192. Secrets of Sand Hill Road (Scott Kupor)

Scott Kupor of Andreessen Horowitz joins Nick to discuss Secrets of Sand Hill Road. In this episode, we cover:

When Marc and Ben first reached out to you about joining A16Z, you hesitated. Why?
“When Marc and Ben first started A16Z, they described a founder’s leadership capability as “egomaniacal”… what do you think they mean by that and do you share this belief?
What are the key factors in determining if venture is appropriate for the new business and its founder?
How should one decide how much to raise?
Scenario I’ve heard all too often… founder goes out to raise their next round, they’ve more than doubled the business, hit major milestones but the offers are less than double that of the last round. Scott, can you talk us through the valuation mistakes you most often encounter?
Founder has started fundraising… the first step is to get their foot in the door. Talk us through the right and wrong way to get a meeting.
You mention the 5 pitch essentials in the book – can you talk us through each?
We’ve done an episode with Brad Feld where we went into detail on the Term Sheet… both Economics and Governance. I don’t want to cover each term today but first, related to Economics, what’s different now about the Economics terms or the negotiation than what you saw maybe five years ago?
Same question for Governance, what has changed and what are the key terms in focus?
Do you have any guidelines on how much of their business founders should sell in any given round?
So the next topic, we’ve all seen before, assuming you’ve been doing this long enough, but a founder is struggling to raise, has little capital left, and is scrambling to get creative. What are some of the more common mistakes and outcomes you see in this scenario?
Why should entrepreneurs care who the LPs are behind the VC fund that’s investing?
We could spend hours discussing boards… any key items you’d like to highlight w/regards to boards?
Talk us through the acquisition process?
IPO process?
Great summary section where you talk about good VCs… can you recap your thoughts on what Good VCs do?

Guest Links:

Key Takeaways:

As an entrepreneur, its important to be incredibly headstrong, knowing the odds of success are against you. Scott looks for founders that have a sense of vision, purpose and willingness to “walk through walls” when times get tough, who recognize early on that the process of building a company is a challenging one.
Key factors in determining if venture capital is appropriate for your business include, alignment from an incentives perspective with the capital that your considering taking to the company and being comfortable with the tradeoffs that come with taking that money.
At Andreessen Horowitz they wanted to design the firm around what a young CEO needs and how they could we use the brand of a16z to provide relationships that can add value. As a result they created a set of operating teams, where they build relationships with people in various areas of expertise and ultimately connect them with their portfolio companies. Ideally this will enable companies to grow more rapidly and allow inexperienced CEOs to stay in that seat longer and grow with the company.
When deciding on the right amount to raise, it’s important to ask yourself, “what do I need to sufficiently de-risk the ability to raise the next round at a price materially higher than the prior round.” Typically a 2x step up is a reasonable target.
In order to avoid making valuation mistakes, Scott shares the importance of thinking very critically at the time you take a round and evaluating your confidence level. Also evaluating if the expectations and valuation that this round set for the next round investor, put you in a good place to top that desired valuation.
The worst mistake you can make as an entrepreneur is to take a small amount of money at a very high valuation. This ultimately sets an unrealistically high marker without giving yourself the runway needed to clear that hurdle.
Part of what makes a good founder is their ability to find creative ways to make things happen, that others can’t. A good way to demonstrate that skill set is by being resourceful and figuring out a way to get a warm intro to a VC rather than reaching out cold.
Scott gives an overview of the 5 pitch essentials as outlined in his book – 1. The concept of market size. 2. The team – Articulating what makes you unique and why the VC should back you. 3. Product – VC’s often recognize that the product will change and evolve over time, therefore it’s important to demonstrate how your team will evolve with it. 4. Go to market strategy. 5. How much are you going to raise and what milestones do you have?
At the early stages, team is the biggest determining factor because its the one constant element that will not change. It’s important to identify early on if the team fundamentally has the expertise and all necessary intangibles that uniquely set them up to navigate through all the ups and downs that come with fundraising.
The balance of power has dramatically shifted between VCs and entrepreneurs within the last five years. Money has no longer become a scarce resource and entrepreneurs are now in the drivers seat. Today, terms that create misalignment between both parties are much less in favor than they have been historically. Also, the size of fundraising and valuations across the board have jumped up 1 level.
Scott shares guidelines on how much of the business founders should sell in given rounds – Seed related rounds often tend to see 15 -20% dilution, Scott believes 10 -15% percent is reasonable. If you think about it as a principal in the company, that gets you 40-55% as you’ve gone through a B round, where hopefully your ready to scale the business.
If you find yourself in a situation where your struggling to raise, the best advice Scott shares is to be honest with yourself and the VC in order to have a real conversation on why the business may not be working. If you come out of that meeting with conviction that there is still an opportunity there, the next step would be to figure out how to finance through this, set the company up for the next round and get the company back on the right track.
Entrepreneurs should care who the LPs are behind the VC fund that is investing to identify if they have staying power and if that firm will be there for the long haul.