SECOND EDITION 80+ Customer Ratings on Amazon with over 50 Five-Star reviews “The Business of Venture Capital is a comprehensive book with data, industry trends, and insights from leading VCs and LPs – a must have for practitioners.” —David York, Managing Director, Top Tier Capital Partners, a Fund-of-Funds with over $2 billion under management “Whether you are a practitioner or a student of the venture capital industry, this book offers innumerable insights into the art of the deal.” —Scott Kupor, Managing Partner, Andreessen Horowitz “A valuable resource for beginners and experts alike, The Business of Venture Capital addresses the complexities and chal- lenges of being a successful venture capitalist.” —Michael Kim, Managing Partner, Cendana Capital, a next generation Fund-of-Funds “Mahendra’s research into today’s most active investors reveals how the Venture Capital model is evolving. It’s the closest book I’ve found to a User’s Manual for VCs.” —David Cowan, Bessemer Venture Partners “Combines concrete examples and deep insights of industry leaders – a must-have for any venture investor or practitioner.” —Karim Faris, General Partner, Google Ventures “Mahendra demonstrates how skill, discipline, and often luck and intuition can help to create successful venture capitalists. This is engaging and enjoyable.” —Jon Callaghan, True Ventures “Detailed yet accessible description of the many facets of ven- ture capital – from the nuanced considerations of LPs to the intricate mechanics of the entrepreneurial companies they bet on.” —Amish Jani, Founder and Managing Director, FirstMark Capital FIRST EDITION “If you read only one guide to becoming a successful VC, this is the one to read.” —Paul Maeder, Chairman, National Venture Capital Association (NVCA) “Captures the LP mindset succinctly – any GP or aspiring VC can benefit from this book.” —Timothy Recker, Chairman, Institutional Limited Partners Association (ILPA) “... packs the insights and wisdom of those who have done it, not once but multiple times.” —Frank Caufield, cofounder, Kleiner Perkins Caufield and Byers “An immensely useful and comprehensive guide.” —Mark Florman, CEO, British Venture Capital Association (BVCA) The Business of Venture Capital Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally com- mitted to developing and marketing print and electronic prod- ucts and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisti- cated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. THE BUSINESS OF VENTURE CAPITAL THE ART of RAISING a FUND, STRUCTURING INVESTMENTS, PORTFOLIO MANAGEMENT, and EXITS THIRD EDITION Mahendra Ramsinghani Copyright © 2021 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scan- ning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authoriza- tion through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi- cally disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial dam- ages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762- 2974, outside the United States at (317) 572-3993, or fax (317) 572-4002. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http:// booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Library of Congress Cataloging-in-Publication Data Names: Ramsinghani, Mahendra, author. Title: The business of venture capital : the art of raising a fund, structuring investments, portfolio management, and exits / Mahendra Ramsinghani. Description: Third edition. | Hoboken, New Jersey : John Wiley & Sons, Inc., [2021] | Series: Wiley finance series | Includes bibliographical references and index. Identifiers: LCCN 2020030565 (print) | LCCN 2020030566 (ebook) | ISBN 9781119639688 (hardback) | ISBN 9781119639718 (adobe pdf) | ISBN 9781119639701 (epub) Subjects: LCSH: Venture capital. Classification: LCC HG4751 .R36 2020 (print) | LCC HG4751 (ebook) | DDC 332/.04154068–dc23 LC record available at https://lccn.loc.gov/2020030565 LC ebook record available at https://lccn.loc.gov/2020030566 Cover Design: Wiley Cover Image: © piranka/Getty Images Author Photo: Courtesy of Mahendra Ramsinghani 10 9 8 7 6 5 4 3 2 1 In the memory of my parents, who reminded me to put knowledge above wealth, people above profits, truth above power, and service above self For Amar and Geeta, who gave me wings & for Deepa and Aria, who bring the light and the song Contents Foreword xiii Preface xv Acknowledgments xxvii Part One The Making of a VC 1 The Business of Cash and Carry 3 2 Why Choose a Career in VC 11 3 Attributes of Successful VCs 15 4 Welcome to the Land of Ad-Venture 21 5 Developing Your Investment Career 41 6 A Business Where Enemies Accumulate 57 7 Generational Transfer and Succession 63 Part Two Raising Your Venture Fund 8 LP Universe 73 9 LPs of Choice: Fund of Funds 89 10 How LPs Conduct Fund Due Diligence 95 11 Defining Your Fund’s Investment Strategy 99 12 Investment Team Diligence 119 ix x CONTENTS 13 Fund Size and Portfolio Construction 129 14 Performance Analysis 137 15 Terms of Fund Investment 155 16 The Venture Firm’s Ethos, Culture, and Values 173 17 Raising Your First Fund 193 18 The Fundraising Roadshow 205 19 Why LPs Seek First-Time Funds 221 20 Sourcing Investment Opportunities 229 Part Three Building Your Portfolio 21 Due Diligence Cheat Sheet 255 22 Diligence 259 23 Management Team Diligence: Assessing the Intangible 269 24 Market, Product, and Business Model Analysis 293 25 Terms and Conditions Apply 303 26 Structure of the Term Sheet 309 27 Buy Low, Sell High 317 28 The Closing Process 353 Part Four The Art of Value Creation 29 Serving on Boards 357 30 Board Culture and Orientation 367 31 Let Me Know How I Can Be Helpful: Value Creation 377 32 Challenges in the Boardroom 391 CONTENTS xi Part Five Exits: Liquidity Events and Champagne 33 Exit Strategies 407 34 Acquisitions 417 35 Initial Public Offering 435 36 Secondary Sales 449 Notes 451 Index 485 Foreword Now in its third edition, The Business of Venture Capital builds on the foundational best practices in venture investments, offering new, valuable tools along with some wit and wisdom. The scope of the venture capital business is wide, and often opaque. For example, how do our investors (limited partners or LPs) make decisions? What challenges do they encounter, and how should a general partner (GP) understand their universe? How can a practitioner build a “point of view” on the market, identify emerging trends, compete to win the best opportu- nities, and nurture them to success? What biases and cognitive traps spring up in our business? How should we think prob- abilistically? What skills are critical to our business, and how does one develop such skills? Which parts of our business are at the mercy of the markets? In this book, you will find answers to many of these ques- tions. But, as with any good book, it will leave you thinking about many other questions. You'll ultimately need to figure out how to apply many of the mental models about which Mahendra writes to your own situation. Over the past decade, Mahendra has had to answer many of these questions, both as an investor and a practitioner. When the first edition was released nearly a decade ago, there was no book on VC and the blogosphere was just in its infancy. So, he heeded Nobel Prize winner Toni Morrison's advice: “If there's a book that you want to read, but it hasn't been written yet, then you must write it.” xiii xiv FOREWORD This book includes views of over 50 leading LPs and GPs, compiled in a jargon-free, digestible format to benefit all those exploring VC as a path, whether you're a solo-GP getting ready to raise a fund or a venture partner on your first board.