The Business of Venture Capital

11 The Venture Capital Firm, Operations, and Culture 137The DNA of a Firm 137Governance of the Firm 142Notes 147CHAPTER 12 The Fund-Raising Process 149Build Your Target List of Investors 151Fund Marketing Materials 152Presentation Slides 154Making the Presentation Pitch: Drink YourOwn Kool-Aid(r) 154Attracting the Lead Investor: Your "Nut" 156Communicate, Create, and Maintain Momentum 158Announcing the Close 159Notes 160CHAPTER 13 Terms of Investment: The Limited Partnership Agreement 161Key Terms 161Fund Financial Terms 164Fund Governance Terms 168What Institutional LPs Seek 171Offering Sweeteners to Attract LPs: A Double-Edged Sword 173What Matters Most 173Notes 175CHAPTER 14 The Role of Placement Agents in Fund-Raising 177Agents Bring Market Intelligence and Relationships 179Ethical Challenges 182Notes 183PART TWO Making Investments 185CHAPTER 15 Sourcing Investment Opportunities 189The Best Source: The Network 194Accelerators and Demo-Days 196The VC e-Marketplace: AngelList, Kickstarter and FundersClub 197Angels 197The Fountainheads of Academia and Research 199Corporate Research 200Trade Conferences 201Pitch Me, Bro 203Competitions: From $40 Million Moonshot to $10K 204Cold Calling 205You Win Some, You Miss Some 206Notes 209CHAPTER 16 The Art of Conducting Due Diligence 213The Due Diligence Checklist 214What Is Important: Jockey, Horse, or Markets? 217Who Invests in Rap Music and Shaving Blades? 220Notes 223CHAPTER 17 Management Team Diligence 225Assessing Intangibles 225How to Assess the Jockey 229Serial Entrepreneurs versus First-Time Entrepreneurs 237What about Charisma? 238The Importance of Conducting Background Investigations 239Notes 241CHAPTER 18 Diligence beyond Management 245Assessing the Market 245Evaluating the Idea or Product 247The Business Model 249Financial Projections 251Do Business Plans Matter? 252Notes 253CHAPTER 19 Structuring Investment Transactions 255The Spirit of the Term Sheet 255Negotiation Stress Points 256Structuring Terms to Generate Target Returns 258Valuation Methods and Other Voodoo Arts 260The Drivers of Valuation 261The Simplified Form of the Venture Capital Method of Valuation 262Comparable Valuations of Similar Investments (Comps) 264Discounted Cash Flow Method 266Convertible Loan 268Equity: Preferred Stock 270Liquidation Preference 273Antidilution Protections 277Milestone-Based Financing: Risk Mitigation or Distraction 279Governance and Control: Protecting Your Securities 280Exit-Related Provisions 281Other Terms 284Syndicating Investments 285Keeping Term Sheets Simple 286The Closing Process: After the Term Sheet 289Notes 291CHAPTER 20 Serving on the Board 295Self-Education: Preparing for Your Board Role 296Roles and Responsibilities of a Board Member 297Legal Requirements of Board Service 298Notes 302CHAPTER 21 Board Culture, Composition, and Orientation 303Toward a Better Board Culture 305A VC Reports to LimitedPartners and the Venture Capital Firm 309Importance of Independent Directors 309Notes 310CHAPTER 22 Board Value Creation and Evaluation 311Good Governance as the First Step toward Value Creation 313The CEO's Perspective on VC Value Add 314Board Self-Evaluation 317Notes 318CHAPTER 23 Challenges in the Boardroom 321Challenges among Shareholders 322Managing CEO Transition 326Best Practices in Managing Transitions 328Alignment of Exit Method, Timing, and Exit Value 329Notes 330CHAPTER 24 Exit Strategies 333Preconditions for an Exit 334Secondary Markets 339Notes 342CHAPTER 25 Acquisitions: The Primary Path to an Exit 343The Sell Process 349When an Acquirer Comes Knocking 353The Buy-Side Acquisition Process 354Deal Killers 358Notes 359CHAPTER 26 Initial Public Offering 361The IPO Process: The Long and Winding Road 362Steps to an IPO 363Not an Endgame, but a Financing Event 366Timing the Market 367IPO Underpricing and Dutch Auctions 367Information Asymmetry: The Bigger Fool Theory of IPO Underpricing 369The Dutch Auction: Eliminate the Pop and Those Middlemen 370Post IPO: Should VCs Stay Engaged? 371Notes 373CHAPTER 27 Human Psychology 375Emotions versus Logic 375Reciprocation, Obligations, and Indebtedness 376A VC with Ego: Why Should I Eat Your Leftovers? 376Conformity (or Groupthink) 377Rock Stars in the Business 378That Overhyped Rolodex is Not as Useful as You Think 378Notes 379Afterword 381About the Author 385About the Companion Web Site 387Index 389