The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies
The definitive guide to demystifying the venture capital business
The Business of Venture Capital, Second Edition covers the entire spectrum of this field, from raising funds and structuring investments to assessing exit pathways. Written by a practitioner for practitioners, the book provides the necessary breadth and depth, simplifies the jargon, and balances the analytical logic with experiential wisdom. Starting with a Foreword by Mark Heesen, President, National Venture Capital Association (NVCA), this important guide includes insights and perspectives from leading experts.
* Covers the process of raising the venture fund, including identifying and assessing the Limited Partner universe; fund due-diligence criteria; and fund investment terms in Part One
* Discusses the investment process, including sourcing investment opportunities; conducting due diligence and negotiating investment terms; adding value as a board member; and exploring exit pathways in Part Two
* Offers insights, anecdotes, and wisdom from the experiences of best-in-class practitioners
* Includes interviews conducted by Leading Limited Partners/Fund-of-Funds with Credit Suisse, Top Tier Capital Partners, Grove Street Advisors, Rho Capital, Pension Fund Managers, and Family Office Managers
* Features the insights of over twenty-five leading venture capital practitioners, frequently featured on Forbes' Midas List of top venture capitalists
Those aspiring to raise a fund, pursue a career in venture capital, or simply understand the art of investing can benefit from The Business of Venture Capital, Second Edition. The companion website offers various tools such as GP Fund Due Diligence Checklist, Investment Due Diligence Checklist, and more, as well as external links to industry white papers and other industry guidelines.
The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies
Table of contents
Foreword xv
Preface xix
Acknowledgments xxiii
PART ONE Raising the Venture Fund 1
CHAPTER 1 The Basics 3
Raise the Venture Fund 3
Find the Right Investment Opportunities 4
Generate Financial Returns 6
Roles and Responsibilities 8
Compensation 9
Notes 12
CHAPTER 2 Getting In 13
Entry-Level Positions: Analysts and Associates 14
Internships and Campus Recruitment 18
Midlevel Positions: Principals and MDs 19
Honing Investment Expertise within Allied Fields 22
Senior Partner versus Junior Associate 24
What about Luck? 25
Notes 26
CHAPTER 3 Building Your Career as a Venture Capitalist 29
Intellectual Stimulation and Financial Returns 30
Aptitudes and Attitudes of Successful Practitioners 31
The Challenges of a VC Career 40
Notes 43
CHAPTER 4 The Universe of Limited Partners 45
An Overview of Alternative Assets 47
Sources of Capital: Limited Partners 51
Fund of Funds 59
FoF Models: Variation of a Theme 61
Comparison of Limited Partnerships 65
Notes 67
CHAPTER 5 How Limited Partners Conduct Fund Due Diligence 69
Sourcing and First Screens 70
Evaluating the Venture Firms 71
Notes 74
CHAPTER 6 Defining Your Fund's Investment Strategy 77
Sector-Based Strategy 79
Stage and Geography 81
Notes 86
CHAPTER 7 How Institutional Investors Evaluate Fund Managers 89
The Fund Management Team Dynamics: Stability, Skill Set, and Alignment 91
Notes 99
CHAPTER 8 Fund Size and Portfolio Construction 101
Fit within the LP's Current Portfolio 105
Market Timing 106
Why LPs Terminate Existing Relationships 108
Notes 109
CHAPTER 9 Performance Analysis 111
Individual Performance and Attribution 111
Fund-Level Performance 113
Comparison Benchmarks 117
Public Market Equivalents 119
The Quest for the Elusive Top Quartile Managers 119
All the Managers Are Above Average 122
Notes 124
CHAPTER 10 Emerging Managers: A Promise of the Future 125
Why LPs Seek Emerging Managers 127
How Investors Rank Emerging Managers 130
Institutional Allocations for Emerging Managers 131
A Tale of Two Emerging Managers 132
The Global Emerging Manager: 500 Startups 133
Notes 134
CHAPTER 11 The Venture Capital Firm, Operations, and Culture 137
The DNA of a Firm 137
Governance of the Firm 142
Notes 147
CHAPTER 12 The Fund-Raising Process 149
Build Your Target List of Investors 151
Fund Marketing Materials 152
Presentation Slides 154
Making the Presentation Pitch: Drink Your
Own Kool-Aid(r) 154
Attracting the Lead Investor: Your "Nut" 156
Communicate, Create, and Maintain Momentum 158
Announcing the Close 159
Notes 160
CHAPTER 13 Terms of Investment: The Limited Partnership Agreement 161
Key Terms 161
Fund Financial Terms 164
Fund Governance Terms 168
What Institutional LPs Seek 171
Offering Sweeteners to Attract LPs: A Double-Edged Sword 173
What Matters Most 173
Notes 175
CHAPTER 14 The Role of Placement Agents in Fund-Raising 177
Agents Bring Market Intelligence and Relationships 179
Ethical Challenges 182
Notes 183
PART TWO Making Investments 185
CHAPTER 15 Sourcing Investment Opportunities 189
The Best Source: The Network 194
Accelerators and Demo-Days 196
The VC e-Marketplace: AngelList, Kickstarter and FundersClub 197
Angels 197
The Fountainheads of Academia and Research 199
Corporate Research 200
Trade Conferences 201
Pitch Me, Bro 203
Competitions: From $40 Million Moonshot to $10K 204
Cold Calling 205
You Win Some, You Miss Some 206
Notes 209
CHAPTER 16 The Art of Conducting Due Diligence 213
The Due Diligence Checklist 214
What Is Important: Jockey, Horse, or Markets? 217
Who Invests in Rap Music and Shaving Blades? 220
Notes 223
CHAPTER 17 Management Team Diligence 225
Assessing Intangibles 225
How to Assess the Jockey 229
Serial Entrepreneurs versus First-Time Entrepreneurs 237
What about Charisma? 238
The Importance of Conducting Background Investigations 239