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?
