Secrets of Sand Hill Road: Venture Capital and How to Get It - Hardcover

Kupor, Scott

Hardcover

ISBN 10: 059308358X ISBN 13: 9780593083581

Publisher: Portfolio, 2019

Synopsis

A WALL STREET JOURNAL BESTSELLER

The ultimate insider guide to the world of venture capital that every entrepreneur needs to turn their startup into the next unicorn

“Kupor takes founders through everything from how VCs raise money and evaluate deals, to how to think about term sheets and set up boards. It’s a valuable resource for any founder.”—Sam Altman, co-founder and CEO of OpenAI

If Silicon Valley is the greatest wealth-generating machine in the world, Sand Hill Road is its humming engine. That's where you'll find the biggest names in venture capital, including famed VC firm Andreessen Horowitz, where lawyer-turned-entrepreneur-turned-VC Scott Kupor serves as managing partner.

Whether you're trying to get a new company off the ground or scale an existing business to the next level, you need to understand how VCs think. In Secrets of Sand Hill Road, Kupor explains exactly how VCs decide where and how much to invest, and how entrepreneurs can get the best possible deal and make the most of their relationships with VCs. Kupor explains, for instance:

• Why most VCs typically invest in only one startup in a given business category.
• How to develop the skill of storytelling to get buy-in from VCs.
• How to handle a "down round," when startups have to raise funds at a lower valuation than in the previous round.
• The 80/20 rule that all VCs use when making investment decisions.
• Why you need to build relationships with potential acquirers long before you decide to sell.

Filled with Kupor's firsthand experiences, insider advice, and practical takeaways, Secrets of Sand Hill Road will help you understand what VCs are saying about your startup behind closed doors—and how to influence that conversation.

About this title

About the Author

Scott Kupor was appointed as the Director of the U.S. Office of Personnel Management in July of 2025. Prior to his current role, he was the managing partner of Andreessen Horowitz. He oversaw the firm's rapid growth to one hundred fifty employees and more than $7 billion in assets under management. He is also a cofounder of the Stanford Venture Capital Director's College and taught venture capital and corporate governance courses at Standford Law School and the Haas School of Business and Boalt School of Law at UC Berkeley. He is vice-chair of the investment committee for St. Jude Children's Research Hospital and was previously the chairman of the board of the National Venture Capital Association.

Excerpt. © Reprinted by permission. All rights reserved.

What Goes into the Pitch?

Before you show up for your meeting, let's demystify the pitch process by remembering and applying some of the things that we've talked about already in this book. Recall that we talked about what motivates VCs and how they evaluate investment opportunities (not the least of which is remembering that they are humans, a lot like you, and they are looking for a good financial outcome).
On the motivation front, VCs are incented by their LPs to produce outsize returns ("alpha" in the finance world) relative to the alternative uses for which LPs might invest that capital. The implicit bargain between the LP and the GP (the VC) is that LPs will lock up their capital for ten or more years to give the GP the time to realize those returns in the form of acquisitions or IPOs of portfolio companies. And remember our batting average analogy—most of what VCs invest in will not yield much, if at all, in the way of financial returns. It is those few home runs that return ten to twenty-five times, or more, of the VCs' invested capital that will make or break their business.
So your job as an entrepreneur is simple: Convince a VC that your company has the potential to be one of those outliers. That's it. Piece of cake, right? Okay, so how do you do that? Go back to the first principles we discussed earlier about evaluation criteria VCs are likely to apply to early-stage investment opportunities.

Pitch Essential #1: Market Sizing

Let's start with market sizing because it's really the first and biggest factor that you need to help a VC understand. It is your job to lead the VC to the water. It's your job to be a patient and inspiring teacher here. Don't assume the VC understands the market or its potential size. You need to paint the picture for them that enables them to answer the "so what?" question. That is, if I invest in this company, and the CEO and her team do everything they say they are going to do and build a nice business, can that business be big enough to really drive an outsize return to my fund? Will it ultimately be big enough and material to accomplishing my objectives as a VC?

We mentioned Airbnb earlier in the context of discussing market size to illustrate that the answer to this question might not always be obvious. Now let's look at Lyft as a way to show how you can best position market size as an entrepreneur.
When Lyft was getting started (Lyft actually started as another company called Zimride, a long-distance ride-sharing company), it wasn't obvious how big the market for ride-sharing could be. A lot of people evaluating the financing opportunity started with the existing taxi market as a proxy for market size and made some assumptions about what percentage of that market a ride-sharing service could reasonably capture. That line of thinking was perfectly logical, but the entrepreneurs didn't stop there.

Rather, they made the case--convincingly at least to us at Andreesen Horowitz--that that line of reasoning was too myopic. Instead, Lyft argued that the taxi market was too limiting because people made assumptions about the availability of taxis, the security of taxis, and the convenience of hailing taxis in choosing whether to in fact order a taxi. If you closed your eyes for a moment and imagined a world in which everyone was walking around with a fully networked supercomputer in their pockets with GPS tracking, which is exactly what a smartphone is, then the market size for on-demand car sharing could be much larger. After all, drivers who couldn't afford to purchase a taxi medallion could just use their own cars to increase the supply of available drivers, and this increase in supply would therefore dramatically increase the convenience of utilizing the service for consumers. Increased supply would drive increased demand, which would in turn drive more supply into the market. You get the picture--a true network-effects business.

Network-effects of course don't exist in every market, but this line of reasoning could be (and has been) applied to lots of pitches to VCs. For example, if cancer screening techniques improved to the point that they are materially less invasive and have a higher predictive value relative to current screening modalities, people might get cancer screenings as part of their annual physical exams, and the market for early-stage cancer screening could become orders of magnitude bigger than it is today. That was a key part of the investment thesis when we invested in a company called Freenome, which is using machine-learning technologies to identify early-stage cancers from blood tests.

Many startups are going after existing markets, which may themselves already be quite large. In that case, your job as an entrepreneur is to fit yourself into that market and explain what macro trends are evolving in that market that create an opportunity for you to own it.

An example from our portfolio is Okta, which is a now-public company that we first invested in back in 2009. Okta is an enterprise software company that provides a way for companies to consolidate log-in credentials for their many software-as-a-service (SAAS) applications. For example, many modern companies use Gmail, Salesforce, and a variety of other internet-based SAAS applications, each of which has its own method of logging in and authenticating users into the applications. Okta provides a unified portal whereby a user needs only to log in to Okta once, and then Okta passes those credentials through to all the SAAS applications for which an employee is granted access.
When we invested in Okta in 2009, such a solution already existed. Microsoft had developed a software package called Active Directory that did what Okta was proposing to do, but for traditional applications that were managed and maintained inside the IT environments of most major companies. And they were by far the market leader.
But what Okta convinced us of was that there was a change in the existing market landscape that created an opportunity for a new company to take over. Traditionally, the number of applications that an enterprise could deploy was limited by the amount of available IT staff in the enterprise; every application had to be implemented and supported by the internal IT staff of the organization. What the advent of SAAS applications enabled was the lifting of this constraint and thus the potential for a proliferation of applications within the enterprise. The marketing department could now use applications that were different from those used by sales or engineering or HR, precisely because there were SAAS applications that were managed by the SAAS vendors themselves versus by the enterprise’s internal IT staff.
This proliferation of disparate applications, Okta suggested, would give rise to the need for a new way to manage access to and security for these applications. And thus a new company could be created to take advantage of this market opportunity. We bought the argument and invested in Okta. It’s now a more than $5 billion market capitalization public company because their vision of how the market would develop was in fact correct.

Sometimes as an entrepreneur you have the hard job of positing the creation of a market that develops as a result of a new technology. For example, we were seed investors in 2010 in a company called Burbn—that is the correct spelling, and they were not a new adult beverage. Burbn originally started with a different product focus but ultimately developed into a photo-sharing application for the iPhone. The iPhone, of course, had been invented only three years prior, and the smartphone category was not nearly the size that it would ultimately become.
So the market-size challenge in this case was to build your argument on two assumptions: (1) this iPhone thing would really become a dominant global computing platform, and (2) photo-sharing would be a killer app for the platform. People of course had shared photos before the advent of the iPhone, but that market size would never get a VC excited about this investment. So for a VC to make the investment decision, she would need to forecast that iPhones would be big and that photo-sharing would be enabled in a way by this new technology platform so as to create its own big, new market. And then you’d have to assume that there would be some way to monetize photo-sharing. This last piece, I think—if most VCs are being honest—was a complete unknown at the time, but it was not a crazy hypothesis that if you can amass billions of photos that are being shared among millions of people, there ought to be some way to make money from that.

Lucky for us at Andreessen Horowitz, we took the leap on market size and invested in Burbn. Two years after we invested, Facebook acquired the company—now named Instagram—for $1 billion.

Edition details

• Publisher: Portfolio
• Publication date: 2019
• Language: English
• ISBN 10: 059308358X
• ISBN 13: 9780593083581
• Binding: Hardcover
• Number of pages: 320