Mastering the VC Game

Jeffrey Bussgang

2010

A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms

Chapter 1 - The Entrepreneurial Itch: Change the World

What makes an entrepreneur tick - profiles of Sirtris's Christoph Westphal, Twitter's Jack Dorsey, LinkedIn Reid Hoffman

Characteristics of an entrepreneur

• a certain mind of visionary optimism
• tremendous confidence in oneself that can inspire confidence in others
• huge passion for an idea or phenomenon that drives them forward
• a desire to change the game

Chapter 2 - Inside the VC Club: The One Thousand Deciders

A look inside the exclusive VC club - profiles of August Capital's David Hornik, DFJ's Tim Draper, Union Square's Fred Wilson

Characteristic of a VC person

• intelligent
• fantastically curious
• omnivourous
• driven to success
• competitive
• a bit geeky

The typical entrepreneur who is a good fit for VC money wants and needs the very active participation of the capital provider in the oversight of the business.

Charles River Ventures' Ted Dintersmith - "Remember, you don't run these companies; you invest in great people to run these companies. If you think they work for you like divisional presidents, you have it all wrong. In truth, you want to invest in people who are better than you, and make sure you work for them. The entrepreneur is your boss and customer combined."

Key VC choice drivers

• industry specialisation
• location specialisation
• network
• past backed companies success
• backed funders feedback
• average investement round / stage specialisation
• average capital per GP
• being invested in by a Senior GP (sitting at 5-10 boards max)
• funding cycle / "sold out" (cash available or closing round)
• GP decision making equality
• personal fit
• holiday
• investment syndication preference

Chapter 3 - The Pitch: Being the One in Three Hundred

How to succeed in pitching VCs - give them what they are looking for: a set of discrete experiments with clear milestones

• arrange for a Warm Introduction!
• nail the first 15min
• be prepared
• don't overpromise / be transparent on the risks

Funding = sweet spot + compelling vision + right people

Chapter 4 - When the Dog Catches the Bus: Making the Pick and Doing the Deal

How VCs add value to start-ups and how to negociate a term sheet with them

Check specific board partner's references

Long-term value

• Strategy
• Recruiting
• Business Development
• Future financing

"There are a lot of people with good ideas out there trying to start businesses, but very few execute them successfully."

Pre-money valuation, post-money valuation, stock option pool.

Liquidation preference / preferred vs. common shares.

Misalignment of incentives between participating and non-participating preferred shares. Capped participation.

Exit "waterfall" distribution.

Three elements of control

• Composition of the board of directors - power to fire and hire the CEO and decide on major transactions, such as when to sell the company and what follow-on financings should look like
• Protective provisions - provisions that require approval from the VCs ("Preferred Directors"), not just the board, to make certain decisions (buy companies, sell the company, make major investments, go into debt)
• Combination of voting threshold and drag-along rights

Investment syndication

Chapter 5 - As the Start-up Turns: Every Company is a Soap Opera

How to manage your board of directors and avert a fall from grace

Three archetype directors

• The Domain Expert
• The Cheerleader
• The Truth Teller +++

Manage the board before it manages you - No secret. No surprises.

Chapter 6 - Routes to Cashing Out

Exit considerations: who, what, when, and how - profiles of Constant Contact's Gail Goodman and Brontes' Eric Paley

Chapter 7 - The Venture-Backed Start-up: America's Greatest Export

A sampling of how VC is practiced abroad - profiles of China, Vietnam, and Europe