Secrets Of Sand Hill Road by Scott Kupor

23 Jun 2019

As clickbait-y as the title of this book might seem, it is a must-read for anyone trying to bootstrap a startup. You will walk away with a deep understanding of VC and get actionable entrepreneurship advice. As a litmus test; I guarantee your pitch deck, how you approach VCs, which VCs you partner with, how you evaluate your startup and your term sheets - all of it will change slightly (for the better) after reading this book.

Having done, a sort of, experiment startup in college and then later bootstrapping Foghorn at an incubator, I was appalled at the information asymmetry that exists between LPs, VCs, and founders (primarily technical founders). I learned it myself in hard ways. It made me feel furious, stupid, and even pity myself. However, as with everything, you don’t know what you don’t know. In the long run, this disparity doesn’t promote trust or incentive alignment. Possibly why I connected so strongly with Scott’s book. The book is non-pretentious, from the heart, and is genuinely trying to eliminate the asymmetry mentioned above.

There are way too many useful nuggets to summarize but, personally, if I had a gun to my head and I had to pick one meta takeaway - I would say the book helps you develop an appreciation and a working intuition for playing the incentive alignment game.

Working intuition, once you have it, works like common sense. Kicks in when you need it. As you assemble your startup one tile at a time (ideation, prototyping, fundraising, hiring, selling, marketing, partnering, scaling, etc.) always ask yourself if the incentives are lining up and are you doing the right thing.

What is incentive alignment?

I am sure you can Google some formal definition. To me, it is the act of making sure all the people believe in, line up, and point in the same direction. Meaning people are correctly incentivized to head towards a singular common goal. It’s okay for goals to change or evolve, but people must align.

Why is it so important?

Because it helps:
1.setup the right reward structures for everyone,
2.inculcates a sense of urgency for progress and motivation,
3.reduces tolerance towards complacency,
4.establishes checks & balances in decision making,
5.always helps to keep the long-term view in mind (very underrated).

You can rarely build an outlier success single-handedly. No matter how smart you are. Many processes, people, market dynamics, and a good bit of luck have to come together for that to happen. One critical dimension in all that (at least as of today) is VC. So it’s vital you embrace it, understand it, and truly make sure it lines up with your core intent. The guidance in the book helps you hash that out.

Concepts and ideas in the book are conveyed with an example or story first style. E.g., as common as it may be; many people don’t understand what goto market (G2M) actually means. So the book doesn’t go - Goto Market: Definition but instead goes - here is an excellent story about Okta’s sales/marketing machinery, why it made sense, why it worked, and by the way, it’s called G2M.

Chapters towards the end lose that example-based style of writing a little bit so unless you need the information right now you might find it hard to absorb it all. You can almost use it as a reference later.

Margin Notes

Venture capital is a game of outliers and power law distribution. So as an entrepreneur, it’s your job to communicate why you fall on the left of the curve and why now. You have to be able to demonstrate a long term vision.

Given the current landscape, most VCs realize, just access to capital to not a competitive edge anymore. So find a VC partner that aligns with your domain. Possibly have some expertise to offer in that space. It’s a dual relationship, so always make sure you do background checks. It is a long relationship.

Twitter will tell you fundraising is just the start, so get it out of the way ASAP, and focus on your company building. That’s pure bullshit. You have to understand what terms you are getting into. Of course, you cannot churn forever but don’t work with a VC who isn’t patient with you. They see 50 pitches a day, and you are probably going to do this once or twice in your lifetime. Most of the terms you sign up with are either unfixable or very hard to fix later on. You don’t get a do over.

Formulate a strong but straightforward thesis that you can explain to both VCs and employees. Why now? What forces - market, economic, sociological, psychological, environment are lining up to be able to do this. Don’t be egoistic if your thesis doesn’t make sense to people. Value feedback, and ask what isn’t working. Adjust accordingly. Possibly you haven’t considered something important. Having said that, don’t just blindly listen to VCs. You have spent a lot more time on your startup than anyone else.

Ever wonder how and why VCs find so much time for Twitter? Positive signaling and thus the deal flow is dependent on all this. E.g. a16z doesn’t produce such great content because it has nothing better to do.

At the Seed or even Series A timeframe investors are essentially betting on two main things: the people and the market size. Not to say the product isn’t important, but those two are significantly more critical.

Care to ask about where the money is coming from. Where in the lifecycle of the fund is the VC? Does it align with your timelines? All those affect your operational state. Are you comfortable with the source of the fund? Do you want money from 1MDB? :)

Actually, find out details about how your startup is going to be valued. Get a lawyer to help you understand it.

Set clear expectations, agreements, and rules of engagement. With your co-founders, early employees, and your investors. Just like the rule of thumb for your product, keep this simple and clear.

Understand financial modeling 101. It will help you figure out how much money to raise, and at what valuation. Also, help communicate projections. I am still figuring out how actually to do this. Can’t find many resources around this.

Raise money based on clear milestones you would like to achieve, how you will de-risk at each stage, and what would it take for you to get there; always future looking.

Startup valuations are based on market factors, real progress, perception of progress, competition, and to some extent the buzz around the space. Having said that, always be true to your mission. Real progress trumps all hype.

Internal employee sentiment about startup valuation and progress is as crucial as the external sentiment. When you are private, it is easier to ignore the former.

Evaluate the term-sheet with a forward-thinking mindset. Don’t just compare numbers at the moment. Do a scenario based computation of what the future might hold and what does it mean. Both good and bad.