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INTRODUCTION
You’ve a brilliant idea and are thinking of building a prototype to test the market reaction. However, you lack the crucial seed funds for product development. Now it’s time to locate some investors and find out what they can do for you, and you start to meet with a number of venture capital firms to present your business idea. Welcome to the world of venture capital: a world of sages and heroes.
Heroes have a powerful grip on people’s collective imagination. For instance, the gungfu warriors of ancient China, defying all odds to succeed, are immortalized in sword-fighting novels and idolized by millions. The hero of such a tale is always guided by a wise and inscrutable mentor who points him in the right direction and teaches him the critical strokes. Entrepreneurs are the modern-day heroes, and standing beside each hero is a mentor, the venture capitalist.
Pioneer venture capitalists—VCs—like Arthur Rock, Tom Perkins, and Eugene Kleiner are legendary for the mentoring roles they play, growing companies like Google and Genentech. Alongside the innovators who dream up the ideas, VCs contribute the tactical brainpower that fuels Silicon Valley, Route 128, and other creative hubs. Their success in catalyzing innovation has been mirrored in technology hotbeds around the world, including Israel, China, and Singapore. The next generation of star venture capitalists, Tim Draper, Tan Lip Bu, and Bing Gordon , are continuing in the footsteps of the pioneers.
The striking thing about the partnership between venture capitalist and entrepreneur is that the journey is a marathon and not a sprint, a testing long-distance run fraught with pitfalls and challenges. Entrepreneurs often have to put their heads down and keep pushing, thinking hopefully ahead to the triumph of a successful finish (usually in the form of an IPO or a trade sale) but keeping their eyes on the work at hand. Companies take time to build and founders work for the day they will cross that finish line. Star VCs significantly increase the probability of a winning finish.
The role of the venture capitalist is to partner the entrepreneur in the journey—despite frequent misconceptions that make it seem more hostile. The start-up ecosystem has been termed a zoo (or in certain geographies, a jungle) where vulture capitalists pounce on innocent entrepreneurs as their hapless prey. By and large, however, a star VC can provide the missing expertise a start-up needs for winning the marathon. The best VCs don’t just hand over cash; they help the companies in their portfolio plan and pace themselves like marathon runners, and they also help the companies make sound decisions and build teamwork, and they tap their own networks to strengthen each entrepreneur’s team.
Why This Book?
Books on venture capital crowd the shelves. Unfortunately for the would-be entrepreneur, the academic books have generally failed to capture true reality, while those that captured the life stories of successful entrepreneurs haven’t adequately distilled the full essence of venture capital. This book focuses directly on the key concepts and winning techniques used in venture capital, translating what really goes on in a venture capitalist’s mind into structured processes that you can use to promote your own ideas.
It was not that long ago that it might have been possible to cover the whole topic of venture capital in one white paper. Now, it is not possible to provide comprehensive coverage even in a book. The industry has flourished, as variations of the initial venture capital funds have been developed and now operate in most developing and developed economies. To make the topic manageable, this book has a strong focus on U.S. and Asian business. That may still seem broad, but I’ve found a surprisingly high degree of agreement among interviewees on the key characteristics that VCs across this area were looking for in an ideal venture, their thought processes, and the venture assistance they provided. Despite vast differences in background, stage of investment, and geography, a consensus quickly emerged. The book is organized around the journey that the VC embarks upon with the entrepreneur, with each chapter encapsulating the winning moves for both parties at that specific stage of the journey.
It is through this process of high-stakes investing under uncertainty that unbelievable fortunes are made in the clubby world of big-bucks venture capital. The Way of the VC: Top VCs on Your Board takes readers into this private world of extreme investing. For those who want to invest like the best, The Way of the VC distills winning moves from real-life venture capital experiences, revealing the unique strategies, the sectors VCs are tracking, and the screens and criteria they use. It discusses some of the best and worst investments, the pitfalls that await both sides in a deal, and the ways individuals can use the lessons they’ve learned.
The VC and the Chef
Venture capitalists are like skilled chefs. Their dishes—the successful companies in their portfolios—are most valuable when the firms remain small and retain their own distinct style. When a chef tries to mass-produce a menu item, the dish loses value—scaling a batch beyond its ideal size degrades its quality. Likewise, when partners of VC firms take on too many deals and overstretch themselves with too many companies to look after, they can no longer add sufficient value to each portfolio company.
The team in a restaurant closely mirrors that of a venture capitalist firm. The “analysts” of the kitchen, if you will, are the people who work the longest hours and do the tedious grunt work that no one else wants to do. They are young, durable, numerous, and disposable. The “associate” of the kitchen is the chef de partie, who also does a lot of work but has the commis chefs to boss around. In place of a vice president, there is the junior sous chef. Junior partner parallels the sous chef, and the top of the food chain stands the managing director—the much-feared yet highly revered executive chef. It is the challenge of the managing director to orchestrate the team to cook a winning dish time after time.
The best chefs have return customers. Serial entrepreneur Jim Clark called on Kleiner Perkins to build his second billion-dollar company (Netscape) and his third (Web MD). The true acid test of a venture capitalist firm is whether entrepreneurs return to work with it in their subsequent companies.
The best chefs neither undercook nor overcook their dishes; each guest receives the meal at the proper time. VCs who are prone to taking companies public prematurely in an effort to gain a reputation ultimately ruin their own brand. Similarly, the best VCs do not delay exiting. The best VCs time their exit perfectly.
Most cooks prepare dishes based on what they feel most customers will feel like ordering. Similarly, most VCs choose companies in an environment characterized by great uncertainty of outcomes, fast-changing market conditions, and an abundance of highly subjective information on potential investments—a process akin to a Keynesian beauty contest. VCs typically pick winners based on what they think other VCs are going to pick to win in the next round, and not on how good they assess the company to be. Behavioral economists call this herd behavior—a term that describes how individuals in a group tend to act together without planned direction in ways that are sometimes irrational and driven by emotion—greed in the bubbles, fear in the crashes. The timeless art that my colleagues and I found in the top VCs we interviewed is made up of winning techniques, disciplined thinking, and analysis designed to overcome the instincts and emotions that can misguide even VCs.
Voices of Experience
There are ten thousand VC firms—and only a couple of hundred are any good. This book is about how the 1 percent think differently: What got them there? How do they add value to entrepreneurs? What are their thoughts about failure and how does that separate them from the rest of the world?
The Way of the VC shows you what premier VC firms such as Kleiner Perkins Draper Fisher Jurvertson, and Flagship Ventures look for in winning ventures and how they offer venture assistance, and how every entrepreneur can benefit from learning leading-edge techniques. The Way of the VC offers you
- The enabler of entrepreneurial initiatives to improve performance, because A teams make initiatives successful and lesser teams don’t
- A “silver bullet” technique in near-perfect communication with VCs
- A guide to coaching start-ups effectively
- The ultimate entrepreneurial development manual
- Insight and advice acquired by interviewing dozens of top-tier venture capitalists
- An easy read
Having gone through the long process of researching, writing, checking, revising, and editing The Way of the VC, I have learned that the start-up marathon, even with a star VC alongside, is not simple. Happily, my task did not require me to become an expert on either side of the relationship; I only had to interview experts and top entrepreneurs and VCs and invite them to share their insights, anecdotes, and advice—a far more manageable goal. The Way of the VC illustrates the trials and tribulations that an entrepreneur has to go through in working with the star venture capitalist to finish the start-up race.
How can the star VC prepare, mentor, and change an entrepreneur’s life? This is not a book on current best practices; rather, it separates the truth from the myth, drawing from the journeys of entrepreneurs who have worked with star venture capitalists. The book also has hiring implications. Suppose you are an entrepreneur looking to hire a VP of sales: What kind of experience do you need to find? What are star VCs looking for in your team? Would the candidate be able to withstand the trials and tribulations that is required in the long journey?
