The VC Field Guide E-Book

William Lin

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 298

Veröffentlichungsjahr: 2023

Beschreibung

The Venture Capital Investment Framework Venture capital is the economic engine that drives entrepreneurship and innovation through capital investments, board membership, advice, introductions to relevant employees, and customers. Despite the outsized importance of venture capital, the inner workings remain hidden. Venture is still a mentor-led industry and it is an industry where you have to do a lot of self-education--you have to learn by doing, and you have to get up to speed quickly. Until now. Author William Lin spent over a decade in venture capital, starting in an entry-level position, helping to start a leading VC firm from scratch, and eventually becoming Managing Partner. In The VC Field Guide: Fundamentals of Venture Capital, Lin shares his unique framework, the Venture Capital Investment Framework, to help any venture capitalist, entrepreneur, or investor make better investment decisions, quicker. He delivers an incisive and practical handbook for the world of venture capital. You'll learn about the industry, how to break into it, and discover the art of investing in startups, and more, including: * How VC deals are analyzed, vetted, and made * Which questions experienced and successful venture capital investors ask startup founders when making investment decisions, and why those questions matter * The venture capital mindset that dominates the thinking of the most prominent venture capital investors * The best ways to begin a career in venture capital and tips on advancing your career * Key differences between multi-stage and boutique firms and what it means for entrepreneurs * The different factors VCs use to evaluate early-stage versus late-stage companies If you want to be close to company creation and innovation as a venture capitalist, investor, or entrepreneur, this book is for you. If you want to be involved in situations that impact economic growth, innovation, and the founders, employees, vendors, and communities that support the broader entrepreneurial ecosystem, this book is for you. The VC Field Guide is not only a primer on the inner workings of the venture capital industry, but a timely framework for how investment decisions are made. Anyone who wants to better understand how venture capital investments are made, and why will find this book helpful.

Leseprobe

Additional praise for The VC Field Guide

“Venture capital investors aggregate a number of data points as they deploy capital in high‐risk startups: Management teams, market problems, market timing, and more. In this book, VC William Lin has simplified the investor's diligence process by sharing his succinct and crisp framework, thereby simplifying a complex and opaque part of the VC business.”

—Mahendra Ramsinghani, founder of Secure Octane Investments and author of The Business of Venture Capital

THE VC FIELD GUIDE

FUNDAMENTALS OF VENTURE CAPITAL

William Lin

Copyright © 2023 by William Lin. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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ISBN 9781394180653(Hardback)ISBN 9781394180660(ePDF)ISBN 9781394180677(ePub)

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Foreword

I've known Will for half of his life. We first met as mere freshmen at UC Berkeley––both of us were undeniably nerdy, incredibly ambitious and wanted to truly make an impact on the world after graduation. Most of the students I met were studious, hard‐working, and remarkable at consuming vast amounts of knowledge in a quick time frame. However, I knew right away that Will was different. Perhaps it was his unconventionally independent childhood or the fact that he had to chart his own path from a very young age without much familial influence, but the way he viewed the world was just different.

He was a natural problem‐solver, very inquisitive, and intellectually curious about how the world works, and had the uncanny ability to see things that others didn't––he did that by transforming the data in front of him to create abstract ideas and frameworks that were scalable and applicable to a broad set of use cases. Once he solved a problem in front of him, he instantly began to codify the framework behind how to solve 100 versions of those problems in the future. He enjoyed building things that could transcend beyond him and naturally helping as many people that came in his path.

So when I heard that he was writing a book about a framework for how to evaluate investment opportunities, I laughed. Of course. As a fellow venture capitalist myself, I often get asked the question: why did some VCs invest in the Zooms and Squares of the world and others didn't? How did the VCs have the foresight that these companies would be so successful? And why did so many VCs pass on the initial investments in these companies? As much as we can codify exactly why these amazing VCs were able to pick Zoom and Square at the early stage and realize their immense potential before anything was obvious, the reality is that a large chunk of it was due to luck. And the other chunk of it was due to that “gut feeling.”

But what exactly informs that gut feeling? Is it possible for that gut feeling to evolve over time, learning from pattern recognition across other investment opportunities and the osmosis of being in the industry? This is Will's primary thesis––while this book won't give you the answers of yes or no on a particular investment opportunity, it'll help provide you with the fundamentals on how to develop that “gut feeling” with an insightful framework on what to evaluate and focus on when looking at a new investment opportunity.

Venture capital has always been an exclusive industry—for every company that a VC funds, they'll likely end up passing on 1,000+ companies. But how do they arrive at these decisions? How are they able to adjust their risk tolerance for some companies and not others? This framework will serve as a good starting point to help illustrate how to evaluate an investment opportunity and develop a better “gut feeling” over time. It'll finally democratize the decision‐making behind an industry with so much mystique and allure.

Priya Saiprasad,

Partner @ Softbank,

Life Partner to Will Lin

Preface

Growing up, I remember feeling a conflicting mixture of emotions every day for my parents—grateful for them shipping me off to the United States when I was 5 so that I could have an American education, but resentful of them not being there for me as a role model. As an adult now, however, I've become only grateful as that experience shaped me into who I am today. It forced me to figure out how to navigate life and American culture first‐hand and, if I was lucky, find role models: people that I admire, respect, and could learn from. It turned me into someone who loves to see the world from another perspective.

In the early days, I wondered what it was like to have easy access to role models at home. People who could help me with my homework, deal with bullies, and talk about classic schoolyard dramas. I continue to believe that I'm lucky to have a career at all. I still look back on my life and see all the ways I was likely to fail. Honestly, if so many lucky breakthroughs hadn't perfectly lined up, who knows what I would be doing today? So whenever someone genuinely helped me, it left a deep impression and I still remember them to this day. This includes the many mentors I've had since then, in college and so far in my career.

I wrote this book because of my mentors and the help I've received over time. While my career is far from being over and this may sound like I am about to retire, I wanted to take a moment to share what I've learned with others interested in the often misunderstood and opaque world of venture capital. My goal is to “demystify” and explain venture in simple terms (hence the title), using a framework I've found valuable when working with founders and their companies. This book is not meant to be the ultimate compendium on how to succeed in venture, fund the next dozen decacorns, or land on the Midas List tomorrow, but a straightforward and personal perspective on this profession from someone who has been in it for over a decade.

I hope it helps underscore why I spent years, at nights and weekends, working to get this book over the line. It's to help that person who is determined to make their next breakthrough but unclear on the how. No matter how much mentoring and coaching I try to do, none of that scales compared to getting information onto pages, into a book, and in people's hands.

So I do feel privileged to have the opportunity to write this book and share my candid thoughts about the venture capital ecosystem. While I know this book will not answer every question or answer everything definitively, I hope you will find it useful. This book is filled with perspectives that I already regularly share in my communities and with more content that I could ever deliver over hours of in‐person coaching.

Thank you for reading this book. Stay in touch. Ping me or ask me questions on LinkedIn: www.linkedin.com/in/linwilliam. Tell me when this book helps and even when it doesn't. Life is a rollercoaster.

William Lin

Acknowledgments

Thank you for helping me to be a better investor, entrepreneur, and passable writer: fellow board members, team members, community‐builders, and early book reviewers.

Priya Saiprasad

Lin family

Saiprasad family

Adnane Charchour

Adrian Sanabria

Alberto Yépez

Alex Konrad

Alex Pinchev

Allan Alford

Amit Pandey

Andrew McClure

Anne Marie Zettlemoyer

Andy Cao

Arneek Multani

Barmak Meftah

Bill Carroll

Brian Castagna

Brian Markham

Byron Alsberg

Casber Wang

Charlie Giancarlo

Chris Bishko

Chris Castaldo

Chris Jones

Chris Olsen

Chris Roberts

Chris Wenner

Christina Richmond

Connie Qian

Dave Zilberman

David Endler

David Tsao

Deepak Jeevankumar

Don Dixon

Don Duet

Enrique Salem

Eric Quanbeck

Erik Bloch

Ernie Bio

Evan Wolff

Feng Hong

Francis Brown

George Hoyem

Gerald Beuchelt

Gil Beyda

Guillaume Ross

Gustavo Alberelli

Gwen Castro

Helen Patton

Howard Ting

Howard Zeprun

In Sik Rhee

J. Ram

Jai Das

Jake Flomenberg

Jeff Shreve

Jilbert Washten

John Cowgill

John Moragne

John Steven

Jon Gelsey

Jon O'Connell

JS Cournoyer

Julie Albright

Karl Sharman

Katherine Walther

Koos Lodewijkx

Leo Casusol

Lisa Lee

Lucinda Rhys

Manoj Apte

Marc Talluto

Mercy Caprara

Michael Biggee

Mike Hluchyj

MJ Ramachandran

Mohit Tiwari

Nipun Gupta

Owen Van Natta

Paul Lanzi

Pete Birkeland

Priscilla Kawakami

Raj Dodhiawala

Raj Judge

Rajiv Sinha

Rakesh Soni

Rey Kirton

Rita Gurevich

Rob Ackerman

Rob Fry

Ryan Naraine

Sam Haffar

Sarah Ashburn

Satish Dharmaraj

Scott Crenshaw

Sean Cunningham

Shane Shook

Sheck Cho

Shobie Ramakrishnan

Sid Trivedi

Sinan Eren

Sounil Yu

Srikant Vissamsetti

Steve Huffman

Sue Chung

Tamara McCarthy

Tanya Loh

Thomas Luciano

Tim Keeler

Todd Algren

Todor Tashev

Tushar Kothari

Uma Reddy

Vincent Liu

Yoram Snir

Part IIntroduction

Introduction

MY BACKGROUND

I still remember the state of the economy when I graduated. It was an important time for me. Interviewing for my first real job out of UC Berkeley felt like the culmination of all my education and life preparation—and at that point, the economy was a bloodbath.

I remember high‐achieving graduates having their prestigious offer letters rescinded after already proving themselves during summer internships. Brilliant people who could not find alternative options because employers had already made all their entry‐level hires. I remember record unemployment and so many students going back to live with their parents, jobless, and unsure how they were going to pay off their student debt. I saw how that experience turned my entire graduating class into risk‐averse working professionals pursuing careers in the highest‐paying, lowest‐risk, and tried‐and‐true jobs available out of college.

Meanwhile, I didn't have a home as a fallback. At that point I couldn't go back to my childhood home in Salt Lake City, Utah. Everyone I had lived with had moved away. My standard operating model was already to “figure it out.” I have lived without my parents since I was 5 as a first‐generation immigrant. I had a lifetime of being different and I had no idea what to call my experience until the pejorative term, “anchor baby” was popularized on the news.

For my graduating class, that highest‐paying tried‐and‐true job in business was investment banking. Only a small number of students were able to break into it, and in the midst of record unemployment, we were incredibly grateful for the opportunity to work 100+ hours a week. My first year in investment banking started with providing investment banking services for financial institutions like AIG, Metlife, and Cigna and then a second year for technology companies like Facebook and GoPro.

Venture capital is seen today as one of the most visible careers in finance, making headlines with each startup unicorn ($1 billion+ valuation) milestone. It has been the genesis for some of today's most successful companies like Google, Airbnb, Instagram, and many other startups that are now household names.

During my time in banking, as my peers moved to tried‐and‐true roles at private equity firms and hedge funds, I stubbornly pursued a career at the intersection of entrepreneurship and emerging business. I was one of the few candidates to both interview and receive an offer at a venture capital firm in 2012. I joined Trident Capital, an enterprise‐first VC with specializations in adtech, business services, cybersecurity, and healthcare IT. I joined the cybersecurity team as an associate and that's where I met Alberto Yépez and Don Dixon, the core group I would work with for the next decade, first, at Trident Capital and then at our spin‐out to create the sector‐focused Forgepoint Capital, a leading VC firm with its roots in cybersecurity.

Over this decade the economy picked back up and, with it, a shift from risk‐averse thinking to risk‐tolerant investing. This led to an exponential growth in venture capital over the past decade as well. While I have had the chance to work with many aspiring venture capitalists (VCs), I've also seen many fail to make it a long‐term career. These are hard‐working, smart, motivated people with all the right credentials and skillsets. It doesn't make sense: they are incredibly bright and capable, and every bit as deserving as me or more. So what happened?

I've wondered if it's because they've struggled with something that frustrates me too and was actually one of the biggest inspirations to write this book in the first place. When I first started in venture, I didn't have any frameworks or background, so in my early career, I had to hit a lot of dead ends in order to finally piece things together. Sure, there were random books that addressed financial models and the tactical aspects of being a good investor. Perhaps you could read VC blogs for specific insights but it's not like anyone sits you down and says “This is how it works” in simple terms. So this book is my attempt to do just that. I hope this guide and the Venture Capital Investment Framework (VCIF) help others learn from my mistakes in order to aid their own journey through the murky maze of venture capital.

As I reflect on where I am at this point in my career and its challenging beginnings, I am grateful for having taken the path I did and feel lucky for what I was able to learn and do as a result. I was one of a handful of people who got to work with one team, to start from the bottom and work my way up through the ranks. Simultaneously, I helped to build a venture capital firm from the ground up. I've gotten to see first‐hand how to found a successful VC firm, from raising the capital to establishing the team, the strategy and the investment approach, to making the investments and working with exceptional entrepreneurs to build thriving companies.

Throughout, I've had the opportunity to observe senior, experienced people across multiple venture capital firms make decisions, and I've worked with and learned from brilliant mentors over the years—yet, amazingly enough, none of these opportunities guaranteed my success in the VC industry. Same goes for so many others who have tried to make it in VC.

Venture is still very much an apprenticeship industry that is mentor‐led yet requires a self‐driven mindset. You have to do a lot of self‐education, learn by doing, and get up to speed quickly. What happens when you work with seasoned investors who are experts at what they do is that by simply watching them, hearing the questions they ask and taking note of the approach they take, you develop an understanding for what they see as important. You come to understand how they try to rationalize key decisions in order to persuade all parties of what they believe to be the best path forward. You end up using your powers of perception to pattern‐match and figure out why they felt positive about one discovery, and negative about another.

Because of the nature of on‐the‐job mentoring, you can't expect busy VCs to describe exactly what's going on while they're being pulled in multiple directions. That just doesn't scale because each mentor has multiple mentees, they serve on multiple boards and have to look after their portfolio companies, and, on top of that time commitment to mentoring, they have firms to manage. Mentors are not classically‐ trained teachers or coaches who make the learnings or plays explicit––that's not how mentorship works, especially in venture. The opportunity for a person new to the industry is to be in the same room, to see the same data as a senior investor, to help digest the data in the style the senior investor thinks is the best format, and then to gradually build the credibility to help influence the decision the team makes.

I'm one of those mentors in my community. I enjoy spending time investing in people, whether I am helping someone choose between multiple job offers, working with founders to make critical decisions, creating qualified win‐win connections between opportunity and talent, suggesting skills that will position someone for their next step, or helping them foretell what the decision‐makers are considering behind the scenes. To be good at this requires that I understand, enjoy, and, over time, build empathy for almost every type of role within the startup ecosystem.

The common theme across our ecosystem is that everyone follows their respective learning curves by doing, by trying, sometimes succeeding, sometimes failing, and always learning from those various experiences. They need exposure to startups, perhaps by investing in their careers and joining or founding a startup, by investing their budget and purchasing from a startup, or maybe by investing either their own capital or their investors' capital in startups or venture capital firms. If they were lucky, they made informed decisions and learned from the decisions with the help of a mentor or advisor.

Unfortunately, many people never get the opportunity to get exposure to venture capital, let alone develop deep mentor relationships.

Despite all that exposure to experienced investors and rapid company growth, making money‐losing investments is still expected: it's common for 20% or more of venture capital invested to go to zero (called “venture capital loss ratios”).1 This is almost the exact opposite model of the leveraged buyout (LBO) private equity model where the priority is investing in a company that can capably and predictably pay down the debt on their balance sheet. For traditional LBO private equity, loss ratios are significantly lower.

With so much risk in venture capital, that means that the winning investments are rare and impactful. Everybody wants to know, why did you invest in a successful company X, Y, or Z? Attend any panel about venture capital featuring any successful VC and they always get asked why they invested in a particular company that hit a major milestone or exited. This is because there is a lot of room for interpretation about what makes a great opportunity.

For example, almost every mega‐successful founder will have dozens of stories of how they pitched their ideas to VCs and were rejected exponentially more times than they were accepted, especially in their riskiest and uncertain early stages. Today, we look at the success of Uber and say, “Of course, I would have invested in that,” but would you have done so in 2009? Riders trusting their life with a perfect stranger at the wheel––who knew? Only a few people invested: they embraced the idea and risk, and believed it would be possible to change consumer behavior to create a viable, sustainable service and business model that would be reliable, safe, and profitable one day. The decisions investors and venture capital firms make are often difficult to understand.

Even after being in the industry for a while and listening to my peers, the decision‐making process is individual across the board. Not everyone has the same reasons for investing or passing on a startup. It took me a while to listen to all these people, study my own decision‐making process and realize there is still structure to how people make decisions—it's just not verbalized, not readily shared. The reality is, even after a decade, this industry moves so quickly that thoughtful decisions at one time can quickly become brilliant or silly at another time.

That brings me to one of the biggest inspirations to write this book: my own frustration and struggle in understanding venture. When I started out, I didn't have any frameworks or a background, so I hit a lot of dead ends in order to piece things together. As I learned from watching others and fumbled around gaining professional experience, I kept asking myself: “How do these great VCs make their decisions? What really matters to them?” I liked VC firms' slogans like “people first,” “protecting the digital future,” or “companies of consequence”—but what does that actually mean in practice?

This book introduces the Venture Capital Investment Framework, which is designed to help consolidate my and your learnings into a pattern to venture capital, prompt what I believe are productive questions as you learn, to fill in blanks, and to humanize and put some sort of structure around some of the qualitative aspects in venture that are challenging to measure. When I was starting in this industry, I searched for a framework, or a cheat sheet, but I couldn't find one. I can't tell you why that was the case, but the most reasonable answer is that it is still a relatively young and mentorship‐driven industry. So for the next generation of VCs, entrepreneurs, and investors, the most important way to progress was, and still is, to learn by doing.

What we've seen across multiple industries, however, is that each generation is able to learn faster than their predecessors, thanks to the power of information. So while I didn't have a framework to encapsulate the lessons I've had to learn over the past decade, I hope the following helps further the continued evolution of this dynamic, exciting, and interesting industry and career path for those who choose to pursue it.

WHO IS THIS BOOK FOR?

The aim of this book is to provide exposure to the art and science of entrepreneurship, working with startups, and to reveal the inner workings of venture capital. I do a fair amount of mentoring and networking and the common theme I've heard is that the people who want to get into venture capital (aspiring investors) or participate in the ecosystem (as founders, limited partners, customers embracing emerging tech, etc.) often have the least access to it.

So whether you're a founder, a startup employee, a student, a rising venture capitalist, a customer of startups, a public market investor, a corporate development leader, a lawyer, a consultant, an investment banker, a business unit lead, a private equity investor, or a limited partner––or a multiple of the above, or generally curious, this book is for you.

Because finance and venture capital are full of acronyms and specific terminology, I've included a glossary at the end of the book. One term to highlight is “Next‐Gen VC,” which applies to investors early in their career and it helps to differentiate the people who have decades of experience.

As a Field Guide, I have organized this book to help readers pinpoint the areas they'd like to focus on, whether that's fundraising, board dynamics, etc., although it's entirely possible to read the book from start to finish. In the remainder of this Introduction I discuss the genesis of the Venture Capital Investment Framework. How did I come up with the framework and what problems does it help solve? I follow that up in Part II where each chapter explains a different component of the Venture Capital Investment Framework. In Part III, I explore venture capital for specific audiences and stakeholders, such as students, current VCs, entrepreneurs, limited partners, and startup customers.

THE FRAMEWORK'S ORIGIN

Access to knowledge has always been a catalyst for change, whether it is a simple disagreement up to empowering humanity to evolve across arts and sciences. It also has the potential to provide perspective and accelerate growth but the issue has always been the same. We aren't born with knowledge and have to learn it. So the first and biggest obstacle for anyone who wants to better understand VC is gaining access to this knowledge, access to this experience, access to being able to see the ins and outs of venture first‐hand.

When I first became a VC, I struggled to make sense of the industry because, unlike a lot of consulting or finance firms, venture capital firms are typically small and they don't have an onboarding process, they don't have a lot of training or knowledge forums, and you are expected to hit the ground running and learn by experience. When I started out, I didn't know anything about the industry and my thoughts were, what the heck is this industry? What do people do? How do they make the decision to invest in one company and not another? What due diligence do VCs carry out and what do they look for in an entrepreneur or in a startup? When they're saying, “Hey, I want to invest in this company,” what questions are they asking? Who are the great venture capital firms and why are they great? Where does the money come from? How does the transaction, the matchmaking, come about and how do the entrepreneurs and the VCs find each other? How do they decide what the terms are to work together? There are so many questions that I had, that I didn't understand, and if you were to ask me in my early years in venture capital how these important decisions are made, I wouldn't have been able to tell you why one deal happens and another doesn't.

Even though I had access, I didn't have the answers. I struggled to figure out simple things, like what is right and what is wrong. Just because something happened, like a company failing miserably, how do I understand what happened in the postmortem? There are so many different potential hypotheses on how and why something happened and it's not like we have these parallel universes to look into and conclude, “Oh, in this universe, X happened and in a different universe, Y happened.” We just don't have that. And so, as a result of so many of these experiences—both good and bad—whenever I sat down to draw out the key lessons learned, I was never happy that the lesson was grounded in enough data or was unbiased based on my own preferences. I didn’t yet understand what was truly happening beneath the surface and why.

There was no formula, there was no structure to figuring out why some investments went well and others failed. I spent a lot of time guessing, “Oh, yeah, we didn't have the right set of leaders at this stage of the company, or the product was ahead of its time, or the company was solving a problem that ended up not becoming a real big problem, or the team didn't scale.” Unlike in science or any analytics role, why a startup is or isn't successful cannot be rationalized via a multivariate regression or even simple A:B testing. Not only is there no standard way to adequately compare companies, there is no defined way to even measure the data.

As a result of constantly struggling in venture in my early years, I decided that, to be successful, I needed to develop an approach based on the scientific method for myself. How could I make sure that I learned as much as possible, given the unique access I had? I started going through VC and entrepreneur interviews, going to conferences, listening to hundreds of recordings of successful people, and then I applied my own experience to all of it. Initially, it was just a flood of information and I tried to capture as much information as humanly possible and make sense of it all later. I referred to this process as “turning over rocks,” a phrase one of my mentors taught me.

What does turning over rocks mean? It refers to the required work to make a comprehensive decision. To leap into a new project knowing little, to turn over many rocks that yield nothing on the other side or even worse, bad news. To sometimes not know exactly what you are looking at and having to guess something is good or bad. To have to pause making a decision until other rocks are turned over and connecting the dots. It also refers to the importance of prioritization and experience. As you gain more experience, the ability to prioritize also grows. Yes, you will turn over every single rock, but is it possible to look at every rock and guess what is on the other side? To find the higher‐priority rocks first? Eventually, with experience and data, it becomes possible to “see the matrix”. To be able to see the common patterns and turn over rocks effectively.