I finished reading “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist” by Brad Feld & Jason Mendelson. Before jumping into my next book, thought I’d take some time to reflect and make a few notes on the Venture Deals book.
Venture deals is a must read if you want to raise money for your startup. It will help you understand how VC (venture capital) works and how VC backed companies operate. It covers the following:
1. The process of raising money
2. Whether venture capital is appropriate for your startup
3. How to approach a venture capitalist
4. Term sheet (the initial offer) and the terms used
5. Letter of Intent
6. How to negotiate
7. How Board of Directors works and how to structure it.
8. How employee option pools work and it factors into valuation
9. What happens when you sell your company
10. How a VC fund operates
Importantly, it tells you what to focus on which is economic terms and control terms. Also what not to focus on and when your lawyer is wasting your time & money. I learned about terms such as participating shares, fully participating, liquidation preferences.
I’d say this is a good book to read quickly to understand how it works. Then its something you would go back to and read in more detail when you go through the process. When you need to refer to something. It does provide a structured way to think about raising money and how to go about it.
I’m glad they wrote this book to open up the work of startup investing and venture capital. The skeptic in me also thinks about the motivation for writing this book – its great marketing for them to bring in more deal flow and to get deals structured this way.
Sometimes the book lost me with some of the examples which involved numbers. I had to read those a few times to understand them. There’s a bunch where I don’t get it. I would need to analyse it for a while, do the calculation myself using a calculator or spreadsheet to understand the maths.
I also had some prior knowledge which helped with reading this book as I’ve come across some of this stuff before. So that helped me get through the book a lot easier and some of those things made sense to me. It provided me some more colour as to how it worked. From working as an accountant at Deloitte, I was involved in the tax/accounting side of venture deals. As an entrepreneur I’ve pitched to many VC’s and also speak to many friends who have raised money. I also speak to angel investors and venture capitalists to understand how they think.
The small print
I’d like to add some final notes for the venture deals book which are very important. Some of its from the book and from my experience.
1. Raising money is not the goal of a startup. The goal is to solve a customer problem and find a viable business model.
2. Raising money is not necessary for a startup. It only suits certain startups, like a small %. It is a necessary evil. It can be viewed that way and several investors have also expressed it that way. You may need it to scale your business, particularly in a competitive market. Also, depends on your projections and what you are aiming to do.
3. There are some awesome bootstrapped companies. Bootstrapped companies are businesses that have never raised money and reinvested their profits back into their own growth. There are companies that were bootstrapped for a very long time before raising money. Bootstrapped companies are the norm, not the exception.
4. When you raise money, you are committing to a relationship with your investors. Its relatively permanent. Its not easy to get rid of them. So you have to find investors that you can work with. It is a long term relationship.
Want to learn more about venture capital?
Check out the website Ask The VC from the authors of the Venture Deals book.
If you would like to learn more about venture capital, check out the Ask Me Anything session we did with Niki Scevak from Blackbird Ventures. He’s one of Australia’s leading startup investors. Read the Q&A here.
I’m out like your burn rate,