A student's guide to VC
A collection of resources on venture capital
Over the past year, I fell in love with VC, and I created the following collection of notes and resources for myself. It began as a glossary to keep track of the alphabet soup of terms I learned in Scott Kupor’s Secrets of Sand Hill Road, but it soon expanded into book and podcast recommendations, investment theses from different firms, blog posts from student VCs I enjoyed, and notes from information sessions I attended.
VC has a reputation for being a very opaque industry. It's really hard to find job postings, it's hard to get resources about how to prep for interviews, and interview processes aren't really structured. Whether you’re a founder raising a new round or a student aspiring to become a VC, I hope this guide is helpful to you.
tl;dr: what VC is, how VCs evaluate founders, resources to learn more about VC as a student (no application required!)
Intro
What is VC?
Venture capitalists (VCs) provide capital to promising founders in the form of money in return for an ownership stake. In addition to funding, VCs advise founders on long-term decision making and reaching strategic goals.
VC Life Cycle
since VCs also need to raise their own funds from limited partners (LPs), the later in a fund cycle an investment occurs, the greater the likelihood that the VC may also not have sufficient reserves to set aside for subsequent financing rounds
to achieve two and a half to three times net returns (after all fees), VCs probably need to generate three to four times gross returns; therefore, they hedge their bets on companies that will provide outsized returns
Why does VC exist?
loans are not the best form of financing for startups because they don't form the permanent capital structure of a company (debts have to be paid back, often with interest)
equity (financial investment in exchange for ownership) doesn't suffer from this limitation
equity is good for companies that are not generating near-term cash flow, risky, or have long illiquidity periods
Why does VC matter?
“Venture-backed companies now spend 44 percent of the entire R&D budget for American public companies. The 665 public companies that are VC-backed make up a fifth of the total market capitalization of public companies. They employ four million people. Those are significant numbers, but I believe this is just the beginning.”
“According to a 2015 study by Ilya Strebulaev of Stanford University and Will Gornall of the University of British Columbia, 42 percent of all US company IPOs since 1974 were venture backed. Collectively, those venture-backed companies have invested $115 billion in research and development (R&D), accounting for 85 percent of all R&D spending, and created $4.3 trillion in market capitalization, which is 63 percent of the total market capitalization of public companies formed since 1974. Furthermore, specific to the impact on the American workforce, a 2010 study from the Kauffman Foundation found that young startups, most venture backed, were responsible for almost all of the twenty-five million net jobs created since 1977.”
(Scott Kupor, Secrets of Sand Hill Road)
In 2017, investments in VC companies topped $84 billion.
VC investments have a positive signaling effect; companies with backing from acclaimed investors are seen as more likely to succeed
that said, in 2017, US VC firms raised about $33 billion from investors; in comparison, the global buyout industry raised about $450 billion in 2017, and hedge funds manage north of $3 trillion.
How does VC work?
Who backs venture funds?
Limited Partners (LPs) give VC firms money to invest. They can be:
Sources of investment for LPs
Growth assets - investments intended (as the name suggests) to earn returns in excess of what less risky assets (bonds and cash)
public equities - stocks that trade on public market exchanges
private equities - stocks that do not trade on public exchanges but are managed by funds that transact in privately held companies (including buyout firms and VC)
buyout funds - private equity funds that typically buy controlling ownership stakes in existing businesses and seek to increase their value over time by improving their financial operations (KKR, Blackstone)
hedge funds - funds that invested in publicly trade equities but take both long (invest in stock) and short (bet that stock will decline in price) positions
Inflation hedges - investments meant to protect against inflation (decreasing value of currency)
real estate - property prices rise with inflation
commodities - gold, silver, and other precious metals
natural resources - oil, gas, timber, agriculture
Deflationary hedges - when prices drop, purchasing power of currency increases
bonds - interest rates fall with deflation, and since the value of bonds is inversely correlated with interest rate, bond price increases
cash
How do VCs make money?
GPs charge an annual management fee (around 2%) that is calculated as a percentage of the capital that the LP has committed to contribute to the GP over the life of the fund.
Carried interest - the portion of the profits that the GP generates on her investments and that she is entitled to keep; can vary but ranges from 20-30%
Hurdle rate - under some LPAs, unless the VCs makes returns above a certain percentage (usually 8%), the GP is not entitled to take her carried interest on the profits
VCs cash out when the company exits (goes public or get acquired)
Liquidation preference: who gets their money back under certain circumstances (e.g. acquisition)
seniority - typically occurs at a later stage of financing where there are at least two classes of preferred stock
pari passu - everyone gets treated the same
What structures do VCs use to invest?
convertible note
a note is like debt, in that it has an interest rate and a date by which the principal amount of the debt is expected to be repaid
but it also has a conversion feature through which the investor can convert debt to equity, typically into shares of preferred stock upon the closing of a Series A round of financing
uncapped note: debt converts into equity at the same price at which the Series A investors purchase equity; the valuation at which the note converts is not restricted and is determined by the Series A equity price
capped note: ceiling on the maximum price at which the debt will convert into equity
for a convertible note, the valuation is determined at the next round, typically with a cap; terms also typically comply with the next round
according to Pillar's Jamie Goldstein, convertible notes and SAFEs can lead to misalignment
SAFE
differences between SAFE and convertible note: no interest, no maturity date, no size requirement for conversion
terminates upon equity round, acquisition, IPO, or shut-down
helpful video here:
priced round - valuation set now, terms set now
How do VCs determine the valuation of a company?
last round valuation/waterfall
Some firms value their companies by taking the last round valuation in the private market and assigning that value to the firm’s ownership in that company. For example, if a firm owned 10 percent of a company and the last round valuation was $200 million, a firm that utilized the last round/waterfall method would report the value of its holdings as $20 million (0.10 × $200 million).
comparable company analysis
Devise a set of public “comparables”—companies that have a similar business model or are in a similar industry—and pick a valuation metric (often a revenue multiple) to reflect how the broader public market values this set of companies. That metric is then assigned to the financials of the portfolio’s companies.
option pricing model
uses the Black-Scholes option model to value a portfolio company as a set of call options whose strike prices are the different valuation points at which employee options and preferred shares convert into common stock
(Scott Kupor, Secrets of Sand Hill Road)
Basic Vocab
(Most of these came from RBL1’s guide)
General Jargon
SaaS = Software as a Service
B2B = Business to Business
D2C = Direct to Consumer
Cap Table = Capitalization Table (who owns what of a company)
Unicorn = Companies worth over $1B
ESOP = Employee stock option pool (how much have we allocated of the company to give to employees)
Term Sheet = document guiding company's round and investor relationship
(Source: Ripple Ventures)
Legals
TS = Term Sheet, a sheet summarizing the commercials of an investment agreement contract
SHA = Shareholders Agreement, the contract defining the relationship amongst the company and the shareholders and amongst the shareholders
CT = Cap Table or Capitalization Table, a document (usually a spreadsheet) that states who owns what % of shares in the company
ROFR = Right of First Refusal, in case existing shares of the company are sold, shareholders with a ROFR will have the option to buy those shares, ratably, before they are offered to new investors
if I want to sell some of my stock, I must give the company and the investors the right to purchase the stock at the same price
allows the company and investors to control who owns the stock
Liq Pref = Liquidation Preference, a right attached to a specific class of shares that regulates the order of priority in case of a liquidity event (simply put: who gets the $ first in case there is not enough to make everybody happy)
Pre = Pre Money or Pre Money Valuation, one key term of the term sheet, it is the valuation of the company that determines the price per share for a capital increase
Post =Post Money or Post Money Valuation, Post = Pre + capital injection
LPs = Limited Partners, these are the investors of the VC funds
GPs = General Partners, there are commonly known as Partners and are the manager of the VC fund, deciding the allocation of the investments
Preferred stock - investors typically purchase preferred stock; it means that investors either get 1) their money back or 2) their % of the company
General Financials
KPIs = Key Performance Indicators, a set of numbers/ ratios displaying the performance of a company
GMV = Gross Merchandise Value, total monetary value of transactions taking place on a marketplace
MRR = Monthly Recurring Revenues, the kind of revenues that SaaS and subscription-based companies are earning
ARR = Annual Recurring Revenues, MRRx12
EBITDA = Earnings Before Interests Taxes Depreciation Amortization
EBIT = Earnings Before Interests Taxes
CAC = Customer Acquisition Cost
COGS = Cost Of Goods Sold
VC Financials
ROI = Return On Investment, Return/ Investment -1
Money Multiple = Shares Value now/ Total Investment
Valuation Multiple = Company Valuation now / Company Valuation at the time of initial investment
IRR = Internal Rate of Return
EV = Enterprise Value, the equity value + debt value (net of cash)
NAV = Net Asset Value, the total valuation of the assets in a fund
AUM = Assets Under Management, basically how many $ a VC fund is managing
MF = Management Fees, a fixed % of the AUM through which VCs finance the fixed costs of running a VC fund
Miscellaneous
Pivot - incorporate compelling market data to evolve product (e.g. justin.tv → Twitch)
Value add - what you can do for the person you are connecting with (a.k.a. "What's in it for me?")
What do VCs look for in companies?
Why Us: people and team
“Are they the right people to build this company?”
Earned secret: what is the unique skill set, background, or experience that led this founding team to pursue this idea?
Do the founders have deep empathy for the problem they are solving? Empathy is crucial to building a great business; you must know the pain points of an enterprise and build for an audience you know well (Vinay Iyengar, Two Sigma Ventures)
The Thunderlizard startups we’ve worked with all have some sort of contrarian insight that the founders knew before anyone else did (or at least they knew to be valuable before anyone else did). Airbnb knew before anyone else that strangers would be willing to stay the night in the houses of other strangers, as long as they were a trusted third-party verification system in place. (Shawn Xu, Floodgate)
“[The founders of Airbnb] were struggling to make ends meet living in San Francisco and noticed that all the hotels were sold out locally whenever there was a major convention in town. What if, they thought, we could rent out a sleeping spot in our apartment to conference attendees to help them save money on accommodations and help us meet our rent obligations? And thus was born Airbnb.” (Scott Kupor. “Venture Capital and How to Get It.”)
Founder-market fit: unique characteristics of this founding team to pursue the instant opportunity
Founders must feel an intrinsic motivation to solve the problem they’ve chosen, which I think helps them through the most uncertain moments of building a startup. (Shawn Xu, Floodgate)
Questions VCs ask:
Is there something in their personal background that indicates grit? Jamie at Pillar wants an hour-long version of a life story.
Are they a learner? Do they desire to improve their company and themselves? Would much rather have someone who comes back with an answer
Are they self-aware?
Do they have a magnetism or charisma that makes them want to make introductions?
Are they a chess player? Do they understand how the space will evolve?
Product-Market Fit
“Is this a business?”
“a product being so attractive to customers in the marketplace that they recognize the problem it was intended to solve and feel compelled to purchase the product."
products we can't imagine not having: e.g. Facebook, Airbnb, Instacart, Instagram
evidence of product-market fit: consumer delight and repeat purchasing
might take many iterations/pivots to achieve (ex. Justin.tv → Twitch)
Questions VCs ask:
How did the founder get to the current product idea, incorporating which insights and market data to help inform her opinions?
Does this startup represent an innovative way to solve an existing problem or create a new market by introducing a product or service that consumers didn't even know could exist?
Why is now the best time for this startup? Is there an inflection driven by a technology, regulatory, or consumer behavior change?
Market Size
“How big will this business be?”
What is the ultimate size of the market opportunity? So what?
“I’m looking for the founder who paints the picture of a future that’s very different from today and it’s the future I want to see...The best entrepreneurs aren’t just forecasting the future. They aren’t saying this is where we are today, and if things continually incrementally in the direction we are, it will become this. Rather, the best founders are creating a future. They’re building it and designing it. [The role of investors is to] think about whether or not this is a future we want to see or if it’s a future that’s desirable for society.” (Ann-Miura Ko, Floodgate)
Does this startup have a path to a valuation that can return the fund?
The big pitfall is getting the company right but the category wrong: the company might have a great team and a great product, but if the market isn't big enough, the company will never get to more than $50-$100 million in revenue → VCs must invest in big-market opportunities to survive
can be difficult to estimate if the market does not yet exist (or market is constrained by current technology)
Questions to Ask (for VCs and Founders)
Questions for Students to ask VCs (e.g. informational interviews)
What do you look for in a founder? On a team?
Given capital as a commodity, how do you win deals?
What is in your anti-portfolio?
Do you have a mentor?
Do you have an investment thesis?
Is there a trend that you follow?
What would you change about the startup and VC landscape today?
What have you learned from previous leadership/operational experiences that made you a better investor?
Where do VCs and Founders run into problems with their relationship? What advice do you have for board members or founders?
How have both bull runs and crises (2008, COVID, etc.) impacted the way you think about risk?
How would you compare/contrast operators-turned-investors and career investors? Is one better than the other? Does one perform better in any way?
What are some hard rules you stick to when deciding on an investment?
How do you think about portfolio construction before investing, then time allocation with your portfolio companies afterward?
What's your stance on Silicon Valley? Do you have to be there or do you think great companies can/should be built anywhere?
How can startups today build defenses and competitive moats? What are the most durable moats that you've seen?
How do you define product-market fit and how do you know if you're there?
Questions for VCs to ask Founders
Why now
Why does this startup need to exist now?
What technological, regulatory, or adoption inflection points are you building off of?
Why us
Why did you start a company?
What is your differentiated value (new problem startup is trying to solve)? VCs want to see companies that other people are not seeing, insights that other companies are not seeing; want to create a category that can reduce outside returns without fear of competition.
What is your story? VC is a people business. Who are you, what have you overcome, why are you doing what you have?
What are some of your most important failures?
What is your personal journey? Often, it’s really easy to talk about the company. As founders, we get asked a lot of questions about our startups and spend a lot of time talking about our companies. But really thinking about the personal entrepreneur’s journey is also important because it fuels the direction of the company. As founders, we have a lot of influence on the culture. The way we run the company really affects how our employees act and how the company continues to grow. So I think understanding personal journeys is really important. (From Jonathan Tan, CEO of Coreshell Technologies, via Tsingyuan Ventures)
Questions for Founders to ask VCs (Source: Tsingyuan Ventures)
Ask qualifying and process-oriented questions
How does your investment decision-making process work?
What is your target check size? (Or, even better… “based on your Pitchbook profile, it looks like your average check size is normally $1M, and that you mostly invest at the seed round — is that right?)
What is your target ownership? Do you have any requirements around board seats, etc?
Do you guys follow along? Do you prefer lead or not?
Ask for snap feedback: "Based on what you’ve seen in this meeting, what are your initial thoughts?”
As the investment process progresses:
How active are you with your target companies? How do you generally add value for your portfolio companies? Can you walk me through a specific example?
You don't want every investor to be hands-on with your business
How do you think your portfolio companies would compare you against their other investors? Where do you spike relative to others?
Tell me about times when the relationship with the entrepreneur has become strained? What happened, and how did you work through it? What was the result?
What are your expectations for your entrepreneurs? Do you have a playbook on how you work with your companies? What does the “top 20%” look like? What about the “bottom 20%” (in terms of working relationship/ process)?
Things to avoid:
do not spend more than 50% of the first meeting vetting the investor: quizzing investors about how they add value, how they work with portfolio companies, etc. - this behavior can be seen as posturing
Question for Founders to Ask Themselves When Evaluating Investors
Who - what is the investor's value-add? Do they lead? Do they follow-on?
How much - What are you using the funding for? How long will the funding last (runway - 12 to 18 months)? What milestones will you hit (users, GMV, recurring revenue)?
At what valuation - How much dilution are you taking on (higher valuation means future investments will set higher milestones)?
General Advice for Founders
Taking investments is like creating a horcrux, but it comes at a high cost (Ann-Miura Ko, Floodgate)
many successful founders have given up almost all of their ownership (ex. Etsy, Box, Pandora)
some founders are great at retaining ownership (ex. Qualtrics, Atlassian)
be very sensitive about the valuation you are receiving
think: what does this $ enable, what does it cost?
Raising a lot of money at an early stage can generate great momentum, but it can also narrow the range of paths your company can pursue
Target carefully - find an individual at a firm that makes investments like yours
get a warm referral if you don't know them directly
ask for advice (much easier than asking for money → free-flowing instructions)
if a VC is interested in your company, they will let you know
Do your own reference checks (e.g. CEOs of portfolio companies)
Resources
Books
Still trying to get through all of these! Special thanks to Vinay, Jessica, and everyone at the Floodgate team for many of these recommendations.
The Hero with a Thousand Faces
Principles
The Hard Thing About Hard Things
Innovation Blind Spot
Raising Venture Capital for the Serious Entrepreneur
The Entrepreneurial Bible to Venture Capital
Venture Deals
The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail
Competing Against Luck
Range
How Will You Measure Your Life?
Jonathan Livingston Seagull
Secrets of Sand Hill Road
The Lean Startup
Zero to One
Sources:
Articles
A Guide to Marketplaces from a16z: https://a16z.com/2018/03/05/marketplaces-guide/
A Rake Too Far: Optimal Platform Pricing Strategy: http://abovethecrowd.com/2013/04/18/a-rake-too-far-optimal-platformpricing-strategy/
Email Newsletters
Ones I read daily:
Axios Pro Rata - great daily updates on market activity.
Accelerated - this is one of my favorites! Love Olivia and Justine Moore.
Fortune Term Sheet - love Lucinda Shen’s writing
Newsletters others have recommended to me:
Fortune CEO Daily
Bloomberg Tech
Recode
TechCrunch Digest
StrictlyVC
CB Insights
Blogs et al.
General advice, if there’s a firm you’re interested in (or a firm with portfolio companies you’re interested in), look up their website and the names of the partners; chances are, they have some kind of content platform (Medium, Substack, personal website) where they publish investment memos/theses.
VC Twitter is great! I’m generally a social media averse person, but VC Twitter has been great for learning about new investment trends and opportunities. Also. Memes.
The OGs
Paul Graham’s Blog (Cofounder of YC)
Dalton Caldwell: http://daltoncaldwell.com/
Mendelson's Musings - Jason Mendelson's blog
Feld's Thoughts - Brad Feld's Blog
The Conglomerate (legal business academics' blog)
A VC (Fred Wilson's blog)
Student VCs:
Jack Mcclelland (Accel, Contrary) - https://jackmcclelland.com/
Gaby Goldberg (Bessemer Venture Partners) - https://www.gabrielagoldberg.com/
Ayushi Sinha (Prospect Street Ventures) - https://ayushisinhahaha.medium.com/
Paige Doherty - https://paigefinndoherty.com/
Linus Lee (Dorm Room Fund) - not strictly VC related, but lots of insightful tech trends - https://thesephist.com/
Up and Coming:
Jessica Li (ex Soma Capital, now Growth at Zageno) - love Jess and her writing so much! - https://www.notion.so/Playbook-for-Founders-Investors-Operators-88f1e1357c134e1a8ebbeef75be645fa
Vinay Iyengar (Two Sigma Ventures) - http://www.vinayiyengar.com/
Shawn Xu (Floodgate) - https://floodgate.com/shawn-xu/
Kristina Hu’s Hu Knows (HBS ‘21) - also not strictly VC related, but very valuable advice on soft skills for any student - https://kristina.substack.com/
Podcasts
General advice: if there's a firm you are interested in, listen to their podcast to get a better sense of their investment philosophy and how they work with the founders they have backed
If there's a specific VC you look up to or want to work with, just search their name on Apple Podcasts to learn more about them
Ones I like:
The Twenty Minute VC: Venture Capital | Startup Funding | The Pitch on Apple Podcasts
Starting Greatness on Apple Podcasts (Mike is such a visionary)
Podcasts others have recommended to me:
Communities
Gen Z VC’s - Love this group with all my heart - cannot recommend enough.
Ladder - Regular postings about internship and fellowship opportunities in VC, super supportive student VC community
The Wiress (Women in VC group)
Templates
The VC Partners Meeting (includes the Startup Snapshot) by RBL1.COM
Legal Document Generator (including Term sheets) by CooleyGO
Sources
These are the sources I used when I was putting together this guide. Highly recommend all of these!
Blinkist: https://www.blinkist.com/en/nc/reader/secrets-of-sand-hill-road-en
Federico Wengi's "Do You Speak VC": https://medium.com/paua-insights/do-you-speak-vc-30-jargons-and-acronyms-you-should-know-cfeca9e37945
Paige Doherty 's amazing guide on breaking into VC: https://www.notion.so/Tech-VC-The-Foundation-a51dab2846ea44b5b0ce1fefd32e8ccd
Flora Dicara’s guide on student VC opportunities: https://link.medium.com/BkDpyLz8Dcb
Sergio Marrero's "The Ultimate VC Toolkit" - https://medium.com/rbl1/the-ultimate-ultimate-vc-toolkit-b161336120f9
Jessica Li's "Playbook for Founders, Investors, Operators" - https://www.notion.so/Playbook-for-Founders-Investors-Operators-88f1e1357c134e1a8ebbeef75be645fa
Wiress Home Base - https://www.notion.so/The-Wiress-Home-Base-78761153a1f940f19934063e126c6493
VC Fellowship Database: https://docs.google.com/spreadsheets/d/13mv0lQYlVCGA1F-UQohWrEkwIW4GwjmFtzhB270GcBc/edit#gid=1946680338
VC Toolstack: https://airtable.com/shrqhdW4NFPLTPnDt/tblN6wj0NRIiEngsW/viwVf6XzLOP9oXbbA?blocks=hide
Round table w/ student VCs: https://stanford.zoom.us/rec/play/F3gL6nehlbUNRpoN_U7F8Wpat5UfpVjKQLqah4qU1jSer-QWnbO22yVZOSMizfK-bGmmlLj1bt9LVC9-.mj35uO3ZRcy-hQjC?continueMode=true&_x_zm_rtaid=eNAydT46RkCF7kzsY8_syQ.1600578966755.deacdba7183eb6bc565c2f5ff4612b03&_x_zm_rhtaid=255
How to Be a Great VC by Jessica Li: https://jessli.medium.com/i-interviewed-a-dozen-vcs-on-relationship-building-core-skills-and-value-add-27ea9e7c7686
How to Find a VC Internship by Olivia and Justine Moore: https://medium.com/@justinemoore_85088/how-to-find-a-vc-internship-4bf8401c4877
9 Essential Lessons That Helped Me Break Into VC by Shawn Xu: https://medium.com/startup-grind/9-essential-lessons-that-helped-me-break-into-vc-fb05d2bd058
Resources for those interested in venture capital and private equity by Jason Heltzer: https://medium.com/venture-evolved/resources-for-those-interested-in-venture-capital-and-private-equity-3964d0734273
Pillar's Founder Playlist - raising money, meeting founders, recruiting, etc.: https://www.pillar.vc/playlist/topics/
How to Recruit for VC by Ayushi Sinha: https://medium.com/prospect-student-ventures/vc-recruiting-2a5a5169a94b
VC Sourcing 101 by Ayushi Sinha: https://medium.com/prospect-student-ventures/vc-sourcing-101-9937c23a39c0
Guide on VC from Prospect Student Ventures: https://docsend.com/view/dvufhb27r5bzrpym
List of VC funds from Roro: https://joinroro.medium.com/lists-of-all-the-vc-lists-i-amassed-while-researching-funds-105d552cddbd
VC and PE Resources: https://airtable.com/shrb8VbuYumhhC6q4/tbl9cAMfGMGqsz8e8/viwM8VVPgXVmhsxly?blocks=hide
Essential VC Skills from Jessica Li: https://jessli.medium.com/i-interviewed-a-dozen-vcs-on-relationship-building-core-skills-and-value-add-27ea9e7c7686
'Observations from the pitch meeting: what questions should entrepreneurs avoid? What questions should they ask?' from Tsingyuan Ventures: https://medium.com/tsingyuan-ventures/observations-from-the-pitch-meeting-what-questions-should-entrepreneurs-avoid-7edd96260d7f
'What to read, watch, and listen to — according to founders' from Tsingyuan Ventures - https://medium.com/tsingyuan-ventures/what-to-read-watch-and-listen-to-according-to-founders-b7bce05eb636
YC's Startup School: https://www.startupschool.org/curriculum
Breaking into and Thriving in VC from Cowboy Ventures: https://medium.com/cowboy-ventures/breaking-into-thriving-in-vc-33e05e8dc109
The VC Investment Process by RBL1.COM
40+ Questions Investors ask Founders by RBL1.COM
100+ Venture Capital Terms by RBL1.COM
How to Break into VC from Thea Knobel (GSV Ventures): https://blog.usejournal.com/a-guide-to-breaking-into-venture-capital-ea9e8608d19a