I’m doing a venture fellowship at Republic! Here are pre-reads and my notes. To anyone at Republic—I’ll take this down if it ends up violating the NDA.
What is VC?
55 Things Learned as a 19 Year Old in VC, Tiffany Zhong
- VC is unstructured, and successful VCs are self-motivated and organized. Key tips:
- It’s all about mindset. Good VCs are:
- Right. Develop good judgement about investments over time.
- Modest. Admit gaps in knowledge and adopt a growth mindset.
- Transparent. Be honest and show integrity; don’t gossip.
- Hard workers. Passion and hustle can outweigh intelligence.
- Analytical. Don’t get caught up in hype; evaluate logically.
- Action items for VCs:
- Master persuasion and power dynamics.
- Ask persistent questions. And good questions, like “What are your biggest concerns?” And learn to distinguish correct answers from smart answers.
- Talk to people! VCs hang out on Twitter.
- For consumer products:
- Either social or transactional.
- Social products should 1) possess utility, 2) leverage narcissism, 3) be entertaining, and 4) have a community. They evolve from Utility → Platform → Ecosystem.
- Consumer marketplaces require 1) positive unit economics, 2) good branding, 3) a strong community, and 4) SEO/ASO.
How do Venture Capitalists Make Decisions?, Antoine Buteau
Facts about deals:
Only 0.25% of companies are venture financed, but 50% of U.S. IPOs are VC-backed, accounting for 20% of U.S. market cap and 44% of R&D spending.
Most deals (54%) come are sourced or come from a network, while the remaining are referred, inbound from management, or referred by a portfolio company.
Only 2% of considered companies closed a term sheet. The process goes:
Considered —(28%)→ Met Management —(36%)→ Reviewed with LPs —(48%)→ Due Diligence —(35%)→ Term Sheet —(59%)→ Closed
- Facts about investments:
- When selecting investments, the team is the biggest factor (53% early stage, 39% late stage), followed by business model, product, fit, market, and industry. VCs don’t care about valuation
- VCs use cash-on-cash, multiple of capital, and net IRR instead of DCFs or NPV. Only 80% of VCs and 69% of early stage VCs forecast cash flows.
- Most term sheets involve pro-rata and participation rights, while a minority outline redemption rights, cumulative dividends, full-ratchet antidiluation, and 2x+ liquidation preferences.
- VCs syndicate 65% of their investments to share risk, build reputation, conserve capital, and gain expertise.
- After the deal:
- After investing, VCs add value by hiring board members and employees, connecting customers and investors, and offering strategic and operational guidance.
- Only 12% of early stage investments and 19% of late stage investments end up with an IPO. While 50% and 60% exit through M&A, respectively, these are mostly disguised failures.
A Brief History of the World of VC, Nicolas Colin
- Information systems and limited liability made equity more attractive
- Prior, companies raised money through credit. They couldn’t verify investments and were liable for money owed by the company.
- Accounting technologies made information reliable. In 1811, New York led other states in introducing limited liability.
- Tech startups relied on government.
- New ventures were hard for the public to find and invest in. They also lacked tangible assets and clear earning potential.
- Amidst World War 2, Vannevar Bush directed the government to fund military research at universities.
- Stanford gave birth to Silicon Valley
- Frederic Terman encouraged military partnerships and student entreprenuership.
- VC exploded after legal changes and personal computing.
- Fueled by the Small Business Investment Act, the Bay Area gave birth to the first limited partnerships.
- The Internet provided VCs abundant investment opportunities.
- In Europe, capital is weighted so little that people invest in VC even when it performs poorly—the next step is to rigorize VC.
Tech & VC: The Foundation, Paige Doherty
- Breaking in
- Cold emails should only contain 1) praise, 2) project, 3) importance, 4) the ask, and 5) excitement.
- Avenues include joining through startups, associate→principal→partner, angel investing, or content expertise
- Create a personal site with any of: Squarespace, Wordpress, Wix, Tumblr, Webflow, GitHub, Notion
- List of fellowships
- Subscribe to newsletters, learn the vocab.
Terms to know in VC
100+ VC Terms, Sergio Marrero
- Capital call: A fund prompts LPs to put in capital to finance an investment.
- Carried Interest: Share of profits a manager can keep, usually 20-30%.
- Exit velocity: Speed of an exit, usually higher for growth funds than accelerators since late-stage companies are closer to exit.
- Fund of funds/LP: A fund that invests in PE and VC.
- GP: A VC/PE firm that makes investment decisions.
- LP: Provide capital to the fund.
- LPA: Limited Partnership Agreement, between LP and GP.
- MFN: Most favored nation; largest investor gets benefits of side letters with other LPs.
- Roll-up: Acquiring and merging multiple small companies to achieve economies of scale.
- Side letter: Agreement between a VC fund an individual investor.
- Funding rounds
- Down round: The company is valued lower at a later round.
- Friends and family round: Super early stage round.
- Inside round: A round of financing composed of existing investors.
- Party round: Raising small amounts of money from many small investors.
- Seed round: Earliest round of fundraising, usually during product development.
- Washout round: Everyone suffers yuge dilution.
- Term Sheet
- Anti-dilution clause: Protects an investor from reductions in percent equity stake, increasing shares issuable upon conversion.
- Clawback: Money already paid must be paid back under certain conditions.
- Control rights: Control over voting, incurring indebtedness, board seats, and other key actions.
- Convertible: The right to convert preferred shares to common shares. Usually automatic on IPO.
- (Negative) Covenant: Obligation to do (or not do) something, such as obtain life insurance or not deviate from the budget.
- Come/tag along rights: Investor can sell shares if key employees sell shares.
- Cutback rights: Determines who’s shares are let out of an IPO to preserve price.
- Demand registration rights: Require company to register investor shares for sale to public, even without a plan to IPO.
- Drag-along rights: Require other shareholders to sell their shares or vote their shares to sell the company.
- First refusal/preemptive rights: Right to prevent dilution by purchasing a pro rata share of all new stocks.
- Full ratchet: Adjusts the conversion ratio so each share of preferred stock can be converted into the same number of common stock the investors could’ve bought at a lower price.
- Grandfather rights: An old rule will apply to existing situations, while a new rule applies to future cases.
- Information rights: Company provides financials, including stock ledger, stockholder list, and books/records.
- Investor’s rights agreement: Made by early or large investors, often including “first offer” (in future financing rounds) and “observer rights” (for board meetings).
- No-shop clause: Founders can’t share the term sheet with other investors.
- Over allotment option: Right to exercise the first refusal rights and come along rights of other, non-exercising investors.
- Pay-to-play: Require all investors to continue pro rata commitments.
- Piggyback registration rights: Include shares in any IPO.
- Price antidilution protection: Adjusts conversion ratio to counterbalance drops in price.
- Protective provisions: Right to veto certain transactions.
- Pari passu: On the same terms as.
- Ratchet: Issue additional shares if IPO conversion doesn’t meet the price paid by the investor.
- Redemption rights: Force the company to repurchase investor’s stock.
- Tag-along right: Right of a minority investor to the same benefits as a majority investor.
- Weighted average: Adjusts the conversion ratio to account for both the lower price and number of shares. Favors the investor more than broad-based weighted average.
- Blended preferences: Equal payment rights for all classes of preferred stock in liquidation.
- Cap table: Shows ownership by investor.
- Cliff: Period, usually one year, before which no employee stock options vest.
- Conversion rate/ratio: Price of common stock in terms of preferred stock.
- Common stock: Issued to founders, management, and employees; lower priority than preferred shares.
- Convertible debt: A loan with a pre-determine debt-to-common-stock ratio.
- Exercise/strike price: Amount paid to execute options, usually pegged to fair market value.
- Fair market value: What investors are willing to pay. For private companies, based on comparables or recent transactions.
- Fully diluted: Total common stock shares issued, after outstanding options, warrants, preferred stock, and convertible debt.
- Liquidation preference: Order that investors are paid in event of liquidation or bankruptcy.
- Option pool: Shares of common stock that can be sold without triggering antidilution protection, often 15%.
- Participating preferred stock: Class of stock with right to share equally assets for liquidation after payment for preferred stock. Non-participating preferred stock holders choose between liquidation preference and common stock distribution.
- Preferred stock: Receive dividends and liquidation preference.
- Restricted stock: Restrictions on transfer or sale.
- Stacked/senior liquidation preference: Higher liquidation preference than other stakeholders.
- Shares outstanding: Stock held by all shareholders, used to calculate market cap and earnings per share.
- Stock option/warrants: Right to purchase or sell a stop at a price within a period of time. Employees get options, investors get warrants.
- Vesting: Employees only receive equity after a period of employment.
- 409A Valuation: Third-party valuation.
- ARPU: Average revenue per user.
- AOV: Average order value.
- ARR: Average recurring revenue.
- ARRG Ratio: ARR over growth rate.
- EBIT: Earnings before interest and taxes, a measure of operating profit.
- Gross margin: Difference between revenue and COGs over revenue.
- Net revenue: Accounts for discounts and refunds.
- PEG ratio: Price over earnings to growth ratio determines trade-off between stock price, earnings per share, and expected growth.
- Revenue multiple: TEV/TTM.
- TEV: Total enterprise value.
- TTM: Trailing 2 month revenue.
Technicals in VC
How to talk about valuation when a VC asks , Mark Suster
- VCs look for fit, balancing early, mid, and late-stage deals.
- An overpriced last-round valuation means dilution, which deters VCs.
- Asking about existing funding gives a peak into capital efficiency.
- If existing investors are continuing to invest in a round, that a) means they remain confident in the company, but b) means you might have trouble getting target ownership.
- When dealing with strategic investors or groups of investors, startups will often just name a price.
- Startups should ask questions, like target ownership ranges or syndicate opportunities.
Growing our SaaS company to $1 Million+ , Mike Kulakov
How did Everhour, a SaaS company, reach $1M ARR without VC money?
- Competitive advantage by specializing and innovating features.
- Belief in the product, using it internally.
- Bootstrapping forces you to be careful, doing outsourcing and product development simultaneously.
- Freemium can trap you with low conversion rates, about 0.5-1%.
- Annual billing can boost MRR 10-15%.
- Tailor your promotion channel; consider going organic.
Diversity in VC
- Only 6% of VC firms are led by women, and less than 10% of VC capital goes to female-led startups.
- Lots of angel groups and VC firms support women!
Across a sample of 1,500 VC professionals:
- 74% are white and 23% are Asian.
- Only 11% are female.
- There were no Hispanic or black females.
- 28% have an engineering degree and 41% have operating experience.
- Diverse teams increase performance on every measure.
- Across 2,000 investors, only 1.5% were black; for larger funds, it’s less than 1%.
- African-Americans may lack connections and role models.
- Some strategies to diversify:
- Programs that connect undergrad CS majors with SV startups
- Black/minority investment networks and communities.
- Statistics can be demotivating, but don’t let them imbue undue pessimism.
- Emphasizing non-traditional backgrounds can help shake the norm and improve diversity in VC.