Building Wealth through Venture Capital

A Practical Guide for Investors and the Entrepreneurs They Fund

Leonard A. Batterson, Kenneth M. Freeman

• Publisher: Wiley
• Year: 2017
• ISBN:
  9781119409366
• Edition: 1
• Topic: Business
• Subtopic: Finanza d'impresa
• Index: Business

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.

PART I
Understanding the Major Players

CHAPTER 1
The 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 2
The 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.

Springsteen and Jobs listened to their passions and followed the beat of their own distant drum, and that made all the difference. Springsteen put it this way: “I wanted the singular creative and decision‐making power of a solo artist, but I also wanted the live, rambunctious gang feeling that only a real rock‐'n'‐roll band can deliver. I felt there was no reason you couldn't have the best of both worlds, so I signed as a solo artist and hired my longtime neighborhood running pack as my band (the E‐Street Band).”

Springsteen and Jobs both wanted it—insisted on it—their way, pursuing single‐mindedly their vision, which guided subsequent direction and evolution. Their passion and drive gave them the power to pivot when times became tough, as is so often needed in a new entrepreneurial venture, as well as to bring others along with them. In Jobs' case, the almost‐mystical persuasion of his “reality distortion field” led investors, employees, and ultimately consumers to believe almost anything he told them.

Motivated by the Opportunity to Make a Positive Difference

Often the best investments are those where the entrepreneur is way out on the leading edge of the possible. These breakout deals are generally priced right, with low early valuations/share price, and yet have the potential to disrupt or reinvent existing businesses and sometimes even entire industries.

These breakout developments represent potential opportunities for big profits whil...