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The Entrepreneurial Bible to Venture Capital


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Table of Contents

List of Contributors and Interviewees xi
Foreword by Andre Jaeggi xiii
Introduction 1

1 Start Me Up! 3
Why Now Is a Great Time to Start a Company, Be a Venture Capitalist, Be an Angel Investor, or Invest in a VC Fund 3
BranchOut: The Textbook Case Study for Superb Angel Advisory Round and VC Funding 7
Add Angel Dignitaries to Your Series A VC Round 10
Why Entrepreneurship Is Becoming Increasingly Important and Why Angel Investing and Venture Capital Are Here to Stay 11
Getting Started 12
We've Got to Start a Company 13
When to Start Up? 14

2 Angels, Mortals, and Super Angels 17
The "Startup Cambrian Explosion" 18
Ron Conway, Super Angel 20
Accelerators 22
Tech Stars and the Rise of Accelerators 24
Online Funding Resources 28
Crowdfunding: Everything You Always Wanted to Know but Were Afraid to Ask 28
Practical Ideas and Advice on Raising Angel Funding 35
How to Recruit and Negotiate with Advisors 37
Convertible Note Versus Priced Round 37
Valuation Ranges for Pre-Money Caps on Seed-StageConvertible Note Financings 40
Don't Raise Angel Funding at Too High a Valuation 41
Raising Angel Funding 41
Steve Jobs Rated by His VC 43
The Team Means Everything 44
A Balanced Team 44
Recruit a First-Class Team Contingent upon Funding 51
Choose Your Investors Wisely 52
Building Blocks of Pre-Money Valuations 53
Pitch Lawyers before Pitching Angels 53
Legal Fees for Startups: Fixed Pricing 55
Legal Factors to Consider When Choosing an Angel Investor 56
Smart Angels Flock Together 57
Pledge Funds 58
The Importance and Art of Networking 58
Never Turn Down a Smart Strategic Investor 59

3 How Venture Capital Works 61
Understanding VC Titles 66
To the Victor the Spoils 67
The Stock Market and Venture Capital 69
Where Do VCs Get Their Money? 69
Why Are VCs So Arrogant? 71
Old School Venture Capital: Pitch Johnson on the Early Days of Silicon Valley 72
Romans Five Forces Venture Model: Incentives Are Not Aligned 77
Corporate VCs 79
Family Offices 80
The Difference between Venture Capital and Private Equity 81
A Perspective on the Difference between VC and PE 83
What About Venture Debt? 85
This Is Not Your Mother's Venture Debt 86
Pick the Right Partner the First Time 89
Questions You Should Ask Your Venture Debt Partner 90
Venture Debt Terminology and Term Sheets Revealed 91
Why Venture Debt Is an Attractive Asset Class 95
Fund of Funds 96
More Than Matchmakers Between GPs and End Investors 97

4 What to Bring to the Dog and Pony Show! 103
Business Plans 103
Executive Summary 105
Investor Slide Deck 105
Financial Model 106
Characteristics of the Best Spreadsheet Models 109
Investor Control Schedule 114
Demo and Video 115
The Pitch 116
Five VCs Explain What They Really Think About Your Pitches 118

5 Practical Ideas and Advice on Raising VC Funding 121
How Should an Entrepreneur Approach Negotiation of the Key Terms? 123
How to Negotiate with a Venture Capitalist 124
Don't Tell VCs Which Other VCs You Are Talking To 127
Confidentiality: No NDAs or Secrets in the Fast Lane 128
Bridge Financing 129
Living from Round to Round 129
Employ an Army of Interns 130
Customer Financing 130
Dual Tracking 132
Venture Fratricide 132

6 Corporate Governance: Who's The Boss? 135
The VC That Wanted a Board Seat 136
Engaging the Board of Directors 140
Making Your Board Work for You 146

7 Company Building and Growing Value 149
Distribution Versus Product 149
Skype: Where is Your Button on Kazaa? 150
Facebook: The Balance Among Product, End User Experience, and Advertising 151
MySpace: Pimp Out Your Contacts 153
YouTube: How to Extend Beyond Your Domain 156
The Marketing Myth 157
The Blackmail Business Model 159
The Nine-Year Overnight Success 160
Just Grab the Bird and Lower Yourself Out of Those Clouds 161
How to Come Up with True Innovation That Drives the Rest 162
Picking a Name 163

8 Which Way to the Exit? 165
M&A Is the Most Likely Positive Outcome for Most Entrepreneurs 165
Practical Ideas and Advice When Selling Your Companyvia M&A 165
Three Kinds of Business Buyers 170
How Instagram Secured a $1 Billion Valuation 172
Advice on the $300 Million Sale of Adify 173
How Liquidation Preferences and Carve Outs Play inExit Scenarios 174
How to Smoke Out the Serious VCs in Your Syndicate 175
Large Trade Sales of Private, Venture-Backed MedicalDevice Companies 176
Acqui-Hire Early Exits: VCs Versus Founders 176
Several Perspectives on Acqui-Hires 185
Seek Truth in Facts: Statistics on Venture Exits 186
Fund Physics: Expect Improved IRRs from Smaller Funds 188

9 Do We Need All These Lawyers? 191
What Are the Key Terms in a Term Sheet? 192
No Time Like Right Now to Settle a Legal Dispute 198
Dumb Licensing 200
Letting a Licensee Get Out of Control 201
Sometimes You Have to Go Downhill to Get to the Top of the Next Hill 202
It Is Better to Be Lucky Than Good 203

10 Ladder to Liquidity: The Secondary Market 205
How Early-Stage Angels and VCs Can Get Their Cash Back Prior to an Exit 205
To Sell or Not to Sell: The Secondary Market for Startups 208
The Direct Secondary Market: Selling Some of Your Sharesfor Cash Before a Liquidity Event 210
Founders' Preferred: Best Structure for Founder Early Liquidity 211
Direct Secondary Funds 213
When to Take Your Chips off the Table 213
The Founders Club Equity Exchange Fund Model 214

Afterword 219
Acknowledgments 221
Index 223

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