Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist

Companies staying private and delaying going public has been a major trend over the last decade. You’ve likely heard the term “Unicorn” used in the media to describe private companies with valuations over $1 billion. While these unicorns used to be rare, hence the terminology, there are now almost 400 of them scattered across the globe.

This trend of staying private has profound implications for portfolio management. The traditional investment vehicles that you have likely been exposed to (mutual funds and ETFs) typically only invest in public companies. Therefore, as these valuable companies stay private, the traditional investor has been unable to participate in their growth – think Airbnb, Uber, Theranos (just kidding, you’re lucky you missed that one ;)). So, you may be asking, if these companies are not tapping into the public markets to raise capital, where are they getting funds to fuel growth? Venture capital.

And with this changing paradigm, you can see why it is critical for anyone with an interest in investing to become more familiar with venture capital.

In typical finance fashion, venture capital is loaded with jargon and seemingly overcomplicated processes that make those of us in finance feel smarter than we are, and help the lawyers earn their fees. The reality is the actual investment in and of itself isn’t that much different than traditional investing, but the processes and terminology are more complicated. Fortunately, Brad Feld and Jason Mendelson, both of the extremely well-respected venture capital fund Foundry Group, wrote as straightforward of a book explaining this jargon and key components of the funding process as could be hoped for. I think they perfectly explain this frustration in the foreword of the book,

whatever the origin story was, the language of venture deals is foreign to many and remains opaque and confusing to this day. This works to the advantage of industry insiders and to the disadvantage of those who are new to startups and venture capital.

One of the most important components of a venture deal is the “term sheet”. This can be thought of as the offer letter that is given from an investor to the startup founder. The terms and criteria required for the investment if you will. There can be numerous terms to cover, many points of which are debated between the investor and founder, until ultimately a deal is agreed to. Venture Deals is packed with valuable information covering the important factors typically involved, but more importantly, I love how Brad and Jason succinctly summarize the reality of the term sheet – “there really are only two key things that matter in the actual term sheet negotiation—economics and control.” (Pg 2)

In addition to covering the major aspects of the term sheet, Venture Deals provides helpful tips on raising capital, negotiation tactics, and even enlightening information on the inherent conflicts within funds that may frustrate entrepreneurs, and limited partners, that may be unfamiliar with a fund’s inner workings. One of my favorite aspects of the book is their inclusion of the “entrepreneur’s perspective”. These are chapter summaries provided by Return Path CEO, Mat Blumberg, that relate how the information pertains to an entrepreneur.  

All told, if you have any interest in VC whatsoever, I highly recommend reading Venture Deals as a primer.