by Kunal Mehta
FINDING GENIUS
Kunal Mehta
Copyright © Kunal Mehta, 2019
All rights reserved.
ISBN 978-1-099-63824-4
www.kunalrmehta.com
For my nephews and my nieces, and to the entrepreneurs working hard to make this world a better place for this generation to live in.
Contents
Foreword (Sutian Dong, Female Founders Fund)
Preface
SECTION 1: THE TRAIL-WISE SIDEKICKS
Chapter 1: Venture Capitalists: The Trail-Wise Sidekicks
Chapter 2: Raising a Venture Capital Fund: VCs as Entrepreneurs
Chapter 3: General Partners and The Job of a VC
Chapter 4: Investment Theses and Developing an Information Edge
SECTION 2: PATTERNS OF GENIUS
Chapter 5: In Pursuit of Genius
Chapter 6: Future Makers and Storytellers
Chapter 7: Execution: Genius and the Inevitable March of Technology
SECTION 3: THE VENTURE CAPITAL & ENTREPRENEUR PARTNERSHIP
Chapter 8: Alignment and Terms
Chapter 9: The Future of Venture Capital
Chapter 10: Looking Forward and Conclusion
SECTION 4: THE FUTURE VENTURE CAPITALISTS ARE BETTING ON
Building an AI Toolkit and Investing Through the Hype (Rayfe Gaspar-Asaoka, Canaan Partners)
Optimizing Human Health and Wellness: Data, AI, and the Future of the Quantified Self (Andrew Kangpan, Two Sigma Ventures)
Next Generation Transportation and Mobility (Brian Yormak, Story Ventures)
The Future of Work (Adriel Bercow, Flybridge Capital)
Web 3.0 Infrastructures: Blockchain (Wendy Xiao Schadeck, Northzone)
The Future of Financial Technology (Nitya Rajendran, Tribeca Venture Partners)
Consumer Trends and Investing (Grace Chou, Felicis Ventures)
Investing in Media & Entertainment Technology Companies (Michael Raab, Sinai Ventures)
Social Media: A Game of Status (Laura Chau, Canaan Partners)
The Digital Health Revolution (Shefali Bhardwaj, ZS Associates)
Contents
Title Page
Copyright
Dedication
INTRODUCTION
FOREWORD
PREFACE
FINDING GENIUS
SECTION 1
CHAPTER 1
CHAPTER 2
CHAPTER 3
CHAPTER 4
SECTION 2
CHAPTER 5
CHAPTER 6
CHAPTER 7
SECTION 3
CHAPTER 8
CHAPTER 9
CHAPTER 10
SECTION 4
RAYFE GASPAR-ASAOKA
ANDREW KANGPAN
BRIAN YORMAK
ADRIEL BERCOW
WENDY XIAO SCHADECK
NITYA RAJENDRAN
GRACE CHOU
MICHAEL RAAB
LAURA CHAU
SHEFALI BHARDWAJ
RESOURCES
INTRODUCTION
FOREWORD
Sutian Dong, Female Founders Fund
Kunal and I met when he was writing his first book, Disruptors, and interviewing startup founders to unpack how passion and meaning have, against many odds, driven success on their entrepreneurial journeys. When Kunal told me he was writing Finding Genius, I knew there was no better person with the innate curiosity to tell other people’s stories than Kunal.
The funny truth about venture capital is that it is both an art and a science, and for decades has been an industry where expertise is built from apprenticeship. As a consequence, the industry behind almost all successful technology companies has, for too long, been insular and tribal, and the answers to the questions that strike many entrepreneurs — What is venture capital? Why should I raise venture capital? How do I do it? — have been hard to access in a single, easy way.
It’s been a long time since I’ve read a book that was this useful and actionable, and I suspect that is because there are only a few people in the world who excel at both research and practice. In Finding Genius, Kunal manages to walk us so much deeper and further into the practice of venture capital than books normally do. He uses his own experience as a VC to guide readers through the case studies and examples that explain how a fund operates, what types of businesses they invest in, and why the right alignment between a fund and a founder can create extraordinary returns for the company and the investors.
Reading Finding Genius is less like reading a how-to manual, but rather like participating in an exploration of the big questions that venture capitalists themselves are grappling with: What is genius, and how is it being redefined over time? How is venture capital as an industry evolving? And where do VCs push themselves, as their roles — as financial stewards to their limited partners, and as thought partners to the founders they invest in — continue to shift with the ever-changing needs of rapidly scaling startups?
Think about how much you retain when you hear stories instead of scripts of right versus wrong, or what to do versus what not to do. This book offers so much more than single-point answers by capturing a series of experiences from senior-level investors that shed light on the subtleties of identifying, investing in, and supporting the next generation of entrepreneurial talent.
While Finding Genius is built on scenarios and first-hand accounts, at the core it is a book concerned with sharing principles. Grasp these principles, and you will have an understanding of the frameworks with which the best venture capitalists operate, which will guide you whether you are an aspiring VC, a founder seeking capital, or a curious onlooker to the rapidly changing startup ecosystem.
Besides being a gifted and intuitive venture investor, Kunal is a natural storyteller. There is something compelling in the way Kunal shares these principles — especially in his ability to break down the ephemeral nature of “finding genius” to actionable steps that, combined, can create the conditions for venture capitalists to invest in the next Pinterest, Rent the Runway, and Airbnb of the world.
In the end, Kunal believes that venture is a balance between an art and a science, the knowable and unknowable, which combined with hard work, good timing, and luck can create the circumstances that enable the next generation of genius to flourish. He has managed to bring both his intelligence and curiosity about venture capital to the page, and the result is a book that educates the reader while exploring the evolution of venture and the ways that the industry itself might be disrupted in the future.
I predict that this book will make its way onto the must-read lists of VCs new and old, aspiring investors, and entrepreneurs of all stripes who seek to understand the other side of the table. I hope you enjoy reading as much as I have.
PREFACE
Kunal Mehta
In the back of an empty classroom at Indiana University’s Kelley School of Business, four students sit together with an ambitious dream to join the entrepreneurial ranks of individuals like Sara Blakely or Mark Zuckerberg. With napkin sketches and books written by former entrepreneurs spread across the table, this group has their heads together crafting a story. What story can they tell about themselves or their business idea that will resonate with an investor?
Brainstorm sessions like these have become a common after-school activity. These four students are like hundreds of thousands of upstarts across the country, weighing an entrepreneurial dream against a morbid corporate recruiting cycle. Every large university offers classes on entrepreneurship and in recent years, many have added seminars on venture capital to syllabi to meet growing demand. This motivated group of individuals remains hopeful that they can build things that solve real problems. To them, anything less radical would be old fashioned,
narrow minded, and not a valuable use of their talent. They want to join the ranks of entrepreneurial geniuses who have forever changed the fabric of society.
It is the true hopefulness of these entrepreneurs that inspired me to write my first book, Disruptors, which tells the stories of 50 entrepreneurs and the failures they faced when they first pursued entrepreneurial stardom. What did the first six to 12 months of uncertainty look like? In the book, these founders, some of whom went on to start billion-dollar companies, offer candid accounts of bankruptcies, divorces, insurmountable credit card debt, investor and founder feuding, all while maintaining that entrepreneurship was a path worth pursuing, despite the risks. These men and women found satisfaction in their work and were excited to pursue meaningful causes. The stories within those pages revealed that entrepreneurship is an exciting and viable career path, but a founder should be aware of all that is entailed in the unstructured path for non-conformists with bold dreams. There is no such thing as an overnight success story. Disruptors was one of many proof points. As a venture capitalist who now invests in founders for a living, I have witnessed the trials and tribulations of founders firsthand.
Disruptors brought me into classrooms like the one at Indiana University, into well-funded programs at Harvard, Stanford, Duke, Columbia, Princeton, and New York University, and into entrepreneurial hubs across the country in Kentucky, Chicago, Virginia, and North Dakota. Across these diverse populations, the common denominator remains the same — entrepreneurs sought to make a lasting imprint through their own ideas and visions, but they lacked the capital to do so. It became clear that entrepreneurship was no longer only a possibility on the coasts or in elite universities; Startups were emerging in every corner of the country, but capital had yet to follow.
The entrepreneurial dreams of the students I met hinged on one question — can you tell us more about venture capitalists? Some of the students I talked to had signed agreements that were destructive to their companies, flown to San Francisco in hopes of meeting an investor on a coffee line, and hired virtual assistants to cold-email anyone with ‘investor’ in their professional title. The allure of power-yielding venture capitalists was high, but students’ understanding of venture capital was slim.
Finding Genius was conceived from my desire to demystify venture capital and provide a roadmap for future entrepreneurs to follow. Through discussions with a growing number of students, disenchanted consultants, lawyers, bankers, doctors, and other corporate escapees, it was clear people saw opportunity through entrepreneurship but were stymied by a venture industry that was opaque, elite, and discriminating. These conversations evolved into interviews with top investors in a format similar to Disruptors — a series of conversations with a diverse group of professionals that offer a more candid look into financing entrepreneurial dreams. The venture capitalists featured in this book have invested in the founders behind companies like Facebook, Tesla, Space-X, Twitter, Snapchat, Pinterest, LinkedIn, Airbnb, Uber, Lyft, and other game-changing enterprises that have forever changed humanity. Given that the job of these men and women is to meet with founders every single day, I wanted to know: What patterns do they see from one founder to the next? What qualities or traits stand out that catalyzes them to make an investment?
Through the pages of Finding Genius, an esteemed group of venture capitalists will provide insights that begin to answer these questions. When I wrote Disruptors, I wrote it with the candor and humility of an aspiring entrepreneur searching for answers. Similarly, I wrote Finding Genius with the same undertones of transparency and curiosity — to break through the façade of venture capital to identify and share genuine morsels of wisdom.
FINDING GENIUS
Kunal Mehta
SECTION 1
The Trail-Wise Sidekicks
CHAPTER 1
VENTURE CAPITALISTS: THE TRAILWISE SIDEKICKS
In 1998, the Harvard Business Review dramatically described venture capital and its place in history amongst American entrepreneurs:
“The popular press is filled with against-all-odds stories of Silicon Valley entrepreneurs. In these sagas, the entrepreneur is the modern-day cowboy, roaming new industrial frontiers much the same way the earlier Americans explored the West. At his side stands the venture capitalist, a trail-wise sidekick ready to help the hero through all the tight spots — in exchange, of course, for a piece of the action.”
The venture capitalist and entrepreneur relationship has been romanticized and widely covered in the entrepreneurial boom that has gripped our imaginations. Mark Zuckerberg’s relationship to his early investors was documented in the biopic, The Social Network. Silicon Valley, a popular HBO series, captures the interactions between eccentric investors and founders who dream of changing the world. Startup mania has led some venture capitalists to crave and get stardom with their own television shows, podcasts, and web series featuring cringe-worthy power dynamics with the founders they meet. While often satirized, the obligations between an investor and a founder are understatedly complex. The history of this asset class remains largely untold and the incentives that drive a venture capitalist are often opaque, leading to a Hollywood-esque representation about the role a venture capitalist plays.
For the stories that do malign the founder and investor relationship, there are the recognizable ‘against-all-odds’ partnerships over the past few decades that ring true to the Harvard Business Review description. Venture investors have helped establish companies such as Google, Facebook, Twitter, Tesla, and Apple as central to our society by making the initial capital investment in a founder’s company and supporting them through the ‘tight spots’ of starting that venture. As Keith Rabois, an investor in Twitter, Airbnb, Square, Yelp, and LinkedIn, describes it, his sole purpose as an investor is to do his best to remove any foreseeable headaches and roadblocks in front of the founders he invests in. His job is to complement a founder’s skill set and help guard against their blind spots. Like other seasoned investors, Rabois is qualified to do this because he has witnessed multiple times the cycle of launching and scaling a company from a rough idea to the first 10,000 customers.
Finding Genius is a glimpse into this knowledge that venture veterans have accumulated over these repeat cycles of working with radical, genius entrepreneurs to answer strategic questions: What traits of entrepreneurial genius appeal to a venture capitalist? How do venture capitalists distinguish between idealistic dreams of grandeur from the cold, hard reality of entrepreneurship (the path that often succeeds)? How do entrepreneurs who possess true genius avoid being exploited by investors posing as ‘trail-wise sidekicks’?
While these learnings are valuable, a challenge emerged as I began to delve deeper into the venture industry through a series of candid conversations: How do I establish a definition of genius that is robust enough given that venture capital is not fairly spread across race, geography or gender?
From its humble beginnings in the 1940s, as a means to democratize startup capital beyond the American elite, who already fared well with banks and family wealth, venture capital was concepted as a Post-World War II catalyst for innovation. It was a response to support creativity, competition, diversity in thought and process; to challenge the status quo cherished by families such as the Rockefellers and Carnegies; and to provide opportunity to the next generation of American entrepreneurs through mentorship and access. As some still idealistically define it, the venture capital opportunity would be equally available to any gender, geography, or race, but it would be a selective process to back a handful of ‘geniuses’.
Yet nearly 80 years later, in speaking with a growing population of entrepreneurs, aspiring venture capitalists, and students across the country for Disruptors, I learned that the majority views venture capital as unattainable startup capital that operates in the shadows and continues to preclude large swaths of people from pursuing their entrepreneurial dreams. While ‘genius’ is defined as the few outliers who will stand apart from the
masses to gain access, there exists an underlying knowledge and opportunity gap that has acted as a fortified barrier for some entrepreneurs to recognize their true genius. Over the past few decades, the definition of entrepreneurial genius has been narrowly limited to certain geographies, races, genders, and the flow of venture capital has tipped the scales in their favor. Sadly, there are still some, including investors featured in this project, who scoff at this remark because they believe hard work, execution, and genius ideas will always get funded. The data suggests otherwise: in 2018, funding for female founders capped out at 2.2% of total venture capital dollars. Data suggests similar funding disparities for people of color, people over the age of 40, and founders outside of New York City or San Francisco. If venture capital was truly efficient and the dollars only went to ‘geniuses’, then genius would be defined as young males who lived on a coast of the United States. Today, more than ever before, people are working to bring efficiency and transparency to venture capital and my hope is that this book serves that purpose.
One goal that drove this project forward was to reveal the inner workings of the venture industry exclusively through diverse perspectives, shared by men and women who believe shining a light on venture capital will enable it to function as it was originally intended. As a result, entrepreneurial genius, as you will see throughout this book, continues to evolve and expand as a new generation of venture investors weighs in and broadens its sample size to surface the true outliers.
While the Harvard Business Review aptly described the personas of the two individuals in the entrepreneurial saga, the reality is far more complicated than stereotypical, surface-level descriptions would suggest. This distinction will be covered throughout this book. Entrepreneurs are generally the bold risk takers who shy away from a traditional path, require little structure, and balk at conformity. Venture investors, at least the successful ones, are willing to embark on these new paths with founders to break down their barriers to market success. The stories of entrepreneurs and investors have been told on multiple occasions, but as this relationship has grown more intertwined, venture capital’s history, incentives and intended purpose have been overlooked. Prior to signing up to work with venture capitalists, entrepreneurs should be more informed on how this asset class emerged and how it has changed over time.
