreneur should then endeavor to get on the radar screen of the relevant executives of the potential acquirers as early as possible.
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The other important conversation to have with your VC partners very early on is what their expectations are for the exit. Ideally, this is a conversation you have with them before they even invest. Are they looking for a five-times return or a ten-times return?
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when you get into your thirties and even in your forties. I think that sometimes it’s harder to throw caution to the wind and go for it, just outright go for it.”
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I personally love working with entrepreneurs who have already made some money (the sweet spot seems to be $2-5 million), where they have enough tucked away to feel safe taking bigger risks but not so much that they’ve lost their hunger and drive.
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Fortunately, we had established a very open relationship and the entrepreneurs and the board trusted each other. Even though the issues confronting us were difficult ones, we were direct in how we communicated them.
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Nothing spurs a prospective acquirer like walking away, especially when you are walking away because of a competitive alternative. Creating scarcity is one of the most powerful tools in an exit negotiation.
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(1) the importance of transparency and trust between the VC and the entrepreneur, particularly during a process as sensitive as the exit; and (2) having a solid funding alternative, which is a huge advantage when talking to potential acquirers.
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Like many entrepreneurs who get hired to run an existing, young business, the reality of the situation was less rosy than the investor’s recruiting pitch.
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As often happens during a recapitalization—or “down round”—the founder, Randy Parker, got heavily diluted. “He got squashed,”
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founders often play a less critical role over time as a company matures. As such, they can be at risk of getting squeezed out if a company gets refinanced at a lower price than the previous round, thereby suffering meaningful dilution. The VCs typically protect the going-forward management team from such dilution, but not the founder unless the founder is still considered essential to the business.
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VCs are very skilled at deferring decisions, sometimes too skilled. When I transitioned from the entrepreneurial side over to the VC side, I quickly learned why. VCs think about time very differently than entrepreneurs. For VCs, time is your friend. The more time you have to make a decision, the more information you get and the better-quality decision you think you can make. For entrepreneurs, time is your enemy. Entrepreneurs have a huge sense of urgency—urgency to get ahead of their competition, urgency to fulfill customer promises, urgency to make payroll as cash runs out. Meanwhile, no matter how bad things get in their portfolio, VCs always return to their cushy offices and collect their management fees the next Monday, even after shutting down a company.
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The IPO is an important event in the life of a company, but the best entrepreneurs don’t really view it as an “exit.” It may be an exit for the VCs and other early investors, but the best entrepreneurs view it as nothing more than a financing event (albeit a very public one) and keep pursuing the upside that is still ahead of them.
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preparing to take a company public has a long lead time. “Getting the IPO done was a two-year process.
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The willingness to stick around after the exit, as both Eric and Christoph did, is an important barometer for VCs when assessing entrepreneurs.
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“I like my CEOs to be stewards for every last one of my investment dollars.”
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EXIT ONLY IF YOU ARE DONE
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the best entrepreneurs don’t focus on the money, they focus on their passion and dream for the business.
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If you have that idea and you’ve more or less seen the end of it, and now you’re just racking your brain trying to figure out how to push it any further, the product might be better off in the hands of someone else, because you’ve done what you can. That’s basically what it comes down to for me. Are you done? If you are, then exit. If you’re not, keep going for it.”
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7 THE VENTURE-BACKED START-UP: AMERICA’S GREATEST EXPORT
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His position as the youngest child in the family also played a role. “When you’re the youngest, you can go one of two ways. You can be ultraconservative and live in this comfortable nest that the social support system provides you. Part of my life was living in that shell. But the rebellious part, the rule breaker part, was, ‘Wow, you know what? I can break a lot of rules and I have a support system that’ll catch me if I fall. I’m going to try to do a lot of wild, crazy things.’ ”
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VC investment in Europe has been relatively stagnant over the last few years and is not projected to grow in the next few years. Many blame the cultural barriers to entrepreneurship in Europe, where there is less comfort and tolerance with failure and risk taking.
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European entrepreneurs, even the experienced ones, have a different style than those in the United States, Irena says. “They are much more prone to telling you the truth about everything—all of the darkest, deepest secrets and risks. They are less polished salesmen. They are hesitant about putting together a plan that they think may be unachievable. So you have to push them on accelerating their vision. Or they might have a big vision but the timeline is too long. I think the American perspective is more optimistic, often over-optimistic, about compressing timelines and moving faster.”
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LOOKING AHEAD
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Increasing globalism is sure to characterize the world of start-ups in the next decade or more,
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example, Pets.com, an online community for pet lovers, went public in February 2000. The IPO resulted in a $300 million valuation. The only problem was that the company had negligible revenue and no sustainable business model. It went out of business in November 2000, less than a year later.
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Even with $15-20 billion invested each year, it is a stretch to describe the industry as one in which every investor should participate. “Venture capital is simply not an asset class,” Brad Feld of Foundry Group insists. “It’s a niche category. But a niche category with tremendous leverage.”
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Quick riches and unrealistic valuations are not, and should never be, the goal of a serious start-up. VCs are attracted to entrepreneurs whose business models transcend economic cycles rather than those who are interested in the “quick flip” by selling their start-up after a year or two.
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Venture-backed start-ups have something magic about them. Whether it’s because of the discipline that an outside investor imposes on a start-up, the value and experience that VCs bring to the table, or simply a selection bias, venture-backed start-ups outperform all other forms of entrepreneurial ventures. “With forty or fifty years of venture capital investing, why are these companies still growing jobs at twice the rate of the other members of the private sector?” asks Polaris’s McGuire. “You have to go back to the core. We back great people. Combine that with smart, patient, and experienced capital. When you put those two forces together, you have this enormous engine for growth.
Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang
