What is Venture Capital?
Venture capital is growth capital provided to start-up companies and small, breakout businesses which are expected to grow rapidly but lack the funds or other resources to do so.
Venture capital firms provide these entrepreneurs with the capital needed to grow their businesses or assist them in other ways; like by providing them with industry contacts, access to opportunities, consulting them on specific aspects and so on. Venture capital is a high-risk, high reward asset class with many investments failing, but a single blockbuster success more than makes up for it.
Since the target companies are start-ups, most venture capital firms are staffed by entrepreneurs and industry experts themselves. This means that venture capital firms have a culture that career bankers may find a bit alienating. Lastly, VC firms get to work in some very interesting sectors like healthcare, cleantech, regtech, fintech, biotech, AI and other start-up hotspots.
Types of venture capital
Venture capital investments are distinguished based on the stage of growth of the portfolio company when the investment is made. There are several terms floating around like seed stage, expansion stage, launch phase etc. But at the end of the day, they all just represent different stages in the life-cycle of the portfolio company.
Early Stage vs Late Stage Venture Capital
Early-stage venture capital firms usually try to be one of the first companies to look at a potential business opportunity. In most cases, the target company may not even have launched a product yet and might just be looking for launch support in the form of capital, contacts and expertise.
Late stage venture capital, on the other hand, is closer to traditional investment firms like private equity. At this point, the target companies have usually established the business model and are just beginning their phase of high growth for which they require a lot of fresh capital. Late stage investments are driven by data and modelling to a greater extent than early-stage investments.
As you can imagine, the success of early-stage VCs depends on their ability to read the people behind an idea and their ability to execute that idea and bring their product to market.
Analysts and associates in venture capital firms mostly just assist the VPs, principals and partners with whatever they need it order to grow the fund. The first step is obviously identifying and evaluating investment targets. Post investment, these portfolio companies have to be mentored and guided through the high growth phase and prepared for an eventual, and hopefully profitable, exit.
- The first thing you need to do as a venture capitalist is to actually find opportunities to invest in. You will be looking at start-ups for the most part and therefore you need to hang out with that crowd. Be a regular at events and venues where early-stage entrepreneurs congregate like incubators and accelerators.
- Most of the time, entrepreneurs will come to you seeking investment. For this to happen, you have to build a reputation as a valuable partner. Even when you are not able to take the transaction forward, it’s always good to provide valuable insights and be generally helpful in order to cement your reputation.
- Be aware of any emerging technologies and trends in the sectors that you cover. The whole reason start-ups are so successful is because you have millions of people coming up with ideas each day and your success is predicated on spotting them.
Due Diligence and Investment Evaluation
- The due diligence process is quite unique for venture capital investments. You don’t have a lot of historic data to use as a base for your modelling, structuring or predictions. Furthermore, you might not even have a competing or complimentary product or service that you can benchmark against. This makes the valuation of venture capital targets pretty much intuitive guesswork.
- Due diligence starts with looking at pitch books and investment decks made by entrepreneurs. It includes validating the business idea, estimating the potential market size, identifying and researching competitors, coming up with benchmark metrics that the target company would be evaluated against, getting feedback from partners and experts and so on.
- Once evaluation is complete and the investment committee is satisfied, a term sheet is drawn up which specifies the terms of the deal. You will likely work on a few of these in your career.
- The majority of VC invested companies usually fail to get any significant traction. However, that is part of the business plan as just a few successes can more than make up for it. Your job is to make sure you don’t miss out on a future Uber, Google or Amazon even if it means making some dicey bets.
- With some experience, you will become a member of the investment committee which is responsible for making the ultimate decision on investment proposals.
- Venture capital firms play a very large part in deciding the strategy of their portfolio companies. You will spend a lot of time consulting your portfolio companies on how to add value, grow their market share and dominate their niche.
- Venture capital firms can in fact be so impactful that they usually imprint their own culture onto their portfolio companies!
- Portfolio companies in the growth phase have crazy high cash-burn rates and this makes the job of their VC mentor all the more challenging. You have to bring your experience to bear and balance the need for growth with other considerations.
General management and support
- This is a catchall category that includes all the marketing and support activities that junior level analysts and associates need to perform as and when required. Things like investor updates, presentations, ad hoc requests and so on.
- VCs make money by eventually exiting their portfolio companies at a significant profit. This exit can be in the form of a buyout by another investor or the portfolio company going public via an IPO etc.
- Knowing which investment to exit and when can be just as challenging as knowing which company to invest in the first place. Timing is crucial, as competitors can quickly replicate the business model of a portfolio company.
- As a VC associate, you would be assisted by investment banks and lawyers in the execution of such exit transactions, but you have to handle things from your side of the table. You still have to ensure that you’re getting the best price that you possibly can.
Getting into VC
Charting a path into venture capital is not as clear cut as in other banking roles. Venture capital is a more unstructured industry existing halfway between finance and start-ups. Because of this, it requires a more dynamic approach to get in.
Network like there is no tomorrow
Venture capital is more about building relationships with investors, with entrepreneurs and with industry experts. In order to get your foot in the door, you need to demonstrate your value to the firm and this has to be more than just modelling or your number-crunching ability.
VC firms are more likely to hire experts who have consulted with them for some portfolio company or an entrepreneur that demonstrated exceptional business aptitude or something similar. But just having these skills is not enough, you need to communicate it to the VC partners and that is where networking comes in.
Be a successful entrepreneur
Venture capital firms love entrepreneurs who have themselves waded through the mud and got their hands dirty. Because it is these people who best understand the challenges faced by a start-up. This makes them best qualified for handling any issues or challenges faced by the portfolio companies at a later date. Such professionals are called Entrepreneurs-in-residence (EIRs) and may be hired temporarily for a short stint or on a recurring/ permanent basis.
To be honest, you don’t even have to be a successful entrepreneur but just someone who really understands the problems that start-ups face.
Have years of industry experience
Even if you’re not a start-up machine, you can still demonstrate value with your years of industry experience. For example, if you have worked for 20 years with the company that makes windmills, it is likely that you will bring quite a lot of to the table when handling a renewable energy investment target.
Additionally, industry veterans also come packaged with a long list of contacts that can be tapped into for consulting assignments, general advice, business partnerships or other requirements that the portfolio company might have.
Resume Building/ Academics
Venture capital firms don’t have a set “type” of CV that they the look for at campuses. They care less about your quantitative acumen and more about your business aptitude. This does not mean that academic excellence is not required. In fact, unless you’re an industry veteran or a start-up machine, the only way to reach senior level positions is by having a solid MBA or equivalent degree.
The point is that you don’t have to be the finance type to get in. For example, if you are a doctor who is interested in healthcare start-ups then you will likely make more than an ideal candidate for a venture capital firm that specializes in healthcare.
You have to be smart, you have to be an overachiever, you have to be a self-starter. The difference is that you can demonstrate this in sectors that are not related to finance and still be considered for a VC role.
I also recommend you go through a good VC course to learn about all the unique financing aspects, jargon and nuances of VC funding. The best one that I can recommend is the Venture Finance Programme from the Saïd Business School, University of Oxford. You can’t go wrong with this one and the brand value of one of the worlds best business school will help anyone.
Venture Capital Compensation
The compensation structure in venture capital firms is quite similar to that in private equity, although the actual numbers are lower. If you are a junior analyst or associate at an entry-level role, then your expected total compensation would be between USD 100,000 to USD 200,000.
However, most VC’s actually spend a few years in a core industry before getting their MBAs and then moving into venture capital. This is the preferred method as it gives them valuable experience in some industry that they can then cover for their firms. The compensation for such senior associates is usually in the USD 250,000 to USD 400,000 range.
The interesting part of being a post-MBA hire is that you get to be included in the carried interest or carry. The carry is essentially a percent of the yearly return that the investment firm retains for services rendered. This carry is then distributed amongst partners and trickles down to the lower levels as well. It usually forms the bulk of the compensation for most mid to senior level staff.
A Normal Day in Venture Capital
Given the entrepreneurial bend of the portfolio companies managed by VC firms, the culture there tends to be a mixture between finance and tech start-ups. Like any investment professional, you start your day early with a copy of your preferred business publication. There is usually a specific sector that you specialize in and you need to be tuned into what is happening in that sector.
In your early years, you will spend most of your day in internal or external meetings, looking at investment opportunities, performing due diligence for some target company, talking to their management and trying to better understand their business. Your goal is to assist the investment committee with their decision.
If you’re a sector expert, then you can expect to spend time coaching and helping your portfolio companies and acting as their mentor. This is the unique aspect of the job that separates venture capital from much of the rest of financial services industry.
The culture in most VC firms is a bit laid-back in comparison to other banking roles. You usually start at around 8 AM and are in a position to leave by 6 in the evening. On a weekly basis, expect to spend about 50-60 hours at work.
These hours are pretty good. But if you’re responsible for managing some of the portfolio companies, then there is a downside. The portfolio companies tend to suffer from serious issues at odd hours and you have to step in to help them yourself or use your influence to connect them to the right people. This again depends on the culture and set up of your firm as some VCs really like to take a very proactive approach towards managing their portfolio companies.
Career Path and Progression
Venture capitalists are usually people who have a deep passion and affinity towards entrepreneurship and start-up culture. This is why many venture capitalists tend to be entrepreneurs themselves rather than career bankers. What this means is that most venture capitalists consider it as a destination rather than a springboard towards some other goal.
Climbing the VC ladder
Let’s look at the natural career progression at a VC.
At the lowest end of the spectrum are the analysts. They may be hired straight out of college and mostly are only involved in the investment analysis and number-crunching. Because of their lack of experience, they don’t get to make actual investment decisions or help portfolio companies.
As I mentioned before, the preferred entry point into VC is after having spent a few years in a core industry, getting your MBA, and then applying for senior associate positions. This way you start at a more dignified position and don’t get pushed around as much. From here, you can get promoted to VP, principal and eventually become a partner.
At the partner level, you share in the profits of the firm in a big way but are also responsible for ensuring profitability and brining in investors (limited partners). You make the investment decisions, add value to your portfolio companies and even invest your personal wealth into the fund. It’s quite an interesting place to be for those who like to work with entrepreneurs.
Some venture capitalists eventually go back to their entrepreneurial roots and start again when something catches their fancy. It is also possible to move into one of your portfolio companies if they grow big enough and if you have already become an integral part of their operations. This unique relationship between investor and investee offers a lot of exceptional opportunities to venture capitalists.
There is not a lot of overlap between venture capital and corporate or investment banking roles. However, there is some commonality between venture capital and private equity with the main difference being the stage at which they make their investments. In fact, the line between private equity and venture capital can be quite blurred if you’re investing in late stage start-ups.
Private equity deals are much larger and therefore the carry can be several times higher as well. This means that mid-level executives and partners can make significantly more in private equity. Of course, some venture capital funds outperform PEs, but it is usually the other way around simply because of the scale of investments.