Peter Zhang

Reads for VCs

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:
    • Time: block off time for projects. Use calendars.
    • Emails: figure out a workflow, install Streak, create filters for subscriptions. Be short and sweet; suggest times in the recipient timezone. Double opt-in intros.
    • Meetings: 15m calls for chats, 30m calls for intros, 1h if local.
  • 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
  • Learning
    • List of fellowships
    • Subscribe to newsletters, learn the vocab.

Terms to know in VC

100+ VC Terms, Sergio Marrero

  • VCs
    • 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.
  • Equity
    • 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.
  • Finance
    • 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?

  1. Competitive advantage by specializing and innovating features.
  2. Belief in the product, using it internally.
  3. Bootstrapping forces you to be careful, doing outsourcing and product development simultaneously.
  4. Freemium can trap you with low conversion rates, about 0.5-1%.
  5. Annual billing can boost MRR 10-15%.
  6. Tailor your promotion channel; consider going organic.

Diversity in VC

Top Angel Groups + VC Firms for Female Entrepreneurs

  • 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!

Who is a VC?

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.

Why are there so few Black investors?

  • 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.

Yes, I’m a 26 Year Old Female Venture Capitalist - Here’s How & Why

  • 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.

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