"The Entrepreneurial Bible to Venture Capital" serves as a valuable resource for individuals starting their careers in venture capital or making their first investments as business angels. Below, I have summarized some key ideas from the book that I hope will be helpful to you.
One idea that caught my attention is Draper Waves. According to Tim Draper, venture capital moves in waves opposite to those of private equity investments. Venture capital does not decline during every financial crisis, but rather every other crisis. For instance, venture investments experienced relatively slow growth from the dot-com crisis until 2008 due to increased capital being directed towards private equity to support existing companies. Consequently, the venture capital market did not undergo a significant correction during the global financial crisis. I wrote this article on September 19, 2023, and I believe we will soon have an opportunity to put Tim's theory to the test. If he is correct, the market will witness fewer venture capital investments and startups in the next decade. To gain a better understanding of investor behavior during times of crisis, I also recommend reading the book "Smarter Ventures: A Survivor's Guide to Venture Capital through the New Cycle."
During and after a crisis, top startups emerge that provide high returns since many investors hesitate to invest in such ventures. This translates to reduced funding for strong teams, ultimately yielding better returns.
Only 10% of companies generate significant profits for venture capitalists (VCs) that can cover all the investments of the fund. It is increasingly challenging for investors to determine which startups will be successful. Out of a total of $100 million, venture investors expect that one-third of the companies will result in a loss of $50 million, one-third will generate $50 million in profits, and the remaining one-third will generate $150 million, resulting in a total return of $200 million for limited partners (LPs).
The process for a VC in evaluating startups is as follows: 3,000 investment opportunities are narrowed down to meetings with 300 companies, further reduced to 100 companies for in-depth analysis, and ultimately resulting in five to ten investments per year.
According to portfolio management theory, venture investments are considered "alternative investments" with high risks and returns. They typically represent 1-5% of a portfolio. If you plan to invest in startups, it is recommended to allocate no more than 5% of your assets to this asset class. However, in recent years, there has been an increasing trend to allocate a higher share of the portfolio to startups, driven by new portfolio management theories.
A public corporation must consolidate the financial statements of all subsidiary companies in which it owns 20% or more. Therefore, corporate VCs aim to acquire a stake below this threshold and often present it as a benefit for startup founders to work with them.
The uncapped convertible note leads to a conflict of interest for a business angel. If the angel provides assistance and the startup experiences significant growth before an equity round, the angel essentially dilutes his own stake because the valuation in the next round will also increase significantly.
The most typical startup team consists of three founders: a strategist who sees the company as a whole and understands how to connect its various components, a technologist who possesses the knowledge and technical skills to transform the vision into a product, and a sales professional who aligns the product with the unmet needs of customers. In the early stages, the strategist becomes a team leader. It is also possible for one person to fulfill multiple roles.
Startups should attend startup events to establish valuable connections. However, in reality, out of 30 contacts, only one or two individuals prove to be useful.
