A founder might see 1-2 term sheets, a nonbinding agreement outlining conditions of a monetary investment, in their entrepreneurial lifetime. 

Venture capitalists (VCs) see dozens, maybe even hundreds, of term sheets in their time.

Secrets of Sandhill Road sheds light on the workings of VCs, their incentives, and provides some solid frameworks for entrepreneurs to adopt when looking to raise money. 

First off, why raise money from a VC? It might be necessary for you to grow your business or to survive and live to fight another day.

“The market can stay irrational longer than you can remain solvent” – Bill Campbell

In addition to some delightful 50-cent words like ephemeral, and amalgamation, here were some of my favorite snippets.

Entrepreneurs sleep like a baby every night, waking up every few hours crying.

Unlike whiskey, most problems don’t age well.

Takeaway One: VC incentives

VCs group the money they raise from the wealthy (referred to as limited patterns LPs) in groups known as funds. A fund typically has a lifespan of 5 to 10 years, which means that the VC has that much time to return typically a minimum return to their LPs.

If a VC invests in your company in year 8 or 10 for their fund they may be more incentivized to encourage an acquisition or other quick way to return money to their LPs. It’s also worth considering if you believe the VC you’ve raised money from will be financially posited to finance additional rounds of funding.

Takeaway Two: It’s more than just money

We’re at a unique moment in history where we are talent constrained as opposed to money constrained. Even in the current economic climate, the upper hand is held by the entrepreneur, those who are willing to enter the arena. When looking to raise money the point of fixation is typically how much of the company you’re giving away, known as equity. However giving away equity is one side of the coin, the other half is equally important, defining how disputes will be handled, how board control will work, and expectations around returning capital. Not to mention if you feel like there’s a fit with the fund and if they’d be able to help you get to where you want to be.

Takeaway Three: The VC game

VCs play by the general belief that the vast majority of their investments are going to fail, which is true. But in tandem with that they believe that those few who do win are going to be such massive winners that they’ll outweigh the majority that lost. Who are the LPs that are willing to make these bets? Some LPs are wealthy individuals but many LPs are tax-free entities, university endowments, etc. Why have these big players entered the VC space? 

20 years ago companies used to IPO (or go public) after 4-6 years, now companies stay private much longer because the previous drivers to go public were typically to raise money and there is an abundance of money in the private markets. Large funds, hedge funds, and endowment funds weren’t getting a slice of those profits because they would primarily move into the public markets, the shift of fewer IPOs has caused them to join the private markets through VC.