As the managing partner for Andreessen Horowitz — the venture capital firm that counts Airbnb, Facebook, Lyft, and Slack in its portfolio — Scott Kupor knows what to look for in startups, and what startups should look for in venture capital.
At the April 19 MIT Tech Conference Kupor — author of the upcoming “Secrets of Sand Hill Road: Venture Capital and How to Get It” — shared his advice on choosing whether venture capital money is right for you, if you’re right for a venture capitalist, and what it really means when a VC joins the team.
Is venture capital right for your company?
Kupor said his number one piece of advice for a startup founder is to make sure they understand the incentives that drive — and the realities that come with — venture capitalists and their money.
“The way our business works, we’re wrong more times that we’re right,” Kupor said.
On average, about 40-50% of a venture capital fund’s investments don’t succeed, Kupor said. What makes a fund successful is the 10-20% of investments that bring in up to 100 times the money invested.
“For you to be willing to enter into that pact with a venture capitalist and take their money, you have to at least think ‘Ok, can I be one of those 10-20% of the companies that ultimately drive big returns?’ recognizing that unfortunately … most of us will not end up in that category,” Kupor said. “But that drives kind of how you think about the market size you're going after, it drives how you think about the growth prospects of the business, it drives how you think about ultimately an exit; whether it’s going to be a public company or not.”
Is your company right for venture capital?
One of the “cardinal sins” of venture capital, Kupor said, is investing in something that is a great business, but one that’s not big enough to drive returns. That’s why smart venture capitalists will ask three questions when assessing a startup and its founder.
“The first question is market size: Do I believe that what this company’s doing is big enough and important enough to sustain effectively a standalone business over time?” Kupor said.
Then they will ask whether that company’s team is the right one to go after that standalone opportunity. That might sound obvious, Kupor said, but in a big, competitive market, there are going to be a lot of different players.
“The question then of a venture capitalist is what is it about this team that makes him or her uniquely suited to be able to actually pursue this opportunity,” he said. “What we’re trying to look for there is … what is the secret this founding team knows and how did they earn that secret?”
Finally, they will figure out what it is about the founder that makes them interesting and able to succeed.
“We use this concept of storytelling,” Kupor said. “Not fast and loose with words, but do you have a compelling way to articulate what is the vision of the company such that people who otherwise would have no reason to come quit their jobs and work for you, are willing to do that.”
An important governance question
What happens after a startup and venture capital firm decide to work together? Kupor said it can be easy for a founder to focus on the economic part of term sheets, but the governance —“who has a say in what decisions” — side is just as, if not more important than the money.
For a lot of failed companies, he said, it isn’t so much the economics that led to problems, it was the relationships between the founders, employees, and the investors.
“Are you prepared for a scenario where a venture capitalist — or, over time, a set of venture capitalists as you raise capital — will have a vote on whether you make more money or not, or whether you decide to sell the company?” Kupor asked.“Are you prepared in exchange for receiving that money as an investment, to have somebody who’s really a co-passenger with you on this ride, at least from an equity and governance perspective?”