Successful serial entrepreneur and general partner at early stage venture capital firm Flybridge Capital Partners, Jeffrey Bussgang was kind enough to take the time to answer a few questions about his very informative and insider information packed book Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms.
Jeffrey Bussgang shares vital insights into the venture capital industry, and demystifies the VC process, while describing how the people involved in the VC world reach their decision.
Thanks to Jeffrey Bussgang for his time and for his very interesting and informative answers.
What was the background to writing this book Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms?
Jeffrey Bussgang: I had originally been an entrepreneur across a few companies – including Open Market (IPO’96) and Upromise – before becoming a VC. Shortly after joining two friends to help start Flybridge Capital Partners, I began blogging on entrepreneurship and venture capital. I received great feedback from the blog and, after five years, decided to write this book to help demystify the VC business for entrepreneurs.
I tried to make it a mix of “how to” and “war stories” so that it’s entertaining and accessible, yet detailed and directive enough to be helpful. In my interviews with over a dozen entrepreneurs and a dozen VCs – folks like Twitter’s Jack Dorsey, LinkedIn’s Reid Hoffman and Union Square’s Fred Wilson – I draw out their insights as well as my own lessons learned.
Why is there so much mystery surrounding venture capitalists and their purpose?
Jeffrey Bussgang: I think the mystery comes mostly from the fact the VC community is so extraordinarily small. There are only about 500 active VC firms with around 1,000 senior VCs who make investment decisions and sit on boards of directors. Yet, VC-backed firms make up 20% of all US jobs and 12% of all US sales, so this small group provides enormous leverage.
A great deal of firms operate very quietly and do not really invest much time mixing it up with the broad entrepreneurial community. It is usually the entrepreneur who comes to the VC and not vice-versa. I think that dynamic also accounts for a lot of the mystery. That is all beginning to change with the advent of VC bloggers, Linked In, and Twitter. Firms and their partners are becoming more transparent and accessible.
Are there different types of venture capitalists, who specialize in different types of start ups, and how does an entrepreneur choose the right VC?
Jeffrey Bussgang: This is one of the great secrets of VC financing and an important thing for entrepreneurs to remember. Venture Capitalists do specialize in different types of start ups and one of the things entrepreneurs need to look for is domain expertise. Entrepreneurs should choose VC's that can help their company grow, bring in appropriate talent, and have contacts in the industry their business are in.
An entrepreneur needs to do research on a prospective VC firm, the past companies they have funded and the relationships that the companies have had with the VC. So much information is now available on the Web that it’s easy to research about the VC and inquire with their funded companies about the real questions about the experience. Many VC's will think better of you if you do your own reference checking.
Jeffrey Bussgang (photo left)
Entrepreneurs are often a different breed of business person. How does a venture capitalist view an entrepreneur and the business plan?
Jeffrey Bussgang: VCs care more about the qualities and experience of the entrepreneur than they do the business plan. Ideas are a dime a dozen. Whether or not a company is successful is in large part dependent on the talents of the founding team. VCs look for passion, domain expertise, deep market insight and tenacity in entrepreneurs. VCs want to be inspired by the entrepreneurs they meet fund. They figure if the entrepreneur can’t inspire them, they won’t be able to inspire prospective partners, customers or employees.
How large is the pool of venture capitalists and how do they differ from one another and what traits do most of them share?
Jeffrey Bussgang: There are only 500 active VC firms in the US with around 1,000 senior VCs who make investment decision. Most of them have college degrees and/or MBAs from the top schools in the country. They tend to be consummate networkers and relationship-builders. Some VCs see themselves as a boss and want to micromanage the entrepreneur's company, but most take a hands off approach and simply advise and suggest possible courses of action to the skilled entrepreneur, I think the best VC's think of themselves as service providers for entrepreneurs – a consigliere of sorts.
How can an entrepreneur make a successful business proposal to a VC?
Jeffrey Bussgang: It is hard to make the perfect pitch, but there are some techniques that can help. First, know your audience. Before you walk into the meeting, talk to other people who have pitched to them and do your online research to help understand where their sweet spot is in terms of the kinds of deals they like to do. Second, stick to reasonable assumptions. At no point do you want to see their eyes rolling or their thumbs twitching towards their Blackberrys and iPhones.
How can a venture capitalist add value to a new business, and how does the entrepreneur avoid being overwhelmed by the VC's terms and conditions?
Jeffrey Bussgang: A VC adds value to a business in many different ways. They usually have a great deal of experience and contacts within the field which are helpful to getting deals, resources, and expertise quickly. They can evaluate and help the company develop strategy and assess their fiscal situation relative to other market participants or companies that have worked with in the past.
An entrepreneur will likely always be overwhelmed by the VC's terms and conditions unless they are very experienced. That is why they should get an experienced start-up deal lawyer to go through the material and explain to them point by point what the agreement says. VC's are in the business to maximize their investment on behalf of the LPs they represent. Their deal terms, even if “fair”, will represent that interest in some way. The entrepreneur should try to focus on the two areas that matter most – economics and control – and also make sure that they feel they can trust the VC throughout the process. If you can’t trust your future business partner during the honeymoon period, the relationship is doomed to fail.
How can problems involving the creation and operation of a Board of Directors be avoided?
Jeffrey Bussgang: The Board of Directors can wield a great deal of power under almost all scenarios. Entrepreneurs should think carefully about how they want the board constructed – both in terms of control elements and the profile of the individuals who serve. Each individual should bring certain expertise and perspective to the table. Entrepreneurs should also project out into the future what the board might look like in future rounds of financing. Boards that get too large can become unwieldy, and so anticipating how to keep the board to a manageable 5 or, at most, 7, is very important in the early days.
Finally, as a CEO or co-founder, you need to establish a very honest and transparent relationship with the Board of Directors. Inform them at all times of what is happening in the company – good and bad. At the end of the day, the board needs to operate like a team, and just like the co-founding team manages its relationships carefully, it is important that a Board of Directors does this as well.
Very often, venture capital funded companies are designed to be sold not long after funding. How can a successful exit strategy be formulated for everyone?
Jeffrey Bussgang: Much of it comes down to good communication and clear expectations. Entrepreneurs often overestimate the future success of their business. There’s nothing wrong with that –it’s great to invest in confident entrepreneurs who want to go out there and make $1 billion. The reality, though, is that outcome is not likely for every company you fund. The VC and entrepreneur thus need to collaboratively figure out a successful exit strategy on a case by case basis.
Is venture capital around the world different from or similar to American VC?
Jeffrey Bussgang: VC around the world has grown rapidly and, in many ways, emulates the American VC model. I talk in my book about China, Vietnam and Europe as interesting areas where entrepreneurship is flourishing and VC is being practiced in slightly different ways. Many firms around the world have US strategic partners. Tim Draper of DFJ, who I interviewed in the book, has made a tremendous push for his firm to have a global footprint through affiliates in other countries. Just as the world as a whole is becoming flat, the entrepreneurship ecosystem is flattening as well.
What is next for Jeffrey Bussgang?
Jeffrey Bussgang: Focus on my day job of being a venture capitalist and spend more time with my family!
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My book review of Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms by Jeffrey Bussgang.
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