The Business of Venture Capital: The Art of Raising a Fund, Structuring Investments, Portfolio Management, and Exits by Mahendra Ramsinghani
A comprehensive guide to how the world of venture capital works and what it takes to be successful as a VC. The job of a VC is to take money from investors, identify the most promising startups in some domain like AI or healthcare, and make a profit over 10 years or so. The job is competitive as there aren’t any hard skill requirements, but it relies heavily on networking with entrepreneurs and investors, and also demands some unique insights into the industry to outperform peer funds.
The first part of the book (after the introduction) is about how to raise money from investors (limited partners or LPs). Many LPs invest in VC funds: pension funds, insurance companies, endowments, wealthy individuals, etc, and VC funds are a relatively high-risk alternative investment for them. They look at the fund’s management team, past financial performance, and investment strategy. Wealthy individuals are the most likely to take risks with new VC funds. Since you want to invest all the money in the first 3-4 years of your 10-year fund, the fundraising process also needs to occur every 3-4 years to raise the next fund.
Next, the book switches to investing in a portfolio of startups. Here, the VC needs to assess the startup’s management team, financial metrics, and market potential. Before funding, the VCs and startup negotiates a term sheet that specifies control over the board and conditions of future funding rounds. Typically, a portfolio consists of about 30 companies, the top will generate 5-10x the investment, the middle third will only generate a small profit, and the bottom third will fail.
After investing in a company, the VC serves on the board. Board seats are held by a mixture of VCs and founders, and votes to decide matters such as whether to replace the CEO and whether to continue funding the company. VCs can provide value by connecting founders to senior personnel and potential acquirers, but should not interfere with low-level details which will only be distracting.
Finally, the last section is about exit events: acquisitions and IPOs. The majority of exits are acquisitions; there a process of negotiation and due diligence involving investment bankers. IPOs offer shares of the company to public markets, often seen as the holy grail, a lot more public disclosure work is required after IPO, and VCs usually sell all their shares at this point. Overall, this book covers all the mechanics of the VC process and serves as a good reference for both potential VCs and founders.