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| What makes VCs tick |
| Sanjeev Bikhchandani / Jul 15, 2010, 00:17 IST |
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When we raised venture capital (VC) funding for Naukri a decade ago, I was fairly clueless about how VC firms worked — how they decided which company to invest in and which opportunities to turn down, how they valued a company, why so many complex clauses existed in the shareholder agreement, why they needed a time-bound exit, why they were only interested in deals of a certain size, etc.
Over the last 10 years, I have learnt through experience the answers to these and many other questions about the mysterious ways in which VCs move their wonders to perform.
This is a book that tells you all that and more in less than 300 pages. This is not a book to be read in one sitting. This is a book that needs to be studied and absorbed bit by bit over a few weeks because it has a lot of information that needs to be absorbed slowly in order to be fully understood.
The good bit is that it passes the sub-head test. You can pick up the book and start reading it from anywhere and still get the drift.
Entrepreneurs who are looking to raise VC funds will find it useful to address many of the issues they face — whether or not to raise VC funding, how likely is my company to attract investment, understanding the term sheet, the costs and benefits of raising capital, how to woo a VC, when to raise money, how much to raise, what to expect once I get a VC investor on board, etc.
This book will also help entrepreneurs who have raised VC funding in understanding their investors slightly better — what are their motivations, what are their apprehensions and what are the possible transitions in the relationship with the investor.
For me the book is useful since we are now on the other side of the table and Naukri is now investing in start-ups as a corporate VC. It tells me things about how the better VCs make their decisions and what they look for in companies.
For instance, the book gives an insight that companies that have low CEO compensation tend to have a higher chance of success because they indicate a frugal mindset and a willingness of the entrepreneur to make personal sacrifices, and such companies have lower cost structures. Sounds obvious when someone tells it to you, right? Well, actually it isn’t so obvious and is something I have learnt the hard way over the last few years. Today one of the most important questions we ask entrepreneurs who approach us for funding is what salary they would like to take after they raise money. The answer tells us a lot.
Another example of a deep insight — while all VCs have financial acumen and adequate intellect, it is compassion that separates the best from the rest. So true. The acid test — will the VC kill a company that is not performing or will it give it time? Having been through two meltdowns in the last decade, I know that the VCs that won were those that stayed the course and backed their companies through difficult times many times out of sheer faith and not any rationality.
Or a third one — the importance of personal chemistry. For a successful partnership between a VC and an entrepreneur, it is vital that there is personal comfort between them. It is not about business model and terms alone.
To write this book, the author has relied on his own experience in the VC industry and also has interviewed dozens of VCs and entrepreneurs.
The book is replete with interesting case studies and interviews of companies like Alibaba, Amazon, Skype, Facebook and others.
Did you know that Jeff Bezos had offers of investment from several VCs. He finally went with Kleiner Perkins Cauflied and Byers (KPCB) even though there were two others who were offering higher valuations because of the value that KPCB could add and because of their reputation. Tells you something, right?
And did you know that Jack Ma was an English teacher who raised $60,000 from 18 friends to start Alibaba in 1999. When asked about his secret of success, he says: “There were three reasons why we survived. We had no money, we had no technology and we had no plan. Every dollar, we used carefully.”
To understand what differentiates success from failure, you need to study not just the success stories but also the failures with equal depth. The problem, however, is that people are not willing to come on record and talk about their failures with even a fraction of the candour with which they talk about their successes. This book too suffers from that limitation.
Nevertheless, it is a very useful book for entrepreneurs, aspiring entrepreneurs, management school students, VCs and wannabe VCs.
The reviewer is the co-founder and CEO of Naukri.com
THE WAY OF THE VC
Having Top Venture Capitalists on your Board
Yinglan Tan
John Wiley and Sons
Pages 282; Rs 1,713
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