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The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

Book Description

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.

    Table of Contents

    1. Foreword
    2. Preface
    3. Acknowledgments
    4. PART ONE Raising the Venture Fund
      1. CHAPTER 1 The Basics
        1. Raise the Venture Fund
        2. Find the Right Investment Opportunities
        3. Generate Financial Returns
        4. Roles and Responsibilities
        5. Compensation
        6. Notes
      2. CHAPTER 2 Getting In
        1. Entry-Level Positions: Analysts and Associates
        2. Internships and Campus Recruitment
        3. Midlevel Positions: Principals and MDs
        4. Honing Investment Expertise within Allied Fields
        5. Senior Partner versus Junior Associate
        6. What about Luck?
        7. Notes
      3. CHAPTER 3 Building Your Career as a Venture Capitalist
        1. Intellectual Stimulation and Financial Returns
        2. Aptitudes and Attitudes of Successful Practitioners
        3. The Challenges of a VC Career
        4. Notes
      4. CHAPTER 4 The Universe of Limited Partners
        1. An Overview of Alternative Assets
        2. Sources of Capital: Limited Partners
        3. Fund of Funds
        4. FoF Models: Variation of a Theme
        5. Comparison of Limited Partnerships
        6. Notes
      5. CHAPTER 5 How Limited Partners Conduct Fund Due Diligence
        1. Sourcing and First Screens
        2. Evaluating the Venture Firms
        3. Notes
      6. CHAPTER 6 Defining Your Fund's Investment Strategy
        1. Sector-Based Strategy
        2. Stage and Geography
        3. Notes
      7. CHAPTER 7 How Institutional Investors Evaluate Fund Managers
        1. The Fund Management Team Dynamics: Stability, Skill Set, and Alignment
        2. Notes
      8. CHAPTER 8 Fund Size and Portfolio Construction
        1. Fit within the LP's Current Portfolio
        2. Market Timing
        3. Why LPs Terminate Existing Relationships
        4. Notes
      9. CHAPTER 9 Performance Analysis
        1. Individual Performance and Attribution
        2. Fund-Level Performance
        3. Comparison Benchmarks
        4. Public Market Equivalents
        5. The Quest for the Elusive Top Quartile Managers
        6. All the Managers Are Above Average
        7. Notes
      10. CHAPTER 10 Emerging Managers: A Promise of the Future
        1. Why LPs Seek Emerging Managers
        2. How Investors Rank Emerging Managers
        3. Institutional Allocations for Emerging Managers
        4. A Tale of Two Emerging Managers
        5. The Global Emerging Manager: 500 Startups
        6. Notes
      11. CHAPTER 11 The Venture Capital Firm, Operations, and Culture
        1. The DNA of a Firm
        2. Governance of the Firm
        3. Notes
      12. CHAPTER 12 The Fund-Raising Process
        1. Build Your Target List of Investors
        2. Fund Marketing Materials
        3. Presentation Slides
        4. Making the Presentation Pitch: Drink Your Own Kool-Aid®
        5. Attracting the Lead Investor: Your “Nut”
        6. Communicate, Create, and Maintain Momentum
        7. Announcing the Close
        8. Notes
      13. CHAPTER 13 Terms of Investment: The Limited Partnership Agreement
        1. Key Terms
        2. Fund Financial Terms
        3. Fund Governance Terms
        4. What Institutional LPs Seek
        5. Offering Sweeteners to Attract LPs: A Double-Edged Sword
        6. What Matters Most
        7. Notes
      14. CHAPTER 14 The Role of Placement Agents in Fund-Raising
        1. Agents Bring Market Intelligence and Relationships
        2. Ethical Challenges
        3. Notes
    5. PART TWO Making Investments
      1. Note
      2. CHAPTER 15 Sourcing Investment Opportunities
        1. The Best Source: The Network
        2. Accelerators and Demo-Days
        3. The VC e-Marketplace: AngelList, Kickstarter, and FundersClub
        4. Angels
        5. The Fountainheads of Academia and Research
        6. Corporate Research
        7. Trade Conferences
        8. Pitch Me, Bro
        9. Competitions: From $40 Million Moonshot to $10K
        10. Cold Calling
        11. You Win Some, You Miss Some
        12. Notes
      3. CHAPTER 16 The Art of Conducting Due Diligence
        1. The Due Diligence Checklist
        2. What Is Important: Jockey, Horse, or Markets?
        3. Who Invests in Rap Music and Shaving Blades?
        4. Notes
      4. CHAPTER 17 Management Team Diligence
        1. Assessing Intangibles
        2. How to Assess the Jockey
        3. Serial Entrepreneurs versus First-Time Entrepreneurs
        4. What about Charisma?
        5. The Importance of Conducting Background Investigations
        6. Notes
      5. CHAPTER 18 Diligence beyond Management
        1. Assessing the Market
        2. Evaluating the Idea or Product
        3. The Business Model
        4. Financial Projections
        5. Do Business Plans Matter?
        6. Notes
      6. CHAPTER 19 Structuring Investment Transactions
        1. The Spirit of the Term Sheet
        2. Negotiation Stress Points
        3. Structuring Terms to Generate Target Returns
        4. Valuation Methods and Other Voodoo Arts
        5. The Drivers of Valuation
        6. The Simplified Form of the Venture Capital Method of Valuation
        7. Comparable Valuations of Similar Investments (Comps)
        8. Discounted Cash Flow Method
        9. Convertible Loan
        10. Equity: Preferred Stock
        11. Liquidation Preference
        12. Antidilution Protections
        13. Milestone-Based Financing: Risk Mitigation or Distraction
        14. Governance and Control: Protecting Your Securities
        15. Exit-Related Provisions
        16. Other Terms
        17. Syndicating Investments
        18. Keeping Term Sheets Simple
        19. The Closing Process: After the Term Sheet
        20. Notes
      7. CHAPTER 20 Serving on the Board
        1. Self-Education: Preparing for Your Board Role
        2. Roles and Responsibilities of a Board Member
        3. Legal Requirements of Board Service
        4. Notes
      8. CHAPTER 21 Board Culture, Composition, and Orientation
        1. Toward a Better Board Culture
        2. A VC Reports to Limited Partners and the Venture Capital Firm
        3. Importance of Independent Directors
        4. Notes
      9. CHAPTER 22 Board Value Creation and Evaluation
        1. Good Governance as the First Step toward Value Creation
        2. The CEO's Perspective on VC Value Add
        3. Board Self-Evaluation
        4. Notes
      10. CHAPTER 23 Challenges in the Boardroom
        1. Challenges among Shareholders
        2. Managing CEO Transition
        3. Best Practices in Managing Transitions
        4. Alignment of Exit Method, Timing, and Exit Value
        5. Notes
      11. CHAPTER 24 Exit Strategies
        1. Preconditions for an Exit
        2. Secondary Markets
        3. Notes
      12. CHAPTER 25 Acquisitions: The Primary Path to an Exit
        1. The Sell Process
        2. When an Acquirer Comes Knocking
        3. The Buy-Side Acquisition Process
        4. Deal Killers
        5. Notes
      13. CHAPTER 26 Initial Public Offering
        1. The IPO Process: The Long and Winding Road
        2. Steps to an IPO
        3. Not an Endgame, but a Financing Event
        4. Timing the Market
        5. IPO Underpricing and Dutch Auctions
        6. Information Asymmetry: The Bigger Fool Theory of IPO Underpricing
        7. The Dutch Auction: Eliminate the Pop and Those Middlemen
        8. Post IPO: Should VCs Stay Engaged?
        9. Notes
      14. CHAPTER 27 Human Psychology
        1. Emotions versus Logic
        2. Reciprocation, Obligations, and Indebtedness
        3. A VC with Ego: Why Should I Eat Your Leftovers?
        4. Conformity (or Groupthink)
        5. Rock Stars in the Business
        6. That Overhyped Rolodex Is Not as Useful as You Think
        7. Notes
    6. Afterword
    7. About the Author
    8. About the Companion Web Site
    9. Index
    10. End User License Agreement