Stanford University. So today's session is all you need to know
about venture capital. So we're going to do a really quick run through
on pretty much every single topic that's relevant to VC from anywhere from sourcing deals to
how to get into VC, how VC firm is structured. So quick table of contents. So we're going to be going over a couple of
these topics right here. So [this] includes getting into VC dynamics
of negotiating finance around sourcing deals, term sheet basics. And, our emphasis for certain topics is just
based on the poll that we sent out. So we're going to emphasize certain topics
more than others. Definitely interrupt any time this session
is to be very helpful to you. So if you have any questions, feel free to
interrupt us at any time. So I guess -- next slide. So getting into VC and staying in VC. So there's kind of two options to get into
VC: 1) as a partner, 2) as an analyst or associate. Getting in as a partner -- there's no application,
there's no job application for VC. It's all based on connections. So the typical track for getting straight
into VC as a partner involves either one, you founded a very successful company, or
two, you've worked at a portfolio company as a high-ranking executive, one of the billion
dollar unicorns at the company, and you've been invited to join as a partner. It's all based on connections. So typically, it's the VC firm has already
funded your company. And now, you've made it big and you're looking
for a second career. So you're joining into VC. The second option is if you're an analyst
or associate, this is typically out of pre-business school or out of business school straight
out. So sometimes there might be a blog post, a
job posting, or you have one to four years of management experience. Or you've joined a trendy fast growing startup
and you're in BD role, and you're hired as an analyst or an associate. Okay, so the way to stay in VC is ABC: Always
Be Closing. So every single VC Fund has multiple funds
in order to stay with the fund, you have to be successfully closing deals, making money
for the fund. Otherwise, you'll be booted from the next
one. So always be closing. So, dynamics of negotiating a financing round. A lot of you had questions around this. Dynamic negotiating fundraising round, it's
pretty complicated in terms of I consider an intricate balance between one convincing
the founders and then two convincing the rest of your partnership to fund the deal. So on the founder side, the very first thing
you do when you meet an entrepreneur is assume it's a really good company. Reason for that is if you show any waiver
of dislike or distaste for the company, that's going to hurt you later on. Because you never know if this founder and
this company is going to start the next billion dollar company. Their first idea might be terrible. The second idea might be wonderful. So as a result, working with the founders,
the very first thing: keep an open mind. Be really friendly and positive to the founder. In addition to pitch your partnership and
pitch your firm, the biggest thing that's most important for the founder is that you
need to start building your reputation before you're actually even starting negotiations. So that involves sitting on panels, judging
demo days judging events, and really building a media presence and reputation in the valley
before you actually even meet the founder. And then the second thing is, once you actually
meet the founder, you want to constantly be able to pitch your partnership, leverage all
of your partners, their experiences, their accomplishments, their successful deals and
be positive in pitching them because every single deal, which we'll talk about later,
is a competitive deal. So you're going to have at least two or three
term sheets and two or three other VCs that you're competing with. Meanwhile, you're always thinking positively,
this could be the next billion dollar company when you're talking to founders. On the other hand, you also need to convince
your partnership. So typically, when you're working with a partner
partnership at a VC firm, every partner does maybe max two or three deals per year. And this is serious, kind-of like boards -- when
I say two or three deals -- significant board seat deals, typically you get 20% ownership
in the company, you're spending a lot of time with the founders, as opposed to just a small
angel investment. So pitching the partnership, you're probably
seeing hundreds of deals every year, there might be maybe 8 or 10 deals that you might
find. And then, at the end of the year, you typically
fund two or three deals. So every single time you see a really awesome
company that might be one of those 8 or 10 potential deals, you'd immediately go to your
partnership, start pitching yet, start getting feedback from all the partners. Just because a VC firm is a partnership. You're not the only one making the decision. You need to be constantly getting feedback,
identifying issues early on, just because at the end of the day, it's generally a consensus
vote when it comes to whether or not a company is going to be financed. So just quickly in terms of process wise -- as
a VC you're always constantly looking for deals, sourcing deals. Once you find a company that's one of those
8 to 10 companies in which you think you might want to invest in, there's the balance between
convincing the founder and then convincing the VC. Once you have a general understanding that
a deal is probably going to happen. The next step is negotiation around the specific
terms, we'll go over a couple specific term sheet terms that are very important. Once that process happens, there's the term
sheet assigned, there's an in depth due diligence phase, which typically includes tech diligence. There might be an outside consultant who helps
with that. Financial diligence, if it's a later stage
company. Also sometimes background checks, VCs might
do background checks, and reference checks as well. So once that due diligence is completed, there's
the final doc stage. So these are all the lengthy legal docs that
happen. The term sheet is typically only one to two
pages, while the legal docs are probably around 10 plus pages. And then final step is the money is wire. So a deal isn't closed until the money is
wired. And it could fall apart at any minute. Competitive rounds. So every single good deal in the valley is
a competitive round. And you should assume that every single company
you meet is going to be competitive, you're going to have at least two to three other
term sheets on the table two to two or three other VCs you're competing with, to try to
get that 20% ownership to try to get that board seat and be involved with the company. You need to treat every company and every
round that you encounter as a competitive round. There's two strategies for doing that. The first one is the more aggressive and move
fast. This is where you meet a founder, they haven't
kicked off their fundraising yet, but you know that they're about to do so, maybe in
a couple weeks. You think that it's the next Facebook, the
next Google and you move very quickly throw down a term sheet and even the strategy for
that is partners have partner meetings on Monday. So you might throw down the term sheet on
Saturday just because the founder can't line up another term sheet within a week, and then,
the term sheet will be considered maybe an exploding term sheet that expires within a
week, and you try to win the deal that way. That only happens and works probably one third
of the time, just because all great founders typically have advisors surrounding them,
people who are mentoring them and have connections in the valley, and the valley is working against
you in this case. So with an exploding term sheet, you have
advisors to the founders, who will likely introduce them to other VCs, and try to get
the round done within that one week time period. So that works maybe one third of the time. The better strategy is being the last one
to put down the term sheet. And this only works if you know if you have
the connections and know intimately what the dynamics of the fundraising round are going
to be. You know who else is putting in term sheets
at approximately what valuation. You’re close friends with some of the advisors
to the founder and to the company, and you're the last one to put down the term sheet. And you end up probably putting it at a slightly
higher valuation, you've already built a relationship with the founders and the advisors, and you
end up winning the deal that way. It's a dangerous strategy. If you execute it well, it works well. But if you put down the term sheet too late,
then you just completely miss out on the deal. How much of the specifics on the term sheet
are actually negotiated versus just going into the deal or not doing a deal? And are you doing those negotiations as the
VC? Early on, the most important thing is how
much money is being put in? What's the valuation for that? Typically, every single VC firm is trying
to… When you think about a Series A or Series
B round, VC firms are trying to get around 20% of the company. We'll dive into valuation in a second. So as a result, the most important thing early
on, it's all about how much money is being put in, and what's the valuation and then
from there, there's a couple other provisions that are negotiated -- but those are pretty
standard. Can you speak a little bit more about some
of the term sheet standards like dividends or things of that nature? Yes, that's the next topic. So just to quickly wrap up on this topic around
co-investors. So co-investors can be angel investors, other
investors happen in pretty much every single financing round. There might be someone, a co-investor, who
you have worked with in the past and absolutely don't want to be a co-investor in the round. Jey strategy for that is don't argue with
the founder early on because that's going to hurt your ability to win the deal and negotiate,
and get the round done. But co-investors can always happen and be
negotiated later on. Another thing to keep in mind is the co-investor
typically take up only 1 to 2% of the entire financing round so it doesn't make a huge
difference. As a VC you want to optimize your own If you
want to get as much as the round as possible, if you actually decide to commit to the company
and you actually want to invest in the company. Every single VC wants to get as much into
the round as possible. The final thing to keep in mind is, for co-investors
is, it's a reciprocity ring around Silicon Valley. So if you help someone get into a round of
a hot company now, it's going to come back to you later, and they'll let you into another
financing round. This is just because keep in mind that every
single good deal is competitive and there's more dollars that want to be put into the
company than their is space for. When you're talking about co investors, how
often do you see strategic investors that aren't funds? So let's say I'm going to sell into commercial
buildings and there's a massive construction company that wants to get in, and that will
give the entrepreneur access to a key contract. Yeah. So strategic investors are definitely kind
of a whole another ballpark. So there's been a couple -- I guess I'm negotiating
a financing right around right now with two to three strategic investors. There's a couple different investment strategies
on that. One of the main currencies of VCs is being
able to take a board seat, and most founders don't want strategic investors say if you
have a Google Ventures, a Rakuten in Japan, or a strategic investor sitting on their board,
just because of information rights. And if you work with, say, Rakuten is on your
board, then likely you can't get another e-commerce company on your board as well. So, strategic investors for most of those
rounds, I've seen VCs put in a smaller amount of capital, but still be able to take the
board seat. And then you have a couple strategic investors
filling up that round. Just one question. Talking about competition. Theoretically, if I have a good company, I
would go first with the top tier VC? Right. So I don't know, take the best, probably you
have the top-tier VCs coming first. Is this a reality? Or no? Because you should. So as a founder, when you're looking for a
VC to partner with, it's really a long-term relationship and a long-term marriage in many
senses. You're gonna be stuck with this VC for years
and years and years, as long as your company's around. So the best entrepreneurs don't look at the
top tier brand name VC that they want to partner with. But actually, who's working with them on the
deal, who's actually sitting on the board. So you might get a term sheet from say, NEA,
Sequoia. NEA only has a couple partners. They have a number of principals, a number
of associates, a number of analysts. If you got a term sheet from an NEA, you might
not actually have the partner sitting on the board. But you might have instead an associate or
a principal sitting on your board. So the best entrepreneurs look for the best
partner. And the best person who's sitting on their
board and working with them long term. In a financing round, what percentage typically
are invested by the lead investor as opposed to the co-investors? Financing round, in general, takes up about
20% of the company. A VC, the lead investor typically takes up
almost all of that 20%. And there is, I guess, a couple of angel investors
who co-invest. That's typically the structure. I’ve heard about no-shop clauses. How does that fit in? So the no-shop clauses in the term sheet -- that's
happens at the very, very end. Keep in mind that there's a lot of conversations
that happen early on in terms of is there general interest from this VC in funding the
company? And those kind of conversations happen before
term sheets are even thrown down. So before a term sheet… when a term sheet
is actually issued, there's a pretty good sense of whether or not, there's a strong
partnership and potential funding that will happen. We'll talk about the term sheet, kind of some
of the terms. So sourcing deals and finding investment opportunities. We'll run through this super quickly as well. So there's a couple ways you can source and
find deals. There's one more the data driven approach. So you’re constantly tracking who's rising
in the App Store rankings, who's rising and maybe the Alexa ratings for top sites, or
you're attending demo days at incubators and accelerators, or you're targeting universities
and trying to hunt down some of those research teams. The most important thing to keep in mind for
that is anything that's available on the internet or is present at a demo day, you're not the
only one looking at it. There's hundreds and dozens of other VCs looking
at that. So the most important thing for sourcing is
really make sure that you have your network in place. So even for example, for demo days, you might,
you might be going to a YC Demo Day. But some of the best investors actually know
all the companies that are presenting before they even present. And that's because they've had founders in
their portfolio who've already gone through YC are providing them advice on some of the
hot startups and companies that are happening. Main thing to keep in mind for finding investment
opportunities is that if it's an official event, data that's available on the internet,
likely, someone else already knows about it. Quickly in terms of what a VCs look for investments,
it's three things. Everyone's going to tell you the same thing
and some sort of variation if you ask a VC and that's 1) tech, 2) team and 3) product
market fit. So one is there strong technology? Is there a strong product behind this company? Two, team. What has the founder done in the past? Is there evidence that they have a vision
that they will be successful in what they're doing? Just because an idea is cheap. It's really about how you execute it. And that's what the team's for. And then three, is there a product market
fit? Is this actually a need that's being met? You don't want to take over 100% of a $10
million market. When instead, if you take 1% of a $1 billion
market, that's a lot better. Let's see. So I guess, how relevant is it to have a detailed
investment thesis? So that's a challenging question, which I'll
get back to you a little bit later when we talk about GP-LP dynamics. But you want to make sure that you have a
general sense of what market you want to target and when you're developing that investment
thesis, but also make sure that it's flexible enough to include a number of different investments. So you don't want to be for example, if you're
looking at investing in big data, AI, you don't want to just be targeting one specific
segment like personalization. Just because the number of companies that
are going to come out of personalization every year might be maybe 10. And if you can't invest in any of those companies,
because one they're really bad or two, it's a competitive round, that basically destroys
your entire sense of an investment thesis. Let's see. And, final aspect of one of the questions
that someone emailed in is, what is the term smart money? So this is just the idea that every single
dollar you're providing as a VC, it's not just the capital, but more importantly, it's
the people, the relationships, the connections, the advice that you can provide -- that really
helps an entrepreneur. So given that 99% of deals are turned away,
can you talk about internal organization and how you keep track of companies that you've
turned away? Do you network with them and keep up with
them? Shoot an email once a year or something like
that? How do you remember that? Different VC firms definitely take different
approaches. I think the one firm who takes probably the
most structured approach to it -- and this has only been a recent phenomenon in the past
maybe four years or so -- would be the agency model. So firms like Andreessen Horowitz, in which
they track every single time they reach out to a founder, how often they interact with
a founder, whether or not they fund them or not, and the advice that they provide. So Andreessen Horowitz, if they don't fund
you, they might still invite you to some of their dinners or sessions, and they try to
stay on top of interactions with founders. The other extreme is what I see most VC firms
doing, which is a pretty informal method of keeping track in terms of -- literally, I've
seen firms in which you just met, manage it through your inbox. So a deal surfaces back up and you do a quick
search in your inbox to see if you've interacted with the founder in the past. And if you have, then you'll kind of observe
what that interaction was like and then build off that. And if you haven't, then you consider it just
a fresh meeting. So keep in mind that most VCs probably spend
most of their time looking for deals, but also maintaining their portfolio, which we'll
talk about in a second. So I guess, keeping track of founders who
VCs have turned down isn't a high priority or even considered a lot. So quick note on a term sheet basics. So, we'll quickly run through some of the
most important terms in a term sheet. So keep in mind that when you're in VC negotiating
a term sheet, the two most important things you want to keep in mind are economics and
control. So running through some of these terms: pre-
and post- money valuation. This is pretty simple addition. You've started a company, you think the assets
are currently worth maybe $3 million. A VC comes in and puts in $1 million. Now it's worth 3 plus 1... $4 million. So the pre money valuation is $3 million,
and the post money valuation is $4 million. But keep in mind that it's actually -- even
though it's 3 plus 1 equals 4 -- the $1 million is likely adding a lot more value than just
$1 million, which is why someone would even give up ownership of their company to take
that $1 million. So another term liquidation preference. Liquidation preference is the main thing that
distinguishes preferred stock from common stock. One company that's a pretty interesting example,
which absolutely hates liquidation preference is Snapchat, in terms of, they have investors
investing at the common stock. So it's a pretty unique case, but typically,
liquidation preference is always present. So the main aspect of liquidation preference
is that VCs get their money back first. So it only really matters when a company sells
below their valuation price. So basically, if a company's worth, say, the
valuation is $10 million, and it sells for $5 million. Basically, whatever amount of money that a
VC has put in for liquidation preference, they get that amount back first. There's two types of liquidation preference
participating and non-participating. Participating doesn't typically happen. It's a pretty aggressive term for VC to negotiate
that. That basically means that the VC gets back
not only their money, but also their percentage ownership. Non-participating. Basically, the VC just gets back the cash
that they put in first. Board of directors. Typically, if a VC is putting in a significant
amount of capital, they want to take a board seat. Generally, it initially starts with your first
institutional financing round would be a three person board, which consists of one of the
founders, the main investor, the lead investor, as well as an independent seat. Oftentimes, the independent seat might not
be filled immediately, just because the meetings and the board meetings that happen are pretty
friendly, pretty collegial. Once it gets to another larger round, another
institutional investor comes in --- that typically expands to a five person board, two folks
from the founder side, the company side. Two VC investors. And a fifth independent board seat. Basic role of the board of directors is just
to help guide the CEO and hold them accountable. Board of directors have fiduciary responsibility,
so they need to do what's best for the company. Let's see. Protective provisions. These are basically depending on the relationship
you have with your VC, this might change. So this can include from, if the company spends
a certain amount of capital, then they have to have board approval before that is spent. So protective provisions just protect the
VC. Right of first refusal. So this is a generic term that's sprinkled
throughout the term sheet. It typically is around the sell of secondary
shares. So the idea is that basically, as an investor,
if a company for example is selling secondary shares, you'll be able to purchase those shares
before it gets out to other individuals outside the company. Sometimes there's ROFL chain. So for example, in the second sale of secondary
shares, you might have first a right of first refusal with investors and then the founders,
and then the angel investors, and then the people outside the company, and then that
chain just continues onward. So pro rata, this is a term that just means
in proportion. So the idea is that you invest in the series
A, as an investor, you own about 20% of the company. In the series B, when there's new money coming
in, you're going to get diluted, but you have the option to actually put in additional capital
at the Series B valuation to maintain your ownership of 20%. Keep in mind that this is kind of a one-way
term. So basically, only the investor has the right
to say whether or not they want to maintain that 20%. And that typically happens if it's a good
company. Otherwise, if they decide to let go of their
pro rata, they’ll be diluted in the future finance round. So instead of 20%, they might own 17%. Let's see, next terms. Drag along. Drag along basically means that as an investor,
lead investor, you're making a lot of the decisions for the company. And there might still be, say you have 50
angel investors in your cap table in your finance round. And when you're making significant decisions
at the company, you don't want to go to every single one of them to get their approval. Drag along just basically means that the lead
investor is dragging along the angel investors, typically the other minority investors. Employee option pool -- there's kind of two
general thoughts on that. One is it's a simple way for employees to
get upside in the company and actually get some ownership, and there's the story of the
Facebook cook who became a millionaire, because he bought some employee options. The other aspect of it that most people don't
realize is the economic aspect. So there's two different ways you can look
at it. One as an investor, you can actually have
the employee option pool created -- typically around 15 to 20% -- created before you finance
the company. What that means is that you're actually diluting
the founders with an employee option pool created before, but you're not diluting yourself
as an investor. What the best entrepreneurs prefer is actually
that the employee option pool is created after the financing rounds. So what that means is that when the 15-20%
employee option pool is created, you're diluting both the founders and the investors, not just
the founders. And finally, no shop agreement. So keep in mind that term sheets aren't binding. So as an investor, you can actually sign a
term sheet and not follow through on the financing round. This typically doesn't happen, just because
your reputation is on the line. And as we know, Silicon Valley is really small. If you sign a term sheet and you end up not
funding the company that's going to hurt you later on, as other entrepreneurs talk about
that. The reason the no-shop agreement exists is
because VCs as general partners are accountable to their LPs who are providing capital. So after the term sheet is signed, there's
an in-depth due diligence phase just to make sure that the tech, the product, the team
is really who they say they are. And the note shop agreement is generally around
40 days, Investors want to -- there's kind of this balance -- investors want to make
that longer, around 60 or 90 days. And then entrepreneurs want to make that shorter,
maybe around 30 days. But the idea of the no shop agreement is that
you're not going to be shopping around the term sheet and valuation. Otherwise, it's just a never ending cycle. Portfolio management. Oh, any questions on term sheets? Drag-along. As a new investor, are you making decisions
for angel investors behind you, in terms of financing decisions? Or in terms of the decisions that are affecting
the company that you've already invested in? Pretty much all major decisions, ranging from
the sale of the company. Firing of a CEO. Major business decision? When David Hornik was talking about during
pitches that basically entrepreneurs to believe financial pitches are just wrong. Was he talking about the pre-investment valuation
of the company? How are those kinds of finances worked out
in between the two? So, just to clarify what David Hornik was
saying, the valuation that the entrepreneur wants versus reality is that? I think so. Okay. I guess keep in mind that in a financing round,
an entrepreneur probably wants 100 million dollars -- a really high valuation. As a VC, your entire partnership, maybe wants
2 million. So there's a huge disparity. I think what David was probably referring
to is that you have this negotiation -- you need to bridge together the founders and your
partnership, and should reach somewhere in the middle. I can add to that. So what David was saying was basically, when
you're doing your deck and you're presenting your financials and how you're going to, you
know, project your sales, that's all BS, usually, right? It's like, how can you predict five years
from market that doesn't exist? But he wants to see what you want to see is,
how you're thinking about it, right? What are your costs, who your customer is,
and that type of stuff is kind of separate from the valuation of your company, somewhat
related in the sense that if you make 100 million sales, and you can get a bigger valuation,
but he was saying, you know, have a slide. If you're gonna pitch a VC, have a slide of
your sales, or how you're gonna make money, but just know that everyone knows his BS. Before I met Ernestine, I would often get
students saying, can you get me together for breakfast? And they said, yes, we could do that. But you have to have a spreadsheet that shows
cash in and cash out. And oftentimes people would say I'm so brilliant. I'm so great. I don't need to do that. They would show up. The VC would come in, and the VC would say
this meeting is over. The argument was just honestly, this argument
-- if you can't make up numbers that make it look like you could be successful, why
should they believe anything else you said? Cool. Okay, portfolio management. As a VC, you probably see in your portfolio,
three different types of companies. One, unicorns. Two, I call them dragon eggs -- it's kind
of a new term that hasn't been used widely. And then, three, the walking dead. So unicorns -- or deca corns are even better
-- are basically your billion dollar outcomes. They're the ones who are your really successful
companies. Dragon eggs, these are the ones who have the
potential to probably make your find probably become those billion dollar outcomes, return
your fund multiple times over. And then walking dead. These are the companies who are basically
just consistently operating but probably not going to create a huge exit for you. So every single VC wants to work with the
very, very best companies in their portfolio. That's naturally where VCs want to spend their
time. You have 10 companies you want to work with,
say, the top three or four consistently. And that's just the case. For example, you have the next Facebook, the
next Google like Snapchat blowing up, you want to be the one supporting that entrepreneur
and building that relationship as an entrepreneur goes on to become a billionaire, because he
might maybe angel investments in her future portfolio companies. And, you typically don't spend as much time
with the walking dead companies. I think the strategy in which VCs spend time
with walking dead companies varies. And it's really interesting. Just to keep in mind, because a company that
currently looks like a walking dead company might actually create a spin off product and
become the next billion dollar company. So walking dead strategies. What I've seen is the activist and the harsh
model. So this is where the VC is super active. Maybe firing the CEO, replacing the management,
significantly shifting the business idea. One clear example of that was PayPal, in which
Sequoia had two portfolio companies. One was led by Peter Thiel, another one was
led by Elon Musk. This was right after the height of the dot-com
bubble. A lot of companies were walking dead companies
at that time. Sequoia decided to actively merge the two
companies together and create PayPal, which was a fantastic outcome for them. The other strategy on the other extreme end
would be being an activist and supportive VC. So this would be the case in which Charles
River Ventures had a company called Odia, which was basically a walking dead company. Wasn't really showing kind of that billion-dollar
unicorn outcome. That company ended up creating a spin off
product called Twitter, which they funded, and became a billion dollar company. So you can take an activist and a supportive
role in that sense. And then the third strategy, if you have a
walking dead company is just completely ignore it and don't support it. We actually don't even hear stories of this
because the thing is, if it's a walking dead company, and you're completely ignoring it
and not supporting it, and it goes under, no VC talks about their failed companies. If it's a walking dead company, and you ignore
it, and don't support it, and the founder manages to make it a success, typically a
VC just jumps in and starts helping it immediately and becomes very active in it. So we don't typically hear of the ignore and
don't support companies. Is the method today of looking for the unicorn
companies just a Silicon Valley phenomenon? Or is it the same in the East Coast, Midwest? Or is it just focused on the tech companies
versus tech-enabled consumer companies? It seems like that's a very high bar, if that's
your only criteria. I think as a VC, the most important thing
is making sure that you have companies that are going to return your fund. So say if you have a $50 million fund, you
want to create a huge outcome that you can actually generate the $50 million back plus
more capital. As opposed to, if you invest very, very late
stage in a unicorn company, and you only have maybe 2% ownership in the company. When it sells, you actually can't make your
fund back. So I think the number one priority for VCs:
you're looking at your portfolio, what are the companies that are actually going to return
your fund and make a return? It’s a little bit of a sourcing question. Where do you guys go to spot emerging trend? For example, do you look at YC class? Do you look at what the brightest Stanford
undergrads are majoring? And what they say they're excited about? At one point, everyone want to talk about
machine learning and AI. At another point, people are looking into
legal software suddenly. Where do these trends emerge from, and how
do you look to spot them? I think that's really interesting because
the one region, which probably has the most extreme example of VC is just pouring money
into one sector and then another sector and then another sector is China and Asia. So if you actually look at China in terms
of like, where dollars have gone initially was -- all this money pouring into like social. And then all this money pouring into O2O,
kind of like sharing economy, Uber, Airbnb, DoorDash kind of companies. And then now there's all this money pouring
into VR/AR. I think the Valley has been a little bit more
kind of general, in terms of VCs are constantly investing in multiple different sectors. So I guess for me personally, I have what
you can call spies or people in different parts of campus and different parts in the
Valley. So basically, having close connections and
close friends who are actually involved in different communities and tracking the hot
investments. I think in terms of trends, it's also pretty
easy because we look for trends, right? So what is enabling a certain trend? Right? So like big trends used in machine learning,
right? It's the cost of computing, right? Algorithms have evolved, right? So there's sort of like market forces of creating
these trends. Pretty easy to spot. So it's really that type of stuff. And then people just constantly reading this. And then to your other question about what
sort of VC they're using to kind of, you know, spot companies or figure out what are the
next hot things, I think there are a lot of data driven VCs now, like using metrics and
trying to scour LinkedIn where people are moving jobs. Or trying to profile entrepreneurs that generally
have a good track record. So there's a lot of data science now being
applied to even the VC industry, in some ways enabled through sort of like, you know, the
cost of computing coming cheap. So it's really interesting. We'll run through this super quickly. So in terms of VC, firm composition, governance
and dynamics. We'll go through this pretty quickly. Basically, every single VC firm has what I
would consider four roles between everyone who's working there. The first one is analysis and market research. The second one is sourcing. Third one is investments and portfolio management. And the fourth one is fundraising. The specific role whether you're an analyst,
an associate, a principal, a general partner, a partner varies between those four. It actually probably times more towards, the
more senior you are, the more you're involved with sourcing investment, fundraising of the
fund. How are investment decisions made? So every single VC in the Valley, if you try
to schedule a meeting between 9AM to maybe 1PM on Monday is probably booked, just because
typically VC partner meetings are on Monday. The way investment decisions are made vary
from some firms might have a formal Investment Committee, in which they'll have a majority
voting process, maybe three to five partners must agree on the deal. Some VC firms are a little bit more casual. In terms of as long as there's general consensus
on a deal, and no significant objection or concerns, then the investment is going to
go through. And then some firms. Typically, in corporate VC funds, there's
just one person making that decision. That's kind of general voting. In terms of another thing to probably keep
in mind is also for decision making is the lifecycle of the fund. In terms of when you've raised a 100 million
dollar fund, typically, early on, you're making a lot of investments that follow the investment
thesis very, very strictly -- the investment thesis that you've pitched to your LPs. If you're near the end of the fund, you're
very, very careful about what are the final investments you're going to make out of that
fund, because it's going to affect how you fundraise for your next fund. And then in the middle of the lifecycle of
a VC fund, is typically when a lot of the crazy investments are made, generally speaking. So we'll quickly run through GP LP dynamics. See, okay, role of LPs. LPs. Limited partners. They invest in VC funds. This can range anywhere from high-net worth
individuals to corporations, to hedge funds, to institutional investors, as well as universities
like Stanford. So let's see, the critical components of a
good pitch for LPs. Especially in the first find, the first and
most important thing is the team cohesion and synergy amongst the GPs. So are the GPs actually able to work together? Every single VC firm is a partnership. Are they able to work together and make good
investment decisions together? Do they have a lot of synergy and good flow
amongst them? The second aspect is the market thesis or
their investment strategy. So are they targeting a specific sector? What is their investment strategy. Are they targeting college campuses and their
research? How is that investment strategy different
from other VC firms? And then the third aspect is, is this team
actually the general partnership well-suited to actually source and close investments based
on the investment strategy? I'll probably just wrap up on... I think there were a lot of questions and
interest around the typical structure of an LP agreement between GPs and LPs. That typically is around 2 to 3% management
fees. So what that means is that you have $100 million
fund, as a GP, you're given $2 to $3 million to manage that fund. Typically, another structure is 20% carried
interest. So that's just 20% profits. So say you have a $1 billion fund. You make $2 billion out of the profits. The LPs get $800 million, and GPs get 200
million. And I would say the most important thing when
raising a VC fund is one, making sure that you have control over the IC voting rights. I've probably been approached by half a dozen
LPs to start a VC fund, but where one of the LPS is actually sitting on the investment
committee and helping make investment decisions, which is hugely difficult if you're trying
to operate the fund and make a return. And the second aspect is, sometimes you'll
see LPs who want to swoop in and take GP carried interest, and there's a lot of misalignment
if you try to do that. So we're running short on time, so we can
answer additional questions and stay a little bit after if you have specific questions around
that.
