All you need to know about venture capital

Venture capital (VC) and private equity (PE) are both toasted and reviled globally — depending on whom you speak to and who has made or lost a lot of money. They are the true engines of economic growth, often funding ideas that grow into a billion-dollar industry and end up changing the world around them. For example, Dominos Pizza (food), Genpact, Intellenet (offshoring), Booz Allen Hamilton (consulting), Hertz (car rental), Apple Computer, Facebook, Google and Skype are all shining examples of the global footprint of the venture capital/private equity industry.  

The Aspatore Raising Venture Capital collection comprises 10 books: Term Sheets and Valuations; Deal Terms; Venture Capital Exit Strategies; Compensation Structures of Venture Backed Companies; The Venture Capital Legal Handbook; Venture Debt Alternatives and Evaluation Guidelines; Venture Capital Valuations; Venture Capital Best Practices; The Role of Board Members in Venture Backed Companies; and Venture Capital Fund Management. As the titles suggest they cover the gamut of VC/PE deal making and are a tour de force, taken together.

The industry is mired in secrecy. Much of the way it functions is done behind closed doors, with as much analytics as financial engineering and a lot of smoke and mirrors! Against this environment, the collection provides an invaluable insight into this industry and the investing process. Consider this collection the definitive resource for venture capital and the only reference material you will need. Within these 2,000 plus pages lies a wealth of critical information that every executive looking to raise capital should have at their fingertips. In addition, these volumes also feature examples of over 50 legal documents, which delineate and govern venture-based transactions, as well as a plethora of expert analysis and indispensable advice on negotiation points and tactics. Each book is authored by leading partners from various top venture capital firms, including Bessemer Venture Partners, Venrock Associates, Mellon Ventures, Polaris Venture Partners, and EuclidSR Partners, who dip into their rich experience and portfolio of investments to educate the reader on the practical aspects of every deal.

The collection talks about how VCs choose their investments, value them, perform due diligence and exit them and create wealth for themselves and others. Consistent with most academic and anecdotal accounts, it finds that it is common for VCs to consider explicitly the attractiveness of the opportunity — the market size, the strategy, the technology, customer adoption, and competition — the management team and the deal terms. It also provides evidence on how VCs expect to monitor those investments. 

In at least half of the investments, the venture capitalist expects to play an important role in recruiting management. Valuations are one area every entrepreneur as well as investor tends to disagree on; the collection devotes an entire volume to valuation and concludes it is as much an art as it is a science. The series offers useful signposts on how to think about different kinds of valuation methods and which one works best in which situation. The volumes on legal aspects, deal terms and term sheets are equally valuable. The collection takes one through clause by clause, in turn demystify complex areas and hence making it extremely easy for the layman entrepreneur to understand and negotiate similar terms with VCs/PEs he may approach in the future. 

In the collection, the authors complement their analyses with information from financial contracts and also with subsequent performance of the investment. The evidence suggests that the venture capitalist’s initial appraisal of a management team is important. Another lesson that emanates from this collection is that stronger management teams obtain more attractive contracts and are more likely to take their companies public. Also, attention is given to liabilities and how they should be addressed while dealing with a sensitive transaction. 

The Indian venture capital and private equity industry is about a decade and a half young and is still struggling to come to terms with Version 1.0. While there have been some compelling investments recently, there have been many more inexplicable duds and, of late, the latter seem to dominating the former. Regulation is still in its infancy and if there is one area where this collection does not shed adequate light, it is on what are the best practices in regulating this industry. Nonetheless, the collection deserves a permanent place in the bookshelf of every VC/PE firm as also teeming Indian entrepreneurs who are scouting out for finance.

The writer is an IAS officer. These are his personal views