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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Venture capital demystified, for both investors and entrepreneurs Building Wealth Through Venture Capital is a practical how-to guide for both sides of the table--investors and the entrepreneurs they fund. This expert author duo combines renowned venture capital experience along with the perspective of a traditional corporate executive and investor sold on this asset class more recently to flesh out wealth-building opportunities for both investors and entrepreneurs. Very simply, this book will guide investors in learning how to succeed at making money in venture capital investment, and it will help entrepreneurs increase their odds of success at attracting venture capital funds and then employing those funds toward a lucrative conclusion. The authors explain why venture capital will remain the asset class best-positioned to capitalize on technological innovation in the coming years. They go on to demystify the market for those seeking guidance on reaping its rich returns. Learn what it takes to succeed as an investor or entrepreneur, and gain the wisdom of experience as the authors explain key factors that determine outcomes. Through a relaxed, down-to-earth narrative, the authors share their own experiences as well as those of their nationally-recognized colleagues. Illustrative anecdotes and personal interviews expand upon important points, and case studies demonstrate the practical effect of critical concepts and actions. World-class professional expertise and personal experience come together to help you: * Understand the nature of both venture capitalists and successful entrepreneurs * Develop wealth-building capabilities in investing in or attracting venture capital * Learn how entrepreneurs and investors can work together toward a lucrative conclusion * Examine the ways in which recent financial regulatory developments and technological advances already in place are democratizing access to venture capital, enabling unprecedented expansion of venture capital opportunities As the field expands through these regulatory and technological developments, savvy participants will have unprecedented opportunity to benefit. Building Wealth Through Venture Capital explains what you need to know, and shows you how to navigate this arcane but lucrative asset class.
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Seitenzahl: 344
Veröffentlichungsjahr: 2017
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Table of Contents
Cover
Title Page
Preface
“Fairy Tales Can Come True, It Can Happen to You…”
Introduction
Innovation: The Path to Wealth Creation and What Venture Capital Is All About
PART I: Understanding the Major Players
CHAPTER 1: The Venture Capitalist: Funder of Dreams
CHAPTER 2: The Entrepreneur: His Mind and His “Cultivation”
DNA of the Entrepreneur
Driven by Passion
Motivated by the Opportunity to Make a Positive Difference
The Need to Recognize Reality: Beware the Seduction of Money and Power
The Importance of Fortunate Timing
Experience and Maturity Can Be Important, Too
Resolute, Energetic Drive Is the Most Common Denominator
They're Not Just Resolute; They Are Bold and Daring, Too
Environments That Cultivate Entrepreneurs
The Emergence of an Entrepreneurial Ecosystem in Chicago
The Age‐Old Question: Nature or Nurture?
PART II: For the Investor: A Guide to Realizing Big Returns
CHAPTER 3: Why Should
You
Invest in Venture Capital?
It Makes Sense Even for Conservative Investors
A Hedge Against Inflation and Lengthy Bear Markets
Hedge Funds and Private Equity Buyout Funds No Longer So Attractive
Venture Capital's Strong Historical Returns
Don't Invest More Than You Can Afford to Lose
Substantial Institutions Love Venture Capital
Emotional Reasons for Venture Capital Investment
CHAPTER 4: How to Find the Right Venture Capital Firm
Surveying the Landscape of Venture Capital Firms
Firm Selection by Venture Stage Focus
Why Should You Care About a Firm's Venture Stage Focus?
Firm Selection by Industry Focus
Firm Selection Based on Geographic Focus
The New Online Equity Crowdfunders
Other Resources for Selecting a Venture Capital Firm
Vetting Venture Capital Firm Candidates
CHAPTER 5: Venture Capital Investment versus “Buffett's Real Rules” of Investment
“Buffett's Real Rules”
How Len's Venture Capital Investment Principles Are Similar
Why Venture Capital Returns Can Beat Even Warren Buffett
CHAPTER 6: Avoid the Seduction of Unicorns: Get in Early
It's All High Risk, So Get in Early When the Biggest Returns Are Possible
Excessive Unicorn Valuations: All the Risk without the Big Reward Potential
Business Valuation 101
Applying Business Valuation 101 to Venture Capital Investment
Try Applying That Logic to Unicorns
Why Many Unicorn Valuations Don't Make Sense to Us
Unicorns Having Difficulty Exiting and Delivering Investor Returns
Now You Know Why We Believe in Early‐Stage Investment
Our Concerns for the Venture Capital Industry and Individual Investors
CHAPTER 7: Finding the Highest Quality Investments at the Right Price
The AOL Story
How to Manage Risk, Play the Odds, and Win in an Evolving Market
What It Takes to Hit Investment Home Runs
How to Find the Potential Home Runs
Price Can Matter, Too, and Can Be Tricky
Need to Consider Non‐monetary Costs, Too
Some Pricing Advice for the Entrepreneur
PART III: For the Entrepreneur: A Guide to the Money Search and All That Follows
CHAPTER 8: The Mating Dance: Prospecting for a Venture Capital Investor
Actually, Lots of Sources and Lots of Available Dollars
How to Appeal to the Venture Capitalist
Prospecting for Gold, or, Better Yet, Drilling for Oil
Venture Capitalists' View of Deal Stages
Targeting Your Money Search Based on VC Industry Focus
How to Do All This VC Screening
An Alternative: Introduction through Expert Middlemen
Making Contact with the VC
Other Ways of Making Contact
Evolution of the Venture Capital Community: Angel Groups and Online VC Portals
More on Online Venture Capital Investment Platforms
CHAPTER 9: The Final Exam: Due Diligence
Is Due Diligence Really That Important?
A Warning to Entrepreneurs: Beware of Limited Due Diligence
Return on Due Diligence Investment Tough to Quantify
Make No Mistake: Due Diligence Is Important
What Due Diligence Is All About
The Due Diligence Process
The Focus of Due Diligence Questioning
Importance of Treating the VC with Respect and Sincerity
Time Can Be of the Essence
Some Advice for Less Experienced VCs
Some Advice for Less Experienced Investors
CHAPTER 10: Finding Your Deal‐Doing Lawyer
So Many Types of Lawyers to Consider
Why You Need a Deal‐Doing Lawyer
Knowledge of the Venture Capital Process
Some Realities to Consider
Finding the Right Legal Counsel
Speed Can Be Important
Lots of Legal Consistency
Build Trust, Not Litigation
The Typical Process
Differing Degrees of Legal Orientation
CHAPTER 11: Financing Has Arrived and “You're Married”…Now What?
Now You Answer to a Higher Authority—a Board of Directors
Be Ready to Make Management Changes
Anticipate Complications and Management Challenges
The Critical Search for Talent as the Venture Evolves
Executive Search Consultants: Expensive, But Can Be Worth It
The Board's Role as Guardians of the Venture and the Investors' Money
Board Meetings
Bankers and Suppliers: Sources of Lower Cost Funds
Following the Money
When Crisis Management Is Required
CHAPTER 12: The Last Dance: A Successful Exit
What Constitutes a Successful Exit?
A Range of Exit Options
IPO as a Badge of Honor
Remaining Private May Better Meet the Entrepreneur's Needs
Going Public Can Also Mean Vulnerability to Rumors and Ruin
Other Risks of Going Public
Beware of Investment Bankers' Inherent Drive to Go Public
Investment Bankers and Venture Capitalists Are Not the Same
The Groupon Story: A Post‐IPO Nightmare
Lessons Reinforced by Groupon's Story
Timely Liquidation Less Risky than Betting on Volatile Public Markets
There Are Exceptions: The Nanophase Technologies Story
Sale to or Merger with a Complementary Business
Benefits of Being Acquired: The Cleversafe Story
Issues to Consider Before Selling the Baby
Truly “All's Well that Ends Well”
CHAPTER 13: Interview with a Successful Entrepreneur
PART IV: Looking Ahead: What’s to Come
CHAPTER 14: The Foreseeable Future
The Case for Even Greater Innovation and Venture Capital Opportunity
Technology Advancement—and Investment—Opportunities
Artificial Intelligence: Computers Becoming Even More Integral to Our Lives
Will the Computer Be Wise?
Big Data and Predictive Analytics: The
Why
of Everything
Biology as a Computer
Nanotechnology: The Domain of the Very Small
Robotics: Machines Come to Life
Virtual Reality: The Unreal Simulating the Real
The Internet and the Coming “Third Wave”
Biomedical Advances through Information Flow
Acknowledgments
About the Authors
Index
End User License Agreement
List of Tables
Chapter 12
Table 12.1 Investment Duration and Multiple
List of Illustrations
Chapter 4
Figure 4.1 Risk/Reward Tradeoff by Stage
Figure 4.2 Why the Midwest?
Chapter 5
Figure 5.1 The Risk/Reward Tradeoff
Guide
Cover
Table of Contents
Begin Reading
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Building Wealth through Venture Capital
A PRACTICAL GUIDE FOR INVESTORS AND THE ENTREPRENEURS THEY FUND
Leonard A. Batterson
Kenneth M. Freeman
Copyright © 2017 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging‐in‐Publication Data
Names: Batterson, Leonard A., 1944– author. | Freeman, Kenneth M., 1949– author.
Title: Building wealth through venture capital : a practical guide for investors and the entrepreneurs they fund / by Leonard A. Batterson, Kenneth M. Freeman.
Description: Hoboken : Wiley, [2017] | Includes index. |
Identifiers: LCCN 2017016750 (print) | LCCN 2017020511 (ebook) | ISBN 9781119409373 (pdf) | ISBN 9781119409366 (epub) | ISBN 9781119409359 (cloth)
Subjects: LCSH: Venture capital. | Investments. | Business enterprises—Finance.
Classification: LCC HG4751 (ebook) | LCC HG4751 .B368 2017 (print) | DDC 332/.04154—dc23
LC record available at https://lccn.loc.gov/2017016750
Cover Design: Wiley
Cover Image: © norph /Shutterstock
Preface
While taking some time off after selling his Chicago‐based company, MusicNow, to Circuit City in 2004, founding chairman and CEO Chris Gladwin had a new idea. It came to him while musing about how to store his extensive collection of photos on his personal computer. There just wasn't enough storage on his computer to house all those pictures.
Storing those keepsakes online in the cloud might work, but Gladwin worried they might then, outside of his control, be subject to loss or perhaps hacking. Not surprising, since he's an MIT graduate, Gladwin began reading books on encryption, and a really big new idea came to him that could alter the way data (including his and others' pictures) were stored and secured.
He realized that the execution of his idea would require forming a high‐tech company, putting together a team that could pull it off, and raising a lot of capital. While his MusicNow was a nice little company, a truly high‐technology startup with this big of an idea had not been developed and funded in Chicago in many years. Such startups had been gravitating to places like Silicon Valley, the towns around Boston's Route 128, and the Washington DC metro area, so the decision to try to do all this in Chicago seemed on the surface to be potentially as risky a decision as going after the big idea in the first place.
Chicago, like many other cities, had once been a hub of bustling entrepreneurship, with many hard‐driving, creative, fearless minds conjuring up the future. But such innovators—like Marshall Field in retailing, Potter Palmer in retailing and real estate, Michael Burke in telecommunications (Tellabs), the Galvin Family in electronics (Motorola), and Casey Cowell in data communications (U.S. Robotics)—seemed to be “yesterday's newspaper.” Until Chris Gladwin came along, there had been a long dry spell, and never in the dot‐com era had there been a high‐tech company created in Chicago that brought to the Midwest's commercial capital that virtuous cycle of local entrepreneur, assembling local talent, and capitalized through local funding.
The creation of that virtuous cycle depended upon not just Gladwin's big idea and his ability to assemble the required talent, but also his ability to attract the necessary funding—first from friends and family, then from local venture capitalists, and then from the wider world of risk capital.
Fortunately, Chris Gladwin had a lot of friends. Even better, some of them were individual accredited investors.
Once he exhausted that source of funds (which happens even to friendly people with big ideas), he turned to professional high‐tech venture capital investors. There were not many of these in Chicago, so it was a tough slog raising the additional $1 million he needed.
Fortunately for his new company, which he dubbed Cleversafe, Gladwin was (and still is) also a really decent, philanthropic sort. Practicing that philanthropic bent, Gladwin hosted a poker party with proceeds going to charity, to which he was able to attract several local entrepreneurs and venture capital investors.
One of the venture capital investors, Jim Dugan of OCA Ventures, knew Chris well and decided to back his idea, even though many other professional VC investors had already turned Gladwin down. Gladwin then went out on the road to find additional capital to join with Dugan and OCA, and ran into our then‐actively investing firm, Batterson Venture Capital. Our firm, along with OCA, recognized that with the rise of big data, big data storage and security were soon to be a big deal.
“Fairy Tales Can Come True, It Can Happen to You…”
The rest, as they say, is history. It may have taken a bit longer than we expected, and ultimately $100 million in investments over time, but when Cleversafe was sold to IBM in late 2015 for $1.3 billion, there were an awful lot of smiling faces in Chicago; 80 millionaires were minted among friends, family, and Cleversafe employees, and numerous already accredited investors suddenly became a lot wealthier.
Gladwin's big idea and its intersection with practical need resulted in market demand, and brilliant execution resulted in a home run win for the entrepreneurial Gladwin, the company's employees, and its venture capital investors. Many got back more than 10 times their investment. The very earliest investors made a multiple of 40 times their early investment. Cleversafe proved that a major high‐tech company could be created in Chicago in the 21st century, and so lots more are ready now to skip Silicon Valley and build their dream in the Midwestern heartland.
Opportunities like Cleversafe, while rare, are not unique. They are all around us, hoping for the risk funding—because venture capital is unquestionably risk capital—to enable them to turn their dreams into realities. This book will help you find them, understand them, and, with some pluck and luck, become a successful venture capital investor or VC‐funded entrepreneur. The result could be personal wealth, job creation, and a capital contribution to our country. Simply stated, we hope this book will help you win!
Leonard A. BattersonKenneth M. FreemanChicago, Illinois
Introduction
Since the financial crisis of 2008–09, the American economy has struggled to grow at just 2%/year. Yes, there has been an extended stock bull market, but the bull must inevitably lose its vigor unless economic growth accelerates significantly.
With the stock market climbing sharply immediately following Donald Trump's election as our nation's 45th president, there are some betting that the Trump presidency will result in such an acceleration. We won't know whether such forecasts prove accurate, and to what degree, for some time. Stock market returns over the past seven or eight years admittedly look great, but that's due largely to the bounce‐back in prices following the devastating collapse of 2008–09. A look at the stock market over a more extended time frame presents a more sobering picture. Factoring in all the ups and downs, from January 1, 2000 to January 1, 2017, the S&P 500 index grew just 2.7%/year. Add dividends paid by the S&P 500, which have averaged around 2% annually, and you're looking at an average annual return of slightly below 5% over that period.
Moreover, the rise in stock prices to historical highs has been helped in recent years by the near‐zero interest rate environment, which has forced investors to turn disproportionately to stocks for any hope of decent returns. Therefore, even if economic growth accelerates, let's say to a 4% rate, the likely accompanying rise in interest rates to more normal levels should temper further prospective stock market gains.
Innovation: The Path to Wealth Creation and What Venture Capital Is All About
So how can the American Dream of wealth creation continue? The key is, and has always been, major innovation—new technology and new product development that address new needs or meet existing needs dramatically better.
The most successful major companies understand this. Today's Wall Street darlings—companies like Microsoft, Alphabet (the parent of Google), and Facebook—were yesterday's venture capital–funded startups. These companies understand that major innovation must never stop. Look at the publicized innovation efforts of Alphabet (now pursuing self‐driving cars), Tesla owner Elon Musk (racing to commercialize space travel), and the major pharmaceutical and biotech firms creating new cures for diseases that won't go away.
Automotive companies such as Volvo and BMW have established formal venture capital arms. Even marketers of mundane food, household cleaning, and personal care products, such as Unilever, are setting up venture capital arms to fund innovative startups in their fields whose growth prospects they can then nurture with dollars, distribution clout, and management know‐how.
So, a fair question from investors might be, why not just invest in the stocks of these big‐league innovators? We'd never suggest that you not invest in these companies. They've demonstrated the ability over the years to grow their businesses and stockholder value. There is one caveat, though. Their already high share prices have baked in investor expectations of continued healthy growth. Hence, you may earn a respectable return on those stocks, but don't count on breakaway gains.
The biggest wealth creation opportunity—for both entrepreneurs and the investors who back them—is through market‐changing innovation commercialized by new ventures. There are the latest winners, highly valued new ventures you've heard about—Uber, Airbnb, Instagram, Square, and many others. There are also the home runs that aren't household words. We just told you about one in the Preface that enriched many of our Batterson Venture Capital investors, a company called Cleversafe. Cleversafe's revolutionary innovations in data storage turned roughly $100 million in investments (to be clear, only about 4% from Batterson Venture Capital) into a $1.3 billion sale to IBM. And there are some doubles and triples out there, too, though the biggest money is to be made on the home runs.
As awareness of recent venture home runs has grown, there has been a surge in innovative venture activity. It's no longer limited to Silicon Valley and Boston's Route 128. Venture capital activity is flourishing in New York, Los Angeles, the DC metro area, Austin, and anywhere where creativity, ambition, and the funds to nurture it are found.
Venture incubators and supportive angels are emerging everywhere. Cleversafe is a great example. While people often talk about the Midwest's conservatism and reliance on agriculture and heavy industry, Cleversafe's billion‐dollar+ win was created in Chicago. In fact, Inc. recently reported that Chicago (which is where our funds are based) is now second behind only New York City in the number of fast growing private companies on the Inc. 5000.
The dollar growth in venture capital investment reflects this broadened activity. Venture capital investments in 2015 totaled $59 billion, up 153% since 2005. Importantly for our readers, for the past couple of years, investments by individuals have caught up with the dollars invested by the big institutions. The rich potential returns from venture capital used to be restricted to an exclusive club of institutions and the mega‐wealthy, but are now becoming “democratized.”
Venture capital returns historically have been handsome, averaging about 12%/year. That's a lot better than the almost 5% average return from the S&P 500 over the past 16 years, and almost anything beats today's near‐zero interest rates.
Some venture capital leaders have done even better. The funds we've managed have generated investor returns averaging 28%/year over the past 30+ years. We've done that even through the dot‐com collapse of 2000 and the broad economic plunge of 2008–09.
Our secret approach in fact isn't really a secret. We've shared it openly in the past, and will share it with you in this book. It takes lots of hard work, screening hundreds and even thousands of venture opportunities to select the few that we believe could grow into billion‐dollar+ home runs. We review at least a hundred ventures for every one in which we invest. We usually get in early, while these ventures still carry low valuations, before others recognize their potential.
The exhaustive screening and due diligence pay great dividends. To be clear, we don't always get it right. But more than 35% of our investments have delivered some positive return to investors. While that might not sound so great, that's almost double the success rate of the industry in total. (It's like baseball, where a .350 batting average can win the batting title!) And our big winners like Cleversafe (and several others, including our multibillion‐dollar exits for AOL and CyberSource) mean lots of new wealth for our investors.
Before we go further, though, let's be clear. Venture capital investment is not for the faint‐hearted. It is a high‐risk—and potentially high‐reward—opportunity. Most new ventures fail. Just 10% of venture capital investments deliver the majority of all returns. In this book, we'll try to help you maximize your success odds and manage your risks. We don't believe that any investor should risk losing his or her proverbial shirt in venture capital.
It's a high‐risk, high‐reward potential situation for entrepreneurs, too. It's easier and lots less risky for talented, ambitious individuals to devote their talents to large, well‐capitalized enterprises and make a comfortable living. But for the most ambitious individuals (and often the most talented), many of whom don't want to live under the yoke of corporate direction and are determined to do their own great thing, that is not enough. They seek the gold ring that can be captured only by building their own market‐moving enterprise.
After they've started up by borrowing from credit cards and home equity lines and then tapping into supportive and hopefully well‐heeled family and friends, they need to find the even‐bigger funds to continue on. As startups succeed, their capital needs to realize their full potential grow sharply.
It's often said that venture successes inevitably take twice as long and require three times as many dollars as the entrepreneur expected. So he or she had better know what they're doing, and go after funds from the right sources—those who can provide the needed dollars today, as well as help in accessing the dollars they'll likely need later, along with the advice and professional help that may be even more critical to their ultimate success.
While this book was written to help both the investor and the entrepreneur learn what they need to know to succeed today, it should remain helpful for many years to come. Sure, like the economy and other markets in general, the venture capital playing field will change over time, just as it has always been changing and evolving. Nevertheless, the fundamentals will still apply.
Very simply, the venture capital marketplace exists to bring together: (1) investors willing to accept considerable risk in exchange for potential exceptional return on investment, and (2) entrepreneurs whose innovative developments are characterized by considerable uncertainty and risk as well as potential for outstanding wealth creation.
For anyone who thinks the greatest innovations are behind us and questions how much is still left to “invent,” we say thank you for leaving the wealth opportunity from future innovations in the hands of those of us who can still dream and think big. Humankind's ever‐increasing expectations and aspirations will inevitably motivate continued innovation. Add to that the needs resulting from natural resource constraints, climate change, and other environmental concerns, which we believe will drive even more innovation than we can imagine.
Here is a list of a dozen categories we believe will be huge opportunity areas for future innovation and new wealth creation, and we're betting there will be even more:
Advanced materials
Artificial intelligence
Big data and predictive analytics
Biological computers
Biomedical
The conquest of aging
The genome
Immunology
The Internet of Things and of Everything
Nanotechnology
Robotics
Virtual reality
Changes in the venture capital playing field will also contribute to making the coming years good ones for venture capital investors and great ones for entrepreneurs.
As we mentioned earlier, the accessibility of venture capital investment opportunities is becoming democratized. Today there are roughly a half million individual venture capital investors in the United States alone, and that number should expand dramatically in the coming years.
Recently launched online venture capital portals have opened investment access to America's estimated 10 million accredited investors (i.e., individuals and couples with net worth, excluding the value of their primary residence, of $1 million or more, as well as individuals with annual income of $200,000+ or couples with annual income of $300,000+). Further, the JOBS (Jumpstart Our Business Startups) Act allows venture capital firms to advertise to these accredited investors.
On top of that, regulations implementing Title III of the JOBS Act, enacted by the SEC in the spring of 2016, open venture capital investment access, albeit with tight limitations, to the rest of America, too. These JOBS Act provisions should increase substantially the availability of venture capital investment dollars. What a great time to be an aspiring entrepreneur!
Entrepreneurs will be helped further by advances in software and Internet technology already behind us, which have brought down the costs of initial startup requirements. Lower‐cost startups are ideal for many online venture capital portals, even those restricted to accredited investors. These online portals typically set much lower minimum investment requirements than the more traditional firms, and so tend to invest fewer dollars in each of their deals. The new online portals open to non‐accredited investors, which are further limited by the SEC as to how much they can invest in a single deal, are also particularly well suited to startups with lower early capital needs.
Ironically, more traditional venture capital firms like ours, which only allow investments from accredited investors and, even though accessible online, set a higher minimum investment requirement (our new firm, VCapital, has a minimum individual investment requirement of $25,000), welcome these new firms that are democratizing the industry. Frankly, they are so new relative to the typical lead time from investment to return that it's too soon to say how well they will do for investors (more on that later).
Nevertheless, for us, the ability of a venture to attract a large number of these firms' smaller investors represents valuable market intelligence, demonstrating early concept appeal. It's somewhat like virtual market research. If the venture goes on to show progress and has greater subsequent funding needs for expansion, we may be more likely to invest. We may not get in quite as early, but the risk when we do get in (which will likely still be early in the venture's growth) will probably be less, too—an acceptable tradeoff.
Notwithstanding possibly lower initial startup funding needs, most ventures with considerable potential will have increasing funding needs as they progress. In some cases, particularly in fields dealing with information technology, the importance of speed to market may require quite sizeable later‐stage investments in order to accelerate expansion. In other fields, such as pharmaceuticals and biotechnology, later‐stage FDA testing requirements carry extremely large costs. The risks even at these later stages are still inappropriate for banks or most alternative lenders, requiring a venture capitalist's perspective and risk tolerance.
Putting all this together, it looks like we are actually just now entering the golden age of venture capital for individual investors and the entrepreneurs whose dreams they will be able to fund and then benefit from financially. This book is written for both groups—individual investors and entrepreneurs—to help guide them along the path to potential wealth.
PART IUnderstanding the Major Players
CHAPTER 1The Venture Capitalist: Funder of Dreams
At the center of the venture capital playing field is the venture capitalist. The practical knowledge needed by both investors and aspiring entrepreneurs begins with a general understanding of this strange and extremely small population of individuals.
This chapter will get into a general description of our unique breed. Chapters 4 and 8 will then get into the distinguishing characteristics that investors and entrepreneurs, respectively, should consider in deciding which ones to invest with or to seek out for funding.
There are many ways to think about the venture capitalist. One is to liken him or her to a marriage broker. At its most basic level, the venture capitalist's reason for being is to bring together investors' dollars with entrepreneurs who need their money. Of course, the investor has to want to invest in that entrepreneur's venture, and the entrepreneur has to be willing to accept the investor's terms. The venture capitalist as marriage broker needs to sell both sides.
The venture capitalist is also like a marriage counselor. The “VC” helps the two sides—investors and entrepreneur—communicate with one another, often counseling the entrepreneur to enhance his or her venture's success odds. After all, the venture's continued progress and potential for ultimate success along with its attendant rewards are what will keep the relationship between investor and entrepreneur together.
Of course, one could describe the venture capitalist in other ways, too. The venture capitalist is part riverboat gambler, part security analyst, part trader, and part entrepreneurial voyeur.
Venture capital is a high‐risk/high‐potential‐reward endeavor, so not surprisingly, venture capitalists are calculating gamblers, instinctively balancing the risks and rewards. No venture capitalist can win every time, but the successful ones' winners will handily compensate for the losers.
Successful venture capitalists have intuitive and analytical skills. They must be able to assemble and digest large amounts of data—some precise but some pretty vague and incomplete—and integrate all that information in order to make seriously consequential decisions.
The venture capitalist must be an astute trader and negotiator, the kind of talent Donald Trump would admire. To succeed, he must figure out what he can sell to whom (like deal potential, deal terms, and ultimately the successful venture he has funded and nurtured) and what he can buy from whom (professional services, shares of high‐potential ventures) at a favorable price.
Even the successful venture capitalists, though, will lose more often than they win, so they must have confidence and strong egos. While recognizing that reality—that they'll lose more often than they win—they still must be able to state unequivocally that they believe in this entrepreneur and his or her venture, and to back that stated conviction with theirs and others' money.
The venture capitalist must often be a skeptic, as he is likely to reject a hundred deal opportunities for every one in which he invests funds. He also must temper the optimistic fervor of the entrepreneur. That's important at the start in order to negotiate a good deal and then later to foster the entrepreneur's management discipline and ensure the entrepreneur recognizes key risks and addresses them thoughtfully. At other times, he must be a business romantic, recognizing and accepting his limited control over the entrepreneur's operations and therefore often having to suspend lingering disbelief.
Venture capitalists must be extraordinary at living with and managing through ambiguity.
Ambiguity in that not much can happen before he or she has investor money in hand, and often that money must be secured before he can even tell the investors the deals he has to offer.
Ambiguity in that he or she must read between the lines, as investment decisions must be made before much of the information one would like is available.
Ambiguity in that the investments are usually highly illiquid; most must be held for 5–10 years, through good times and bad, before success or failure can be known.
Ambiguity in that entrepreneurs may love him as their essential source of money and yet hate him because of the controls and limitations he may insist on imposing in exchange for that money.
Ambiguity in that investors must think enough of him to invest with him, may then grow impatient and displeased, waiting so many years for a return, and then love him dearly for the stellar returns he may ultimately deliver.
Venture capitalists must also have the confidence to live with frequent adversity. Almost all ventures in which he or she invests don't go quite as planned at the start. Most go through the valley of death at least once. Buckminster Fuller once wrote, “Sometimes I only find out where I should be going by going somewhere I don't want to be.”
Most of all, the venture capitalist needs to be a business generalist. He or she is often required to provide not only know‐how but also “know‐who,” to know the resources that the entrepreneur needs to best solve specific problems. Often the venture capitalist needs to know a lot about the particular industry, market, or technology in which he is investing his investors' funds.
Importantly, the venture capitalist must be highly knowledgeable about business development. That means sometimes being a patient nurturer of growth, but at other times being the impatient, sharp prod pushing the entrepreneur. Most people involved in business creation create just one business in a lifetime; the venture capitalist is involved in building many.
The venture capitalist must be an astute strategist. The ventures in which he invests are inevitably on the cutting edge of markets and technologies, so often those ventures need to make sharp strategic turns as more is learned. The successful venture capitalist must be able to participate in driving the venture's strategic path. Both investors and entrepreneurs need such VC skill.
Perhaps surprisingly, the successful venture capitalist must sometimes display exceptional operating acumen as well. While in most cases the venture capitalist will not get heavily involved in portfolio companies' day‐to‐day operations, there are times when the VC must step in, right an errant venture ship, and spearhead the turnaround of a venture that still has valuable potential but has lost its way.
There aren't many individuals who have all these tendencies and skills, and even fewer who want to live life on the edge like this. There are only about 500 active venture capital firms in America. Given all the aspiring entrepreneurs and ambitious startups vying for the support of so few VCs, the entrepreneur needs to understand the time pressures they face and the schedules they juggle. Don't lose faith if the call you made or the documents you sent don't receive responses for several days. The message you get that the VC is out of town or in meetings and can't get back to you right away is likely the truth, so don't despair.
CHAPTER 2The Entrepreneur: His Mind and His “Cultivation”
Since our mission in writing this book is to provide practical how‐to guidance for both investors and entrepreneurs seeking venture capital, it seems important early on to give both reader groups a better sense of what entrepreneurs are all about. Entrepreneurs need to understand some of the variables related to the probability of their success. Investors need to understand better what they should be looking for in entrepreneurs in whom they will entrust their support.
DNA of the Entrepreneur
The entrepreneurs we're talking about here are the ones doing the big new things that are the essence of the venture capital world. Our society, which more readily accepts a degree of conformity, has often made these “creators”—like prophets, persons of vision, and cutting‐edge artists—march to their own distant drum. Their unique talent may be seen as a threat to those who are more conformist, less creative, and who do not always live by their wits. They are a real threat to the established (and the establishment), whether in art, business, science, or government. Their discoveries, inventions, and creations may well end the reign of the old if they prove to have greater utility and value.
Entrepreneurs are neither entirely alike nor entirely different. Nevertheless, we'll try to paint a general profile that captures a reasonable composite of the nature of those entrepreneurs who succeed in a big way.
Almost all are driven by their own particular demons to attempt to create their own unique destiny. They are generally uncomfortable with authority imposed by others. Many as children were unable to be true to themselves while attempting to conform and placate a concerned parent. Their characteristic hostility to authority, and the limitations they sense it imposes, is a response to these childhood chains.
The entrepreneur is not much interested in getting along by going along. They want to follow the beat of their own drum, and some see pursuing their target quickly, with urgency, as being necessary for survival. The best of the breed, though, while perhaps avoiding external authority and situations they feel they cannot control, do know their own limitations.
Driven by Passion
Entrepreneurs are driven by passion, often an all‐consuming passion. There are no half measures on this field. If it doesn't work, try again. They are generally not in it for the money (although that would be nice), but instead for getting something out of themselves that they need to get out, for expressing themselves in their own special way. Bruce Springsteen says it well in his book, Born to Run (published in 2016 by Simon & Schuster), writing about his career journey: “I wanted something that could come only from my voice that was informed by the internal and external geography of my own experience.” Bruce gets it exactly right; successful entrepreneurship is the external expression of a compelling inner need.
Entrepreneurship is both artistic drive and artistic expression. It reflects an internal drive that is converted into an external impact, resulting in product or company. Steve Jobs had an internal drive initially to create a desktop computer truly accessible to the masses. That resulted back in the early 1980s in the Apple II, which was at first sold mostly to schools and to parents with young kids. As someone driven by an especially powerful inner demon, though, Jobs couldn't stop there. His focused drive pivoted in different directions a number of times, leading to a worldwide brand of devices and their integrated software.
