Venture capital is the cause of much misunderstanding among entrepreneurs. Indeed, there are many in the entrepreneurial world who believe that the venture capital industry deliberately confuses the issue to its own advantage. The authors of this book acknowledge the misunderstanding but insist that it is "a myth" that venture capitalists prefer to deal with inexperienced entrepreneurs. The book, they say, "was inspired by the realisation that venture capital deals are best done when everyone around the negotiating table understands what the deal is about."
And in the methodical and logical way that one would expect of a lawyer and an academic, they successfully set out the parameters of how the industry works and the role of the entrepreneur within it. Since both also have some first-hand experience of venture capital - with the well-known firm of Atlas Venture - this is more than a theoretical exposition.
Helpfully, Rupert Pearce (the lawyer) and Simon Barnes (the academic) start by examining the concept of the entrepreneur - from its beginnings as a term first used by French philosopher Richard Cantillon in 1755 to denote a trade with an eye for an opportunist profit, through Joseph Schumpeter's idea of entrepreneurs being innovators, to Harvard Business School professor Howard Stevenson's definition of entrepreneurship as "the pursuit of opportunity regardless of resources currently controlled".
It is the last two definitions that interest the VC industry, say Pearce and Barnes. The personal computing, software and biotechnology sectors are "prime examples of industries built via entrepreneurs who innovate and change the world," they add. "VCs looks for businesses with the potential for global impact and they back entrepreneurs with just such a vision. VCs also appreciate that, although a great deal of successful entrepreneurship is about having the right people, it is also a process in which businesses are built via the aggressive pursuit of opportunity, and in which their role is to provide the financial resources as the business grows."
Any entrepreneur reading those two sentences should be left in no doubt that unless his or her business is in the world-changing category they should not bother reading any further and should go back to the bank to look for a further advance against the family home. After all, one of the biggest misunderstandings surrounding venture capital is that it is some sort of superior source of finance that is just desperate to help businesses that cannot get their short-sighted banks to support them.
As Pearce and Barnes somewhat bluntly state: "VCs are aiming for one thing: capital gains." They describe them as professional fund managers who invest the cash that comes from funds that are effectively their own shareholders' in high-risk start-ups in return for equity that they look to sell later with the aim of making substantial gains.
Readers may debate the extent to which VCs invest in high-risk start-ups. One of the criticisms levelled at VCs is that their exit strategies are so well programmed that the entrepreneurs who receive the investments are put under greater pressure than if they had listed on the stock market. But the authors dispel the idea that venture capitalists are any closer to being charities than banks.
It is as well to get this sort of thing straight at the start. For only then will the entrepreneurs who really have the stomach for the task bother with the highly complex but extremely useful descriptions of the investment process, business valuation, laws surrounding securities issues and the like that make up much of the rest of the book.
Such is the level of insight contained here that those who are hoping to head ground-breaking businesses using "other people's money" would be well advised to find the time - and the fairly considerable funds - to study this book.Reuse content