The Business of Venture Capital: The Art of Raising a Fund, Structuring Investments, Portfolio Management, And Exits, Third Edition
By Mahendra Ramsinghani
Contents
Foreword xiii
Preface xv
Acknowledgments xxvii
Part One The Making of a VC
1 The Business of Cash and Carry 3
2 Why Choose a Career in VC 11
3 Attributes of Successful VCs 15
4 Welcome to the Land of Ad-Venture 21
5 Developing Your Investment Career 41
6 A Business Where Enemies Accumulate 57
7 Generational Transfer and Succession 63
Part Two Raising Your Venture Fund
8 LP Universe 73
9 LPs of Choice: Fund of Funds 89
10 How LPs Conduct Fund Due Diligence 95
11 Defining Your Fund’s Investment Strategy 99
12 Investment Team Diligence 119
13 Fund Size and Portfolio Construction 129
14 Performance Analysis 137
15 Terms of Fund Investment 155
16 The Venture Firm’s Ethos, Culture, and Values 173
17 Raising Your First Fund 193
18 The Fundraising Roadshow 205
19 Why LPs Seek First-Time Funds 221
20 Sourcing Investment Opportunities 229
Part Three Building Your Portfolio
21 Due Diligence Cheat Sheet 255
22 Diligence 259
23 Management Team Diligence: Assessing the Intangible 269
24 Market, Product, and Business Model Analysis 293
25 Terms and Conditions Apply 303
26 Structure of the Term Sheet 309
27 Buy Low, Sell High 317
28 The Closing Process 353
Part Four The Art of Value Creation
29 Serving on Boards 357
30 Board Culture and Orientation 367
31 Let Me Know How I Can Be Helpful: Value Creation 377
32 Challenges in the Boardroom 391
Part Five Exits: Liquidity Events and Champagne
33 Exit Strategies 407
34 Acquisitions 417
35 Initial Public Offering 435
36 Secondary Sales 449
Notes 451
Index 485
Preface
WHY SHOULD YOU READ THIS BOOK?
Thank you, dear reader, for arriving at the doorsteps of this somewhat lengthy tome. I hope you reached here, at the doors of this career after some thought and planning, unlike me, who stumbled in the VC wormhole and got sucked in 20 years ago.
Do you really need a big, fat, expensive book on venture capital, when a thousand blogs can give you answers instantaneously? Surely, in this day and age of free content, why would you want to pay an ungodly amount to buy a book? And who has time to read these days?
And you must surely know, no book will teach you how to be a great investor — you have to get out there and startinvesting. Like learning to ride a bicycle. A book can only do so much. The learning comes from doing. But what is the best way to become a good investor — to build a structured approach, to build your foundation, and to build a strong core? Maybe this book can help. The business of venture capital not only presents basic principles, checklists, and frameworks, but also shares philosophies and wisdom of the ages. At its very core, an investor has the ability to understand risk and then make a probabilistic bet against that risk. We do this to achieve outstanding “venture-like” returns, well above some other asset classes.
On the face of it, the business sounds easy. I mean — how hard can this be? As they say, any fool can write a check. Everybody knows the obvious of investing: “Buy low, sell high.” But how many can do it consistently across macroeconomic changes, with evolving technology cycles, competitive landscape, regulatory dynamics, and management teams? The sands of time keep shifting. Entropy prevails. All that is valuable is being eroded by the new waves. Your role as an investor is to make sure you can stay balanced, find music in this cacophony, and find the right signal.
In public equities, trading strategies include a “momentum” driven approach. You invest in a stock that has a high level of buy–sell activity. This momentum drives the price. In a frenzy, everyone jumps in and the price starts to go up, but very few pause to step away from the herd. To ask, “Why is this happening?” is not the mind-set of the momentum investor. They are well trained to make several short trades and know when to get in, when to get out. The “value” investor — someone like Warren Buffett — studies the company’s financials, its value proposition, the ins and outs of the sector, competition, product pricing, defensible moats, and more. The intellectual effort for understanding value is much more different and strenuous than the herd mentality momentum-based trade. Bear in mind that we are not here to make moral judgments against momentum trades nor demonstrate superiority of any kind — we are merely choosing a path, based on our strengths to get to a destination. I was a herd trader, too, until I could develop my own muscles and confidence. Success can come from many paths, and you have to choose what works best for you. I have tried both approaches and can tell you one is far easier than the other, but the rewards of a well-planned strategy are immensely gratifying — both intellectually and financially. It is like a game of chess — only in this case, you have n number of opponents.
One of the primary goals of this book is to help you to build the muscle — manage risk effectively, shield yourself from all the biases, and get to the promised land.
The second goal is a bit more subtle — what kind of a person will you become in this journey? As a venture capitalist, we are not just trading stock — we work with people. That indomitable human spirit in founders comes to you. They bring their dreams, their life-time aspirations — if we cannot look beyond their fancy PowerPoint decks, we are to blame. Those dreams are a part of this package. If we only chase financial outcomes, are we being short-sighted and self-serving? Wall Street may choose to operate that way, not Sand Hill Road. Not venture.
A typical VC interacts with the portfolio founder multiple times a week — a Wall Street trader may never know the name of the management team members. We become intimately aware of the founder’s day-to-day dilemmas and their sleepless nights, their joys, sorrows, anxiety, and depression — all of these come with this package as well. So the next time you make an investment, remember that you are not just making a trade — you are putting on fertilizer to help sprout the founder’s dreams. Of such dreams will come a better tomorrow. If there is a gale storm in the middle of the night, you better get out of bed and get out there. Do your best to protect those saplings.