Book Synopsis: The Entrepreneurial Bible to Venture Capital by Andrew Romans is an inside look into how the world of venture capital works. He speaks from the perspective of starting your own venture capital and what it looks like and from an entrepreneurs perspective looking to raise funding and exiting a company.
Book Review: I’m currently working on raising seed funding for Minidesk so my scope while reading this book is not on how to start my own VC firm but rather understand the mentality and landscape of the VC world. I’ve only read the chapters that apply to my situation right now since I believe applied insights are much more ingraining than just reading for pure reading sake. With that said, I think the book does a really good job of helping fund-seeking entrepreneurs seeing the perspective of a venture capitalist and the pressure VC’s have in sourcing and investing in really good deals. It makes you appreciate the work they do and be able to understand their scrutiny when you pitch your deal. Most VC’s, depending on their size, can only fund so many starts up. They have to be really shrewd in picking the highest probability of winners or they’ll go out of business and potentially disgrace themselves with limited partner (LP) investors.
Overall, great book if you want to feel more prepared as you go out and pitch VC’s. You have a unique advantage after reading this book because you can see things from the VC perspective.
Rating (1-10): 8
Notes:
- Chapter 3 – How Venture Capital Works
- Acronyms:
- VC = Venture Capital
- LP = Limited Partner (Investors in the fund)
- GP = General Partner (Managers of VC fund)
- MD = Managing Director
- VP = Vice Principles
- EIR = Entrepreneur-in-residence
- PE = Private Equity
- IPO = Initial Public Offering (When a company goes public)
- M&A = Mergers & Acquisitions (When you get bought out)
- IRR = Internal Rate of Return
- 2 and 20 structure = is the typical fee structure for VC funds for General Partners and typically PE firms and Hedge funds. It means they’ll take 2% of deployed funds (funds being used in investments not just total fund amount) annually to pay for office expenses, salaries, travel, etc. They take 20% of profits AFTER they pay-back the capital that was deployed AND meets the hurdle rate (the agreed upon % return for LPs for funding the fund, generally 6-8%). For example, if it’s a fund of 100 million AND all 100 million is deployed in investments, they’ll take 2 million annually for expense and when they exit all the investments at lets say 150 million, they would give back the initial 100 million to the LPs PLUS $6-8 million to pass the hurdle rate and THEN the GP’s take 20% of the profits of 42-44 million dollars (about $8.4-8.8 million). But the GP’s 20% profits are split among how many years until the companies they invested in actually exit through an IPO or M&A. Also, you’re splitting the profit among X amount of GPs.
- A typical life of a fund is structured to be 10 years
- Funds typically invest the fund money in the first 5-6 years called commitment period.
- After the commitment period, the fund restricts new investments and generally do follow-on investments in the companies found in the commitment period.
- Management fees typically end up being 15% cost to the entire fund sometimes even 20% in the worse of 10 years.
- Only certain people at a VC fund has the power to push your deal through
- Order of power tends to be from highest to lowest GP, MP, VC.
- Venture partners don’t work full time at a firm but help with deal origination and due diligence. They are normally former VCs.
- EIR is typically already successful entrepreneurs looking for their next company.
- Institutional investors include banks, insurance companies, pensions, hedge funds, REITs, investment advisors, endowments, and mutual funds.
- Stopped at page 79.
- Chapter 4 – What to Bring to the Dog and Pony Show
- Acronyms and shorteners:
- Fins (financial documents)
- ICS – Investor Control Schedule
- What to bring to a VC for funding:
- Executive summary (Word saved as PDF)
- 1-2 pages (up to 4 pages)
- Don’t go below font 10 Arial
- Don’t make margins too thin
- Like a resume should be on nice paper
- Gets you in the door
- *create your PPT pitch first and use the headings of each slide in your executive summary. Very effective
- A high-level view of financials
- Investor presentation (PPT saved as PDF)
- 10 pages
- A longer version for 20 min pitch
- As many backup slides to answer questions or go deeper dive
- Typically whats in the slide investor slide deck
- Market
- Value proposition
- How it works
- Distribution
- Team
- Competition
- Key milestones
- Deal (How much are you seeking to raise)
- Financial model (Excel)
- 2-5 years of forecasted revenues and other financial data
- Typically includes: (*Startups generally only need these)
- Income statement*
- Operating cash flow*
- Balance sheet
- Financials should change when key assumptions are changed (i.e. the number of sales)
- Don’t forecast numbers too high. A general top line $80 million revenues in fives years justifies most investments from a VC.
- Signs you have solid financials:
- The model is predictive – Use the model to predict the past 12 months to see how predictive the model is.
- The key economic drivers are separated, clear, and measurable
- Your level of confidence in your drivers is clear
- You can do a sensitivity analysis
- Your investments are separated from the core economics of your model
- Your spreadsheet model can be evaluated with real-world questions
- You can gain clarity around the economics of building your competitive advantage
- Your spreadsheet model should be as simple as possible
- Investor control schedule (Excel)
- Basically a tracking sheet for all the investors you’re reaching out to stay organized
- Only shown to your most trusted advisor and friends
- Shows the name of every investor you have contact or are considerating contacting in the future.
- ICS should include
- Name of the investor
- The first and other contacts at the fund you are in touch with
- Who made the introduction
- Who is the point person at your company talking to the investor
- What materials you have sent (exec sum, slides, fins, long investor slide deck, etc.)
- Date of the last contact with the investor, the stage you are at with the investor (i.e. passed, meeting schedule, in discussions)
- The range of low to high on amount this investor might invest
- Notes section
- Demo (Live working product – Demo or video reel)
- This helps if you have a working product or even a video that shows what your product does.
- Not necessary but can help
- The Pitch
- Have 3 pitches ready
- 30-second pitch – When meeting a prospective investor or anyone at a networking event.
- 2-minute pitch – If listeners want to know more
- 20-minute pitch – Full on pitch
- Your 30-second pitch should be clear and concise. Don’t try to make it sound super complicated and don’t use an analog company as part of your pitch. (i.e. We’re like an uber for real estate)
- Tips for pitching
- Introductions by credible people that have connections with VC’s matter
- Keep it short
- Answer questions quickly without getting defensive
- Be a good storyteller
- Avoid buzzwords
- Know the people you are pitching
- Don’t forget the financial info
- Stay in touch means “no”
- Forget saving the world
- Have 3 pitches ready
- Executive summary (Word saved as PDF)
- Acronyms and shorteners:
- Acronyms:
- Chapter 5 – Practical Ideas and Advice on Raising VC Funding
- Acronyms and definitions:
- Term sheet – A term sheet is a bullet-point document outlining the material terms and conditions of a business agreement.
- NDA – Non-disclosure agreement
- BATNA – Best Alternative to The Negotiated Agreement
- Bridge Financing – Loan or investment to keep you solvent until you get to the next round of priced funding
- Priced Funding – New valuations are determined for the company as old and new investors come into play
- Know everything about the VCs you’re talking to
- The most important term in the term sheet is the valuation.
- It’s best practice to let the VCs be the first to determine the number for valuation
- Tips on negotiating with a VC firm:
- Be prepared
- Don’t try to pit VCs against each other to get a better term sheet
- Don’t overstate other VC interest. It’s a small world and word gets out quick
- Typical board structure is two commons, two preferred, and one independent board member.
- Don’t tell a VC which other VCs you’re talking to. If one deal falls flat you’ll be dead in the water with both. Wait until one is securely in and see if you can get a syndicate deal. The best option is if one of the VCs brings up the syndicate rather than yourself.
- Never ask a VC to sign an NDA.
- Grow your company as much as you can before you get new funding because it determines your valuation and how much of your company you are giving away
- Have warm contacts for a new round of funding before you actually need it. You’ll get desperate and either give away too much of your company or not get funding in time to stay solvent.
- Acronyms and definitions:
- Chapter 7 – Company Building and Growing Value
- Creating a great distribution/marketing strategy is just as important as having a great product
- One company that sells stuff online sold 60% through Facebook, 24% through twitter, and 10% through google.
- Most value is moving from Google to Facebook and Twitter
- Don’t dilute your platform just to get advertising money.
- Find ways to get massive exposure with little expense
- Hear our customers but don’t just make want customers want.
- Think of what they need and want before they need/want it. That’s how you innovate