Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

CHAPTER 1
Born in the Bubble
In the interest of unlocking the somewhat opaque doors of venture capital,
behind which are the inner workings, incentives, and decision-making
processes of VCs, let me start by more properly introducing myself.
The first thing to know about me is that if I weren’t a venture capitalist, I
would sing country music in Nashville. But lucky for everyone who is a
real country music fan—and for my ability to support my family financially
—I somehow found my way into the VC business! I live in Silicon Valley,
not Tennessee, so the best I can do is wear cowboy boots to work and play
the guitar in my spare time. Both of which I do, as often as possible.
Let me give you a little bit of context about what the tech and investment
world was like when I was getting started in in the 1990s.
Some of the big tech names back then were E.piphany, NetIQ, VA Linux,
Commerce One, Razorfish, and Ask.com. It’s possible you haven’t heard of
any of these companies, but they—like me—were products of the 1999–
2000 tech bubble that produced roughly nine hundred initial public
offerings of venture-backed tech companies. It was a great time to be
starting out in the tech industry, as there seemed to be no end to the promise
of technology and to the amount of wealth creation that was available to
everyone involved.
Netscape had gone public in 1995, a mere eighteen months after its
founding, receiving a huge amount of media attention and heralding the
beginning of the dot-com boom. Google wouldn’t be founded until 1998,
but Silicon Valley was already fired up with dot-com fever. New internet
startups were appearing daily. The tech world was abuzz.
Venture capitalists (VCs) were investing in new companies at an
unprecedented pace relative to historical norms. About $36 billion went into
new startups in 1999, which was approximately double what had been
invested the prior year (although that’s now less than half of what was
invested in 2017). Additionally, limited partners committed more than $100
billion of new capital to the venture capital industry in 2000, a record that
hasn’t come close to being broken since! By comparison, limited partners
committed about $33 billion in funding in 2017.
Startups were also getting to an IPO faster than ever during the dot-com
bubble. On average, it was taking companies about four years from
founding to go public, which was a huge acceleration of the historical trend
of taking six and a half to seven years to IPO. Today, that time period often
exceeds ten years, for reasons we’ll get into later in this book.
In addition to a record number of IPOs, the public markets were also
exuberant. On March 10, 2000, the Nasdaq index, the barometer for
technology stocks, peaked just above 5,000. More interesting, the price-toearnings

ratio (P/E ratio) of the companies listed in the Nasdaq index stood
at 175. This means that stock market investors were valuing one dollar’s
worth of a company’s earnings at $175.
While it’s generally the case that investors value a dollar of earnings
today at some multiple greater than one because a company’s stock price is
intended to reflect the present value of the cumulative cash flows of a
business into the future, a 175 multiple is a historical anomaly. For
comparison, the Nasdaq P/E ratio today is under 20, which is generally in
line with the long-term historical trends for the index.
At the time, Cisco was anticipated by many to become the first $1 trillion
market capitalization company. Alas, Cisco’s market cap peaked at about
$555 billion in March 2000; today it stands around $200 billion. Early in
2018, Amazon became the first $1 trillion market cap company, albeit for a
brief time, and as of this writing, sits at around $800 billion. (Fun fact: In
March 2000, Amazon’s market cap was a mere $30 billion).
What Could Possibly Go Wrong?
So, back in 2000, everyone was on a collective sugar high to end all sugar
highs. What could possibly go wrong? As it turns out, a lot.
The Nasdaq index began a precipitous decline from its March 2000 peak,
falling all the way to its nadir of just above 1,300 in August 2002. While
there is much Monday-morning quarterbacking about the impetus for the
decline, many market analysts point to the Federal Reserve’s aggressive
interest rate tightening in early 2000, which created a big debate as to the
sustainability of heavy borrowing that many technology infrastructure
companies had undertaken. Regardless of the ultimate cause, in about two

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor