FOREWORD

Scott Kupor’s Secrets of Sand Hill Road: Venture Capital and How to Get It is motivated by the desire to democratize opportunity. It demystifies venture capital, laying out how this crucial part of the startup ecosystem works for anyone who picks it up. It examines the VC startup life cycle from every angle, including how VCs decide where to invest, how to pitch, and all the many, many legal and financial details and players involved in forming and growing a startup. (Its exposition of the term sheet alone makes it worth far more than its cover price, and I wish I’d had it available to me when I was first looking for startup funding.) It understands that hard decisions sometimes have to be made and that deals can be confusing, and ends with a look at the IPO process. All of this information is presented as a means of reframing the relationship between startups and their investors as a true partnership, rather than an uneasy alliance. Scott has seen the process from both sides of the table, as a startup executive and as an investor, and he’s distilled his experiences and his perspective into an accessible, straightforward guide. Its purpose is to help build on the progress that’s already been made in taking entrepreneurship from a career path open to the few and the privileged, to one that’s open to anyone with an idea and the will to see it to fruition. This is the most urgent obligation of the startup movement as a whole, as we work to help build a more equitable society, but it also has huge implications for the continuing economic success and survival of our country, where new businesses account for almost all net new job creation and nearly 20 percent of gross job creation overall. Leaders like Scott are moving us all closer to fulfilling that obligation.

For most of the twentieth century, entrepreneurship wasn’t seen as a career. It was more like a path followed by people who didn’t fit into one of the traditional professions open to them and could afford to do something different. Although some succeeded, being an entrepreneur was as much a curse—or maybe more of one—as an exciting opportunity. Even many initially successful entrepreneurs ended their careers in poverty or were forcibly removed from their creations. Now, though, conditions favor entrepreneurs. Barriers to entry are being reduced everywhere, thanks to the semiconductor revolution, the rise of globalization, and the influx of new talent into every industry and sector. Think about this: venture-backed companies now spend 44 percent of the entire R&D budget for American public companies. The 665 public companies that are VC-backed make up a fifth of the total market capitalization of public companies. They employ four million people. Those are significant numbers, but I believe this is just the beginning. The startup movement can—and must—grow to have a much larger impact. When we pour so much money into such a limited range of companies, we can’t effectively tackle the challenges we face. That’s why one of my favorite things about this book is the way it so clearly parses out the incentives and systems behind venture capital. This will help all entrepreneurs navigate the maze of venture investors and decipher their behavior. The system works the way it does for a reason, and now that reason is comprehensible.

But there are other, larger lessons to glean as well. As you’ll learn in this book, most venture firms invest money on behalf of larger institutional asset managers, like university endowments and retirement funds. Most of these asset managers use a formula to determine how much money to allocate to different types of investments, including the high-risk, highly-illiquid sector of venture. (This approach to portfolio construction was pioneered by David Swensen at Yale, whose methods have been widely adopted, as you’ll read about in chapter 2). What that means is that the amount of resources our society currently invests in innovation is based on the percentage of assets that need to be invested according to this formula, rather than on the number of investable opportunities that exist . When too much money is chasing too few deals, there’s only one possible result: Because we have too few entrepreneurs, we can’t put enough money to work. Instead, it’s wasted on bidding up the prices of the few available assets rather than funding the kinds of organizations that are actually needed. The problem is even more pressing when you consider it from a diversity point of view. Not only are there not enough startups, but the ones that do exist aren’t nearly wide-ranging enough to build the kinds of companies our present and future call for. Possibly for the first time in history, we’re talent-constrained instead of capital-constrained. Scott’s book is an important step in making the opportunity to build a venture-scale business available to everyone so we can change that. The information about how to seek out and secure funding shouldn’t be limited to an elite club. Every startup is about a single idea, but taken together, all startups have a common purpose as well: to shape a better world for all of us. And a better world is one in which everyone is represented and served well by the companies and systems we create.

That’s why Secrets of Sand Hill Road is so valuable, and so timely. It’s for people interested in venture capital, of course, but it’s also for anyone who cares about the ability of the US to remain competitive, create new jobs, and continue on the path of economic growth. Those people include policy makers, academics, government officials in the US and elsewhere, civic leaders in startup hubs around the country and globe—who are already helping to democratize startups geographically—and people who work in corporate innovation (who can look to the VC world for inspiration on how to fund and grow projects within their organizations). Finally, Secrets of Sand Hill Road is for all the entrepreneurs who might not see themselves as a part of Silicon Valley—everyone who might not be considering trying to start a company based on their crazy concept, but really should be thinking about it. Given the chance, any one of those ideas could well become a reality that changes the way we live, and those are ideas we need to support. I believe Scott’s book is destined to change the equation when it comes to who gets funded. It’s leading us into a fairer, more robust future, and I can’t think of a wiser person to take us there.

Eric Ries, author of The Lean Startup and The Startup Way