The Business of Venture Capital

The new edition of the definitive guide for venture capital practitioners—covers the entire process of venture firm formation & management, fund-raising, portfolio construction, value creation, and exit strategies

Since its initial publication, The Business of Venture Capital has been hailed as the definitive, most comprehensive book on the subject. Now in its third edition, this market-leading text explains the multiple facets of the business of venture capital, from raising venture funds, to structuring investments, to generating consistent returns, to evaluating exit strategies. Author and VC Mahendra Ramsinghani who has invested in startups and venture funds for over a decade, offers best practices from experts on the front lines of this business.

This fully-updated edition includes fresh perspectives on the Softbank effect, career paths for young professionals, case studies and cultural disasters, investment models, epic failures, and more. Readers are guided through each stage of the VC process, supported by a companion website containing tools such as the LP-GP Fund Due Diligence Checklist, the Investment Due Diligence Checklist, an Investment Summary format, and links to white papers and other industry guidelines. Designed for experienced practitioners, angels, devils, and novices alike, this valuable resource:

• Identifies the key attributes of a VC professional and the arc of an investor’s career
• Covers the art of raising a venture fund, identifying anchor investors, fund due diligence, negotiating fund investment terms with limited partners, and more
• Examines the distinct aspects of portfolio construction and value creation
• Balances technical analyses and real-world insights
• Features interviews, personal stories, anecdotes, and wisdom from leading venture capitalists

The Business of Venture Capital, Third Edition is a must-read book for anyone seeking to raise a venture fund or pursue a career in venture capital, as well as practicing venture capitalists, angel investors or devils alike, limited partners, attorneys, start-up entrepreneurs, and MBA students.

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

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

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

MAHENDRA RAMSINGHANI, B. Engg., MBA, has over fifteen years of investment experience and is the founder of Secure Octane, a San Francisco–based cybersecurity fund. He is the former Managing Director of First Step Fund and has advised investment organizations in the U.S., Asia Pacific, and Middle East regions. He is a frequent speaker at engagements around the world, and contributes regularly to professional publications, including Techcrunch, Forbes, and Venturebeat.

The Business of Venture Capital, already in its Third Edition, is a remarkably forward-thinking guide to VC. Naturally, it's important to understand the basics of how venture capital works, and there the book certainly doesn't disappoint. Simply imitating the investment practices from those who came before us isn't enough, though—especially in today's hypercompetitive investing arena. We need to go beyond.

This book will help you build a foundation of knowledge about VC investing, and then it will help you shift that perspective. The "business as usual" approach might bring success, but for real success—the kind that really means something, even after all the checks have been signed—we need to put our hearts and souls into serving the founders on the VC journey. Working within a structured approach to raising a fund, sourcing investments, and working toward (and attaining!) exits, we can help founders realize their dreams, innovate, and build a better future, one company at a time. Its commitment to such an intricate approach is what makes The Business of Venture Capital the first-choice VC manual for capitalists, limited partners, entrepreneurs, and students.

The Third Edition includes updated case studies, the most relevant investment models, and refreshed content throughout. Venture capital is not for the faint of heart—this book provides a roadmap for getting into the business while managing risk and overcoming biases. Navigating the challenges of a VC career and knowing how to build that career, as well as how to get out when the time comes, is key. Prospective VCs must also understand portfolio strategy, due diligence, boardroom intricacies, and how to structure transactions and exits. It's a lot to know, and this book makes it manageable. There's no substitute for getting out there and learning by investing—but The Business of Venture Capital will help investors hit the ground running.

PRAISE FOR THE BUSINESS OF VENTURE CAPITAL

"In the First Edition of this book, Mahendra covered Arboretum's Fund I journey. A decade later, we are now on Arboretum Fund V. The Business of Venture Capital continues to inspire, inform, and shape the journey of future fund managers."
—Jan Garfinkle, Founder and Managing Partner, Arboretum Ventures; Board Chair, National Venture Capital Association (2019-2020)

"Mahendra has written the book I needed when I first entered the venture business. Rather than blindly stumbling my way to understanding the basics, I would have saved so much time. This book is like getting a five-year head start for anyone who wants to get up to speed about how it really works."
—Mike Maples, Jr., Founding Partner, Floodgate

"A solid foundation of investment frameworks and mental models for any venture investor, a useful guide in our rapidly changing world."
—Beezer Clarkson, Managing Director, Sapphire Partners

"An essential guide for any investor—one of the few books that weaves real-life case studies with leading academic research."
—T.K. Kurien, Managing Partner and Chief Investment Officer, Premji Invest

"A definitive guide to a nuanced, complex business which has no formulas—The Business of Venture Capital peels back the curtains to reveal an insider's look into the high-stakes world of high-tech VC."
—Peter Hebert, Co-founder and Managing Partner, Lux Capital, a VC firm with $2.4 billion under management

"A decade later, the Third Edition of this book continues to build upon the VC industry, its best practices, worst biases, swift changes, and all the excitement that goes with it."
—Brad Feld, Co-founder, Foundry Group and Techstars; Co-author, Venture Deals

"T.S. Eliot suggested that exploration would lead us back to where we started, allowing us to know the place for the first time. Mahendra's book was like that for me, shedding fresh light on areas I'd explored during two decades in VC while also expertly illuminating emerging trends."
—Chris "SuperLP" Duovos, Founder and Managing Director, Ahoy Capital

"Another masterpiece digging into the art of venture funds, portfolio construction, and deal mechanics! Loved it and a must-read."
—Harry Stebbings, Founder, Stride.VC and The Twenty Minute VC Podcast