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Name: Secrets of Sand Hill Road
Rating: 4.4 (139 reviews)
Author: Scott Kupor

Scott Kupor

Venture Capital and How to Get It

4.4 (139 ratings)

19 mins

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Secrets of Sand Hill Road
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What’s in it for me? Discover the life cycle of venture capital from an industry insider.

In the late fifteenth century, Queen Isabella of Spain provided a businessman with capital for a very risky business venture. Some might even say that she was the world’s first venture capitalist. The businessman in question? Christopher Columbus. The venture? To find a shorter route to India in order to save money and time in trading goods. And the risk of failure? Extremely high!

Fast-forward to today’s world of venture-capital-backed start-ups. Failure may not result in death on the high seas, but the risk is still very high. In fact, nearly 90 percent of start-ups fail.

That’s where good venture capitalists, or VCs, come in. They provide capital in the form of money so that promising founders can bring their ideas to life. In return, the VCs receive an ownership stake in the company. In addition to providing funding, VCs advise founders on long-term decision-making, and how best to go about reaching strategic goals.

For many in the start-up world, the inner workings of VCs are a bit of a mystery. Fortunately, the author, Scott Kupor, happens to work at one of the biggest names in VC. In these blinks, you’ll learn some of his insights into the life cycle of VC-backed companies.

Along the way, you’ll discover

what the Y Combinator is, and how it tipped the VC landscape in favor of entrepreneurs;
why the author’s firm decided to invest in Airbnb; and
how to prepare for your first VC pitch.

The nature of venture capital has changed over the last few decades.

Nearly half a century ago, in the early 1970s, Silicon Valley found itself host to a number of new businesses operating in the world of venture capital. For the next thirty years, a very small number of these companies held the vast majority of venture capital in Silicon Valley. This meant, of course, that a select few companies had a lot of power over which entrepreneurs received funding.

But starting in the early 2000s, all this began to change. Two converging phenomena started coming together, transforming the nature of the VC-entrepreneur relationship.

Firstly, rapid advances in technology meant that the amount of capital required to found a start-up began to decline. On one side, servers, networking and data center space were getting cheaper by the day; on the other, with the advent of cloud computing, start-ups no longer needed office space to store their data on-site, thus saving on rent. All of a sudden, founding a start-up was less reliant on VC backing than it had been in the past.

The second development that transformed the VC-entrepreneur relationship was the founding of the Y Combinator, or YC, in 2005. The YC is a school that teaches entrepreneurs how to found companies and secure VC funding. Famous alumni include the founders of Airbnb and Dropbox. The YC helped a once-dispersed entrepreneurial community come together to share knowledge and, in doing so, also helped even the balance of power between VC firms and entrepreneurs.

It was at this point that the author’s VC firm entered the scene. In 2009, investors Marc Andreessen and Ben Horowitz founded Andreessen Horowitz. Detecting a change in the Silicon Valley landscape, they realized that VCs needed to provide more than just capital to entrepreneurs. Sure, having CEOs with vision and good product-market fit was still as relevant as ever. But they might lack knowledge in other important areas like recruiting, marketing or sales.

This is where VCs like Kupor enter the equation. At Andreessen Horowitz, it’s his job to advise CEOs, particularly by helping them build networks and relationships with both people and institutions. In doing so, Andreessen Horowitz has concocted a winning formula that’s churned out several huge companies, such as Pinterest, Slack and GitHub.

There are three important things VC firms look at when deciding which early-stage companies to fund.

Founders of early-stage companies often don’t even have a product to present to potential investors. Instead, a founder usually comes to pitch an idea to VC firms with, well, precisely that – just an idea. This means that VC firms have little actual data to look at when assessing whether to invest in early-stage start-ups. Instead, they have to rely more on qualitative analyses.

The first aspect of such an analysis is all about the people involved in the company. What are the backgrounds of the founders? What evidence does their pitch provide that they’ll be able to bring their idea to market effectively? And, in particular, what makes their story stand out from the potentially dozens of other founders who’ve had the same or a similar idea?

Mastering the art of the pitch involves a delicate balance of both flexibility and determination.

If you’ve ever had the chance to pitch a business idea to venture capitalists, then you know that it’s a pretty nerve-racking experience. Perhaps you’ve recently quit a steady job to pursue your entrepreneurial dreams, and your future livelihood might rely on whether the pitch goes well or not.

Luckily, the author has heard thousands of pitches over the last ten years of working at Andreessen Horowitz, and he knows how to distinguish the good ones from the bad. In his experience, a good pitch can most easily be understood by contrasting it with a bad pitch, so let’s begin with the latter.

Term sheets can be tricky to navigate, as they concern both economic and governance aspects of any venture.

If you as a founder have been lucky enough to make a successful pitch to a VC firm, you’ll then begin the often arduous process of negotiating a term sheet. Essentially, a term sheet lays out all the rules, regulations and processes that both the VC firm and company have to abide by if the deal is to go through.

These stipulations can be pretty complicated and confusing – especially to founders, who tend to be much less familiar with term sheets than the VC firm with which they’re partnering. But term sheets can be simplified into two main components, which can make them much more comprehensible and thus level the playing field of knowledge between VCs and founders.

Maintaining a healthy CEO-board relationship is key to the success of any VC-backed company.

With a fair term sheet in hand, it’s time for the CEO to turn her attention to running her now-funded company. As well as leading her team through the day-to-day activities of the company, the CEO is of course responsible for keeping her eye on long-term vision, particularly if she is also the founder. However, a CEO’s relationship with her board of directors can sometimes complicate things – it’s thus important to make sure that both sides maintain a healthy relationship.

That’s especially true of the relationship between the CEO and the VC representatives on the company’s board. While most good boards give CEOs room to run their companies, this isn’t always the case. In many instances, VCs were themselves CEOs in the past, and can often face the temptation to involve themselves in the daily affairs of companies they’ve invested in. But at the end of the day, VCs are not meant to be aware of all the nitty-gritty day-to-day happenings of a company – that is the job of the CEO. So it’s of vital importance that VCs keep a safe distance, and give CEOs space to do their thing.

At the end of a successful VC life cycle, boards are faced with two options for how companies may continue in the future.

Let’s assume for a moment that your company isn’t bankrupt and being shut down after a few rounds of VC funding that eventually led nowhere. If this is the case, congratulations – your company is in the 10 percent of start-ups that don’t fail.

If you’re now the CEO of a profitable business that can survive independently without venture capital, it’s likely you’re being offered potential acquisition deals. In fact, 80 percent of successful VC-backed start-ups go on to be acquired by bigger companies.

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What is Secrets of Sand Hill Road about?

Secrets of Sand Hill Road (2019) unveils the inner workings of one of Silicon Valley’s most iconic streets. Many of the area’s top venture capital firms are located here and have played a part in funding some of the biggest names in tech today. VC insider Scott Kupor has worked with many of them, and these blinks share their secrets – allowing the rest of us to decipher the mystery of venture capital, how to get it and why it can make or break a company.

Who should read Secrets of Sand Hill Road?

Founders and CEOs seeking advice on how to navigate the world of venture capital
Beginner venture capitalists looking for wisdom from an industry veteran
Tech enthusiasts curious about how their favorite apps came to fruition

About the Author

Scott Kupor is managing partner at Andreessen Horowitz, one of the biggest names in venture capital, which holds more than $7 billion in assets. Over the years, they’ve invested in companies that have become household names, such as Facebook, Twitter, Airbnb and Groupon. Kupor also teaches courses on venture capital at Stanford University and co-founded the university’s Venture Capital Director’s College.

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Money & Investments Entrepreneurship

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