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

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.

John Greathouse

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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  • Steve Anderson

    Great post, John.  I picked this up
    a few weeks back and it’s been a great resource for me. 

    Will be good to
    take your additional insights as I get more up to speed on the
    process/pitfalls as the authors have laid out.   Thanks for sharing.

  • John Greathouse

    Steve – I have heard for a number of entrepreneurs since I published this entry who either purchased the book and it is sitting on their desk or they have been ‘intending’ to buy it.

    Hopefully my humble review will cause those entrepreneurs to dive into Venture Deals, as the content is of immense value. Read a chapter at a time – it certainly is not the type of book where you have to read it in its totality to ‘get it.’

    Thanks for sharing your thoughts.

  • Alex

    Hi John,

    Good to see you are endorsing this one.

    I am an *in*experienced founder and i try to read everything that these guys put out, I love their books/blogs for the rich insider info and accessible style of writing.

    They really understand how to reach a broad audience and still deliver concentrated knowledge. I like that the chapters are short bursts of important info and various perspectives/voices are mixed in. This latest book feels like a version update of their style, serving the information even more smoothly.

    One thing I worry about personally, due to the fact that I do love what they write, is that I do not fit in with their rule of not being a solo founder.

    I am a solo founder who is not a tech wizard. My tactic thus far has been to found the company on my own, and build the product with help from both developers I know personally and by contracting various developers over the web to build certain parts of the product piece by piece.  

    I have leveraged resources i found near me and online to build the major product so far. Now i have a nearly ready prototypical product, yet I am a solo founder who has not built it himself. I worry that 

    1) Even though the product is awesome, important investors will doubt my company because of me and my limited experience and skillz,

    2) Much of my product is built off the combined work of contracted developers and open code online which might bring legal troubles once things get kicked off.

    I want to attract the right investors who have good social clout in the tech world. but i fear that i am dangerously ill equipped in their eyes.

    any advise on what aspiring tech entrepreneurs in my situation should do?

    Thanks for the blogs
    Alex    

  • Wow, great review! I had heard of the book before but never had chance to pick it up. It’s now on my to-read list for next week!

  • John Greathouse

    Thanks Alex.

    The first “rule” of entrepreneurship is that we ignore the rules. Rincon Venture Partners recently funded a solo Founder and his company is killing it, partly b/c he wisely brought in senior advisers and skilled executives. 

    The best way to grab any investor’s attention is to prove your value prop in the market place – paying customers alleviate most other concerns…don’t wait, if focus most of your efforts on achieving third-party validation, everything else will fall into place.

    Best of luck to you.

  • John Greathouse

    Thanks Alex.

    The first “rule” of entrepreneurship is that we ignore the rules. Rincon Venture Partners recently funded a solo Founder and his company is killing it, partly b/c he wisely brought in senior advisers and skilled executives. 

    The best way to grab any investor’s attention is to prove your value prop in the market place – paying customers alleviate most other concerns…don’t wait, if focus most of your efforts on achieving third-party validation, everything else will fall into place.

    Best of luck to you.

  • John Greathouse

    Stefan – glad to hear it. Check back, as I will publish an interview with Brad Feld in a few weeks. Should be entertaining and educational!

  • John Greathouse

    Stefan – glad to hear it. Check back, as I will publish an interview with Brad Feld in a few weeks. Should be entertaining and educational!

  • Alex Nazaca

    Thanks a lot John,

    the first rule is to ignore the rules !   

    sounds like fun,,

    thanks again, 

  • Rshaffner

    Great review and good insights.  Time to get the Kindle back from my wife!

  • John Greathouse

    Thanks. I just posted the first installment of my recent interview with Brad Feld to YouTube. I will publish it on my blog in a week or so. I really enjoyed my conversation with him – very witty and engaging. 

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