Book Review: Secrets of Sand Hill Road by Scott Kupor

ABOUT

• Title: Secrets of Sand Hill Road
• Sub-title: Venture Capital and How to Get It
• Author: Scott Kupor
• About the author: Scott Kupor is currently a Managing Partner at the successful venture capital firm Andreessen Horowitz. He was one of the founding employees at a firm that would go on to surpass $10 billion in assets under management. Prior to Andreessen Horowitz, Scott worked for software companies HP and Opsware. He began his career in investment banking for Credit Suisse First Boston and Lehman Brothers. Scott graduated from Stanford with a BA and JD.
• Pages: 320
• Published: 2019
• Link to book

HIGH-LEVEL SUMMARY

Secrets of Sand Hill Road is a guide that hopes to democratize the opportunities within venture capital. Author Scott Kupor has worked for investment banks, tech companies, and as a Managing Partner for the venture capital firm Andreessen Horowitz.

The three parties involved in venture capital are the investors that invest into the fund, the venture capital firm itself, and the entrepreneurs/companies that receive investment capital. Scott has experience in all three areas and is well-suited to write this book.

This book is aimed at helping entrepreneurs. Being an entrepreneur and raising capital was once seen as an opportunity for only a select few. In the past few decades, the barriers to entry have fallen dramatically. Scott emphasizes the need for entrepreneurs to start companies and sees them as backbones of the economy.

Secrets of Sand Hill Road walks through the venture capital world in a comprehensive way.

Topics in the book include:

• Why current conditions are favorable for entrepreneurs
• The abundance of money available waiting to be invested
• The history of the venture capital industry
• How VCs decide where to invest
• Limited partners and general partners
• How to form your startup
• Things to consider before raising capital
• The art of the investment pitch
• A comprehensive dive into the term sheet
• Board members and governance
• How to go about financing rounds
• The final stage and exit of the VC-entrepreneur partnership

This book won’t teach you everything you need to know as an entrepreneur of a startup, but it is probably the best option to educate and point you in the right direction.

RECOMMENDATION

This book is a great read for those going to school for business and those working in business.

More importantly, this book is a must-read for current or aspiring entrepreneurs. It doesn’t matter if your background is in business or engineering, you will benefit from Secrets of Sand Hill Road.

It is inevitable that you will need to raise capital. That capital will come from VC firms. This book will show you how the industry works and will teach you the lingo you’ll be dealing with.

For those who aren’t currently entrepreneurs, I would still recommend you read this. It is insightful and can teach you what some of the most influential companies had to go through to become who they are.

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TOP 25 TAKEAWAYS

• In no particular order

1. Conditions now favor entrepreneurs more than ever. Barriers to entry are being reduced everywhere, thanks to the semiconductor revolution, the rise of globalization, and the influx of new talent into every industry and sector.

2. There is actually too much money chasing too few deals out there. VCs and their investors are unable to put enough money to work. Possibly for the first time in history, we’re talent-constrained instead of capital-constrained.

3. Venture capitalists raise investment funds from a broad range of limited partners (LPs), such as endowments, foundations, pension plans, family offices, and fund of funds. The capital raised from LPs is then invested in great entrepreneurs with breakthrough ideas.

4. A company typically leaves the venture ecosystem one of three ways: via an initial public offering (IPO), a merger or acquisition, or bankruptcy and a wind down. If you look at VC exits today, more than 80 percent come via acquisition.

5. Successful venture capital firms do not just pick winners. They work with the companies they invest in and help them throughout the company-building life cycle over a long period of time.

6. VCs seek investment opportunities with asymmetric upside payoff potential. This means low risk and high reward with a minimal loss compared to the extraordinary potential gain.

7. “Live to fight another day” is another great startup mantra to always keep front and center in your mind.

8. Cash is undoubtedly king in the startup world—and in the business world more generally.

9. Startups thrive (or die) based on the availability of capital from VCs, particularly at the formative stages of their lives when the business itself is in growth mode and can’t support itself through operating cash flow.

10. There are basically three types of people involved in VC. There’s an investor, venture capitalist, and entrepreneur.

11. VC firm results tend to follow more of a power-law curve instead of a normal distribution. In fact, as recently as 2017, the median ten-year returns in VC were 160 basis points below those of Nasdaq.

12. Good VCs get a hit about five times out of ten at bats (a .500 batting average). A VC “hit” means that the investment returns more than the original amount the VC invested in a company. Luckily, we still have 10–20 percent of our investments left—and these are our home runs. These are the investments where the VC is expecting to return ten to one hundred times her money.

13. The difference between a top-performing venture fund and a poor-performing one is not the batting average, but rather the at bats per home run.

14. The venture capital industry represents a tiny amount of capital at work in the broader financial system. But the impact of venture-capital-funded businesses punches well above its weight.

15. How early stage VCs decide where to invest. There are qualitative and high-level quantitative heuristics that VCs use to evaluate the prospects for an investment. What matters most to VCs is the ultimate size of the market opportunity a founder is going after. Big markets are good; small markets are bad.

16. Funds tend to be ten years in life and often can get extended for a few years beyond that. It’s important for the entrepreneur to know what stage of the cycle a VC fund is in. If they are early in the fund, then they should have less pressure to return capital.

17. The limited partnership agreement (or LPA) is the legal document that formally lays out the rules of the road—the economic relationship between the LP and the GP and the governance relationship between the LP and the GP.

18. How VCs get paid: 1) Management fee – 2% up to 3%. This is used to pay bills, salaries, etc. 2) Carried interest. 20% up to 30% of profits generated.

19. Startups formed should be formed as a C corp. There are lots of reasons, but probably the most fundamental is that the C corp is a good vehicle for companies that are focused on building long-term equity value in the business versus distributing profits directly to shareholders.

20. Founder stock vesting and aligned incentives. You contribute to the success of the company by helping to grow the business, and you are rewarded over time with an increasing ownership position in the equity you helped create.

21. How much money should you raise? The answer is to raise as much money as you can that enables you to safely achieve the key milestones you will need for the next fund-raising.

22. How to get in front of VCs. You should be industrious enough to find someone who knows some-one who has some relation to a VC. Your ability to find a warm introduction to a VC is often a screening heuristic that VCs use as a gauge on your grit, creativity, and determination, each of which might be an important characteristic of a successful founder.

23. What goes into a pitch? VCs are incented by their LPs to produce outsized returns. So your job as an entrepreneur is simple: Convince a VC that your company has the potential to be one of those outliers. You need to show market sizing, team, product, how you plan to go to market, milestones you plan to reach with funds for this round and plan for next round.

24. The term sheet is filled with important items that should not be overlooked. They contain the economic and governance terms that can make or break a deal for all parties involved. The entrepreneur needs to be aware of the meaning and consequences of each term.

25. Companies are definitely staying private longer, resulting in more of the appreciation of startups going to those investors in the private markets, at the expense of those in the public markets.

WHAT I LIKED

Author experienced on both sides of the table

Secrets of Sand Hill Road is meant for entrepreneurs more than anyone. The author wants to level the playing field and educate those looking to start companies and raise capital. If Scott Kupor was only a venture capitalist, it would be hard to relate to him as an entrepreneur reading the book.

That’s not the case. Scott has been on both sides of a table: as a member of startups looking to raise capital and as a managing partner of a venture capital. This dual-experience allows him to give comprehensive and valuable advice.

Written with positive intentions

I enjoyed why Scott wrote this book. Entrepreneurship can be intimidating, even more so for those entrepreneurs with no background in business. The players and terminology in the VC space can deter entrepreneurs from taking the leap.

Scott Kupor realizes how important new companies and VCs are. VC funded firms have an outsized impact on our economy. This book being written to help entrepreneurs is a good gesture.

High-level explanation of most moving parts in VC

This book is not the VC bible, and it clearly states that it does not intend to be. It covers all the important moving parts in venture capital at a high level.

For the entrepreneur, you’ll learn enough to identify what you need to learn more about. The important part is that you were exposed to something in the first place.

For example, the book dives into the term sheet. There is a decent explanation on what antidilution provisions are. You didn’t know what this was prior to reading, so you put this on your to-do list to research and perfect.

Example term sheet with explanation of term items

Speaking of the term sheet, this is probably one of the most valuable parts of the book. Definitely worth more than the price of the book.

My firm has gone into the venture space, and it’s difficult to find example term sheets to reference and work off of. Why would any firms and companies want to publish their term sheets?

Venture capitalists are well-versed in how these sheets work and what is on them. For entrepreneurs, this example term sheet can help you as you build your company.

Before you confront a VC, this sheet can guide you during your negotiations. Items in the term sheet can make or break a deal. Reading the term sheet and explanation of the items can help all parties reach a favorable deal.

BENEFITS TO YOUR LIFE AND CAREER

Show you that entrepreneurship is within your reach

If you are on this blog, odds are that being an entrepreneur is on your list of goals at some point in your life. If so, this book will show you that starting a company and raising money isn’t as out of your reach as you may think.

Secrets of Sand Hill Road will reveal how there is actually more money out there than there are opportunities to invest in. You just have to put yourself in front of the right people with the right pitch.

Help you put yourself in the shoes of a VC

Although the impact of venture capital is large, the industry itself is small. As a result, it’s hard to know what VCs are, what they do, and how they operate. The insight from Scott in this book can help you put yourself in the shoes of a venture capital firm.

You’ll learn what they want in a company, team, and product. You’ll learn how to make a top-notch pitch and how the process will work. When you put yourself in the shoes of a VC, you can put yourself in the best position to raise capital and have a healthy and successful partnership.

Help you if you are looking to work in VC

Putting yourself in the shoes of a VC will also help you if you are looking to work in venture capital. Maybe you are fresh out of college or have worked in banking for a few years. Reading Secrets of Sand Hill Road will teach you about VC so you can hold a conversation during an interview.

Some terms and topics are unique to the industry. If you are able to speak on these things, it will show the firm that you are interested and have done your research.

RESOURCES

Secrets of Sand Hill Road can be found on Amazon at this link here if you are interested in reading.

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