Stanford research shows those venture capital-backed companies founded since 1979 account for 43% of all US public companies, 57% of public company market capitalization, and 82% of the country’s total R&D budget. The world needs this risk-seeking asset class. And indeed you see every region around the globe trying to nurture their own Silicon Valley-like ecosystem.
But much still remains secretive about the way venture capital firms work. a16z Managing Partner Scott Kupor book Secrets of Sand Hill Road: Venture Capital and How to Get It demystifies the way the industry works. And in this series of three videos, we distill all that goodness into actionable advice for an entrepreneur building a startup in three distinct phases of their company: before the fundraise, during the fundraise, and through the company’s journey to a distinct outcome.
Part 1: How to Understand (and Choose) a Venture Investor
In this episode, Scott and Frank discuss:
- Why the world needs venture (risk) capital
- Where venture investors get the money to invest
- Why venture investors only fund companies with large market sizes
- When fund raising, does it matter how old a fund is (how far along in its so-called J curve)?
- Should you care how much money a specific General Partner has invested in a fund? Or whether they have governance rights as well as an economic interest in the fund?
- How do corporate venture investors have similar and different incentives from pure financial investors?
- Can’t entrepreneurs just crowdsource both funds (for example, with an Initial Coin Offering), advice and connections? What useful really is a venture investor in the era of crowdsourcing?
- What are 3 ways venture investing and entrepreneurship evolve over the next 10 years?
Part 2: How to Raise Money from a Venture Investor
This episode covers:
- Why is it easiest for venture investors to fund Delaware C Corps?
- What should you do if you’re planning to start a company but are still employed?
- What much money should you raise?
- What do you need to be careful of when raising a convertible note?
- Is there such a thing as too high a valuation?
- Congratulations, you got a term sheet or three. Now what?
- How should you think through some of the economic terms of your term sheet?
- What about the governance terms?
- What are liquidation preferences, and what is the most startup friendly kind of liquidation preferences?
- What are other examples of deals “with structure”?
- Should you try to get a dual-class voting structure similar to Google and Facebook?
- What kind of transfer restrictions should I put on the company’s stock?
- When should I recruit an independent board member? What should I look for?
- What kind of pro-rata rights should you get? How should you think about the way your existing investors will invest in future rounds?
- What vesting schedule should you use for founder shares and employee stock options?
Part 3: How to Get the Most from Your Board
This episode covers:
- What do you want from a board?
- How much should you share with your board, given that the board might have the power to remove you as the CEO?
- How do you handle situations in which the economic interests of your board members diverge?
- When should you start recruiting an independent board member? What should you look for?
- What is a “management carveout” and should you get one?
- How do you negotiate three different scenarios: a tough “down round” or wind down, a successful acquisition by a bigger company, and (most fun!) an IPO? What do you want from your board in each of these situations?
- What do you need to understand about the incentives of your investment banker who is taking you public?
- What are Scott’s key takeaways from his book about raising money from venture capitalists?
The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.