The VC landscape is changing
The author starts out by saying that the venture capital landscaped has changed in the last several decades of full at least two reasons:
- 1/ First of all, launching a startup today requires less capital than it did before as technologies such as cloud computing, the internet, big data and artificial intelligence are lowing production costs.
- 2/ Second of all, accelerators like Y Combinator, are providing educational grounds to would-be entrepreneurs and helping them transitioning to an entrepreneurial fife by providing them with advice, the network and seed capital.
As a consequence, VCs need to provide more than just capital if they want to attract talented founders: putting them in touch with decision makers in target industries as well as leading organizations are some of the introductions that venture capital may offer.
Today VCs takes into account at least three elements before making an investment decision:
- 1/ They look at founder to market fit. In other words, it is the founding team knowledgeable and proficient in the market that they are targeting. Have they built a reputation and made connections to important of decision makers?
- 2/ Have founders demonstrated that multiple customers are willing to pay for their service?
- 3/ Finally, are founders targeting a market large enough to ensure growth?
Most entrepreneurs believe that a successful pitch involves summarizing an idea in several slides and then listing all potential acquirers. But, in the eyes of Scott Kupor, the successful pitch also entails talking about “conquer the world strategy”. In other words, investors want to see how the world will be different once the startup has indeed secured a dominant position in its targeted markets. Then, the conversation typically moves on to what the author calls the “idea maze”. In this section, investors want to find out how the idea originated, why the product is promising and view the data to assess market potential.
Some founders may decide to pivot their business during meetings with venture capitalists. The author stresses that this is perhaps not the best idea. As many startups do indeed pivot, most founders should demonstrate determination during VC meetings. The decision to pivot should be taken later on in the process, not just during an exploratory VC conversation.
The author also talks about term sheets. The economic aspect looks at valuation and ownership. The governance side of the term sheet still with who is sitting on the board. The author mentions that founders want to build a balanced board made up of 3 people: the founder, the venture capitalist and one independent board member. He also stresses that CEOs are in charge of running the operations and must build a healthy relationship with board members throughout the venture.
Ultimately, maintaining a healthy CEO board relationship proved crucial to the success of any venture capital-backed company. This may involve setting up weekly calls and formalizing some kind structured conversation between board members on a regular basis.
In the end, boards are faced with several alternatives, assuming that the start of doesn’t go bankrupt.
- 1/ The first alternative would be that the startup gets acquired by a large industrial player.
- 2/ The second alternative would involve going public.
In both of these cases, venture capitalist seek a reward for their initial investments in order to return their profits to the limited partners.
To sum up
In his book secrets of sand Hill, the author, a prominent venture capitalist from the Bay area provides an overview of the venture capitalist and entrepreneurial relationship. While 90% of venture capital-backed startups actually go out of business, he mentioned that today, the venture capital and Gander relationship has changed due to technological progress and the rise of accelerators like YCombinator. As a consequence VCs must provide more than just capital to attract promising entrepreneurs.
Plus, the author talks about how entrepreneurs can pitch convincingly and how they can get to a favorable terms sheet both in terms of valuations common ownership and governance. He also stresses that CEOs are in charge of running the operations and must build a healthy relationship with board members throughout the venture. In the end, successful startup board members face two potential exits: acquisitions and an IPO. That’s when venture capitalist get a return on the capital invested. Entrepreneurs who get this far are part of a slim minority: they successfully graduated from the VC cycle!
What’s striking in the book is it least two things:
- 1/ First of all, while the author says that 90% of venture capital-backed startups fail, he offers no framework for reducing this risk. He mentions a risk and there’s not going to detail into too many details as to why startups fail. Then he moves on to another topic. There’s a lack of risk management that’s quite striking.
- 2/ In addition, the book stresses the fact that venture capitalist must now make a concerted effort to attract promising venture capitalist entrepreneurs as capital is apparently abundant and foundries get to choose between multiple venture capitalist. In this respect, showing how venture capital is can help entrepreneurs minimize bank receipt the bankruptcy risks proves crucial in attracting talented entrepreneurs.