Book Summary — Mastering the VC Game

You can find all my book summaries — here.

Jeffrey Bussgang, who co-founded two startups (one IPO) and then joined Flybridge Capital Partners, provides insights into startup financing from both sides of the table. The book was written in 2010 and the VC industry has changed quite a bit since, but most of his learnings still remain relevant.

1 paragraph summary:

‘Mastering the VC game’ provides a great overview of the VC world and how to find the right partner in your startup journey. In short — you have to find a partner who you have chemistry with, hit the VCs sweet spot, be open, honest and don’t be afraid to ask for help.

1. Entrepreneurs — The Itch

Reid Hoffman, founder of LinkedIn, observed that an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.

There are certain characteristics of entrepreneurs:

A) Visionary optimism

• Genuine belief that they can make the world a better place
• Although the positive traits are displayed to the world, more negative concerns may also drive the founder
• Optimism that everything will go right, often accompanied by raging feat that everything will go totally wrong (that paranoia is part what drives them forward in the positive direction)

B) Tremendous confidence in oneself that can inspire confidence in others

• entrepreneurs have to persuade VCs to invest into a glimmer of an idea, same for customers

In the face of obstacles, distractions, and naysayers, great entrepreneurs follow their passion no matter the odds.

C) Huge passion for the idea or phenomenon that drives them forward

• Don’t hide what you’re doing. If you think you’re doing something interesting, get it out in the open, shout it out from the rooftops, and solicit as much feedback and input as possible.

D) Desire to change the game, so much it changes the world

• It is always more impressive to investors when you are so confident in your idea and your ability to build it that you just go ahead and do it on a shoestring budget and have something tangible to show investors.
• Great entrepreneurs think: The money is nice and appreciated, but it’s almost never about the money. It’s about passion, following a dream, and changing the world.

2. VCs — Inside the VC Club

VC entails a very different kind of excitement than entrepreneurship does. It offers intellectual adventure, exposure to amazing people with brilliant ideas, and the chance to make a positive impact on the world. I have found far fewer up and downs as a VC as compared to being an entrepreneur. For the VC there’s a greater emotional detachment — to which it has taken time for me to adjust.

VC characteristics (at least back then):

• intelligent, curious, omnivorous, driven by success, competitive and geeky
• emerge from the same schools (ivy league)

Mindset and decision making

• Get investment professionals with diverse backgrounds and perspectives
• Robust group discussions and debates will yield better investment decisions than any individual by themselves

Roles:

• General partners (GP) — most senior, make investment decisions, sit on boards
• Principles (GP in training) — seek out investments, do due diligence, 3–6 years of experience post MBA
• Associate — no authority to make investment decisions and support the rest
• Entrepreneur in Residence (EIR) — former startup CEO, hired for 6–12 months to think about next idea or joining a portfolio company or finding new investment opportunities
• Limited Partner (LP) — where the money comes from — pension funds, universities, wealth funds, funds of funds, wealthy families

There’s no school for it. Every truly successful venture capitalist has been mentored in turn by another successful venture capitalist over a long period of time.

Important: every VC company has its own profile (area of interest/expertise) and they all have a sweet spot re check size, based on the funds under management

3. The Pitch

Passion for the market, a technology, and the qualities of the entrepreneur play a big role.

Pause 15 minutes into the pitch and check in with the BCs to see if they think the pitch is interesting and going anywhere — be open about it and ask straight out.

sweet spot + compelling vision + right people = funding

Even if everything looks good, VCs do not like to be rushed into a decision. They prefer to see the company and the team evolve over time, like a movie, as opposed to a snapshot taken at the discrete point in time.

Best Practice

One way to think about startups is like a giant experiment. VCs much prefer to invest in experiments that are:

1. specific and discrete
2. clear assumptions
3. not too costly
4. outcomes which are measurable over a short period of time

4. Doing the Deal

Do your due diligence on the VC! (call portfolio companies, do they have the necessary expertise?, reputation?)

Most importantly look for chemistry — thinking styles, ways of working, enthusiasm for the business and shared view of the future.

The VC provides values in four ways:

1. Strategy

VC can become the CEOs thought partner, testing issues and challenging assumptions — they can focus on value creating, not day to day

Best founders listen to all the feedback and know how to process it

2. Recruiting

They can help find and interview senior executives.

3. Business Development

Introductions to flagship customers, partners, channel partners and strategic acquirers

4. Future Financing

Can fund you again or be great coach for future fundraising

This can create a weird dynamic (like the inside out dance — VC doesn’t want to fund, then flips once there is market interest and funds it after all), so openness and honesty are key.

Term sheets

It’s all about economics and control.

Economics

• Total valuation = pre-money valuation, option pool, $ invested
• Liquidation preference — who receives money first (standard = 1x non-participating), be careful here to align the VC’s incentives with yours

Control

• Composition of the board directors (can hire, fire CEO and approve major deals)
• Protective provisions — can be inserted by VCs, only they can control (be careful here)

5. Startup Journey — the Soap Opera

3 Stages

1. The Jungle — no set path, change directions, make adjustments, casualties
2. The Dirt Road — shipping product, generating revenue, clear strategic direction, twists, turns and bumps but not as chaotic as jungle
3. The Highway — full speed ahead, less room to manoeuvre

3 Directors

1. Domain expert — many seek this out, but after a while, he can be very repetitive and inflexible
2. Cheerleader — always gives encouragement, after a while no real value
3. Truth Teller — gives you tough feedback and holds you accountable

3 Classic Plots

1. Fall from Grace — things start going wrong, board is worried, tigher leash, start having their own meetings, CEO threatened, fires VP of sales (no numbers!), then VP of engineering (no shipping!), trust erodes, board and CEO stop communicating, CEO fired, replacement can’t be found fast enough
2. High Noon Shoot-out — professional CEO is instated, founder stays on as senior management, CEO and founder clash, board interview senior management team to decide what’s going on, trust erodes, board fires founder, 6 months later CEO quits because it took the board so long to fire founder and trust is lost
3. VC mutiny — VCs become irritated by lacking performance, before mutineers walk out, performance picks up, they change their minds, they become much more active and vocal, senior management team becomes resentful, team starts leaving starting exodus

How to Avert the Soap Opera

• Be open and honest
• Don’t be afraid to ask for help, especially if you know you’re in over your head
• Keep board up-to-date — manage them — no secrets, no surprises

6. Exits

Exits are super emotional for the founder and anticipated by the VC.

Buy Out

5 considerations to make a decision if to sell:

1. Do you still love running the business?
2. Do you passionately believe in the business’ potential?
3. How much is the offer compared to where you can be in 1–2 years?
4. Does the business require more capital? How easy is it to get?
5. Do the people around you encourage you to sell it? (VC, senior management, family, etc)

IPO

This does not mean an immediate exit for the founder. You can’t just sell your shares, because you’re going to get scrutinised publicly.

Suddenly, you have public stakeholders too and all meetings can be recorded and streamed publicly.

If you really want “out” you first have to IPO and then sell the company a couple of years later.