Tag Archives: Steven Dickman

VC From Both Sides: “Mastering the VC Game” by Jeffrey Bussgang

A Boston Biotech Watch Book Review

By Steve Dickman, CEO, CBT Advisors

Jeffrey Bussgang’s new book Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms is a welcome contribution to the literature surrounding venture capital and entrepreneurship. Entrepreneurs of all stripes, whether in healthcare or information technology or cleantech, stand to benefit from Bussgang’s highly personal and articulate look at the process of raising venture money.

Part how-to, part memoir and part reportage, Bussgang’s book offers a folksy stroll through the gardens and thickets of the venture funding process. What’s more, Bussgang, a general partner at Boston-based Flybridge Capital Partners adds transparency and rationality to many seemingly impenetrable aspects of it.

This is no small feat. To some entrepreneurs, VCs may sound like politicians and football coaches, using words without saying anything. Many entrepreneurs, especially after their business plans have been turned down a few times, see VCs as masters of the universe who talk in zen koans or SilValSpeak. Worse, they see VCs as vapid schemers afloat on oceans of “other people’s money” who will never understand businesses as well as those who run them.

MasteringTheVC_cover Therefore, the rare VC who, like Bussgang, has actually been a successful entrepreneur may come to enjoy a special place in the entrepreneur’s heart. “He’s been where I am” is the basis for what an entrepreneur hopes is the beginning of a beautiful business relationship. In my experience, this is a reasonable expectation. My VC office became a more fair-minded and understanding place when a seasoned entrepreneur joined the team.

Bussgang writes with passion and conviction about how to build a company as much as he does about how to fund one. He comes to authorship having worked with not one but two highly successful startups – first Open Market and then Upromise. Both had great exits (Bussgang writes that he was a “paper millionaire” by the age of 26) and Upromise is still on the scene, albeit as part of Sallie Mae, which acquired it in 2006. Bussgang had an early role in both, especially in Upromise. When he was there, he writes, he and his colleague nervously pitched to the legendary VC John Doerr of Kleiner Perkins. The company went on to win the investment.

It is Bussgang’s crossover history as well as his knack for reporting on the work of others that allows the book to overcome its largest obvious potential flaw: how can Bussgang consider himself a “master” when as an investor he has apparently had only one or two exits?

jeff_bussgangBussgang succeeds because he is a savvy reporter and scores fresh material from some key people in both life sciences and information technology e.g. LinkedIn’s Reid Hoffman; Constant Contact’s Gail Goodman; Sirtris’ Christoph Westphal; because he is not afraid to address tough issues, such as differences between a CEO and his or her board of directors; and because he displays an infectious ebullience in relating the ups and downs of both entrepreneurship and investing.

The book owes its existence to some extent to blogging; VC-bloggers are an unusual species, now growing in number, and Bussgang joined their ranks early with his blog Seeing Both Sides: VC Perspectives From a Former Enterpreneur. There, he found satisfaction in sharing some of the steps he took to make his companies successful in both of his careers. The book was a natural next step. Readers can expect pithy and readable answers to questions such as:

1). Should I raise angel money or VC money for my fledgling company? (Bussgang’s checklist is very helpful – I’ve put it to use already in my practice).

2). If I decide to take VC money, how do I approach VCs, by cold call or warm introduction? (The question gives away the answer…)

3). Several VCs are interested in my company; what criteria do I use to choose among them? (It’s not always about the money.)

4). What are the keys to getting along with the VCs who have already invested in my company? (One well-known entrepreneur quoted here called VCs “the hire I could never fire.”)

5). How up-front should I be with information about my company that might be damaging to the company should it fall into the wrong hands? (In my own experience, the answer is to err on the side of saying too much. Being too secretive is one of the worst mistakes I have seen entrepreneurs make.)

Book reviewers are notorious for airing their quibbles so here goes, but I hope they are taken not as a criticism but as a call to action for Bussgang and other VC bloggers everywhere:

It’s good that the book contains a “blog roll”; too bad that it does not go on to cite Twitter feeds about VC and entrepreneurship. The book makes no mention of web-based tools for tracking or understanding the VC industry (“TheFunded.com” comes to mind). There is no chapter – or even a quick aside – on how VC is likely to change (or has already changed) in response to the financial crisis of 2007-2008, a topic obsessing more than a few portfolio companies not to mention would-be entrepreneurs.

I don’t want to spoil it by saying too much more (though a 40-page chunk of the book is available free on Bussgang’s web site. What I will say is that, as an avid reader of the literature about VC (for a list of my previous faves, see below), I find Bussgang’s book to be a welcome addition. By both staying away from technical jargon and avoiding the temptation to reduce his advice to over-general sound bites, Bussgang threads the needle and we all benefit.

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Steve Dickman’s favorite books on VC and entrepreneurship
The First $20 Million is Always the Hardest: A Novel by Po Bronson (1995) – Too sad to be funny and too funny to be sad, Bronson’s fictional tale of a 1990s computing startup rings true and should make the reader immediately pick up Bronson’s other books Nudist on the Late Shift and Bombardiers.

StartUp coverStartUp coverStartup: A Silicon Valley Adventure by Jerry Kaplan (1994) – A self-deprecating and illuminating account of Kaplan’s first venture, a Kleiner Perkins-backed “pentop computing” company that never turned a profit. In a New Yorker interview published after the book came out, Kleiner general partner and former company board member John Doerr said, “[The book] should have been called ‘Screw-Up.’”

Done Deals: Venture Capitalists Tell Their Stories by Udayan Gupta (ed.) (2000) – Like Bussgang’s book, this little-known and somewhat out-of-date work delivers real lessons from real VCs in their own words.)

Lerner Venture Capital Casebook coverVenture Capital and Private Equity: A Casebook by Josh Lerner, Felda Hardymon & Ann Leamon – Lerner, an excellent researcher and writer, is “the source” in academia on VC topics. This book is in the “case” format used at Harvard Business School, where Lerner teaches. The top-listed Amazon reviewer called it “perhaps the only book available on the subject matter.” It is more VC-focused than entrepreneur-focused.

eBoys cover
eBoys: The True Story of the Six Tall Men Who Backed eBay, Webvan and Other Billion-dollar Start-ups
by Randall Stross (2000) – An at times informative, at times adulatory look at life inside Benchmark Capital, one of the most financially successful venture funds of the 1995-2000 era. The anecdotes about funding eBay and WebVan are worth the price of the book.

Burn Rate coverBurn Rate: How I Survived the Gold Rush Years on the Internet by Michael Wolff (1998) – A hilarious and witty romp through the bubble-era world of revenue-free Silicon Alley media startups – Wolff, a long-time columnist for New York magazine, names names and the reader benefits.

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Clouds Over the VC sky

Clouds Over the VC sky

by Steven Dickman, CEO, CBT Advisors

Last week I attended a one-on-one podium discussion put on by Xconomy featuring two Boston gods of private equity and venture capital, Peter Brooke, founder of TA Associates and Advent International, and Terry McGuire, Managing Partner at Polaris, who is also currently Chairman of the US National Venture Capital Association.

Peter Brooke, founder of TA Associates & Advent International. Advent’s global buyout fund (GPE VI) raised $10.4B in April, 2008.

Peter Brooke, founder of TA Associates & Advent International. Advent’s global buyout fund (GPE VI) raised $10.4B in April, 2008.

Though generally upbeat in tone, the event did not dispel the clouds that have rolled in over the world of VC. Just as Wall Street bankers are facing salary caps and nagging questions from the government, VCs and private equity heads like McGuire and Brooke are struggling with changes in the ecosystem that hit them in the place it hurts the most – their ability to raise funds.

The discussion did not dwell on the challenges of their own next fund-raisings. Both McGuire and Brooke have proven to be adept at raising capital over many fund generations and through very tough times. “This is my fifth economic downturn,” quipped McGuire.

Indeed, large and established fund groups are having some success raising new funds in 2009. For example, Domain closed on $500 million in August (down from an original target of $700 million announced in January but still a strong and quick raise) and PEHub reported last week that New Enterprise Associates (NEA), one of the world’s oldest and largest PE and VC partnerships, had submitted an SEC filing announcing that it had raised $2.45 billion of its $2.5 billion thirteenth fund with $300 million coming in since its previous closing in April, according to the Wall Street Journal.

But McGuire and Brooke touched ominously on the potential re-allocation of limited partners’ funds away from PE and VC. The mood among LPs lately, Brooke said, has been sullen, even mutinous. Therefore, Brooke said, GPs everywhere are asking themselves, ‘Will limited partners find new types of investment?’ And ‘If the LPs’ VC allocations go lower, where will we find our capital?’

Brooke mentioned the report in Forbes that Harvard has $11 billion in unfunded commitments to VC and PE funds. Brooke linked that figure with the earlier data point that Harvard’s endowment has lost $11 billion of value. “If that faucet is shut off, it will have a real impact.” (Read Forbes’ initial coverage of the crisis in university endowments here.) Detailed numbers follow in Addendum 1 below.

Many VC GPs would agree that too much money was pumped into the system in the 2003-2007 time frame. The tail end of that period was extreme by any estimation – too much capital chasing too few deals.

But driven by forces arising from the wider capital & credit markets, the pendulum seems to be swinging back to the other side. The amount of VC raised in 2009, McGuire said, will be less than the amount raised in 2004. This sets up VCs and entrepreneurs for a “new normal” that, while capital efficient, may prove challenging in the short run.

Longer-term, Brooke and McGuire were optimistic. “There is no question that the industry will continue,” McGuire said. “There is no question any more that the system works.” The basis for good VC investments, McGuire said, is seeing a path to solving real-world problems. The sun will doubtless come out again before long for VC since, as McGuire put it, “There are problems that the world and the economy face that have the makings of great investments.”

Addendum 1: The numbers.

Between 1999 and 2008, the size of Harvard’s endowment increased from $14.4 billion to $36.9 billion. It then fell $11.1 billion to $25.8 billion by June 30 of this year. Stanford, whose endowment is down from $17.2 billion in 2008 to $12.6 billion this year, has $6.1 billion of unfunded commitments and told Forbes earlier this month that it was putting $1 billion of its private equity assets up for sale. The issue, according to this August, 2009, Vanity Fair piece, is that there may not be buyers for these positions at anything close to the sellers’ asking price. The stalemate further increases the pressure on LPs’ liquidity.

Addendum 2: Harvard’s dilemma

Here’s a telling excerpt from the VF piece, written by Nina Munk:

>>A money manager I spoke to described his meeting late last year with Jane Mendillo, who in July 2008 became president and chief executive officer of Harvard Management Company. Knowing that Mendillo was trying to unload assets, he offered to buy back Harvard’s sizable stake in his private fund. As he recalls, the surreal dialogue went something like this:

He: “Hey, look, I’ll buy it back from you. I’ll buy my interest back.”

She: “Great.”

He: “Here, I think it’s worth—you know, today the [book] value is a dollar, so I’ll pay you 50 cents.”

She: “Then why would I sell it?”

He: “Well, why are you? I don’t know. You’re the one who wants to sell, not me. If you guys want to sell, I’m happy to rip your lungs out. If you are desperate, I’m a buyer.”

She: “Well, we’re not desperate.”<<

Maybe they are now.

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