A Serial Entrepreneur’s Take On Brad Feld & Jason Mendelson’s Venture Deals

Venture DealsAs an Instructor of entrepreneurship at UC Santa Barbara, I welcomed the chance to read Brad Feld & Jason Mendelson’s Venture Deals: Be Smarter Than Your Lawyer And Venture Capitalist. As the authors make clear in the book’s preface, their goal is to create a “definitive guide to venture capital deals” and “demystify the venture capital financing process.” Their primary intended reader is a “first-time entrepreneur”, but clearly other stakeholders within the startup universe can also benefit from the book’s hands-on advice.

Even though I have raised significant venture capital as an entrepreneur and have participated in dozens of transactions as an investor, I still found the book to be informative, especially with regard to the dilutive impact of some of the more onerous deal terms that we avoid at Rincon Ventures.

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The Magicians Tells Their Secrets

Brad and Jason have been exposing venture capitalists’ secrets since 2005, when they began writing a blog series on Term Sheets at AskTheVC.

They are both former entrepreneurs and current Partners at Foundry Group, a highly successful, early stage venture firm. Foundry GroupIf you have not seen the Firm’s recent music video entitled I’m A VC, take a moment to watch it now – it will give you a window into Brad and Jason’s respective personalities and the degree to which they do not conform to the stereotypical stick-up-the-ass venture capitalist. My favorite line in the song is: “I can’t take a leak without people who pitch me”, having experienced similar restroom encounters firsthand.

Things I Loved

  • Tactical & Hands-on – As described in Why Most Business Books (Still) Suck, entrepreneurs have limited time to expend reading theoretical business books which do not provide actionable content. In contrast, Venture Deals focuses on pragmatic, tactical advice.
    • Jargon Free – As noted in Buzzkill, it can be difficult to describe a complex subject in simple terms, free of industry jargon. Brad and Jason consistently maintain an approachable, straightforward writing style that allows the reader to readily focus on the content, rather than parsing dense, rhetorical flourishes (like those which often populate this blog...)

 

  • Attitude – Brad and Jason clearly exhibit an entrepreneur-centric approach to the venture funding process. Their relentless (mostly friendly) mocking of venture capitalists and lawyers adds some welcomed levity to what can be, at times, dry subject matter.
  • Examples – The book is filled with text excerpted from actual funding documents, rather than the generic templates usually found in academic textbooks.  Each example is explained and guidance is provided regarding to the extent an entrepreneur can and should attempt to negotiate the provision.
  • Focused Negotiating – Brad and Jason do an excellent job of explaining common negotiating tactics deployed by VCs. However, their most salient advice is that entrepreneurs should focus on two factors: economics and control. As they state, “We suggest that any significant time you are spending beyond these two core concepts is a waste of time.” They then dissect a typical term sheet and identify which terms impact: (i) economics, (ii) control, (iii) both and (iv) neither. They also remind emerging entrepreneurs that the power is not solely held by the VCs and encourage entrepreneurs to, “Figure out your superpower and your adversary’s kryptonite.”
  • Don’ts – As noted in greater detail below, I especially like the chapter entitled, “Raising Money The Right Way.” This chapter provides spot-on, tough-love advice. Entrepreneurs should take this chapter to heart, because commission any one of these mistakes will immediately mark them as a rookie.

Things I Liked

  • Entrepreneur’s Voice – Matt Blumberg, CEO of Return Path serves as the voice of the entrepreneur, punctuating the text in periodic sidebars. For instance, in a section describing the ramifications of a No-Shop clause, Matt writes, “Insist on spelling out key terms prior to a signed term sheet if it has a no-shop clause in it. A VC who won’t spell out key employment terms at the beginning is a big red flag.” He goes on to recommend that, “…you should also ask that the no-shop clause expire immediately if the VC terminates the process. Also, consider asking for a carve-out for acquisitions.” Such detailed, practical counsel can prove to be priceless.
  • VC Firms Unveiled – As the VC world is relatively small and a bit clubby, many internal aspects of the industry, such as: how firms are structured, the manner in which VCs reserve for follow-on investments and the various fiduciary hats a VC must wear, are not always obvious to emerging entrepreneurs. Venture Deals demystifies the VC landscape and helps entrepreneurs understand the typical VC’s motivations, responsibilities and priorities.

Things I Liked Less

  • Price – I am cheapskate. The hardcopy list price of $49.95 is frankly a bummer (to be fair, Amazon offers the book new for $33). Fortunately, you can download the Kindle edition for $27 and the audio version for $18. I normally would advise readers to purchase the cheapest offering.  However, some of the book’s value is lost in an audio format, as it is difficult to derive value from the book’s numerous sample contract provisions via an audio recitation versus written text.
  • Limited Entrepreneurial Perspective – Although Matt does a serviceable job of providing the voice of the entrepreneur, readers would be well served to hear from multiple entrepreneurs who have been bloodied by the fundraising process.

What Not To Do

Although Venture Deals primarily describes what an entrepreneur should do to facilitate the funding process, I found the brief chapter describing what not to do to be especially instructive. The mistakes outlined in this chapter include several that I have seen entrepreneurs make when pitching me, including:

  • Don’t Ask For A Non-Disclosure Agreement
  • Don’t Email Carpet Bomb VCs
  • No Often Means No
  • Don’t Ask For A Referral If You Get A No
  • Don’t Be A Solo Founder
  • Don’t Overemphasize Patents

Venture Deals Has Made My Life Easier

The typical sophisticated investor crafts funding rounds for a living, whereas an entrepreneur usually raises money a handful of times over their entire careers. Venture Deals helps level the inherently skewed fundraising playing field by providing a window into venture capitalists’ bag of tricks, while guiding entrepreneurs to remain focused on the deal points that matter most.

For the past several years, I have directed my students and other emerging entrepreneurs to AskTheVC, as well as Feld Thoughts. If you have an ad hoc funding question, these sources may still satisfy your needs. However, if you are an emerging entrepreneur seeking institutional funding, the time and monetary investment required to read Venture Deals will undoubtedly yield a positive ROI.

Venture Deals has made my life easier by providing me with a one-stop repository of fundraising advice that I can recommend to my students and other emerging entrepreneurs. Since its publication, I have referred hundreds of entrepreneurs to Venture Deals, most recently at a keynote talk I gave to 300-budding entrepreneurs at Cal Tech. If you are an emerging entrepreneur contemplating the mysteries of the fundraising process, Venture Deals will undoubtedly make your life easier as well.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.


Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.





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