I recently reviewed Brad Feld and Jason Mendelson’s book Venture Deals, in THIS ENTRY. I concluded that it is an effective tool for leveling the playing field between sophisticated investors and emerging entrepreneurs. I have subsequently recommended the book to number of students as well as emerging entrepreneurs, all of whom expressed positive feedback.
Thus, I was excited when Brad agreed to chat with me via Skype to discuss the book’s genesis, along with the reaction of his fellow venture capitalists to the book’s revelation of numerous fundraising “secrets.”
You can watch my interview with Brad below or on YouTube here: http://youtu.be/Au2bshd4neY
Brad and Jason are both former entrepreneurs and current Partners at Foundry Group, a highly successful, early stage venture firm. Brad is also the Co-Founder of TechStars, an acclaimed startup boot camp which has spawned a number of promising companies. Of the 80 companies that have completed the program since its 2007 inception, 49 have received funding, 8 have been acquired and 8 have ceased operations.
At one level it’s a terrible return on time investment, but on another level, it’s a really positive one. Writing a book is very different from writing a blog.
There were a couple motivations. One, I wanted to know what it was like to write a book. Second, both Jason and I felt there was a lot of timeless information…the state of the art of the Venture Capital Term Sheet hasn’t changed that much in the last 30-years. We felt it was a topic that we could create something that would be really lasting for entrepreneurs. We decided to do it in a way that was accessible.”
I then asked Brad what he thought would be the most surprising lesson that emerging entrepreneurs will learn from Venture Deals? “There are several. One is we really try to shift the discussion from a negotiation with the venture capital firm to a negotiation with an individual. We spend a lot of time… talking about negotiations, negotiation theory and how to think about it. It’s remarkable…how poor negotiators many VCs and many venture-backed lawyers actually are. The vast majority are not very good negotiators. An entrepreneur doesn’t need to know that much to be in a pretty strong negotiating position.
The incentives of the VCs matter a lot. We… take apart how venture capital firms actually work and how the VCs get compensated. We try to do it in a very direct way. The dynamics of the venture capital industry have changed a lot over the last dozen years and probably will continue to change and entrepreneurs really need to understand that.
The third…even though there is a lot of legal stuff that you’ve got to deal with, you can boil all of the issues down to very straight forward, non-legal terms. Most of the dynamics in a venture capital deal… can be done in your head. There are tradeoffs that don’t require a lot of study or handwringing and we try to point those out and prioritize them so the entrepreneur can understand what he or she should really care about, rather than get stuck in the minutia of an endless negotiation about stuff that don’t matter.”
One of the most helpful aspects of Venture Deals is that it dissects the typical venture term sheet, provision by provision, and highlights which relate to (i) economics, (ii) control, and (iii) other. Brad and Jason encourage entrepreneurs to focus their negotiating efforts on optimizing the first two factors while essentially ignoring all provisions which fall into the “other” category.
In my review of the book, my biggest concern was the rather elevated list price of $49.95. As such, I asked Brad how much input he had in determining the book’s price. “We had zero say in it, which was kind of typical. I am actually in the midst of writing a third book, it (may be) called Entrepreneurial Communities… and I am going to self-publish it.
Now that I have published two books and learned how the publishing industry works (I realized) the publishing industry is completely screwed. It doesn’t even know how screwed it is, is how screwed it is. You learn that when you are actually an author.
We literally didn’t have any conversation about price until we got the cover art which had the price on it. My first reaction was, ‘Forty nine bucks, what the f*ck?’ The (publisher’s) response was, ‘Well, it’s kind of in-between a business hardcover which prices at mid-twenties and an academic book which could price eighty to a hundred’. It gets discounted on Amazon to $30. It’s still expensive, but for what it is, it’s worth it. If you don’t want to pay anything, there’s still the term sheet series on the blog.”
Brad and Jason are somewhat like magicians who tell the audience how the tricks work. Given their entrepreneur-centric approach, I was curious if Brad had received any pushback (implicit or otherwise) from his brethren VCs who think Venture Deals makes the venture process too transparent. “It falls into three categories. There’s the category of VCs who are all for more transparency. The goal is to help entrepreneurs build an incredible business. You want to cut a fair deal on the front-end, but fair is not complicated. I think all those folks are strong, strong supporters of the book, TechStars, accelerators - anything that helps an entrepreneur be more successful is good for that category.
Then you have a category of VCs who are uninspiring. Hanging onto a certain dynamic between the entrepreneur and the VC where the entrepreneur is somehow one down or subordinated from the VC. In the mid-90s… at the tail end of being an entrepreneur, I found that behavior to be particularly off-putting and frankly irrelevant. In today’s day and age, the entrepreneur should be one up to the investor...the investor should be focused on enabling the entrepreneur in every way they can. That category tends to be silent about this stuff. They look at it and shake their heads. The same group that says, ‘Oh, gosh. Why are you spending any time blogging?’ It’s also the same group that says, ‘We’re value-added investors.’ When anyone says what they are, my reaction is that they are probably not that.
There is the third category…they’re just bad people. They are people that are never going to engage with an entrepreneur in an effective way. The negative responses to the book, which have been very few, mostly come from (this) category. It kind of like people who give you a negative response and you don’t really care what their response is anyway.
We talk about that in the book in the context of how entrepreneurs should think about VCs. It’s important not to think about venture capital firms, but individual venture capitalists. There are some great individual venture capitalists who are members of really crummy firms and vice versa.”
I have always been intrigued with the co-authoring process, which prompted me to ask Brad if his collaboration with Jason differed from how he and David Cohen created Do More Faster. “Jason and I have a pretty good back-and-forth writing style. It took shape that way, it was a very collaborative writing effort.
David and I had a little bit more of a divide and conquer approach. That book is a compilation of our writing and a bunch of the mentors and the entrepreneurs in the TechStars program. That was a little bit more of a managed process. I enjoyed both (approaches), a lot.
With Venture Deals…it sounds like it’s in a single voice. We worked really hard…to merge them into a uniform writing style. We didn’t have too many content arguments. There were a few places where we disagreed how to present a topic. But most of the time, it got better with each iteration.”
Brad and his partners clearly take themselves far too seriously – as anyone who has watched the “shower scene” from their infamous I Am VC music video can attest. Given the unconventional nature of the video, I asked Brad to elaborate on its genesis and the venture community’s overall reaction. “(The reaction has been) mostly really positive. One of the things we have always tried to do is poke fun at ourselves and be lighthearted. We view the experience of being a venture capitalist as an experience of life. One of the mistakes people make is that they take life way too seriously.
Jason came up with the idea to do a music video to promote the book. Jason is a very serious musician. Our partner Ryan is also a very good musician. Seth thinks he can play the guitar, but he can’t, nor can he sing. I know I can’t play the guitar nor can I sing and I also can’t dance. So we knew where we fit in the mix.
Part of our goal with it, was to just have fun. We did it on an ultra-low budget. We spent a day filming it. I have new respect for Brad Pitt. It’s hard…and we didn’t even have a makeup crew or a trailer to retire to.
We have some obvious homages…the Saturday Night Live Dick in a Box skit. One of the things that was particularly fun was thinking…about satire. With satire…there have to be moments that are uncomfortable to the viewer… and there have to be moments that are uncomfortable to the people in them, or else it doesn’t work, and for people in a serious business, that can sometimes be hard.”
If you have not yet read Venture Deals, seek it out. It is a worthy read. As I note in Why Most Business Books (Still) Suck, I am not a huge fan of the genre. However, unlike many business books that have transitory relevance, the majority of the material in Brad and Jason’s book will be pertinent a decade hence. Understanding how to properly do the dance with sophisticated investors will never go out of style.