Hey, so hey Crockett
Happy Halloween. Happy Halloween, man. Want to hear a joke. go for it
Where do ghosts do their mail where?
at the ghost office
I'm Sahil. I'm Crockett and today we're gonna be taking a step back and really going into what is venture capital
We've been talking about a few big deals to big people but we thought we'd give a real intro video talk about
You know the basics well timeout timeout timeout
Should we just address the elephant in the room here and for our listeners on Spotify and Apple music?
And out the podcast. Let's just address the elephant in the room. Yes. We're wearing furry walrus costume. Why?
Yes, we are still in college we like to have fun. I don't know walrus onesies seem like the move
It was a mutual decision
I was kind of forced into it. It was a mutual decision. Um, alright, let's cut back to it continue
So venture capital so everyone knows about investing giving money away, but let's really talk about the three main stages of
investing in private company
Actually, let's take a step back and let's talk about the terminology sell side first buy side
Crockett, why don't you talk a little bit about sell side?
So when we talk about and so it's good to split up the two right? So when we talk about
The sell side you're referring mainly to kind of investment banking. You're thinking about the higher end of the spectrum where you are trying to take companies public
And you're kind of like issuing shares. That's not where venture capital falls in which is more so on the buy side
Which is really what we're going to be focusing on today
So for the purpose of this discussion when you think buy side think that's what we're focusing on
So let's give a breakdown of the buy side. Yeah
So buy side is all really about investing is when companies like venture capital firms go ahead and get started
And get stakes in companies. They actually own they buy equity in these companies, right?
So the three main areas of buy side we're gonna focus on today is really venture capital is the first part
Then we'll go to growth equity second part and the last part is private equity, which most of you have probably heard
It's the most popular one. It's the biggest one. But the most exciting one to me is venture capital
Yeah, well, well no doubt. This is the everything venture capital and invested podcast. Yeah, we gotta be focused on venture capital
But but think of it exactly like sockless just mentioned as kind of expected
So you have venture capital at the low end then you move into growth equity and you move further into private
Today we're gonna talk about venture capital as it contrasts from the others
Use it as kind of a lens through which to highlight why it's so special why we love it so much
But let's let's dive in and so I think what we should talk about is kind of the baseline understanding, right?
Of what all of them are so the baseline understanding all of them what they really do is you're investing in private companies and
All the investment firms have one mission to make more money
If I give Crockett a dollar I better get more than a dollar back
Otherwise, there is zero chance of me giving him a dollar and all these economic, you know functions wouldn't exist today
If these companies didn't think they would reap a benefit
However, where the main differentiator comes in is what type of companies are we investing in how much are we investing?
So we think about venture capital you're investing in very early firms usually unprofitable but growing extremely, you know, very very fast
Next we went to growth equity, you know, this growth is actually slowed, you know
Kind of contrast to the term growth equity, but the term is slowed
But you're investing a little bit more will say and then lastly private equity
We're gonna say now these companies are finally profitable, but their growth is pretty baseline, you know, it's pretty flat
They're not growing at this hundred percent every year, but private equity friends what they do is very interesting
They take a majority stake most of the time into these companies
So they're becoming like I said the majority person running the decisions and they do this because they see an upside to the companies
They're you know investing in usually to do this with some form of debt essentially, right?
Right, it's also sometimes helpful to think about the spectrum in terms of how established the actual companies are right?
And so you look at
Operators in venture capital their startups, right when you hear the term startup you think that your capital growth equity
Is startup but more so on the established side. These are companies that have been around for a while
They've raised a ton of money before that they're often, you know
A couple hundred people strong it could be millions hundreds millions billions of dollars that these private equity firms are putting into these
Companies. Yeah, well said and then you move to private equity
Which is if you are a PE firm private equity and you're you are essentially buying a majority stake in a company
It better be an established company and it better be profitable exactly but to us that's not really boring
You know, there's a lot of numbers involved
You can really crunch the financials seeing if there's upside there
But when you kind of scale it back to growth equity even less numbers some qualitative aspects
But when you really go all the way down to venture capital
There's very minimal numbers unless you're getting you know more to establish companies
But I really like to focus on the early stage companies
But why don't we talk a little bit more specifically about venture capital and why the function of venture capital even exists, right?
So the function of venture capital first from the founders perspective is you need money to get your product off the ground, right?
Well, why can't you just you know use your friends money your neighbors money your own money? Well, that's a good question
Well first that takes a long time, right? Maybe your startups dying
Maybe you don't have the time and you don't have the runway runways a term that we use in VC and entrepreneurship to help
Detail how long you have until your company goes to put right? So you essentially what you do is you like divide
The number the number of dollars you have by like number of months and you get like a number of certain months
Yeah with your with your revenue coming in right with with the revenue coming in
Um, but why wouldn't I raise money from my friends and family and go and go crowdsource also known as bootstrapping
Um, why wouldn't I go bootstrap? It's hard. Yeah
I mean, yeah bootstrapping is a term when a founders raising all the money on themselves
They retain a hundred percent ownership the startup everyone's dream, right?
You sell the company for a billion dollars. You have a hundred percent you get a billion dollars
but the reality is I don't have hundreds of millions of dollars millions of dollars to go and
You know go make my company my startup become this billion dollar firm because it takes a lot of money to put in to get
You know from a small a small startup to you know, we're Apple and Google is yeah rip meta
Yeah, we're in that exactly but so so I'm not gonna bootstrap taking too much time our products gonna die
I need to get off the ground. Um
You have a savior and that's where saw whole code comes
Yeah
You know the best venture capital firm in the world saw stuff co comes in invest in the firm
Because it takes a lot of money to put into a company to bring it from a small time to start up all the way
Up to you know, Apple Google rip meta
That's my new mic by the way
Yeah
But you know, why would a venture capitalist even want to put money into a startup, you know
We have to consider how risky startups are. I think them like there's numbers like
50% maybe not know maybe like 90% of startups fail every night. I'm sorry. I don't know. I think it's like yeah
I don't know where I was going with that. Oh, yeah, 99% of startups fail all the time
So you really are making bets, you know
It's some essence when you're investing in a startup, right?
But the reason people and the main differentiator between venture capital growth equity and private equity
Is as you're investing in less established companies you are expecting a much much higher return
You know venture capital firm if I give you a dollar I expect three dollars back private equity firm. I give you a dollar
I'm only expecting, you know dollar ten cents back right dollar fifty
I'm not expecting that three X return that a lot of venture capitalists maybe even up to 10x hopefully, right?
So there's a lot of entry and hype around your returns. That's one of the pros if you're a venture capitalist
Exactly, and also the biggest differentiator when you're investing as a venture capitalist
You're investing in very high growth firms like we said in the beginning, you know, those established firms
They're based on growth is flat but with high growth firms, you know, it's very important
They're not a lot of metrics. You don't know how much revenue they have
So the one metric you really have is how fast is this firm growing and that's usually an analogy to is this firm gonna be?
Good or not. Mm-hmm. And so let's just let's let's keep clarifying here
And so like if you're a venture capitalist and you're investing money
What does that mean?
Does it mean you're going to a company and saying I want to invest in this product specifically or is that up to the founder? Yeah
They make what I mean this product so let's say I own a car company and I have car A and car B
And you're giving me money and you're saying I want you to just just for car
A is that up to you or when you give money to founders as a venture capitalist
Did they just take full directive and then they try to hustle and make whatever they can with that? Oh, okay
Yeah, so this is where we have what we talk about a passive verse, you know
I'm active investor essentially, right?
So when you go to when a venture capitalist goes to a founder, they can either try to lead around
We'll get into that maybe a little bit later talking about different stages
That's just how much monetary amounts people are getting but when you lead around and you usually take an active role, you know
I'm gonna become part of Crockett's company. I want to get a board seat
So I want to be one of their advisors and help them make strategic decisions
Sometimes venture capitalist firm come in and help them hire and that type of stuff
But also there's on the flip side. There are those passive investors where I'm just giving Crockett money
You can do whatever he wants with it as long as I get my three dollars on the dollar back, right?
so you can you can sit back and kind of take like the backseat role as an investor or
You can try your best not to micromanage but really make sure that your money is good
Gonna be getting you some type of return. Yeah, exactly. Exactly. Okay interesting. Um, and so you're at this place
You're a VC you're investing money into a company. Um, how does that actually work when you're investing money?
Do you you write like a term sheet? Like how does that work? So I'll explain. Okay, so a true roof for the sake of this episode
Okay, okay. So basically a term sheet where we're talking about think of this is just a contract between the investor
Salisbury and Crockett's car company. I'm giving a term sheet. I'm showing the terms of what I want to get
So how much money I'm gonna give him for what equity, you know
There might be some other stipulations in there
But the basis is I'm gonna give him like a million dollars for 10% of his company and you know that million dollars
I have if his company's triples in values the million dollars I put in is also gonna triple in value, right? Right, okay
It sounds pretty fun to be venture capitalist clearly. Yeah, I mean it's you know, it sounds easy
You know, you just give away money you get money back when this firm blows up
But like we said 99% of startups fail. So there's a lot going into finding the best startups
I'd say so let's talk about some pros and cons. Yeah, I think I think that's an interesting space
Right. So I think one of the interesting things and we talked about there's a lot of there's a lot of intrigue
If you're a founder, you're having a hard time bootstrapping or raising money from friends and family
There's a lot of incentive to go towards the DC right and to go raise money
Yeah, and to kind of gather a pool of money for your company fastest way to grow, right?
It's it's a quick way to grow but also you get resource
Because for example, if I'm a car company and Sahil Co has been investing in car companies for 30 years
He has a lot of connections. He knows what work he knows what doesn't work exactly
And that's really exciting for me is as a new founder in this space
But I think what an interesting con then occurs is the more money you raise and the more equity you're giving to people
The less you actually own of your business. Yeah, the more you're becoming like a public firm
You know where you can't make decisions like like we're talking about rip matter meta, but seriously on Mark Zuckerberg
He's coming under a ton of scrutiny from who his investors for what does he do?
He made Facebook himself and he wants to take it to the VR space
But you know what?
He doesn't get to make those decisions anymore because Facebook is now a public company and is endowed to its
Shareholders not the CEO and founder Mark Zuckerberg anymore, right who is a shareholder, but you know, I don't think he's not the majority shareholder
He's not but but again
it's it's like a horrible position to be in because at the end of the day you are the point man for this company and
You are you are thought upon by all of your investors and given this responsibility to steer in the right direction
Despite owning way less of the company than they might actually own exactly a lot of people think venture capitalists like ah
It's like the Holy Land but in my reality in my like opinion if you can bootstrap
You know that is the best option to retain your company do what you want with your company and and the end of the day you
Will make the most money from your company if it scales to the same size
But the one difference is a venture capital firm is gonna help you scale probably much bigger and much faster
When we talk about venture capital firms themselves awful, are they they're investing in whatever and everything do they specialize was that?
Yeah, most of them specialize because like we said, there's not many numbers. I don't know, you know, you're not profitable more safe startups
You know, they just have like revenue coming in certain customers, but really I don't have any serious numbers
Your numbers could be all over the place. Maybe they're from a month. Maybe they're from a year, but they're not you know
They're not reoccurring numbers. I haven't seen your past history. I'm really just making a bet essentially
So I really have to be an expert in a certain industry
That's my most like almost all venture capitalists themselves like the partners and firms
They specialize in one area they become the sole expert
That knows what makes a good company in this industry versus what doesn't make a good company in this industry
Yeah, you'll see people across VC firms. There'll be a partner that specializes in say enterprise level SAS softwares of service
There'll be a partner that specializes in autonomous vehicles
They're a partner that specializes in food delivery like people build up these expertise as a result
That kind of molds into like how VC firms actually operate you have VC firms out there who are
Specifically geared at software or specifically geared at consumer tech or specifically you get what I'm saying
Yeah, exactly, and I think by doing that you get better at picking out. Yeah, a Crockett's car company as okay
I've seen companies like this before. Yeah, this is an interesting and they all have their own philosophies
Maybe they use like quantitative metrics, but they all have their sole way
You know certain type of companies that they want to invest in and that can vary from partner to partner
within a venture capital firm
But another area when time about is like how do you really different besides like what they specialize in is there anything else?
Crack it that you think differentiates venture capitalist firms from each other or from different levels of invest
I'd say to to a founder, you know when like, you know
You have to venture capital firms throwing hundred million dollar checks at your face. It's kind of hard to tell them apart
Right, right. So I think there's a couple of the first is we talked about before it
There's difference between passive investors and active investors. Yeah
Um, if I know that this company has a track record of you know, it's gonna be great
They're gonna give me way more money than the other company. Yeah, I'm never gonna talk to this person again
They're they're only gonna come to me when they want their money back. That might not be super great
As a founder you have to consider that money isn't the only thing that's gonna get you through the next couple months, right?
Yeah, yeah
You need resources you need help you need people who are gonna help you build a team you need
Venture capital firms who are gonna say look I have great options for a c-suite for you and these people can build out a great
Exactly. They may know potential customers. They might already have relationships. They can literally be like here's this customer
Let me put you in touch. Mm-hmm. So you're weighing a scale, but it's also um, sometimes they're very specific needs to have as a founder
Yeah, so let's say imagine. I am a founder in Los Angeles
Oh, actually, I think the best way to think about it is like, you know when you go to Shark Tank
Yeah, right each founder like we said has their own industry
But they also come with their own network as well when you join Mark Cuban if you have a sporting brand
You know any start relates to sports you want to go with Mark Cuban
He knows the most about sports not only does he know the most but he also knows the most people in sports
Yeah, you look at someone like Damon, right if you're familiar with Shark Tank, I love James the go to Shark Tank, by the way
Yeah, so he's the one you know fashion industry expert, right? You have a fashion brand who you're gonna go to Damon
I'm gonna go to the founder of FUBU. That's who you're gonna go
Yeah, you're not really gonna go to the owner of the Dallas Mavericks when you could try to go to the founder of FUBU exactly
But that's the thing Mark Cuban might offer you three times the money, but does he have the resources you want?
No, he might not exactly have them, right?
So it's got to be a fit and that's a really important things that founders look for but it's also equally as important on the VC side because
Venture capitalists will look for patterns in people that they've seen before people who are successful people are unsuccessful
And that's that's how ultimately they'll craft their due diligence and make a decision
Exactly. That's I think that's a great segue because what I really want to talk about next is, you know
What do venture capitalists even do we said, you know, they make bets they invest money expect returns have a network
But on a day to day, what is a venture capitalists do?
And I think the best way to start off is you know when you go like analysts a partner
So I can start with you know, and then crack it will get into due diligence
But an analyst really is the ones main jobs gonna be sourcing, you know
By any means remember that word sourcing remember the word sourcing by any means necessary
Am I gonna go out and I'm gonna find the next Apple the next Figma, you know
I'm gonna buy any means necessary any networks I have I'm gonna have conversations with these CEOs and then you know
Once they go through the funnel. I pick like a few I like I might propose it to an associate and then we'll have this in
Their pocket so you propose it to an associate and that's when a process starts happening called the due diligence process
Exactly due diligence is used. It's kind of an analogy and like day-to-day conversation
Yep
The way that it's referred to in venture capital and investing even a growth equity in the private equity level is how much do I know?
About this company and how much can I understand before I'm ready to sign a check for this company?
The due diligence includes things like taking all of their financials checking them checking the legality of the product that they own
Competitive landscape checking the competitive who is doing this product who's out there else?
Yeah
Well, it's out there well
It's out there a big part of that big part of the due diligence process and we touched on this a little bit
Or that's what helps differentiate these C firms is something called investment thesis
Yeah
So a lot of venture capitalists when we look at these partners who specialize in different areas
They'll build up a thesis which is basically their idea of where a space is going and it's kind of the next level person and like
The partner, you know, there's a lot of terms between like the middleman like you have your analyst associates
And then like firms have all different names principal, you know VPs directors, you know
But you know when you get like kind of up to like higher level will call them
Yeah, right at this analyst level you're not creating an investment
No, no, no, you are listening and you are you're trying to learn because you're no you're not an expert in any field yet
Mm-hmm. So so you start to move up you have maybe at the associate level
Those are the people who are doing a lot of the due diligence in the back end work
You're checking to make sure that this company has their stuff straight their founder is not telling different people different things
Yeah, they have a story they have a product if we put money in this product
Are we confident or in this person are we confident?
They're gonna do it they say and that the product is gonna succeed in the way that the person described
Um as it gets higher up the chain, that's when you validate it with an investment, right?
And so that's when you say let's go back to the car company analogy, right?
Like let's say you want to invest in the car company and I'm a partner of a VC firm and I'm telling you
I know where the car space is going. It's going here
Yeah, then I can then I can try to make a guess like if that's where the car space is going
That's my thesis. Yeah, is this car company gonna be positioned in that space nicely exactly
And so that's how you can kind of help validate
So, yeah, um, yeah, we know we threw a lot
It's a lot. It's a day in the life of VC again. It's abstract
Yeah, we try to simplify it but it is not simple at all
It's not but look at the end of the day what you need to remember
It's just all VCs are doing is they're putting money into a company expecting a huge return
Yeah, and they're putting money into early companies early startups
If you are expecting a lot of money and you're gonna put in a lot of money, you better do due diligence
Yeah, well, thank you guys for listening, you know, let us know in the comments
We haven't got any really comments yet. But if you want any, you know venture capitalists founders any other topics
Really wants to talk about you know, we're really about doing anything
Yeah, definitely make sure to check out the Spotify and the Apple podcast as well
If you are listening on those platforms right now, please tune in to the YouTube that uninvested podcast
Yeah, you can see these sick wall
Let us know what you think of these massive like five pound tusks that are hanging off our heads right now
Yeah, I mean we could keep wearing them if that's what the viewers want
Uh, well that being said this is uninvested. I'm Sahil. Thanks for joining. Thank you