Secrets of Sand Hill Road

Scott Kupor is managing partner of venture capital firm Andreessen Horowitz. He joined the firm at its inception in 2009 and has overseen the firm's growth from $300 million in assets to more than 150 employees and over $7 billion in assets under management. Scott Kupor also teaches courses in venture capital and corporate governance at Stanford Law School and at UC Berkeley's School of Business and School of Law. Scott Kupor previously worked at Lehman Brothers, Credit Suisse First Boston and as business development manager at LoudCloud. He is a member of the investment committees of several nonprofits. Scott Kupor is a graduate of Stanford Law School and Stanford University.

In 2017, US-based venture capital (VC) firms injected around $84 billion into companies and startups. The most prestigious and successful of those VC firms operate in Silicon Valley, and the most influential of those headline VC firms have their offices on Sand Hill Road — not too far away from Stanford University.

So what are the secrets of securing venture capital?

To access venture capital funding, you have to know and take into account:

1. How venture capital works
2. The necessary company formation decisions
3. The process of negotiating with VC firms
4. The constraints you will be working under
5. The plan for how returns will be realized

Align your funding requirements with the VC life cycle, and you have a shot at securing the funding you need to grow a company. Miss that alignment and there's no realistic chance that a venture capitalist will be able to work with you. As in most things in business, timing is everything.

1. Learn how venture capital works . Every VC firm has investors who fund them, and incentives and constraints which are specified by those investors. To understand how VCs make their decisions, start by understanding the motivations of the firm's backers first.

2. Make good formation decisions . Whether or not you can seek VC funding will depend to a large extent on the decisions you make when founding your enterprise. Make sure you make all the right allowances when you form your company, otherwise VC funding won't be an option in the future.

3. Understand the VC finance process . Pitching VC firms is one challenge but ultimately any negotiations will center around the term sheet, the Magna Carta of the VC industry. Know what to include in a good term sheet and you're ready to hunt bear when you talk to VC firms.

4. Operate to agreed constraints . Any funding a VC firm provides will come with a set of economic and governance constraints. Make certain everyone knows and abides by those constraints, particularly your board of directors who will be at the coalface of compliance.

5. Plan how returns will flow back . Money has to ultimately flow back to VC firms (and their backers) in order for the VC cycle to keep operating. Plan how that will happen in your case in great detail. If enough money doesn't make it through the full cycle, the financing hydrant will dry up and disappear.

This week's summary focuses squarely on venture capital and what's involved. It's an interesting topic — although admittedly it will appeal more to entrepreneurs than to salespeople or managers. I've always heard great stories of venture capitalists who put $2 or $3 million into early-stage companies like Facebook or Amazon and end up with a stake which is worth $1 billion or more but how that happens has always just been a mystery. Were they just lucky? Do they invest in lots of companies but only talk about their success stories, not their failures?

Secrets of Sand Hill Road fills that gap and talks about venture capital from both sides of the equation. It explains how venture capital funds work and the pressure venture capitalists are in from their limited partners to generate results. I also liked learning about the highly structured way potential investments are negotiated including the written term sheets which put on paper how an investment would work. There are good business practices to pick up on here and run with even if you never come face-to-face with a venture capitalist.

Their track record suggests venture capitalists are doing something right. Secrets of Sand Hill Road is a great insight into the way they think and make investment decisions. Well worth a read.

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