Ernestine Fu: All You Need to Know About Venture Capital | Summary and Q&A

TL;DR

This session covers key topics related to venture capital, including getting into VC, negotiating financing rounds, sourcing deals, and portfolio management.

Key Insights

• 🖐️ Connections and reputation play a significant role in entering the venture capital industry as a partner.
• 🛝 Successful negotiations in a financing round involve balancing the interests of founders and the VC partnership.
• 🤝 Venture capitalists need to constantly source deals by tracking trends, attending events, and building networks.
• 💀 There are different strategies for handling walking dead companies in a VC portfolio, including being activist or supportive, or ignoring them altogether.
• 🖐️ LPs invest in VC funds and play a crucial role in the success of the fund.
• 🤱 The structure of LP agreements includes management fees and carried interest.
• 🤩 Maintaining positive relationships with founders and having a strong investment thesis are key factors in attracting LPs.

Transcript

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 the... Read More

Questions & Answers

Q: How can one enter the venture capital industry as a partner?

Becoming a partner usually requires founding a successful company or working as a high-ranking executive in a funded portfolio company. It is all based on connections within the industry.

Q: How can an analyst or associate enter the venture capital industry?

An analyst or associate can enter straight out of business school or with management experience. They may apply through job postings or be hired from successful startups.

Q: How important is it to maintain a positive relationship with founders during negotiations?

It is crucial to maintain a positive relationship with founders as it can affect the outcome of the deal. Showing support and positive thinking can help build trust and increase the chance of a successful negotiation.

Q: How are investment decisions made in a VC firm?

Investment decisions can vary between VC firms. Some may have a formal Investment Committee, while others may have a more casual decision-making process. It often requires consensus among partners or a majority vote.

Summary

This video provides an overview of venture capital, including how to get into VC, sourcing deals, negotiating financing rounds, and portfolio management. It also discusses important terms in a term sheet and the dynamics between general partners (GPs) and limited partners (LPs).

Questions & Answers

Q: How can someone get into venture capital as a partner?

Getting into VC as a partner is typically based on connections. One way is to have founded a successful company, while another is to work at a portfolio company as a high-ranking executive and be invited to join as a partner.

Q: What are the options for getting into VC as an analyst or associate?

Getting into VC as an analyst or associate usually requires applying for a job or having one to four years of management experience. Sometimes, job postings or roles at trendy fast-growing startups can lead to positions as an analyst or associate.

Q: How does one stay in VC?

To stay in VC, one must be successful in closing deals and making money for the fund. This involves always be closing, as every VC fund has multiple funds, and if you're not successful, you may not be invited to participate in the next one.

Q: What are the dynamics of negotiating a financing round?

Negotiating a financing round involves balancing the needs of the founder and the VC partnership. It's important for VCs to assume the company is good, pitch their partnership positively, and establish a strong reputation before negotiations even begin. VCs also need to convince their partnership, constantly seeking feedback and consensus on which deals to finance.

Q: What is the process for sourcing deals as a VC?

VC firms source deals through a variety of methods, including tracking rising rankings in app stores and website metrics, attending demo days and events, targeting universities and research teams, and leveraging personal networks. It's important to be aware that any deals available on the internet or at public events are likely being seen by other VCs as well.

Q: What factors do VCs consider when looking for investments?

VCs generally look for strong technology, a successful team with a track record, and a product that has good market fit. It's important for VCs to assess the potential for high returns and look for companies that can generate a significant exit.

Q: What are some important terms in a term sheet?

Some important terms in a term sheet include pre- and post-money valuation, liquidation preference, board of directors composition, protective provisions, right of first refusal, pro rata rights, drag-along rights, employee option pool creation, and no-shop agreements. These terms influence the economics and control aspects of the investment.

Q: How are investment decisions made in VC firms?

Investment decisions in VC firms can be made through a formal Investment Committee process, a consensus approach, or by a single decision-maker depending on the firm. Partner meetings are typically held on Mondays to discuss and vote on investment opportunities.

Q: What are the different strategies for managing a VC portfolio?

VC portfolios typically consist of three types of companies: unicorns (billion-dollar outcomes), dragon eggs (high-potential companies), and walking dead (slow-growth or low-exit potential companies). VC firms often prioritize the best companies in their portfolio and may use various strategies, including activism, support, or ignoring, to manage the walking dead companies.

Q: Who are limited partners (LPs) in VC funds?

LPs are the investors in VC funds, including high-net worth individuals, corporations, hedge funds, and institutional investors. They provide the capital for VC firms to make their investments.

Q: What factors are important in pitching to LPs?

When pitching to LPs, the most important factor is the cohesion and synergy among the general partners (GPs) of the VC firm. LPs want to see that the team can work together effectively. Additionally, LPs consider the investment thesis, track record, and reputation of the GPs, as well as the potential returns and alignment of interests with LPs.

Takeaways

Venture capital can be entered through connections as a partner or by starting as an analyst or associate. Successful VCs are always closing deals and making money for their funds. Negotiating financing rounds requires building a strong reputation and trust with founders while convincing the VC partnership. Sourcing deals involves tracking trends and leveraging personal networks. Important terms in a term sheet include valuation, liquidation preference, board composition, protective provisions, and drag-along rights. Investment decisions are made through partner meetings, and portfolio management involves focusing on the best companies in the portfolio. LPs play a crucial role in providing capital, and pitching to them requires demonstrating a cohesive team and alignment of interests.

Summary & Key Takeaways

• Venture capital can be entered through two options: as a partner (based on connections) or as an analyst/associate (through job postings or management experience).

• Successful negotiations in a financing round involve balancing the interests of the founders and the VC partnership, while always considering the competitive nature of the deal.

• Sourcing deals involves tracking emerging trends, attending demo days, and building networks within the industry.