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«JEFFREY BUSSGANG General Par tner, Flybridge Capital Par tners portfolio / penguin MASTERING THE VC GAME Bussgang, Jeffrey, a successful serial ...»

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MASTERING

T H E VC GAME

A Venture Capital Insider Reveals

How to Ge t f r o m S t a r t - u p t o I P O

o n YO U R Te r m s

JEFFREY BUSSGANG

General Par tner, Flybridge Capital Par tners

portfolio / penguin

MASTERING THE VC GAME

Bussgang, Jeffrey, a successful serial entrepreneur for ten

years, is now a general partner at Flybridge Capital Partners, an early-stage venture capital firm with more than $500 mil- lion under management. Before becoming a venture capitalist, he was the cofounder of Upromise, the largest private source of college funding contributions in the United States. He serves as an entrepreneur in residence at Harvard Business School, where he earned an MBA with highest distinction. Bussgang writes a popular blog, www.SeeingBothSides.com, and lives in the Boston area with his wife and three children.

MASTERING

THE VC GAME

A Venture Capital Insider Reveals How to Get

FROM START-UP TO IPO

on YOUR Own Terms

JEFFREY BUSSGANG

PORTFOLIO / PENGUIN

PREFACE

Since the publication of Mastering the VC Game in 2010 I have received wonderful feedback from the entrepreneurial community. In fact, I have been blown away by the response from such a diverse population of entrepreneurs and would-be entrepreneurs around the world. One twenty-something entre-

preneur working at a non-profit in Australia wrote me:

Thank you for writing this book. It was a captivat- ing read that gave me the basics of how the industry looks. I loved it. My only problem was feeling inspired to action, which made me put the book down to send emails to friends and look up companies, which was a great problem to have.

Inspiring entrepreneurs into action was my original goal for the book. Now, as the global economic crisis recedes in | P R E FA C E viii the rear view mirror, policy makers and business leaders have both come to recognize that the capacity of human beings to innovate is our best hope for addressing and ultimately solv- ing society’s thorniest problems. It has never been more crit- ical that we brew up that magic elixir that comes from mixing entrepreneurs, who are the source of innovation, with inves- tors, who are the source of capital to fuel that innovation. I wrote Mastering the VC Game to inspire, in some small way, entrepreneurs around the world to arm themselves with the knowledge, skills, and tools they need to take action and to succeed in their endeavors and attract investors, the sources of capital that fuel their innovation.

It turns out that I was fortunate in the choice of compa- nies and founders profiled here. When I began writing, four of them—Baidu, LinkedIn, Twitter, and Zynga—were relative unknowns outside the insular start-up community, but have since become household names with multi-billion-dollar valu- ations. Their success further validates the lessons included in the book, although there is also much to be learned from the failures that those early founders suffered (and openly discuss here.) Since publication, a few significant trends have emerged. One of the most important has been the rise of angel investors as an influential source of capital for entrepreneurs. This has come about through the confluence of two forces: the rapid reduction in costs required for a lean start-up to initiate operations and achieve early success—thanks to cheaper infrastructure, cloud computing, social media marketing, and more sophisticated techniques for getting initial customer feedback; and the return into the start-up ecosystem of dollars and talent from | ix P R E FA C E successful entrepreneurs at start-up companies like Google, Paypal, and others.

Interestingly, these developments have been disruptive to many early-stage venture capital investors who have focused on consumer Internet and mobile start-ups, particularly in Silicon Valley. Many VCs find themselves competing with their former entrepreneur friends who have made enough money that they can afford to invest in young start-ups themselves. In response, VCs have adjusted their model by participating alongside angels in “seed” rounds that are often less than $1 million or focusing on later stage investing. Further, successful angels have attracted enough interest and capital that they have become more institutionalized (earning the nickname “super angels”) or raised outside capital and hired young associates to scale their model into something that looks remarkably like a small VC fund. Entrepreneurs that can successfully navigate this new landscape have more funding choices than ever, especially at the earliest stages when they seek only a modest amount of capital. By and large, I believe that it’s a good thing for us all that entrepreneurs have these new options from which to choose.

We have witnessed some important new technological trends in the past few years, particularly the launch of the iPad and tablet computing, the continuing explosion of smart phones and applications, and a massive cost reduction in the mapping of the human genome, which has the potential to change the game in health care and a broad range of industrial fields. Not surprisingly, most of the companies leading the way in these exciting areas are VC-backed.





These trends and others like them have further fueled the need for the kind of cooperation between VCs and entrepreneurs I | P R E FA C E x

–  –  –

P.S. Visit my blog to keep the dialogue going—www.Seeing BothSides.com.

INTRODUCTION

I was born to be an entrepreneur. Becoming a venture capitalist (VC) was never part of my life plan.

Reid Hoffman, founder of LinkedIn, observed that an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down. This is certainly an impulse to which I can relate. I credit my father with sparking my entrepreneurial drive. He was a Holocaust refugee and survivor, who came to America, penniless, in 1949 and earned his master’s in engineering from MIT and PhD in applied physics from Harvard. He then started a successful high-technology company the old-fashioned way—living hand to mouth, operating with customer revenues only, and without benefit of any outside capital. Watching my immigrant father embrace entrepreneurship inspired in me a passion for the field and an unyielding belief in its power to effect change.

Armed with a “kitchen table” MBA, as well as the real thing from Harvard Business School, I set out many years ago on 1

| MASTERING THE VC GAME

2 my own entrepreneurial journey. During the ten years I spent making my way as an entrepreneur and executive team member of two venture-backed start-ups—Upromise (which I cofounded in 2000) and Open Market (IPO 1996)—I interacted with and pitched to many VCs and became fascinated with the VC game. So, after a decade of scratching the entrepreneurial itch, I went over to the “other side” and became a VC myself. I joined a new VC firm, called Flybridge Capital Partners, that a couple of friends had just started.

I initially both revered and feared VCs as powerful, intimidating characters in possession of the one thing entrepreneurs are desperate to get access to: capital. As I spent more time with VCs as my partners and co-investors, I learned what made them tick and how entrepreneurs can be most effective in pitching them, managing a VC-led board of directors, and successfully navigating an exit.

I wrote this book to demystify the VC world for entrepreneurs, having seen both sides as an insider, and to help entrepreneurs level the playing field when pursuing venture capital so that they can secure the resources necessary to achieve their vision. In this book, I reveal industry insights drawn from my experience as a practicing VC. I also include the perspectives of partners from some of the leading VC firms around the world who were kind enough to divulge their own secrets about their approach to the business.

I was also fortunate enough to be able to convince some of today’s most successful entrepreneurs—including the founders of Constant Contact, LinkedIn, Sirtris, Twitter, Zynga, and others—to talk from their deep knowledge and experience about how to work with VCs to shape a young company and |3

Introduction

help it grow. The purpose of this book is to share the magic formula of how great entrepreneurs team with VCs to create valuable companies from raw start-up. Whether you are the next Mark Zuckerberg (the Harvard student who started Facebook) or Jim Barksdale (the seasoned Fortune 500 executive who became CEO of Netscape), Mastering the VC Game will provide you with an insider’s guide to the world of VC-backed company formation, growth, and exit.

In the book’s first two chapters, I will explore the psyche of the two protagonists in the start-up game: the entrepreneur and the VC. In Chapters 3 and 4, I turn to the process of raising money (“the pitch”) and negotiating the deal. Chapters 5 and 6 provide insight into the company-building process and the way entrepreneurs and VCs make money by selling their companies (“the exit”). After a profile of the VC business outside the United States in Chapter 7, I conclude with a few observations about the industry’s future direction.

I have written this book not only to share this knowledge so that others can pursue their dreams—and, if things go well, turn their investments into handsome returns—but also because I strongly believe in the positive impact the venture-backed start-up can have on our economy and our society as a whole.

VCs acting in concert with entrepreneurs function as an essential and powerful engine of the U.S. economy. In the more than forty years since the very first venture-backed start-up—Digital Equipment Corporation (DEC), which was founded by Ken Olsen with a $70,000 investment in 1959 and went public in 1968 with a market value of $37 million, a 528-fold return!—VCs have invested more than $450 billion in some 57,000 companies in the United States. More than 12

| MASTERING THE VC GAME

4 million people (about 12 percent of the U.S. workforce) now hold jobs and make careers at venture-backed companies, and those businesses have combined sales of $2.9 trillion or over 20 percent of the total business revenues in the United States.

And the VC game has led to the creation of some of the most iconic of American companies: Amazon, Apple, eBay, Facebook, Google, Intel, LinkedIn, Microsoft, Staples, Starbucks, Twitter and YouTube.

The venture-capital-driven entrepreneurship model has also become one of America’s most influential and important exports. Increasingly, the venture-backed start-up is becoming a key driver of growth and innovation in countries around the world. In the rapidly developing countries, venture capital investment is spreading like wildfire—up from zero just a few years ago to $4 billion in China and nearly $1 billion in India in 2009, and those numbers are expected to grow rapidly in the next few years.

Both in the United States and abroad, the venture-backed start-up plays an important role beyond innovation and wealth creation: changing the world for the better. Entrepreneurs and VCs alike invest in dreams—from new sources of energy to curing cancer to revolutionizing education—that have the potential to benefit society as well as themselves. Although the majority of entrepreneurs do not go the VC route to raise money to fuel their businesses, for many reasons that we’ll discuss, all can benefit from learning how the VC-backed start-up formula works.

Over the next decade, hundreds of billions of dollars will be invested in new or young companies and it is critical that this capital be invested wisely. With the accelerating develIntroduction opment of technology, widespread digitalization, broadband Internet, environmental and energy breakthroughs, and medical advancements, the stakes are getting higher and the potential for world-changing opportunities is greater than ever before.

Mastering the VC Game will help entrepreneurs be more effective in financing and launching start-ups and in creating companies that benefit us all, while also providing insight into the critical role these enterprises play in the global economy.

1

THE ENTREPRENEURIAL ITCH: CHANGE THE WORLD

To truly understand the world of VC-backed start-ups, it is necessary to first delve into the psyche of the entrepreneur, because it is fundamentally different from that of the conventional businessperson.

I have had the entrepreneurial drive for as long as I can remember. I was fascinated by technology as a kid. I tease my parents that my love for computers originates from all the video games I played while hanging around ice rinks waiting for my older sister, then a competitive ice-skater, to finish practice. When the Apple II came out, I begged my parents to buy one for me, and I gladly invested the earnings from my paper route in the purchase.

I got my first crack at working in a start-up during the summer of my first year in business school. I became a member of the “executive team” of a software start-up. The entire staff of ten worked out of an apartment in Boston, located in an alley behind a Chinese restaurant. I can still remember the smell—and 7

| MASTERING THE VC GAME

8 not fondly. The vice president of marketing usually brought her dog to the “office,” and she (the dog, that is) always seemed to bark loudly when I was just about to close a deal on the phone.

This first start-up experience proved to be great fun. It was a sandbox where I learned about the real-world pressures of operating a small software company: shipping products, working with partners, meeting payroll, and doing deals.

From that first experience of the entrepreneurial life, I was hooked.



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