A founder’s guide to overcoming the VC-related information asymmetry between the entrepreneur and the investor
A founder’s guide to overcoming the VC-related information asymmetry between the entrepreneur and the investor
How founders can get up to speed on venture capital, prepare for fundraising and negotiations with VCs
Welcome to Venture in Security! Before we begin, do me a favor and make sure you hit the “Subscribe” button. Subscriptions let me know that you care and keep me motivated to write more. Thanks folks!
The VC information asymmetry: what it is and why it is a problem
Recently, a lot of attention from researchers and industry experts has been dedicated to the so-called information asymmetry between the entrepreneur and investor. In other words, we know that information between entrepreneurs and VCs is not shared equally. While VCs are professional investors who see hundreds of startups and tens of term sheets yearly, entrepreneurs (especially the first-time founders) generally have limited knowledge about venture financing, investor requirements, and expectations. When the time comes to raise capital to fuel growth, many founders go through very stressful times as instead of working on their startup, they have to take tens (or even hundreds) meetings talking about the topic of financing they don’t know a lot about.
An investor’s asymmetric information advantage can negatively impact the founder’s startup experience and lead to unfavorable terms, unnecessarily complex processes, difficulties, or even the inability to access capital altogether.
It is important to note that information asymmetry between the founder and investor is generally double-sided. While VCs are experts in the investment process, startup founders have private information about their venture’s quality and the real state of affairs, which may or may not be fully assessed during the due diligence process. After receiving investment, the entrepreneur can hide or misrepresent the actual business progress to the VC. This article will focus on the VC-related information asymmetry alone, and will not cover the other side of the problem which is worth a broad exploration on its own.
Ways founders can learn about venture capital
Due to the nature of the VC information asymmetry, it is unlikely that founders can catch up with VC’s level of knowledge often accumulated during decade-long investing experiences. It is, however, possible to reduce the gap.
There are many ways in which startup founders can learn the ropes of venture capital so that they are better prepared for conversations with VCs during the capital raise. Even more important, it can help them to understand if their company can be a fit for a VC investment, and what the investor’s expectations will be.
While there are a number of costly courses and bootcamps on the market that promise a solid knowledge and a network in the VC ecosystem, in this article I will focus on ways to learn for free (or almost for free) as founders are already investing what they have into their ventures and very few have large budgets.
Talk to fellow founders
The best way to learn the ins and outs of venture capital and fundraising is to talk to other founders who have raised venture funding before.
Fellow entrepreneurs are best positioned to share their experiences and lessons learned from the founder-focused point of view. They can point the what worked and what didn’t work for them, share tips about the fundraising process (how and when to start, what to keep in mind, how to negotiate), and make introductions to VCs they’ve previously met. Founder introductions are much more powerful than cold emailing people, especially when it comes from a portfolio company. One thing to keep in mind is the fund’s focus: a VC investing in B2B SaaS might not be interested in consumer electronics so make sure you do your research before asking for introductions.
If you do not already have an established network of other founders, it’s never too late to start building it. Entrepreneurs are often happy to hear what others in the space are doing, so a message on LinkedIn can often get you a 20-minute call. If there are founder groups in your area — social communities, accelerators, or incubators, such as Startup Weeks, a chapter of The Founder Institute or a similar community — these are great to get familiar with as well, as they can often connect you to many local entrepreneurs.
Read about Venture Capital
There are a number of sources to learn about VC. Twitter is arguably the best one as that’s where most VCs spend their time. There are some good Twitter lists out there; I would start by following the following few people (in no particular order) and expand from there:
Sahil Lavingia (@shl)
Jason Calacanis (@Jason)
Naval Ravikant (@naval)
Paul Graham (@paulg)
Mac Conwell (@MacConwell)
Jarrid Tingle (@jarridvtingle)
David Frankel (@dafrankel)
Janine Sickmeyer (@myfriendjanine)
Elizabeth Yin (@dunkhippo33)
Kevin Rose (@kevinrose)
Marc Andreessen (@pmarca)
Eileen Burbidge (@eileentso)
There are also a few pretty comprehensive VC Twitter lists from a Chicago Booth Professor and Founder of Origin Ventures Jason Heltzer:
Second to Twitter would be VC blogs where founders can learn about financing, and other areas such as product, growth, hiring, M&A, and more. The number of good blogs out there is incredible, and the following few can be a good starting point:
For those looking for a comprehensive read, I highly recommend the following two books.
Venture Deals
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist is a must-have resource for any entrepreneur, venture capitalist, or lawyer involved in VC deals as well as students and instructors in related areas of study.
Written by Brad Feld (a co-founder of Techstars) and Jason Mendelson (a co-founder of Foundry Group), the book is a great knowledge hub explaining how venture capital deals come together.
The Power Law
The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby features invaluable insights from the most celebrated venture capitalists of all time — the key figures at Sequoia, Kleiner Perkins, Accel, Benchmark, and Andreessen Horowitz, as well as Chinese partnerships such as Qiming and Capital Today. A great source for the founder to understand how venture capital functions from the inside.
Take free courses about VC
There are a number of online courses where founders can learn the basics of venture capital in a short amount of time and at no cost.
Venture Deals
The Venture Deals online course is designed to help demystify venture capital deals and early-stage startup financing to give both first-time and experienced entrepreneurs guidance to secure funding. The course is based on the above-mentioned book Venture Deals, written by Brad Feld and Jason Mendelson, and was designed with the goal of removing the massive information asymmetry between the founder and the venture capitalist.
Kauffman Fellows & Techstars have been re-launching this course yearly (Venture Deals Spring 2022 will began on March 22, 2022), and the course is offered free of charge making it incredibly accessible to anyone interested in learning about investing.
SoftBank Group Operator School
The SoftBank Group Operator School (SBOS) offers master classes led by SoftBank Group’s founders, experts, and advisors on how to successfully run a startup. Each season covers relevant topics based on the challenges startup founders are facing, ranging from fundraising to hiring, scaling, and IPOs.
Season 2 of the SBOS focused on venture capital with sessions about fundraising from seed to IPO. Session recordings are available free of charge on the SBOS’s website and cover topics such as introduction to venture capital, startup valuation, fundraising process, pitching, term sheets, deal negotiation, board management, and growth venture capital.
Venture Education Center
While not a school per se, AngelList’s Venture Education Center offers a great collection of educational materials available at no charge about venture capital, economics and reporting, and more. One of the sections — Venture Capital for Founders — can be particularly useful to those looking to understand employee stock options, cap tables, and similar topics.
VC University
VC University is a certificate course on venture capital, created in 2019 through the partnership of NVCA, Venture Forward, and Startup@BerkeleyLaw at the UC Berkeley School of Law. It offers practical training, resources, and networking opportunities to people interested in venture capital.
While the VC University’s course is not free, they do offer full and partial scholarships to people based in the US from backgrounds that have been historically underrepresented in venture capital (e.g. race/ethnicity, gender, sexual orientation, geography, veteran status, etc.). It’s a great place for founders from diverse communities to learn about VC and expand their network.
Angel invest
There is no better way to understand how investors think than to become one yourself. Angel investing is a fantastic way to better understand the investor mentality, and see the ecosystem from another perspective. If you are an accredited investor, you can for example join one of the AngelList syndicates, and if you are not — you can still invest in the companies started by your friend and family.
Angel investing is a great way to expand your network, meet other investors and build genuine relationships with VCs you might later be pitching to. Having said that, there are three things you should keep in mind:
Angel investing is different from venture capital. As an angel investor, you invest your own money, so you can afford to gamble, to make a decision based on the fact that it’s your friend’s gig and you want to support them, and to see a 2X return as great. As a VC, you are investing somebody else’s money, so the expectations (including the expected returns) are different.
To get the most out of angel investing as a founder, it’s not enough to just throw money at something you like. You want to break every potential portfolio company down into fundamentals, understand the business model, observe what makes companies successful and what doesn’t, and look for trends and patterns.
Some VCs when they see a founder doing angel investing, think of them as being “unfocused”. In their mind, a founder should spend 100% of their time growing their startup and forego any other interests. I think the opposite is true: while being laser-focused on the execution and getting stuff done is important, it’s equally important to stay in touch with what happens on the market, and investing is a great way to do it.
Source deals to VCs as a scout
Another way to learn about venture capital is scouting (sourcing) potential deals for VC firms. Scouts are generally asked to provide an investment memo, and depending on the fund can also participate in the due diligence process. Best of all — if the deal gets funded, they are able to get compensated (most funds would pay either a cash bonus or a carry — a stake in the deal).
It is very common for founders to actively network and meet other founders, and helping your fellow entrepreneurs with funding can be a great byproduct of agenda-free relationship building. Lastly, scouting is a great alternative to angel investing if you do not have free resources to invest in other startups (it is generally the case for most first-time founders).
Most funds that have scout programs only recruit successful ex-founders and serial entrepreneurs who are then given the ability to write checks within a specified amount. While that would not be a fit for the first-time founders, there are a few funds, including those below, with more open and accessible scout programs.
Grishin Robotics
As outlined on their website, Grishin Robotics’ venture scout program includes a series of in-depth discussions and educational sessions with topics ranging from deal sourcing advice, evaluating startups and markets, partnering with early-stage founders, and much more.
Calm Company Fund
Calm Company Fund has a super-charged scout program that allows anyone to apply their thesis and make a strong recommendation for a particular investment. Scouts have the ability to earn either cash or carry as compensation if the company they refer receives investment from the Calm Company Fund.
Saison Capital
Saison Capital Scout Program is a fully remote 12-month work experience where scouts help Saison Capital with deal sourcing, understand how a VC fund works, and what it takes to be a VC. The program is suited for working professionals and mature students alike, designed for the operator/builder looking to build VC experience on the side, as well as mature students looking to break into Venture Capital.
Participate in VC fellowships
Venture capital is a profession that can be best learned through apprenticeships, from and with people doing the VC work. Fellowships are a great substitute for a real experience in venture capital: while they will most definitely offer fewer insights you would accumulate if you were to work in a VC fund, I would say it is as close as it gets. These fellowships are also a great way to expand your network and meet both existing fund managers and soon-to-be investors as many fellowship alumni go on to become VCs themselves.
Below is a list of four VC fellowships that are fully remote, free, and accept mid- and late-career professionals (the vast majority of VC fellowships and internships are targeting students).
Laconia’s Venture Cooperative
The Venture Cooperative is an educational program and inclusive community that makes Laconia’s investments, processes, and learnings accessible for the next generation of early-stage investors. Members financially share in Laconia’s success, participate in the investment processes, share expertise within Laconia’s community, and collaborate with early-stage founders.
Susa Ventures Fellowship
Susa Venture Fellows is a one-of-a-kind, six-month program for aspiring venture capital investors that allows them to learn about and gain practical experience in sourcing, diligence, and post-investment support. While this program is geared toward people interested in becoming a VC, founders attempting to gain a VC experience on the side can also apply.
Romulus Capital Fellowship
Romulus Capital Venture Fellowship is a mentorship program that selects 6–8 high potential talents to teach them about how venture capital works. Romulus Capital has a thesis in construction, real estate, and manufacturing technologies, so founders focused on these areas can apply.
The fellowship includes seminars to learn how to find, identify, research, and invest in the most promising companies, as well as hands-on VC experience applying what you learn in the seminar into real practice.
Republic Venture Fellows & Associates
Republic’s Venture Fellows & Associates program enables participants to learn the fundamentals of VC and angel investing from top-tier speakers, receive live deal experience through the Republic investment team, and build a network of peers to support them on their journey.
There are some other great programs like Included VC but these are focused on people actively working to break into venture capital.
Build relationships with VCs
While it is listed last on the list, this way to learn about venture capital is and arguably should always be the number one in the founder’s arsenal.
Get out there, meet people, and evangelize your vision of the future. Most importantly — look for ways to add value. Do you have some experience that could be valuable to a company in the VC’s portfolio? Can you help one of their portfolio companies with marketing or make an introduction to a potential partner? Are you able to offer some unique experience that can help with the due diligence a VC is working on? Then do it!
There are many ways to add value, and your unique background is the best thing to look at for specifics. The only two things I want to leave you here with are 1) be genuine — it’s easy to sense a blunt desire to take advantage of some connection, and 2) be generous — try to give more than you take, no matter the context. Remember that VCs are people with their interests, worries, and goals to hit — be open to help, and eventually someone else will help you. To start this flywheel, you need to be ready to pay it forward.
Conclusion
The VC knowledge gap between experienced venture capitalists and entrepreneurs is real, and it can harm both individual startups and the ecosystem in general. As we have seen, founders have access to all kinds of resources to educate themselves about the investment process, requirements, and expectations.
As a founder, you should most definitely obtain legal advice from an attorney experienced in venture financing. However, a solid legal counsel is not a substitute for the fundamentals of venture capital knowledge every founder thinking about accessing a VC investment should develop. Doing so will make your communication with both investors and your legal counsel easier and much more pleasant.
In this article, I have highlighted seven ways founders can learn about venture capital. There are many more, and I would like to hear what has worked best for you. Happy fundraising!
I love this collection of VC learning resources! Loving your posts Ross!