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on January 27, 2010
I have been a partner in the Venture Capital business my entire career - over twenty years. I have kept a personal list of "lessons learned" from my investment experience; and, I have read many of the books in the category. By far, this is the very best book in all respects. It is extremely well written and easy to read; captures the essence of each "master's" message; and, also captures the essence of the investor's personality (at least those that I know). I think this book is so good it should become a text book in business schools with private equity / venture capital programs. A must read for anyone interested in the "craft" of making successful investments in private companies.
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on January 8, 2014
In this book some of the real veterans of Private Equity and Venture Capital get to tell their own story - How did their career develop? Why did they make the choices they made and how did this form the sectors today? What lessons can they share (professional and in life)? The author Robert Finkel is the president and founder of a USD 190 million, Chicago based, PE-firm called Prism Capital. He got the inspiration for the book while arranging a number of panel discussions with seasoned VC-managers. With the book Finkel is "seeking to expand my own interest in their accomplishments and channel it, in written form, into a kind of virtual classroom, one open to public viewing." Self-improvement and sharing of financial wisdom - two worthy causes to write a book.

The structure of the book is simple: first an introduction by the author, then the two major parts of the book presenting one academic and five practitioners within first PE and then VC and finally a number of appendices with material from some of the practitioners ("Managing Director Selection Criteria" etc.). The arrangement lends itself perfectly to study the similarities and the differences of the two protagonists. Let's begin with what unites PE and VC. For a start they raise money, run funds with finite lives and then return the limited partners' money. This gives them "the advantage of a burning platform", i.e. a built in sense of urgency, a notion that time is money and an understanding of the alternative use of cash that is very conductive to driving change (and results). Both also view themselves as down to earth stewards of healthy business values, builders of enterprise value and champions of capitalism. That investors in public equity often are seen as politically correct hysterics is perhaps no surprise but I hadn't appreciated the tension that at times exist when it comes to hedge funds. HF:s are much too financially complex for the taste of those managing private capital and on top of that HF:s are the main competitors for the LP's money. In slightly different ways both VC and PE provide structure to the companies they invest in - governance is increased, strategies are sharpened and management is recruited. Another obvious similarity is the "2-and-20" fee structure.

The fee structure however illuminates one of the differences; AUM is much larger in PE than in VC and therefore while those working in the former can live happily on the management fee, the carry becomes relatively more important in VC. Even though they both, as stated above, bring structure the execution is very different. VC:s invest in the early stages and in hot new markets while PE invest in mature cash cows with potential for improvement. This means that while PE-owners at an early stage try to replace a CEO they don't have confidence in, VC-owners often coach an entrepreneur for longer and often only replaces him for a "professional manager" when the venture is brought to sufficient scale. The structure PE brings is focused on cost and capital efficiencies, repositioning often through M&A, accountability and cash flows, VC brings R&D prioritization, hiring skills, taking a product to market by adding sales competences and in general building a company with necessary systems. The outcome of an investment is more binary in VC than in PE and hence the risk is higher. This means that it's more common for VC's to co-invest and spread the risks, while this is mostly done in the very largest deals in PE. The difference in risk level also means that where leverage is a large part of the return PE generates, VC is equity-based only.

The masters presented in this book have been in business for 30, 40 or even 50 years and the stories they tell are those of how VC and PE started. One privilege of age is the ability to put things in perspective. However, at times the texts become memoirs rather than teachings of the tricks of trade. This makes the book likable but you don't learn as much as you could have.

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on September 27, 2011
I just read the chapters related to venture capital in the book The Masters of Private Equity and Venture Capital. These are the chapters 7 to 11 built from interviews of:
- Garth Saloner, Stanford Professor
- Bill Draper, founder of Draper Richards and of Sutter Hill
- Richard Kramlich, founder of NEA
- Steven Lazarus, founder of ARCH Venture Partners
- Pitch Johnson, founder of Asset Management Company

You may not know their names but Draper, Kramlich and Johnson are famous "grandfathers" of Silicon Valley venture capital. You may remember them if you read anything on the history of venture capital.

I have to admit my favorite chapter was about Pitch Johnson. (So if you are bored with my lengthy post at some point, jump to the Johnson chapter before quitting!) I had been in contact with him in the past when he sent me a great poster about the early history of the west coast VC. I had also quoted Johnson in my book; I quite liked what he had to say about entrepreneurship: "Entrepreneurs are the revolutionaries of our time." And he had added: "Democracy works best when there is this kind of turbulence in the society, when those not well-off have a chance to climb the economic ladder by using brains, energy and skills to create new markets or serve existing markets better than their old competitors"

So is VC an art or a science? It is certainly not the only topic of this book but all contributors give their views on the question (and on a few other issues I will also mention).

Chapter 7 - Garth Saloner - The Entrepreneur and the Venture Capitalist

Saloner, a Stanford professor, gives an overview of what VC was and is about. He begins to say that VC is not what it was: "Rich and reliable returns no longer seem quite so dependable" (p. 143) so that VCs "Move toward a more conservative mix in their investment portfolios" because of "stressful market conditions".

One of the sections of his chapter is called "Tough to predict". "A VC cannot tell which of the many opportunities that cross the desk will be a 30 bagger". [A 30x multiple] ... "And it can be nearly as difficult to predict which will return zero. These uncertainties drive the typical venture investor toward a home-run model."

A third topic he studies follows another section title: "Whose side are you on anyway?" He answers by stating that the VC has a responsibility towards its LPs. "The typical VC has every incentive to play long ball while many entrepreneurs will be simply happy to see their product come to market. And therefore the VC may be more aggressive." The disparity in perspective is rooted in two aspects:
- the preferred stock structure which may induce fast exits if success does not seem to appear,
- the time and money, which gives an incentive to shut down if the time effort is too high.
"But even the success does not eliminate this tension: the entrepreneur may prefer a longer time horizon," VCs need liquidity. The author is not sure that Bill Gates, Steve Jobs, Michael Dell or Larry Ellison would have been given the opportunity with venture capitalists in control of the board room.

In conclusion the final section is called: a successful, if uneasy, marriage.

Chapter 8 - Bill Draper - Pioneer Investing

Bill Draper is indeed a pioneer of Venture Capital. You may read more about him on another post of mine, The Startup Game.

"Venture investors put their money into technologies that have not yet come to fruition, untested business ideas, undeveloped markets, and often entrepreneurs with virtually no track record. It is a pioneering from of investment."

One of the sections here is "Seeing into the future". "It is not a simple formula. Experiences become lessons, lessons become practices, and practices help us to succeed or fail." ... "It is essential to be quick footed, connected and on top of the latest technological changes in order to succeed." ... "The face of genius changes all the time." Draper clearly explains the difficulty of the VC activity which makes it (according to my understanding of his views) more an art than a science.

Draper also talks about returns and money making: "Instead of worrying about their carry - in other words, their share of the profits, and fretting about the increase in value of their portfolio, some venture capitalists were more concerned about their fees, or the amount of money that they charged based on the funds under management. The rise of the megafunds and the Wall Street transaction mentality inevitably increased the competitive pressure on everyone." ... "The last thing they want to do is share deals, that is unfortunate because cooperation brings more talent to the table." There is a nostalgia of the good old days, that have suffered from greediness.

But Draper is an optimist: "Skype was still in the idea phase, but it promised to be an amazing breakthrough. Zennstrom and Friis epitomize what it means to be a disruptive innovator." ... "Society would not be as advanced, interconnected and civilized as it is today were it not for the scores of talented venture capitalists who provided the platform for brilliant and passionate entrepreneurs to develop and nurture their world-changing ideas and innovative technologies."

Chapter 9 - Richard Kramlich - Change for the Better

Kramlich is more on the science side (again according to my understanding). Let me quote him: "Some changes can be anticipated and planned for. Others are as surprising as a satellite that becomes space junk." ... "Our ability to anticipate, manage, respond to and capitalize on change has been an essential ingredient of our ability to grow into a firm that over our 32-year life span has helped 165 companies make initial stock sales." ... "We spend a considerable time managing change." NEA has industry teams with experts such as a Nobel Laureate. "VCs are savvy risk takers, able to adapt to changing markets, they nurture creative ideas that might become huge successes. They know that sometimes they will fail completely."

He also sees different approaches: "Some people are natural agents of change" ... "Jim Clark is one of the rarest examples who operates almost exclusively on instinct." ... "A fast-change artist."

He also added about Metcalfe, founder of 3com: "I had a difficult time telling if this was genius or folly"

And he concludes with "At NEA, [we] have developed some fairly sophisticated tools to avoid the dead ends. What are the holes where the incumbents are not playing? We have applied this sort of thinking to solar power, and have invested in 15 companies. But I am not sure their investments in the solar industry have been stellar... He also discusses greed (he claims NEA only takes 1% management fee vs. 2% on average) and the megafunds (he claims he can put in action billion-dollar funds in order to invest in companies such as Tele Atlas)

Kramlich definitely insists on systematic analysis, expertise and processes even if he recognizes intuition, art and guts play a role for others.

Chapter 10 - Steven Lazarus - Beyond the Ivory Tower

The roots of ARCH Venture Partners are unusual as Lazarus funds began in a university framework, which is why the author of the book summarizes this chapter with the comment "It is possible to systematically commercialize the research from university laboratories"

Lazarus is more humble. He describes ARCH as "an experiment designed to help commercialize laboratory research." ... "Systematically rummaging through university labs." but he adds: "We made plenty of mistakes." ... "The techniques that have been so helpful to me might be helpful to anyone trying to manage an enterprise that embraces risk in order to grow companies and turn a profit." ... "The scouts also needed to be good judges of talent." ... "We launched ARCH as a technology incubator but the most successful investment turned out to be a company that had nothing to do with technology."

One of the sections is "Facing the risks". "We were identifying science literally at the site of inception. We faced three risks: technology, market and financing." (Surprisingly he does not mention the people or team risks.)

Lazarus is also on the science side of venture capital but when you read between the lines, you may see some of the artistic features.

Chapter 11 - Pitch Johnson - Fostering Innovation

As I said above, this was my favorite chapter. "The crucial decisions must be made on the basis of inadequate information." ... "Back an entrepreneur without knowing if the idea is powerful, the market big enough and the management strong enough." [About Amgen in which he invested] "The company must control variables, be able to replicate results, learn from mistakes, and incorporate new information. Beyond that, there was the human factor."

"I have learnt the tools and techniques, the importance of working with the best people, perhaps the single most vital ingredient of success, I have learnt the pitfalls to avoid. With a lot of lessons over time, one has a good chance of backing the right people with the right ideas in the right markets." ... "The art of our business is to select only the best people with the strongest ideas. The people with drive, the ones who can execute, who can work with others."

He has also a funny and critical (for him) anecdote: "As I rose in the ranks [of the company he first worked for], I was eligible for stock options. I got 42 shares. The founders each owned hundreds of thousands, I decided I needed to do something else."

He also has quite a unique model of venture capital: he decided to quit VC and run his own money, more like a business angel. The main advantages: "Not the same time horizon. The luxury of patience." He also criticizes some abuses: "VC has become a big money management business. AMC is just $60M. But since 2007, VC is back to basics: starting companies, find people, with breakthrough ideas. Whereas in the dot-com, it was quick-hitting with no intention of really innovating." As an example, he claims he was an investor in Boole and Babbage for 30 years !!

"Many styles of entrepreneurs work. What counts is matching the right CEO with the particulars of the challenges facing a company. Informal or hierarchical styles, both work." (He compared Tandem to Teradyne as examples of both styles.)

Art or Science? Clearly a lot of art, a lot of technique and know-how too. Clearly not an industry, but more a craft. And as we all known, craftsmen are just in-between artists and scientists.
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on January 22, 2016
I have started my Venture Capital firm last year and this book helped a lot to understand the business especially that I have only investment banking background. It's easy to read and has great advise form leading VC/PE personal.
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on April 16, 2015
Reading this book is like reading the abstracts of several biographies. Fun and informative. In particular, you can really start to understand the social/cultural/economic backgrounds behind different stages of evolutions in the investment space. The only shortcoming, I'd say, is the lack of depth. Also, if you are looking for modern prominent VC investors, you will be disappointed.
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on June 23, 2010
Robert Finkel has captured the essence of successful venture capital and private equity masters. Though in the beginning I thought the word "masters" in the title of the book is a bit cheesy but, as I read more about venture capital I am convinced that it's a right choice. The challenge with entrepreneurship, investments, or any activity that involves interactions with humans is that its not a precise science. You are judging and betting on people and their dreams, their intentions, and their ability to get things done. Its a tricky business; and a great candidate for apprenticeship model. Although each PE or VC has somewhat similar set of financial tools, they all have unique personalities, observations, and capacities. So you got to listen to their story in their own words. You got to find out what were they thinking when they did those pioneering deals. In that regard the book does a wonderful job. You can hear the voice of each "master" very clearly. I recommend this book.
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on November 19, 2012
Collection of perspectives on Venture Capital from the industry itself. An interesting read for those wanting to understand VC's. A lot of what has happened is in the chapters. Good snapshot venture stuff book.

Disappointed no final summary perspective or common/uncommon threads as to what it means, how the industry could evolve, trends.
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on September 18, 2015
Bought with the assumption that these masters would share a lot of financial wisdom my way and that I’d be wiser and better off at the end. Unfortunately I really just read memoirs. Don’t get me wrong it was a good read, but I’m disappointed at the lack of insight gained.
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on January 7, 2013
This was a great book for both an entrepreneur and investor. For the entrepreneur this book helps you learn about raising capital, understand what characteristics both VC and PE firms look for. As for the investor, this book provides tips that can make you a better investor.

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on April 14, 2014
This book taps into some insight and specific lessons that you can take away from real leaders in the industry. Reviewing different approaches and philosophies of these practitioners can help you define your own beliefs, based on what you agree or disagree with.
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