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Venture Capital

Andreessen Horowitz invest across stages (seed stage, venture stage, growth stage), and in a variety of business models: consumer, enterprise, and other variations. Marc Andreesen outlines two general concepts.

Outliers

Venture capital (VC) is a game of outliers (extreme outliers). Four thousand venture fundable companies a year want to raise capital. Two hundred of those will get funded by a top tier VC. Fifteen of those will (someday) get to a hundred million dollars in revenue. Those fifteen, for that year, will generate something on the order of 97% of the returns for the entire category of venture capital in that year. Therefore, venture capital is an extreme feast or famine business.

‘Invest in strength, versus lack of weakness’.

The default way to do venture capital is to check boxes. That check-box might include; really good founder, really good idea, really good products, really good initial customers (check, check, check, check, is reasonable process). However, what you find with those sorts of check-box deals is that they often don’t have something that really makes them remarkable and special. They don’t have an extreme strength that makes them an outlier.

On the other side, companies that have really extreme strengths often also have serious flaws. Therefore, one of the cautionary lessons of venture capital is, ‘if you don’t invest in the cases with serious flaws, you don’t invest in most of the big winners’.

The key to success in raising money is be so good, the investors can’t ignore you.

Gigantic Success

If you build a business that is going to be a gigantic success, then investors are going to be throwing money at you. If you come in with a theory, a plan, and no data, you are just going to be one of the other thousand startups, and it’s going to be harder to raise money.

  1. You are almost always better off making your business better than you are making your pitch better.
  2. Raising venture capital is the easiest thing a startup founder is ever going to do. Recruiting engineers, and selling to large enterprises is harder.
  3. Getting viral growth on a consumer business, and getting advertising revenue is even harder.
  4. The single biggest thing for entrepreneurs to remember is ‘the relationship between risk and raising cash’, and the ‘relationship between risk and spending cash’.

A startup has every conceivable kind of risk; founding team risks, product risk, technical risk, launch risk, market acceptance risk, revenue risk, cost of sales risk, and viral growth risk etc. So a startup at the very beginning is just this long list of risks. Therefore, the way to think about running a startup is by thinking about raising money to address risks. That process involves peeling away layers of risk as you go:

  1. First the startup raises seed money, in order to peel away the first two or three risks layers (founding team risk, product risk, initial watch risk).
  2. Then the startup raises the A round, in order to peel away the next risk level (product and recruiting risk).
  3. Following that, they peel away some of the customer risk, after they get their first five customers.

Peeling Away Risk

The startup is peeling away risks as they move forward and achieving milestones. As they achieve those milestones, they are simultaneously; making progress on the business, and justifying the raising of more capital. 

Therefore, the best way to get the introductions as you progress through this peeling process towards A stage venture firms, is to work through the seed investors. The other alternative is to work through something like a Y Combinator.

Source: Marc Andreessen

Angel vs. VC (4:00)

Ian Sobieski

Angels invest their own money, and VC’s invest others people money (OPM).

NOTE: video starts & stops at pre-assigned times

Finding a VC (5:00)

Jeff Bussgang

Know when you need venture capital funding, and what to watch out for when negotiating.

NOTE: video starts & stops at pre-assigned times

Finding a VC (4:00)

Jeff Bussgang

What’s the validation behind your claims?

NOTE: video starts & stops at pre-assigned times

Course Curator: Dr. Gerard L. Danford

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