Introduction to this book
Target audience
The author states at the beginning of the book that the book “Secrets of Sand Hill Road” is written for founders of new ventures. Founders and teams of new startups need to figure out whether they need to cooperate with venture capital? How to cooperate with venture capitalists?
General public’s misconceptions
Most people think that a venture capitalist’s job is to find the next Apple, write a check and walk away. Don’t do anything, just sit back and wait for the new venture to struggle on its own. If the new venture becomes a big success in a few years, sit back and wait to count the money.
The difference between VC and startup
Venture capitalists have many shooting opportunities. If they fail, they can start over and find another company to try again. But start-ups are different. They usually only have one chance. If they miss the opportunity to succeed, they will never have it again.
Reasons to recommend this book
- This is a practical book written by a key member of the management team of a16z (Andreessen Horowitz), one of the top, mainstream, and still very aggresive Silicon Valley venture capitalists.
- Let me tell you why venture capitalists have the ability to identify heroes at a very early stage before they steal the public. When most U.S. listed companies are founded and the company is very small, they can invest with very little capital. , and achieve an astonishing return on investment within five to ten years (usually ten years).
- Why are venture capitalists and startups interdependent? How has it changed the way American businesses raise capital? How has it affected the way American startups do business? Why does it influence the direction of emerging industries in the United States? How to inject new vitality into the industry?
The Importance of Venture Capitalists
Partner with startups
Venture capital investors are not only shareholders or investors. A more appropriate term for the relationship between venture capital investors and new startups should be “partnership”. New startups must first figure out why they need to cooperate with venture capital investors? Once cooperation begins, it is even more important to understand why venture capital firms do this? What are the differences between the roles played by both parties?
Five to ten years of long-term support
Once a venture capital investor decides to invest in a promising new company, the investment period ranges from at least five years to usually as long as ten years. It is not a short-term investment like most people imagine, or it is just like retail investors investing in stocks. Timing your trades.
Help nearly half of successful companies
According to a 2015 study by Ilya Strebulaev of Stanford University and Will Gornall of the University of British Columbia:
- Since 1974, 42% of U.S. public companies have been backed by venture capital.
- Together, these venture-backed companies have invested $115 billion in R&D, accounting for 85% of all R&D spending and 35% of all employment.
- Created a market value of US$4.3 trillion.
- Accounting for 63% of the total market value created by listed companies since 1974.
In addition, a 2010 study by the Kauffman Foundation specifically mentioned the impact of startups on U.S. employment. The study found that almost all of the 25 million net new jobs created since 1977 were created by young start-up companies, most of which were backed by venture capitalists.
How is VC industry different from others?
Missing is more serious than making a mistake
“Missed investment” is more lethal than “investment mistake”, because the venture capital industry can accept that many new startups have failed and lost all the money invested, but it cannot accept any reason not to try or invest in something useful. A startup that has the potential to succeed, even if the odds are low.
Buffett holds a similar view. For a more in-depth analysis of this topic, please see my other article “Mistakes of omission and mistakes of commission“
The influence of the VC
- Apple, Microsoft, Alphabet, Amazon, and Meta are all backed by venture capital firms, without exception.
- In terms of the total funds invested by venture capital firms, it is actually not large. 2017 was the highest in those five years with 84 billion U.S. dollars; but its contribution to the U.S. economy is very huge.
- In 2017, the venture capital industry raised $33 billion from investors; in 2000, this number was $100 billion. In the same year, the global M&A industry raised a total of US$450 billion, the total assets under management of hedge funds were US$3 trillion, and the GDP of the United States was US$17 trillion.
Other capital providers
- Venture capital firms invest in companies over a longer period, with five to ten years being the basic period (usually ten years); the most common banks are usually only willing to provide loans for up to three years.
- Venture capitalists usually ask for equity in new startups and get involved in the company’s operations; banks only care about whether the interest on the money lent to the company can be fixed and paid on a regular basis, and the principal must be protected without the risk of default or bankruptcy.
- The success rate of venture capital-backed startups is very low; banks are often reluctant to provide capital to companies, especially startups with little or no revenue.
How do VCs decide investment targets?
Venture capital firms typically invest in new startups based on advanced quantitative and qualitative methods.
People
When venture capitalists invest in a company, they basically recognize that the company will become a winner in this field, so it is impossible to invest in its competitors. The founder becomes a winner in this field and solves the executors who achieve this goal. The most critical factor.
Additionally, does the founder have the ability to lead a complete company team? Can the market and customers be persuaded to adopt the company’s products? Do you have the ability to convince talent to join a startup?
Remember: most ideas are not unique to a person or company, so ideas rarely determine the success or failure of a company. What ultimately matters is the execution of ideas, and execution comes from whether team members can Work together to pursue the same goal.
Product
Does the product meet market demand? Are users willing to spend their own money from their pockets to purchase?
Venture capitalists focus on the process by which new companies formulate products and ideas, as well as the possibility of launching products into the market. Because venture capitalists know very well that there are very few cases that can be finally launched on the market and are truly successful.
Disruption is very attractive, but in reality there are very few such ideas. Moreover, when many disruptive products suddenly appear, the possibility that most users will accept them is actually very low.
Market
How big is the potential market size for startups that venture capitalists value? Just like real estate developers pay attention to whether real estate is in prime locations.
It is easiest for a product to have a huge potential market size if it is positioned as a replacement for an existing product.
The most difficult thing is to have the foresight to see that a new company defines a new potential market that does not currently exist but will be huge in the future─such as Airbnb (US stock code: ABNB ), is an example. For details, please see my post of “Airbnb’s unique offering is competitive“
How do startups deal with VC?
Raise venture capital
- Venture capitalists may not be suitable for your company: sometimes it is better to find a bank, angel investor, or even a loan from a relative or friend than a venture capitalist.
- The potential market is too small: Venture capitalists will not be interested in companies that are too small, such as less than $100 million.
- Valuation: How much is your company worth? How to calculate? What is the basis? Before contacting venture capitalists, you should have an idea in mind.
- The appropriate amount of money should be raised, which involves the price that a new company must pay-including giving up control of the board of directors, equity, operations and other major issues.
Sale and promotion
Marketing your company is a necessary step, and sometimes the most important step. Venture capitalists will examine the founder’s ability to tell stories to determine whether a new startup has the ability to survive and whether venture capitalists will continue to contact your company.
How do you convince VCs when you pitch your company to them? There are five things that venture capitalists want to know most: including the company’s market size, company team, products, marketing plan after the product is launched, and the next round of financing plan.
Term sheet
It’s very important
The “term sheet” is very important. It is the most fundamental agreement between venture capitalists and startup companies. It is also the rights and obligations of both parties in the future cooperation, and even the basis for litigation when necessary.
Let me remind you that “Term sheet” are very esoteric and boring for ordinary people; they are difficult to understand. But as a startup, you have to understand it and read it word for word.
The most important thing is that venture capitalists know the contents of the term sheet by heart because they have handled hundreds of similar cases. But for new companies, it is very unfair, because most companies are seeing this kind of thing for the first time, and there are very few people who have experience in handling it.
Business and economic aspects
Must include: preferred stock, total income, convertible bonds, price per share, valuation, equity structure, dividends, liquidation preference, share repurchase, conversion rights and automatic conversion, voting rights, anti-dilution provisions, etc. .
Corporate governance and control
This part includes the number of seats on the board of directors, protective clauses, proportional investment, share transfer restrictions, forced sell rights, D&O liability insurance, share redemption, confidentiality clauses, etc., sales restrictions, and company prospects.
Related articles
- “a16z’s “Secrets of sand hill road” to investors and entrepreneurs“
- “Traitorous Eight, the origin of the semiconductor and venture capital industries“
- “How is Y Combinator different from other venture capital firms?“
- ““Blitzscaling” expansion speed decide if startup success eventually“
- “Startup issues that most people care about“
- “Angel is an excellent venture capital book for ordinary people“
- “Two famous essays by Marc Anderson on software and artificial intelligence“
- “Don Valentine, founder of Sequoia Capital, father of Silicon Valley Venture Capital“
- “The Power Law“
- “Zero to One“
- “Venture capital and unicorns introduction“
- “Global Venture Capital and Unicorn Report“
- “The Power Law“
- “Mistakes of omission and mistakes of commission“
- “Airbnb’s unique offering is competitive“
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