Summary

Ramsinghani provides a comprehensive operational guide to the venture capital business – from fund formation and LP relationships to portfolio construction, board governance, and exit strategies. The book emphasizes that successful VCs combine good judgment, situational awareness, and a bias for action with deep networks and the ability to identify technology trends. Central to the thesis is that VC is a calling, not just a career – success requires a foundation of values as an internal compass, not just IRR optimization. The book covers the full fund lifecycle: raising capital from LPs (institutions, endowments, FoFs), defining investment strategy, conducting due diligence on founders (integrity, intelligence, energy), negotiating term sheets, serving on boards, and orchestrating exits via M&A, IPO, or secondary sales.

"In power law distribution, value add << sourcing + winning"

"Calling > career"

"Cortisol-fueled unnecessary hurrying"

Key Takeaways

• Fund structure: 2-2.5% management fee, 20% carry; typical fund $200M, 10y life, 20-24 companies over 3-5y investment period; can take 18mo to line up LPs
• LP universe: Pension funds (largest), endowments, foundations, SWFs (>15% of alt assets), FoFs, family offices, CVCs (~2%); the best LPs forge two-way networks
• Attributes of successful VCs: Good judgment, identify tech trends, situational awareness (world model), ability to pick winners, optimism, patience, stability, comfort in ambiguity, bias for action
• Career development: Think in bets + aware of biases; first principles thinking; lattice of mental models; understand power dynamics; must be a good therapist for founders; have a written decision-making process
• LP due diligence criteria: Expertise + investment strategy; team stability; consistent strategy; proven vs emerging managers. Most important skills rated: 1) listening, 2) recruitment ability, 3) qualitative analysis, 4) coaching
• Sourcing: 50%+ of deals come from network; accelerators → 11% of all Series As; network-based sourcing > data-driven
• Founder diligence: Integrity, intelligence, energy; can they attract a team of giants? Most funded CEOs = "Lambs"; best CEOs = "Cheetahs"; evaluate Direction → Execution → Results
• Term sheet essentials: Valuation, liquidation preference, anti-dilution, board composition, protective provisions, pay-to-play, ROFR; pro rata > participation > redemption in importance
• Board governance: 5 elements of board culture: trust, communications, active engagement, alignment of interests, independent observations; need to be quick to fire underperforming CEO
• Exits: M&A (understand universe of strategic buyers, LOTS of perverse incentives), IPO ($30-50M → $150M+ revenues standard post dot-com; target ~15% pop for underwriters), secondary sales as needed 3rd option

Notes

Preface

• Here to support values
• Foundation of values as internal compass - not just IRR
• Lessons from 3 areas: managing risk, service to founders, developing a framework of values
• Avg VC fund is $200M

1: The making of a VC

1: Cash and carry

• LPs: institutionals and HNWIs
• Primary metrics of success:
  • IRR
  • CoC: cash on cash return
  • MoiC: multiple on invested capital
• 20% carry goes back to Athens
• 2-2.5% annual management fee
• VCs manage multiple funds
• Can often take 18mo to lineup LPs
• Typical life of fund: 10y
• 20-24 companies over 3-5y
• GPs / MDs, VPs, principals, associates, analysts
• Rule of thumb:
  • 1/3 generate 5-10x outcome
  • 1/3 generate 1-2x
  • 1/3 fail

2: Why choose a career in VC

• Fueling the frontiers of innovation, being an agent of change, supporting the next gen of founders, asymmetric financial gains, freedom / autonomy, the thrill of building companies
• Intellectual stimulation

3: Attributes of successful VCs

• Good judgement
• Identify tech trends
• Situational awareness (world model)
• Ability to pick winners
• Optimism, patience, stability
• Comfort in ambiguity
• Learn and grow
• Bias for action

4: Welcome to the land of ad-venture

• Narrow road
• Personal brand
• <skipped>

5: Developing your investment career

• Think in bets + aware of biases
  • Power law
• First principles thinking
• Lattice of mental models
• Personality, brains, energy
• Game theory
  • Games, players, info, strategy, outcome
• Understand power dynamics
• Networking
• Humans are emotional, not rational
  • Driven by narrative
• Must be a good therapist for founders
• Reciprocity
• Reflect on wins and losses
• Have a written decision making process
• Conformity / group think
• Halo effect

6: A business where enemies accumulate

• Often regarded as a commodity
• Reputation: always be respectful
• High level of churn
  • Consistent IRR is all that matters
  • “You’re only as good as your next investment”
  • Most VCs will/should fail
• VCs slice and dice data, deflect blame
• VC takes years of mentorship
• Calling > career

7: Generational transfer + succession

• Headiness → hard to move to another role after
• May be ill-equipped for an operational role after
• “Cortisol-fueled unnecessary hurrying”

2: Raising your venture fund

8: LP universe

• The best LPs forge two-way networks
• Institutions: foundations, university endowments, pension funds, FoFs, family offices, sovereign wealth funds
• 4 major asset classes:
  • Stocks
  • Bonds
  • Alternative assets: private equity, VC, hedge funds, real estate
  • Cash
• Risk, rewards, liquidity ↑
• Pension funds: by far the largest
• Endowments: smooths lumpy donations
  • Generally spend ~5% year
• Foundations: support charitable and non-profit causes
  • Generally must give away >5%, but invest the other 95%
• SWFs: now own >15% of alt assets
• Finance + insurance companies: ~25%
  • In the business of managing risk
• HNWIs / SFOs / MFOs: ~10%
  • US, Japan, Germany are >60%
  • China, India growing quick
• Internal (CVCs) or external: ~2%
• Must consider LP type → strategy

9: LPs of choice: fund of funds

• FoFs: indirect investment funds for pensions, foundations, etc.
• VC is riskiest of all asset classes
  • STDDEV can be as much as 150%
• FoF benefits
  • Most importantly, they’re driven in the same way VCs are

10: How LPs conduct fund due diligence

• 2 criteria: expertise, investment strategy
  • Secondary criteria: investment terms, market conditions
• Performance
• Proven vs emerging fund managers
• Team stability, consistent investment strategy
  • Partnership dynamics

11: Defining fund investment strategy

• Market opportunity:
  • 4 sources: the unexpected, incongruity, process needs, structural changes
  • 3 external factors: demographics, perception, new knowledge
• Match GP with ↑
• Competitive advantage
  1. How they’ll attract the best foundwrs
  2. Stage of investment
  3. Sector
  4. Target geo
  5. Network
  6. Industry insights
  7. Past track record
• Roadmap investing:
  • Disruptive catalysts: technical, demographic, regulatory, psychographic, geopolitical
  • Industries / sectors
• Investment thesis:
• Institutionalized value add: platform
• In power law distribution, value add << sourcing + winning

12: Investment team diligence

• Team dynamics: stability, alignment, skill sets
• Distractions
• Alignment of interests (carry)
• Rated most important skills: 1) listening skills, 2) recruitment ability, 3) qualitative analysis, 4) coaching / advising
• Specialists > generalists in early stage
• Relationships (especially elite networks)

13: Fund size + portfolio construction

• Typical check size, reserves, ownership + dilution
• Modeling / project it out

14: Performance analysis

• Reputational risks of cherry-picking
• IRR doesn’t capture NPV (interim)
• CoC multiples:
  • TVPI: total value to paid-in capital
  • DPI: distributions to paid-in capital
• PME: public market equivalent
• Estimating unrealized returns
• Challenges with ↑
  • Depends on comps universe
  • Adjusting vintage year
  • Self-selection bias
  • Best funds don’t report

15: Terms of fund investment: LP agreement

• Key terms:
  • Fund size
  • Commitment (min)
  • Investment size
  • Fees
  • Industry focus
  • Investment stage
  • Geographic focus
  • Term (10: 4 → 6-8)
  • Investment structures
  • Portfolio construction
  • Governance & management
• Most negotiated terms:
  • Carry
  • Management fee (2-2.5% annual)
    • Typically reduced after y5, or after another fund is raised
  • Waterfall: process of sharing returns
    • Distribution order:
      • 100% catchup to partners
      • 80/20 carry
  • Clawback: recovering excessive profits at end of fund life
    • Escrow
  • Key person
  • Indemnification
  • Side letters (from LPA)
• GP expected 1%+ commitment
• LPAC determines governance
  • Investment limitations (eg. no more than 15% in one investment)
    • Investment drift
  • Conflicts of interest
  • Key person provisions
  • No fault divorce
  • Indemnification / standard of care
  • Confidentiality
  • Side letters
  • Co-investments
• LPs seek:
  • Alignment of interests
  • Governance
  • Transparency

16: The VC’s ethos, culture, values

• X

17: Raising your first fund

• Can be a 2y journey
• Target the right LPs
• Set timeline, expectations (how do you define success?)
• Market timing
• Know your place in the GP universe

18: Getting in the LP door

• Warm intros
• Find pitch deck: fund strategy, team, portfolio construction, past performance
• Track record
• Sample investment memo
• References: founders, investors, thought leaders who can speak to you
• Questionnaire
• Legal docs
• Start with asking how they’d like the convo to go
• Placement agents: kind of like a proxy fund manager for funds in the middle
  • Social capital, leverage, advisory
  • Focus on your core competency
• Anchor investor:
  • Will make intros to over LPs
  • Want them to commit 10-20%
• Sell, sell, sell
  • Communicate, create momentum

19: Why LPs seek first time funds

• Risk → reward
• Super performers who will be harder to access later

20: The sourcing process

• Network / social fabric vs data-driven
• 50%+ of deals come from network
• Cold calls: mixed opinions
• Network-based sourcing
• Accelerators (→ 11% of all Series As)
• Angel networks
  • 65% are dormant
  • Generally viewed as unsophisticated
• Trade conferences
• Investor pitch sessions

3: Building your portfolio

21: Due diligence cheat sheet

• 5 general criteria:
  1. Management team integrity, urgency, knowledge, agility
  2. Clear market pain point, value prop
  3. Key risks + mitigation plan
  4. Capital needs, breakeven, efficiency taken into account
  5. Can it generate sufficient returns in the target timeframe

22: Diligence

• Sizing up opportunity + risks
• Management + market
• Buffet:
  1. Can I understand it
  2. Durable moat
  3. Team is honest + able
  4. Price is right
• Have a checklist
• Tailor diligence by stage
• Sequoia:
  • Clarity of purpose
  • Large market
  • Focus
  • Customer pain point
  • Thinking differently
  • Team DNA
  • Speed and agility
  • Frugality
• Socratic method of diligence:
  • Be humble

23: Management team diligence

• Integrity, intelligence, energy
• Can they attract a team of giants
  • Shockley vs Jobs

1. Direction
   • Vision + strategy
   • Decision making
   • Intelligence, logic, courage
2. Execution
   • Team building
   • Effectively run the company
3. Results
   • Setting goals and meeting them

• Most funded CEOs: “Lambs”
  • Openness to feedback
  • Listening skills
  • Treat people with respect
• Best CEOs: “Cheetahs”
  • Move quickly
  • Act aggressively
  • Work hard
  • Demonstrate persistence
  • Set high standards and hold others accountable to them
• References
• Who top grade survey

24: Market, product, business model analysis

• Primary value proposition
• Development stage
• Can it be protected?
• Market acceptance + adoption rate
• The product will pivot
• Business model
  • Pricing power
  • Value milestones > projections

25: Terms and conditions

• Fundamentally 1) economics 2) control

26: Structure of the term sheet

• Two main structures:
  1. Convertible loan / note
     • Converts to preferred equity
  2. Preferred equity
• Convertible notes: typically in early stage
  • Interest rate: 3-10%
  • Term: typically 1-2y
  • Conversion trigger: usually predetermined amount in series A
  • Discount: eg. 20% to next round
• Capped convertible note:
• Bridge note:
• SAFE: not debt
  • Used when speed matters
  • Though, creates a risk for VCs

27: Buy low, sell high

• Equity preferred stock
• Avoid uncommon terms: damages reputation in later rounds
• Valuation is often a function of demand in the early stages
• Generally want to keep buying in every round
• Keep in mind: 1) value at exit, 2) time of exit, 3) ownership at exit
• Comps to similar investments
• Founders need to create a supply demand dynamic in the round
• Discounted cash flow (DCF) method:
  • NPV: amalgamation of 1) rate of growth, 2) time period of growth, 3) cashflows, 4) cost of capital
• Liquidation preference: sale or shutdown
  • Multiple of amount invested
  • Non-participating: dividends
  • Participating preferred: double dip
  • Capped participation: ~40% of transactions
    • Protects downside of investor
  • Risks demoralizing founders
  • Rare in early stages, and strong argument to get rid of altogether
• ↑ founder liquidation preference (rare)
• Anti-dilution protection:
  • Stick with weighted-average anti-dilution
• Dividends: ~40% of series A deals seek cumulative dividends
• Pay-to-play: keep investing or stock is converted to common
• ROFR: first rights to purchase stock
• Options vs warrants
• Spring warrants: investors give back equity when milestones are met
  • Protects downside risk, incentivizes founders
• Typical board approval items:
  • Officer / management hiring, firing, compensation
  • Stock options programs
  • Annual budgets
  • Debt obligations
  • Ownership / shares
  • Changes to board structure
• Exit-related provisions:
  • Redemption: eg. after 6y
  • Drag-along / tag-along + co-sale
  • Piggyback
• Non-compete
• Exclusivity, no shop
• Pro rata > participation > redemption
• Syndicates: (40% of investments)
  • Know who you’re getting in bed with
  • Small VCs feeding to large VCs
• Milestone-based financing
  • Risk is short-term thinking

28: The closing process

• Board approval
• Execution of documents
  • Investor rights agreement
• Modify certificate of incorporation
• Issue share certificates

4: The art of value creation

29: Serving on boards

• Duty of care, duty of loyalty
• Know your limits
• Legal requirements:
  • Duty of care: fiduciary
  • Duty of loyalty: company > individuals (management)
  • Confidentiality, disclosure
• Self-education: develop an understanding of the business
  • Strategy, key goals
  • Internal + external challenges
• Maximize shareholder value

30: Board culture + orientation

• At a minimum, should have experts in: sales, strategy, industry expertise, marketing
• Active vs passive boards
• 5 elements of board culture: trust, communications, active engagement, alignment of interests, independent observations (from outside the board altogether)
• 5 cultural aspects of healthy boards:
  • Deep attention to detail combined with macro views
  • Promote inquiry and dissent
  • Minimize the minutiae
  • Control the flow
  • Establish a collegial atmosphere
• Need to be quick to fire underperforming CEO
• Skills to hone:
  • Interpersonal
  • Pattern matching
  • Partnering experience (with different financial stakes)
  • Avoiding getting lost in the mundane details
  • Networking
  • Mentoring
• Ensure alignment of interests
• Risks of misalignment:
  • Career interests
  • Fundraising drivers
  • Exit timing
  • Financial
• Adjudicators for 50%+ of the time neither founder nor VC owns board
• Founders must be obsessed; board must take broad view
• Onboarding checklist:
  • Company overview
    • Business background, management team, org chart
  • Directors biographies
  • Financial reports and projections
  • Cap table
  • Board policies: conduct expectations
  • Skills, knowledge of each board member
  • Frequency of meetings
  • Audit, compensation, governance
  • Decision making procedure
  • Policy on observer roles
  • Responsibilities
  • Liabilities and insurance coverage
  • CoI, indemnification etc.
  • Press and media policies
  • Board committees: audit, governance, compensation committees typical
  • Board evaluation process

31: Value creation

• Board governance
• 3 value creation metrics:
  • Strategy
  • Resources
  • Performance
• CEOs value:
  • Financing, advice, intros
  • Strategic focus
  • Recruiting, hiring sr management
• Least valuable:
  • Selection of professionals
  • Law, patent accounting
  • Strategic intros to partners
  • Functional advice in marketing, engineering
• Take a big step back, calibrate

32: Challenges in the board room

• CEO transitions:
  • Red flags: ignores advice, absent, combative, stonewall, doesn’t proactively inform
  • Avoid becoming too close with CEO
  • 50-70% don’t make the distance
• Managing CEO transitions

5: Liquidity events

33: Exit strategies

• Types
  • 13% IPO
  • 43% acquisition
  • Secondary markets
  • Redemption (eg. after 5Y)
  • Write-off
• Preconditions: alignment of stakeholders

34: Acquisitions

• Innovator’s dilemma
• Understand the universe of strategic buyers
• Key drivers:
  • Improved revenues + profitably
  • Operational synergies
  • Vertical (forward/backward integration)
  • Horizontal
  • Diversification
  • Geography (cross-border)
  • Quash rising threats
• The pathology of big deals
• Putting the company up for sale:
  • Test the market conditions
    • Hire a sell-side IB
  • Formalize the process
  • Establish LOI
    • Prepare diligence
  • Negotiate / structure the transaction
• LOTS of perverse incentives ↑
• Escrow, buyouts, other terms

35: IPOs

• $30-50M → $150M+ revenues standard after dot com crash
• 3 stages:
  1. Planning / diligence
  2. Execution / implementation
  3. Realization
• Process starts 1-2 before
• Steps to IPO:
  • Selection of underwriters: bake-off
  • Roadshow
  • Demand assessment
  • File S1 and final prospectus
  • Book building + book runner
  • Decision: go or put on ice
• Underpricing: target ~15% pop to award underwriters
  • Though, cost is borne by the company
  • Though, overpricing is much worse. Thus, worth it
• Information asymmetry + big fool theory:
  • Need unsophisticated investors, thus must underprice
• Dutch auction: bid to find fair price, cut out big banks (eg. Google)
• Should depart board to be more of an investor (IRR) rather than feduciary

36: Secondary sales

• A much needed 3rd exit option
• Can leak too much info, be cumbersome, impact employee morale