Foreword xv
Preface xix
Acknowledgments xxiii
PART ONE Raising the Venture Fund 1
CHAPTER 1 The Basics 3
Raise the Venture Fund 3
Find the Right Investment Opportunities 4
Generate Financial Returns 6
Roles and Responsibilities 8
Compensation 9
Notes 12
CHAPTER 2 Getting In 13
Entry-Level Positions: Analysts and Associates 14
Internships and Campus Recruitment 18
Midlevel Positions: Principals and MDs 19
Honing Investment Expertise within Allied Fields 22
Senior Partner versus Junior Associate 24
What about Luck? 25
Notes 26
CHAPTER 3 Building Your Career as a Venture Capitalist 29
Intellectual Stimulation and Financial Returns 30
Aptitudes and Attitudes of Successful Practitioners 31
The Challenges of a VC Career 40
Notes 43
CHAPTER 4 The Universe of Limited Partners 45
An Overview of Alternative Assets 47
Sources of Capital: Limited Partners 51
Fund of Funds 59
FoF Models: Variation of a Theme 61
Comparison of Limited Partnerships 65
Notes 67
CHAPTER 5 How Limited Partners Conduct Fund Due Diligence 69
Sourcing and First Screens 70
Evaluating the Venture Firms 71
Notes 74
CHAPTER 6 Defining Your Fund’s Investment Strategy 77
Sector-Based Strategy 79
Stage and Geography 81
Notes 86
CHAPTER 7 How Institutional Investors Evaluate Fund Managers 89
The Fund Management Team Dynamics: Stability, Skill Set, and Alignment 91
Notes 99
CHAPTER 8 Fund Size and Portfolio Construction 101
Fit within the LP’s Current Portfolio 105
Market Timing 106
Why LPs Terminate Existing Relationships 108
Notes 109
CHAPTER 9 Performance Analysis 111
Individual Performance and Attribution 111
Fund-Level Performance 113
Comparison Benchmarks 117
Public Market Equivalents 119
The Quest for the Elusive Top Quartile Managers 119
All the Managers Are Above Average 122
Notes 124
CHAPTER 10 Emerging Managers: A Promise of the Future 125
Why LPs Seek Emerging Managers 127
How Investors Rank Emerging Managers 130
Institutional Allocations for Emerging Managers 131
A Tale of Two Emerging Managers 132
The Global Emerging Manager: 500 Startups 133
Notes 134
CHAPTER 11 The Venture Capital Firm, Operations, and Culture 137
The DNA of a Firm 137
Governance of the Firm 142
Notes 147
CHAPTER 12 The Fund-Raising Process 149
Build Your Target List of Investors 151
Fund Marketing Materials 152
Presentation Slides 154
Making the Presentation Pitch: Drink Your
Own Kool-Aid 154
Attracting the Lead Investor: Your “Nut” 156
Communicate, Create, and Maintain Momentum 158
Announcing the Close 159
Notes 160
CHAPTER 13 Terms of Investment: The Limited Partnership Agreement 161
Key Terms 161
Fund Financial Terms 164
Fund Governance Terms 168
What Institutional LPs Seek 171
Offering Sweeteners to Attract LPs: A Double-Edged Sword 173
What Matters Most 173
Notes 175
CHAPTER 14 The Role of Placement Agents in Fund-Raising 177
Agents Bring Market Intelligence and Relationships 179
Ethical Challenges 182
Notes 183
PART TWO Making Investments 185
CHAPTER 15 Sourcing Investment Opportunities 189
The Best Source: The Network 194
Accelerators and Demo-Days 196
The VC e-Marketplace: AngelList, Kickstarter and FundersClub 197
Angels 197
The Fountainheads of Academia and Research 199
Corporate Research 200
Trade Conferences 201
Pitch Me, Bro 203
Competitions: From $40 Million Moonshot to $10K 204
Cold Calling 205
You Win Some, You Miss Some 206
Notes 209
CHAPTER 16 The Art of Conducting Due Diligence 213
The Due Diligence Checklist 214
What Is Important: Jockey, Horse, or Markets? 217
Who Invests in Rap Music and Shaving Blades? 220
Notes 223
CHAPTER 17 Management Team Diligence 225
Assessing Intangibles 225
How to Assess the Jockey 229
Serial Entrepreneurs versus First-Time Entrepreneurs 237
What about Charisma? 238
The Importance of Conducting Background Investigations 239
Notes 241
CHAPTER 18 Diligence beyond Management 245
Assessing the Market 245
Evaluating the Idea or Product 247
The Business Model 249
Financial Projections 251
Do Business Plans Matter? 252
Notes 253
CHAPTER 19 Structuring Investment Transactions 255
The Spirit of the Term Sheet 255
Negotiation Stress Points 256
Structuring Terms to Generate Target Returns 258
Valuation Methods and Other Voodoo Arts 260
The Drivers of Valuation 261
The Simplified Form of the Venture Capital Method of Valuation 262
Comparable Valuations of Similar Investments (Comps) 264
Discounted Cash Flow Method 266
Convertible Loan 268
Equity: Preferred Stock 270
Liquidation Preference 273
Antidilution Protections 277
Milestone-Based Financing: Risk Mitigation or Distraction 279
Governance and Control: Protecting Your Securities 280
Exit-Related Provisions 281
Other Terms 284
Syndicating Investments 285
Keeping Term Sheets Simple 286
The Closing Process: After the Term Sheet 289
Notes 291
CHAPTER 20 Serving on the Board 295
Self-Education: Preparing for Your Board Role 296
Roles and Responsibilities of a Board Member 297
Legal Requirements of Board Service 298
Notes 302
CHAPTER 21 Board Culture, Composition, and Orientation 303
Toward a Better Board Culture 305
A VC Reports to Limited
Partners and the Venture Capital Firm 309
Importance of Independent Directors 309
Notes 310
CHAPTER 22 Board Value Creation and Evaluation 311
Good Governance as the First Step toward Value Creation 313
The CEO’s Perspective on VC Value Add 314
Board Self-Evaluation 317
Notes 318
CHAPTER 23 Challenges in the Boardroom 321
Challenges among Shareholders 322
Managing CEO Transition 326
Best Practices in Managing Transitions 328
Alignment of Exit Method, Timing, and Exit Value 329
Notes 330
CHAPTER 24 Exit Strategies 333
Preconditions for an Exit 334
Secondary Markets 339
Notes 342
CHAPTER 25 Acquisitions: The Primary Path to an Exit 343
The Sell Process 349
When an Acquirer Comes Knocking 353
The Buy-Side Acquisition Process 354
Deal Killers 358
Notes 359
CHAPTER 26 Initial Public Offering 361
The IPO Process: The Long and Winding Road 362
Steps to an IPO 363
Not an Endgame, but a Financing Event 366
Timing the Market 367
IPO Underpricing and Dutch Auctions 367
Information Asymmetry: The Bigger Fool Theory of IPO Underpricing 369
The Dutch Auction: Eliminate the Pop and Those Middlemen 370
Post IPO: Should VCs Stay Engaged? 371
Notes 373
CHAPTER 27 Human Psychology 375
Emotions versus Logic 375
Reciprocation, Obligations, and Indebtedness 376
A VC with Ego: Why Should I Eat Your Leftovers? 376
Conformity (or Groupthink) 377
Rock Stars in the Business 378
That Overhyped Rolodex is Not as Useful as You Think 378
Notes 379
Afterword 381
About the Author 385
About the Companion Web Site 387
Index 389
