Secrets Of Sand Hill Road
One of the many great things about vacations is reading books. Vacation is the one time that I can really prioritize reading books (as opposed to everything else I read).
I just finished Scott Kupor‘s Secrets Of Sand Hill Road, a book for entrepreneurs about rasing capital from venture firms.
Scott makes the point numerous times in the book that the capital raising process is asymmetric for entrepreneurs in that they do it a few times in their career and VCs do it every day.
That is true for the pitch meetings, the negotiation process, and the post financing relationship too.
What Scott does in this book is break down every part of the process and explain it in plain english so that entrepreneurs can understand what’s going on and why it matters to them.
That last part is important, this book is written for entrepreneurs, not VCs.
Scott uses real world examples, mostly investments made over the last decade by his firm A16Z, to make the lessons he is delivering more “real.”
And he uses spreadhseet examples in one chapter and shows how various events can change the cap table for everyone.
It’s very much a “how to” book, more practical than theoretical.
There have been other books written about this topic, I like Brad Feld and Jason Mendelson’s Venture Deals, which is on its third edition now.
Jeff Bussgang’s Mastering The VC Game is also great.
You could teach an MBA or undegraduate course on capital raising for entreprenuers with these three books.
It would be a great course.
If you plan to be raising venture capital for your startup and don’t have the benefit of experience or a fantastic course on the topic, I would strongly recommend you pick up Scott’s book, or all three books, and spend some time reading them now or on your next vacation.
Fred- It’s interesting (and maybe slightly puzzling) that you’d spend time reading this material (over which you yourself are such a recognized authority).Reminds me of the old John McEnroe commercial where they ask him where he’s going to use money he saved, and he answers with a smile, “tennis lessons!”
Ah, books on raising capital from VCs???WOW!!!For years there has been LOTS of advice to entrepreneurs on how to raise capital from VCs in books, articles, VC Web sites, talks, etc.A lot of the VC Web sites have advice to entrepreneurs. E.g., recently at a VC site there has been advice:Change depends on unreasonable peopleDon’t assume — analyzeBrutal honesty trumps hypocritical politenessHave courage — Ignore conventional wisdomThrive on technological riskPeople matter — Work on what’s truly importantAim for revolutionary success — but be willing to fail And that is just a sample: There have been many such lists of advice.For too many months, I tried raising capital from VCs. I sent e-mail messages, nicely written business plans as papers, highly polished pitch decks with lots of them really short, sharp as a needle to the point, really short in number of words and foils, etc.In those efforts I had everything suggested in the advice except:(1) I’m a sole, solo founder, with experience at GE, FedEx, and IBM, as a B-school prof, and in applied math and computing for US national security. So, I have business experience. For the technical side, I’m awash in experience at a range from simple to some of the most advanced and with significant accomplishments.But I have no team of several co-founders. Sole, solo founders, no matter what their qualifications, are frowned upon. That the guy who did Plenty of Fish was a sole, solo founder is ignored. Also ignored is the fact that one of the biggest risks to a startup is co-founder disputes, and a sole, solo founder has none of those and, thus, should be favored.Lesson 1: (i) A team is much more welcome than (ii) a sole, solo founder no matter what the qualifications of (i) versus (ii) — (i) with mediocre qualifications is much more welcome than (ii) with no matter what qualifications.(2) I have the problem identified; it’s for a huge market, say, get 30 minutes a week from nearly everyone in the developed world with a smartphone or better. I have original, proprietary, crucial core technology difficult to duplicate or equal. And I have corresponding running software ready for significant production. So, however good all that is, so far I don’t have traction. And no VC is interested.Lesson 2: Given (i) lots of experience and technology and (ii) traction, significant and growing rapidly, (i) and (ii) together are nearly as good as (ii) alone!How does that go? “A kind word and a gun will get you nearly as far as a gun alone.” Or as for food, concentrate on the main dish; lots of side dishes are from not very helpful to irrelevant to not welcome.Lesson 3: So, what is wanted is a team with traction significant and growing rapidly in a huge market. Essentially everything else is irrelevant. In particular, other advice is irrelevant. Or, the attitude is, whatever else is really important must be there because of the traction.So, I gave up on VCs. I tried two projects where I would have needed VC funding. When no VCs were interested, I picked a third project where some VC funding would have helped but would not be necessary. That project is now in good shape. Since the project has no traction yet, VCs won’t fund it. Since the project has meager burn rate, heavily because I’m a sole, solo founder, the rest because the needed hard/software and digital communications are so cheap, once the project does have traction significant and growing rapidly as VCs would like, no equity funding will be needed, and term sheet details, the threat of a BoD with VCs, etc. mean that no equity funding will be wanted. I’m terrified of reporting to a BoD.Since I showed VCs essentially everything else, by process of elimination the missing item was just traction and maybe to some extent, team.Lesson 4: In a nutshell, the key, essentially in any business, is in one word, no, not plastics but a different one word, traction.Okay, lessons learned.”Cap table”? Keep it simple: Own 100% of the business.Financial management? ASAP and from then on, always have cash enough to go for at least 12 months with no revenue. Simple, basic rule: When run out of cash and can’t pay the bills, then are essentially out of business.Hiring people? For each of many issues, a lot of what will be needed can be obtained from a consultant hired for a few days or even just a few hours.Otherwise have a close knit team of bright, motivated, loyal people with a lot of internal training and then re-training.So, for “Secrets Of Sand Hill Road”, from my experience that seems to be that, no matter what VCs or anyone else says about what VCs want, the main “secret” is just that they want traction significant and growing rapidly in a huge market or, for just one word, TRACTION. The rivers of advice, such as early in this post, from VC Web sites totally misled me, had me believe that business plans having followed such advice were what they wanted to fund. Nonsense. Had I known that the traction was the main thing and a secret, then I could have saved months of my time and time of dozens of VCs.
Maybe have someone other than yourself make the pitch. Can’ t hurt.
If you need capital, the CEO needs to do it. That’s their job.
Not all their job but in cases of interest to VCs usually a lot of their job.And, yes, the guy who did Plenty of Fish didn’t have to worry about fund raising or VCs. Eventually maybe an investment banker when he sold out for ~$550 million, but not VCs.I used to go to yacht clubs: There I never saw anyone who had or qualified for VC funding!I know; I know: ABC, “always be selling” and, in particular jerking chains of VCs. Well, in addition there needs to a business, successful, and run by the CEO …!
Ah, I’m so close to a good alpha test I should do that. For some VCs that do respond, commonly their simple response is justCan I try it?Since the motherboard on my development computer quit (I didn’t lose any data), I need to get the code running on the server I built. For that, it’s simple stuff: Download patches to Windows 7 64 bit Professional, install a recent, solid version of the .NET Framework, likely just stable, old 4.5, install an appropriate version of SQL Server (lightly used).My experience is that installing SQL Server can go wrong and ruin the Windows installation. Sooooo, I have worked to have good backups of Windows and all the installed applications that I can use to reinstall all that quickly if SQL Server ruins it. From my experience, I expect to have to reinstall 2-3 times before I get a version of SQL Server that works and doesn’t ruin Windows. Then I’ll have to get the new installed instance of SQL Server to recognize the old database or just rebuild it from the prior data I do have. The data in the database was enough for some good software testing but not enough to make the site successful on the Internet. Then I’ll add more data, enough to make the site fun to use and interesting.Then, sure, I’ll get a static IP address and pick a domain name, maybe set up for HTTPS, etc. I’ll do the right things with business name, trademarks, etc.I have some code tweaks I want to put in. And I want a Web site log server to improve on what I’ve been using from Microsoft. I wrote a Web site session state server (simple version of Redis) and can get a log server by copying the session state server code, removing the more important code, and adding essentially a print statement. And just now I’m moving.But after the move, and with the above list, all just little, routine things, I’ll be ready for an alpha test. As I’ve mentioned, I’ll announce here, on Hacker News, on Facebook, and maybe some more.After the alpha test, and after maybe tweaking the code, I’ll do a beta test. Then I’ll see how to run ads and get paid — maybe via data in the Web site log file. Then publicity, go live, and make money.From my software timings, the code is nicely fast. I suspect it could get a LOT faster using a solid state disk for some or all of the SQL Server database. Even with just rotating disk, my back of the envelope estimate, using some Mary Meeker data on ad rates, is that if people like the site well enough to keep the server on average half busy 24 x 7, the monthly revenue will be about $250,000. And, of course, on the way to that, if it happens, I’ll have plenty of cash for more servers, etc.If I do get usage enough for $250,000 a month, then as I understand VCs, some of them will contact me.Maybe I’ll remind them of the e-mail messages I sent them that they ignored!But if VCs do contact me, if that happens, I don’t think their arms will be long enough to reach far enough across the table. I’ll remain like the guy who did Plenty of Fish — a sole, solo founder and 100% owner. The US has millions of sole, solo founders although not many with $250,000 a month from one server with parts costing less than $2000. That much revenue, if it happens, will make being a sole, solo founder much easier than is the case for nearly all the millions of sole, solo founders. Or, in business, there is a simple solution to nearly all problems of a CEO — lots of after tax earnings!VCs can give business advice? From at least one VC, there have been some questions about how good that advice is. Instead, I’ll try to use what I already know (at FedEx, my office was next to that of the founder, and I saw some things, good and bad, but FedEx was successful) and what JLM has written — I’ve downloaded, read, abstracted, indexed, and backed up a LOT of it!Some VC funding could have helped. E.g., for SQL Server, I would have called Microsoft and paid for their best support hand holding — could have saved at least weeks of time.But VCs are not interested now. Sometimes I take out an hour and contact some one of them to check this — yup, so far they are not interested! That fact will be for me a LOT of fun if this project is really successful!!!!If this project does work, then a few months after launch I may not be interested in the VCs. In simple terms, VCs and I just do not think a like: E.g., I take the proprietary technology seriously and they don’t. They want a team instead of a sole, solo founder CEO, and really I don’t. They anticipate that for “the big build out”, to “take it to the next level”, for the “explosive growth”, to outrun the “competitors” (the VCs seem to believe that all the technology is routine and don’t believe in technology difficult to duplicate or equal — that’s a BIG difference between me and VCs), for “the big marketing push”, etc. I will really want and need their check. So, VCs have lots of reasons entrepreneurs should accept their term sheet, check, and BoD. Maybe the main, real reason is that (i) the entrepreneur has the traction but (ii) is desperate for some cash, no matter what. My joke is that the VCs want to see five co-founders, each with credit cards maxed out and each with a pregnant wife. And with the five co-founders, the BoD will have more people to select for the CEO they want, e.g., a CEO “who shows proper respect for his betters on the BoD”!Yes, Mr. Chairman. Very good, Mr. Chairman. Of COURSE, right away, anything you say, Mr. Chairman. Can I have the high privilege and high honor of getting you coffee for your Petit Fours? I’ve been following your career for years and have been inspired, Mr. Chairman. And, of COURSE, Mr. Chairman, I’ll hire your suggestions for COO, CFO, CTO, CIO, CMO, head of HR, the bookkeeping firm, the accounting firm, the auditing firm, the recruiting firm, the real estate leasing firm, the vendor of the server farm HVAC, the law firm, of COURSE, Mr. Chairman, and THANK YOU for such good recommendations!The VCs and I agree on one thing: On the horizon, the real goal, what’s important is the traction really after tax earnings significant and growing rapidly with everything or nearly so indicating soon a 1000X “unicorn”.But as an entrepreneur, I have to invest my time, money, and effort well BEFORE the traction — I need to have some solid reasons to believe that the traction is quite likely. Well, as far as I can tell, VCs just will NOT, NOT, NOT consider the reasons and reasoning I have had to use. They are not interested in a cake recipe, cake batter, cake in the oven, or cake out of the oven but not yet decorated. Instead, they want the cake like something at the center of a high end wedding reception.My background in projects, especially technically high end projects, is that what is most important is the largely technical paper that describes, if you will, the cake recipe. To me, such a paper is what is really important, even more than early traction. But VCs will refuse even to consider such a paper. Bluntly, they couldn’t read my technical papers; they couldn’t even do a competent job getting the papers reviewed. They just do NOT have the qualifications to work with high end, original, technical work. The NSF and NIH problem sponsors do; I’ve never seen a bio of a VC that does.But as a sole, solo founder afraid of a BoD, once I have the traction the VCs want, if I ever do, it will be tough for me to be willing to accept their terms and check and report to their BoD. So, essentially the interval of time when I would accept their check has about closed.For this whole issue of VC funding, there is a very close, really simple, really old story, just the story of “The Little Red Hen” in Mother Goose. The hen saw a grain of wheat and envisioned a successful bakery. No one else was interested at all. She worked and had hot, fragrant loaves of bread fresh out of the oven and people lining up to buy, and THEN, ONLY THEN, were people at all interested. But the hen had to see that future clearly and make it real from just the one grain of wheat; and she was the only one who did see that future. Apparently this story is standard going way back.So, just make the business successful and largely just f’get about VCs, especially ones who don’t prove new theorems with powerful results and write corresponding software!!!!!I can see it now: It’s a BoD meeting, and I’m presenting the plans and budget for the next year. Part of those is some original applied math, complete with rock solid theorems and proofs, based on some advanced pure math prerequisites, for our own really good ad targeting. Since it is nearly all just the math that supports and justifies the plans and budget, I outline the math for the BoD. Yup, we’re likely talking some wet chairs, BoD members rushing to the rest rooms soiling the carpet on the way, and then meeting at a local bar to fire me. There is little so painful to listen to than theorems and proofs where don’t understand hardly a single word spoken! But those theorems and proofs are the bedrock of the business. Sorry ’bout that.In the US, millions of sole, solo founding entrepreneurs have been successful, say, to wealth a good fraction of $1 billion; they nearly never have useful, powerful technical backgrounds that compete with mine; their work nearly never goes for anything as finger lick’n good as 30 minutes of eyeball time a week from each of 1+ billion people; I should have a really good shot at being successful, too; I should keep at it.
A 19 paragraph response to the question ‘Can I try it?’And I still don’t know the answer.
The answer is wait for the alpha test and, do you want to be on the alpha test list?But for anyone I would want to work with, I would want them to want to know MUCH more NOW, really to be willing to evaluate and fund the project JUST from planning on paper. The US Navy funded their version of GPS that way. The CIA funded the SR-71 that way. The telescope for Keyhole was funded that way and, thus, made Hubble easy to fund. NSF and NIH fund projects that way. I got my Ph.D. dissertation direction approved that way. The Manhattan Project was funded that way.
You should write a book about this.
I’ve always looked at raising money in the private markets as a variant of enterprise strategic sales.Lots of analogs, starting with know your customer.This post helps on that.
Thanks for mentioning this book, Fred.I picked it up on a recommendation of my Audible account, reinforced by a mention by Jason Calicanis.I’m just starting to have introductory discussions with VC and Family Funds now and Scott’s insights into the fund raising process are invaluable.I’ll pick up the other two books on my audible account.
Thanks for the recommendation.. Timing could not be better.. Entering a new round today. 😉 thanks again.
Curious if you read the hard-copy book or Kindle/digital? Recommend one over the other for this book? I’m nearly exclusively kindle these days (sometimes Audible when juggling too many books) but when I see things like “spreadsheet examples” I worry that nothing matches the old-fashioned print copy…
.The observation that you make that VCs do this — pitches, negotiations, follow on relationships — all the time is a critical bit of knowledge for entrepreneurs to know and upon which to focus.In much the same way that one cannot learn to fly a plane on instruments by reading a book — particularly one written by and from a particular POV — an entrepreneur needs to seek advice from someone who has been on the money consuming/raising side of the table.One of the most important things any entrepreneur needs to know is that there are the “right” kinds of VCs and the “wrong” kinds of VCs for a startup at different times in the history/life of the company.In addition, there is a element of chemistry, personal chemistry, that is further compounded by the work load of the specific VC sitting on the board of the company.It is art with an underpinning of science.”Get good advice from the same side of the table upon which you sit,” said the fox to the hens.JLMwww.themusingsofthebigredca…
It may be time for courts to pierce the corporate veil ? If VCs can be held personally liable for the actions of the companies in which it invests, they will be discouraged from investments that fail to take into account the Regulations and Laws that are often in place to minimize the spreading the costs of the business to third parties. Just yesterday, I saw a father and his 5 yr old daughter on one bird scooter? Who do you think is going to pay for this poor girls heath care along with her pathetic father ? Can you imaging a Car rental company facilitating this nonsense. It’s long time to pierce the veil.
Funny how I’ve just finished reading that book too! It almost feels like I did my homework right, after also noticing the Bussgang and Feld books are similar. I wrote a review of the book on Amazon, pasting it here as FYI for the AVC community. Thanks!If I were to describe Scott Kupor’s Secrets of Sand Hill Road in a word, it would be “mistitled.” A more appropriate title would be something along the lines of The Basics of Sand Hill Road. The book does a solid enough job of covering the entire venture backed startup lifecycle in an easy to follow way. However, it’s hard to see how one could classify Kupor’s writing as revealing secrets.Here and there, Kupor shares some really cool legal case studies that I’ve never come across, such as in the chapter about board member duties. Now that’s quality insight even someone who’s been in the ecosystem for 5+ years can appreciate! And it’s also something that Kupor, a lawyer by training, is particularly well positioned to share. I sincerely wish we’d gotten more of those case studies, legal or otherwise, because they make the whole journey through the startup lifecycle all the more interesting.Instead, Kupor at times dons the Captain Obvious cape, with pronouncements such as “building relationships [with potential acquirers] is important.” Thanks, Scott, who would’ve thought?!At the same time though, I recognize I may not be the target audience for this book. Kupor likely synthesized versions of startup/VC classes he teaches at Bay Area universities. I could imagine a sophomore at another university (one not smack dab in the middle of VC country) reading this book and finding it quite helpful, as she decides whether to found a startup and pursue the venture funding route.It’s worth mentioning though that a significant share of the same content is also covered in Jeff Bussgang’s Mastering The VC Game. And while I haven’t read it, I’ve heard very positive things about Brad Feld’s Venture Deals. In all likelihood, reading either of these three books is probably a good enough basics crash course on venture funding of startups.
Basics of Sand Hill Road sounds like a textbook and wouldn’t sell a single copy. Do you want to know a secret? Sure. Plus a little poetry (alliteration and metonymy).
You are definitely right, Peter, Secrets of Sand Hill Road is much “sexier.” I guess what I am saying ks that “basics” would be more appropriate given the content.
A solid book for first time entrepreneurs raising capital is The Fundable Startup: How Disruptive Companies Attract Capital, written by a different Fred: Dr Fred Haney, an experienced venture capitalist, angel investor, and company founder. https://www.amazon.com/dp/1…
Raising money from VCs for what? For more capital-subsidized “fake growth” on the freemium SaaS model?Or to pre-emptively blitzscale a rigged category leader like Uber that burns a billion bucks a quarter to subsidize its market experiment? For what exactly? There’s never any “profitability”, just red ink and rationalization.VCs have disintermediated both founders and strategic marketing in the American tech industry in a model Tim O’Reilly describes as “financial instruments designed by and for speculators”. It’s a national disgrace. When the DOJ looks into Big Tech, they need to look into “Big VC” as well.That’s what people like Kupor and A16z ought to be writing about. Not more nonsense that makes VCs the center of gravity in the American tech industry.http://www.platformula1.com… https://uploads.disquscdn.c…
To me, the top dozen or so VC successes look good. My view is that VCs need to dig deeper into company business plans and have hundreds of such successes instead of just a dozen.
I was reading Hatching Twitter near Myrtle Beach, South Carolina which I first read about Fred Wilson. Reading over summer vacation is the best.