Book Summary: Secrets of Sand Hill Road

A recommended read for first time founders to understand everything about venture from an entrepreneur’s perspective. Right from whether their business is the type to be funded by venture, how VCs evaluate deals, how they are motivated or pushed into looking at deals on the basis of expectations by their LPs. Most importantly, learning how to read a term sheet and watching out for red flags. Entrepreneurs fundraise only a times in their lives while VCs take part in the process on a daily basis, hence it becomes even more crucial for entrepreneurs to understand the mechanics of the workflow (pitch meetings, negotiations, control of the company and relationship).

The author is a valley old timer Scott Kupor. He’s currently a managing partner at the firm Andreessen Horowitz and in the past served as an executive at HP and Opsware (company started by Marc before the dot com burst).

Understanding the how the math works for a VC will help any entrepreneurs in shaping their pitch and evaluating whether their business is actually suited for venture or not.

One of the best parts of this book are the real examples he uses, about the deals they saw at a16z, using an actual termsheet to show the relevant parts, et al.

A small request for Scott Kupor if he happens to read this: write another book on what it’s like to raise from other sources such as private equity.

Here is my extremely brief summary, but for someone who’s planning on starting up, this should be a must read.

• Debt vs equity: If you can generate near term cash flows debt might be a better option. You retain complete control
• VC is just another asset class for high beer worth individuals and institutions. They’re a very risky asset as their returns follow a power law curve
• VCs have a lot of positive signaling effect that makes it very difficult for a new entrant to prove themselves in the market
• Missing out on opportunities is far more penal than having some false positives. In fact more than half the time, VCs are wrong about their assessment of the company.
• VC is a zero sum game. This sometimes drives deal heat and over valued startups.
• You have to be an accredited investor to invest in a VC fund (net worth greater than 1 million).
• Diversification in VC firms is a bad idea
• How VCs decide where to invest: In early stages people and team matters the most

Term Sheets

• Preferred shares are different from common shares the co founders hold
• Debt usually has a preference on the order of paying back
• Convertible debt is where debt is converted into equity at the next funding round valuation. Capped means call on valuation, so that if an investor comes in at a high valuation for the company, the debt investor gets a discount.