Scott Kupor Discusses Technology Startups – Masters in Business

Check out the Masters in Business Episode Page

Key Takeaways

  • 10-20% of the companies in a VC’s portfolio will return 25, 50 or 100x their initial investment
    • 20-30% will make a small amount of money
    • 50% of companies will get you no money back
  • It’s important to diversify your investments
    • But remember – “diversification needs to be in domains that you understand”
  • A lot of IPO companies are trading differently because they’re priced on growth and potential revenue instead of current profitability
    • 15 of the biggest 25 IPOs in 2018 were from companies that had no profits”
  • The state of affairs:
    • In 1999 and 2000 there were ~700+ IPOs in the tech industry (each company had a median yearly revenue of $17 million)
    • Today, there are only about 30-50 IPOs per year (each company has a median yearly revenue of $170 million)
  • Books are a 10-12 hour commitment – ff you aren’t enjoying the journey, grab a different book
  • Advice for someone interested in a career in VC:
    • “My best advice is to go work for a startup company. You don’t have to start your own company but learn the company building process. Don’t go straight to venture. You will be a much better venture capitalist having understood the company building process.”

Intro

Books Mentioned

About Scott Kupor

  • Scott has worked with Andreessen Horowitz for 10+ years
  • He recently wrote Secrets of Sand Hill Road: Venture Capital and How to Get It to answer many of the common questions asked regarding venture capital and how to raise money
    • “If we could demystify that and hopefully level the playing field, then maybe it would help entrepreneurs have a better relationship with VCs. It might even help people, who wouldn’t have otherwise thought about entrepreneurship come to the business.”
  • Scott sees about 22,500 pitches a year!

Venture Capital | High Risk, High Reward

  • 10-20% of the companies in a VC’s portfolio will return 25, 50, or 100x their initial investment
    • 20-30% will make a small amount of money
    • 50% of companies will be duds
  • It’s important to diversify your investments.
    • But remember – “diversification needs to be in domains that you understand”
      • Andreessen Horowitz does business in a ton of domains and each of those domain areas is filled with investors who are knowledgable about the space
  • “Venture capital is not an especially good investment. As of 2017, 10-year returns for venture capital in the aggregate were 160 basis points below the NASDAQ.”
  • VC investing is mostly a zero-sum game – there’s usually only one major investment firm that participates in each round (AKA leading the round)
    • “And once that opportunity’s gone, there will never be another”
    • As an example = Accel leadFacebook’s A round
      • Facebook had a MUCH higher valuation for their B round (thus requiring investors to put up MUCH more capital)
  • In VC investing, a very small amount of investments return the lion’s share of profits
    • “You got a few things that drive all the return and then you got this long tail of a bunch of stuff that, quite frankly, doesn’t amount to much from a returns perspective”

The State of Venture Capital

  • These days, you don’t need as much capital to start a business (you don’t need large server farms or databases – you can get almost everything from Amazon Web Services) – all it takes is two people with a laptop
  • That being said – there’s a ton of capital out there if do you need to raise money
  • There are also seed funds that give capital to very early-stage startups
    • This is a net positive – since capital is cheap, there is a lot more experimentation and innovation
  • VCs usually only get a board seat in the startup if they invest in the A round
    • “Typically, we will have a board seat and then typically, we will have kind of a set of rights that go along with our stock that’s says, hey, if you’re going to raise money, you have to let us vote to say yay or nay or if you’re going to sell the company, we have some ability to kind of have a say.”

Are we in a bubble?

  • Probably not:
    • In 1999 and 2000 there were 700+ IPOs in the tech industry with a median yearly revenue of $17 million
    • Today, there are only about 30-50 IPOs per year with a median yearly revenue of $170 million
  • A lot of IPO companies are trading differently because they’re priced on growth and potential revenue instead of current profitability
    • “15 of the biggest 25 IPOs in 2018 were from companies that had no profits”

The Venture Capital Lifecycle

  • A venture capital firm starts by raising funds (to invest) from limited partners (individuals, universities, banks, etc.) over a 10-year fund life
  • Then the VCs invest the money in whatever startups they see fit (most of the investing is done in the first 3-4 years of the fund’s life)
  • And then the process repeats
  • (Scott details this process much further in his new book – Secrets of Sand Hill Road: Venture Capital and How to Get It)

Straight Equity vs. Convertible Debt

  • Startups can raise money in two forms: By selling straight equity or convertible debt
    • Convertible debt has become a popular form of acquiring equity because it’s cheaper and faster – you don’t need to spend as much time with lawyers (compared to selling straight equity)
      • You also don’t have to decide on the valuation immediately
        • “We say, hey, look, in the future, when there’s an equity round, we’ll just convert it at that price or some discount, but we don’t need to go fight about valuation now”
      • However, sometimes convertible debt leaves founders underestimating how much of their company they sold off
        • “They don’t really realize [how much of their company they sold off] until they finally go to raise an equity round when all that debt converts into equity. They realize, ‘My gosh, I’ve sold a lot more of the company than I realized.’ They do this because you don’t have that tangible,’ I receive $5 million and I give up 25% of my company for it.'”

Additional Notes

  • Andreessen Horowitz recently finished raising a $10 billion fund
    • The company has about 15 partners and 170 employees in total
  • Software is still eating the world
  • Just as Pepsi competes with Coke, Uber competes with Lyft (there’s room for both companies to experience success)
  • Books are a 10-12 hour commitment – if you aren’t enjoying the journey, grab a different book
    • “One of my partners told me that and, boy, that’s the most liberating thing I’ve ever heard. I never would do that before. I would do the forced march through the woods.”
  • Advice for someone interested in a career in venture capital:
    • “My best advice is to go work for a startup company. You don’t have to start your own company but learn the company building process. Don’t go straight to venture. You will be a much better venture capitalist having understood the company building process.”
Bookmark