Inner Circle Secrets: How Khosla Ventures Evaluates Your Company
I was an Entrepreneur in Residence (EIR) at Khosla Ventures for a year. I share with you how your startup is evaluated by a tier-1 VC.
Intake. You come to the attention of Vinod, a managing director, a partner, principal, or associate in some way.
First evaluation. Is there something cool about your company? Did you come in through a friend of the firm, or via a team member of the firm? If so, does Khosla Ventures (KV) think there is a chance you will pass through diligence? Is there something potentially amazing about your company?
You get booked for a pitch meeting. Awesome! This will be your chance to present your case in 30 minutes to a team member. You might even pitch to Vinod — he is famous for taking unexpected meetings with people.
If you are already a portfolio company, you get prepared for an update meeting. The portfolio companies of a venture capital (VC) firm will likely be raising another round of funding. KV will prepare the company for those pitches. This can take several weeks or months. Even if you are pitching to the KV partners, you will get prepped for that.
You Pitch. Great job. Instead of lecturing for 30 minutes, consider doing a 5–7 minute pitch and leaving 20 minutes for questions by the KV team. You will clear their objections. KV will likely ask for your deck upfront so that their time is used effectively. They will prepare many of their questions in advance.
Your company is discussed at a Partner Meeting. The Friday partner meeting in each of the four focus areas (Life Science, Sustainability, Consumer, and FinTech) will review all deals in process. Your company’s status will be assigned or updated: pass, further consideration, prepare diligence, present at a Monday partner meeting, or schedule a meeting with a Managing Director for discussion of a term sheet.
A 7–10 page diligence report is written on your company. Likely by the person that brought you in, or by the person assigned by a partner. Before a Managing Director will consider a term sheet for your company, a diligence report will be written. Some firms overdiligence, some underdiligence. KV is in the middle. Partners at a tier-1 VC like Khosla have so much experience, they can pattern match successful companies. The diligence report will focus around the Key Questions (which are bespoke to each firm) and the 4 legs of the startup stool (Management, Market, Timing, and Defensible Magic).
You get a term sheet. Wow! This is amazing. Maybe 1 in 100 companies reviewed receive this. You have had several discussions with KV about potential terms, so the terms should not come as a surprise to you. There will be a deadline, and you can negotiate some of the terms.
Full diligence. Prior to close (wiring of funds), a full diligence will be performed. The depth of diligence will depend on whether your company is raising a Seed, Series A, or Series B round. Be prepared with a Data Room.
Your startup is awesome. Knowing the process for closing can help you prepare and help you manage your time and increase your chances for success.
Michael Deem is Managing Partner at Angeliki Fund, a physical and digital private equity infrastructure fund. Previously Michael was an Entrepreneur in Residence for Khosla Ventures, a tier-1 venture capital firm on Sand Hill. Michael was part of the founding team of Ion Torrent Systems, sold to ThermoFisher for $2.3B in 2014. He was the 3rd person and performed all the original engineering calculations. He was the 10th person and director of drug design at CuraGen ($100M IPO in 1998). He started the first `Synthetic Biology’ PhD program in the US. He was chair of a top-10 Bioengineering Department, with responsibility for 400 people and $27M annual budget. Michael is an active member of The National Association of Corporate Directors (NACD).
