CONTENTS:
DETAILS:
What are venture capital, growth equity, and private equity?
To start you off, here's a great intro to the private markets overall from Pitchbook (a SaaS platform selling into private investors with a lot of great free research).
Within the private markets, investors tend to sort themselves based on stages of company growth (e.g. product development, revenue and customer acquisition, etc.). Typically, investors think of early stage companies as higher-risk (with less historical "proof" that their model is really working, and a higher chance of failing and closing down operations altogether), but lower-priced and faster-growing; while later stage companies are often lower risk (more historical "proof" of company's viability, stable set of existing customers), but higher-priced and slower-growing (having already established themselves, they may now face issues penetrating harder-to-reach areas of the market, or face stiffer competition from other mature players).
This means that the earliest-stage investors tend to be more comfortable with risk and/or lack of historical data (and will often invest in just an idea or the right management to execute an idea), but tend to "hedge" their bets by investing smaller dollar amounts in many different companies -- and expecting some number of investments to fail altogether. As an angel or VC, you might see multiple small investments eventually go to $0 in value -- but one investment of only $100K in an early-stage, fast-growing company reach 5, 10, or 20 times its initial value.
Later stage investors, by contrast, like to have clear historical data "proving" a company's price point (what we call "valuation") is sensible, tend to take on less risk, and tend to have more thorough investment models to back up their projected ROI based on more standardized value capture playbooks (e.g. drive value by means such as merging entities, cutting costs, or infusing companies with debt capital to turbocharge growth and capture tax benefits related to interest payments and/or periods of operating loss). These investors tend to pay a higher price for lower risk, and usually make larger "bets" on a smaller but "surer" number of companies.
Now that you've got the investment criteria down, here's a thorough overview of the various types of investors across investment stages. You can cap this off with a note on how growth equity, the oft-forgotten stepchild of venture capital and private equity, fits into the bigger picture.
Why are venture capital and growth equity the "Wild West" of finance?
To understand why VC is so hard to break into, you need to understand how these firms get started. Because the companies venture capitalists invest in are smaller, newer, and riskier by nature, it's really hard to use traditional metrics to automatically source great companies and make the right investments at the right time. Instead, private individuals, entities, and other groups looking to invest in VC, called Limited Partners, often put all their trust (and capital) into the hands of individuals who've demonstrated knowledge of a space -- either by running a company from startup to exit, successfully investing their own or others' money, or just being a "thought leader" who can predict industry trends and invest accordingly (being well-known and having the right networks to find and close deals is also critical).
This means a few things for the world of VC:
What is the job like, really?
Great question! Some great answers from folks in the industry:
What kind of person likes this job?
A lot of industry blogs (aka the hype machine) imagine VCs as shoot-from-the-hip, creative, coffee-fueled hand-shakers and deal-makers. At the earlier tenures (Analyst, Associate, Senior Associate, and even VP/Principal), however, that's not always the case. Here are the folks I've seen love the job from Day 1:
What are some other jobs that would appeal to someone interested in venture capital and growth equity (since I've definitely read the disclaimers and am casting my net wide)?
A few careers draw upon the aforementioned interests and skill sets... and often end up being great gateways into investing (for more on that, see GETTING THE JOB). They are:
How do VCs/GEs think about valuing companies?
Valuation is the estimated value of an entire company, which an in investor generally buys a piece of. For instance, if a company is valued at $10 million, I might buy shares from an existing investor for $1 million, and afterwards own 1/10th of the company. When investors are valuing companies, they're asking: How much would this company cost if I bought the whole thing today?
The simple answer to this question is: How much will someone else pay for this company in a reasonable time frame, and how big is that number compared to the money I might put in today? VCs invest with a targeted return when they sell their stake at a later date (e.g. 5-15x their initial invested capital) expecting that some investments will hit or exceed this return and some will go down to $0. For GEs, this range is constricted (i.e. few to no investments significantly decrease in value, but the upside may be lower), but the same thinking applies.
For example: Say I've found a company offering the next big thing in transport: "The Uber for unicycles." I believe this top-notch product will soon replace walking and e-scooters: unicycles are more fun to ride, cheaper to make and maintain and therefore to provide to consumers, and who doesn't love the adrenaline rush of riding a single wheel next to oncoming traffic? Here are some questions I'd ask when valuing this company:
How much can I "afford" to pay for this company based on my targeted investment return?
VCs/GEs ask multiple questions when determining whether a company will really hit its future valuation target. Here are a few:
- What are venture capital, growth equity, and/or private equity?
- Why are venture capital and growth equity the "Wild West" of finance?
- What is the job like, really?
- What kind of person likes this job?
- What are some other jobs that would appeal to someone interested in venture capital and growth equity (since I've definitely read the disclaimers and am casting my net wide)?
- How do VCs/GEs think about valuing companies?
- How much do venture capitalists make?
DETAILS:
What are venture capital, growth equity, and private equity?
To start you off, here's a great intro to the private markets overall from Pitchbook (a SaaS platform selling into private investors with a lot of great free research).
Within the private markets, investors tend to sort themselves based on stages of company growth (e.g. product development, revenue and customer acquisition, etc.). Typically, investors think of early stage companies as higher-risk (with less historical "proof" that their model is really working, and a higher chance of failing and closing down operations altogether), but lower-priced and faster-growing; while later stage companies are often lower risk (more historical "proof" of company's viability, stable set of existing customers), but higher-priced and slower-growing (having already established themselves, they may now face issues penetrating harder-to-reach areas of the market, or face stiffer competition from other mature players).
This means that the earliest-stage investors tend to be more comfortable with risk and/or lack of historical data (and will often invest in just an idea or the right management to execute an idea), but tend to "hedge" their bets by investing smaller dollar amounts in many different companies -- and expecting some number of investments to fail altogether. As an angel or VC, you might see multiple small investments eventually go to $0 in value -- but one investment of only $100K in an early-stage, fast-growing company reach 5, 10, or 20 times its initial value.
Later stage investors, by contrast, like to have clear historical data "proving" a company's price point (what we call "valuation") is sensible, tend to take on less risk, and tend to have more thorough investment models to back up their projected ROI based on more standardized value capture playbooks (e.g. drive value by means such as merging entities, cutting costs, or infusing companies with debt capital to turbocharge growth and capture tax benefits related to interest payments and/or periods of operating loss). These investors tend to pay a higher price for lower risk, and usually make larger "bets" on a smaller but "surer" number of companies.
Now that you've got the investment criteria down, here's a thorough overview of the various types of investors across investment stages. You can cap this off with a note on how growth equity, the oft-forgotten stepchild of venture capital and private equity, fits into the bigger picture.
To understand why VC is so hard to break into, you need to understand how these firms get started. Because the companies venture capitalists invest in are smaller, newer, and riskier by nature, it's really hard to use traditional metrics to automatically source great companies and make the right investments at the right time. Instead, private individuals, entities, and other groups looking to invest in VC, called Limited Partners, often put all their trust (and capital) into the hands of individuals who've demonstrated knowledge of a space -- either by running a company from startup to exit, successfully investing their own or others' money, or just being a "thought leader" who can predict industry trends and invest accordingly (being well-known and having the right networks to find and close deals is also critical).
This means a few things for the world of VC:
- In theory, anybody with the right track record and connections can become a VC on the basis of convincing someone else to hand them money -- and even as "paltry" a sum as a mere $15 million can establish a "micro" or "nano" VC fund.
- VC's therefore often operate like a bunch of mini-fiefdoms driven by individual star-power and/or know-how, instead of like more centralized, scaled, and process-driven industries such as investment banking or consulting.
- This also means that venture capital is less of an organized industry with clear playbooks and career paths, and more of an unstructured, chaotic, and, well, wild Wild West within the world of finance.
- To cap it off, these firms are typically very top-heavy, as it's the established folks who often have the specialized knowledge or networks to find and vet deals for the hidden gems. So when new jobs pop up, those at the dreamy pre or post-MBA Associate level are few and far between.
Given all of the above, it might be safe to say that there is no "right" pathway to and through VC recruiting, onboarding, training, or even promotion and tenure. While media and networks have had some effect in driving consistency, the variance is high enough that it's hard to know, for instance: what jobs are available when; who to talk to in each firm to snag an interview; how you'll be assessed at each recruiting phase; how hard you should haggle over salary numbers; and a myriad other critical questions. The small number of open roles at any given time only raises the stakes for these questions, and makes recruiting into VC feel like an absolute hot mess.
Unfortunately, I can't tame the wild, wild west of finance for you. But, I can aggregate the best data and resources I've found to help you bring some order -- and maybe even peace of mind -- to the process we know, and tolerate, as "VC recruiting."
Unfortunately, I can't tame the wild, wild west of finance for you. But, I can aggregate the best data and resources I've found to help you bring some order -- and maybe even peace of mind -- to the process we know, and tolerate, as "VC recruiting."
What is the job like, really?
Great question! Some great answers from folks in the industry:
- A nice overview of the components of a VC workday: Sourcing, Deal Execution, Portfolio Company Support, Networking & Brand-Building, Fundraising & LP Relations, and Internal Operations & Other Tasks
- A really detailed, informative, and thoughtful three-part overview of the job from Coding VC
- Some quick Q&A from Crystal Huang, VC @ New Enterprise Associates
What kind of person likes this job?
A lot of industry blogs (aka the hype machine) imagine VCs as shoot-from-the-hip, creative, coffee-fueled hand-shakers and deal-makers. At the earlier tenures (Analyst, Associate, Senior Associate, and even VP/Principal), however, that's not always the case. Here are the folks I've seen love the job from Day 1:
- They like the macro-view... VC firms often develop theses based on understanding an entire landscape - they "get" consumer technology, life sciences, talent, etc., and this helps them understand when an idea is innovative and when it's just status quo.
- ....Are ready to learn... VC firms often also find opportunities outside of their existing expertise -- a new industry, or a new niche in a beloved but rapidly changing industry, will require getting a handle on a new landscape and understanding how an opportunity fits into this bigger picture.
- ...And quickly develop an opinion... After learning something new, a VC will quickly form a hypothesis to vet with further discussions, research, or investments in the market. Remember, new data isn't just nice-to-know: the point is to identify growth opportunities before the rest of the market catches on!
- ...But can also dive really deep... At the earlier-tenured levels in particular, it's not all about shaking hands. VCs will dive deep into company models, contracts, and capitalization tables (an excel sheet outlining the owners of a company and the percentage of ownership, or equity, owned by each) to determine how valuable the company is, and at what price ("valuation") they'd buy in.
- ...Before getting out there to shake hands... VCs meet a lot of Limited Partners (folks who give them money to invest), fellow investors, industry leaders, and, of course, companies. They don't have to be extroverts to do this well, but they do typically have to enjoy finding great people and building strong relationships. And as VC members grow within a firm, their unique Rolodex's will become more and more important.
What are some other jobs that would appeal to someone interested in venture capital and growth equity (since I've definitely read the disclaimers and am casting my net wide)?
A few careers draw upon the aforementioned interests and skill sets... and often end up being great gateways into investing (for more on that, see GETTING THE JOB). They are:
- Consulting: As a recovering consultant, I can confirm that the job leverages a similar "macro" perspective combined with the requirement to quickly conduct deep research, form an opinion, and make a recommendation -- all while building relationships with executives and peers. Consulting was a rewarding job for me which opened a lot of doors, and I'd highly recommend the field to anyone who gets a thrill when they hear the words "high impact."
- Banking: A well-trodden road into VC, banking trains individuals on the "going deep into the weeds" skills while also preparing them for more macro and relationship-building roles. As someone with a few recovering banker friends, I'd say that the industry is much, much more structured, rigorous, and transparent than VC -- those who like a little tumult (and a better lifestyle) will prefer VC, while those who prefer clearer career paths and more structured work environments (and are ready to remove the word "overtime" from their vocabulary) will prefer banking.
- Product Development & Management: It's a truism that VCs secretly want to be product developers. If you love the game-changing power of a new product, and want to be a part of building something (instead of investing in something), you'll love product-focused roles -- whether at a startup or a large enterprise, and whether tech-based (e.g. as an Agile Product Owner) or non tech-based (e.g. as in actually helping develop real live products). Product managers also typically oversee their own "portfolios," and leverage quantitative and qualitative data from customers, business leaders, and other stakeholders to determine the right path for their portfolios.
- Sales & Account Management: Love forming relationships and helping your friends (and strangers) solve their problems? Sales and account management, perhaps one of the most important skills for VCs -- and particularly senior VCs -- is all about taking action on data and tailoring recommendations to customer needs. It's also a great place to cut your teeth in the business world, with a quarter of CEO's coming from a sales and marketing background.
- Other Operational Roles in Your Target Industry: Love education VC? You might try being a teacher (many current investors did). Love the life sciences? Join a healthcare startup and be a part of solving critical operations, distribution, and other problems in that industry. Startups in particular are a frequent inroad into VC, and tap into the same desire to solve a problem, build something new, and unlock customer relationships -- while frequently offering opportunities to learn a whole lot of things about a whole lot of subjects due to the "many hats" worn by most startup team members.
- Research: My buddy in research once told me the difference between research and consulting is that "consultants want an answer... but researchers want the right answer." After recovering from total devastation, I realized that she was probably onto something. If you love the word "macro trends," are great at "going deep" into the data, and want to get to the "right answer," research might be for you!
- Philanthropy / Non-profits: Some might be surprised by the inclusion of this industry, but today's social sector is increasingly landscape-oriented, data-driven, and results-focused. An investor mindset has migrated to philanthropy, with organizations increasingly focused on developing "portfolios" of "investments" or "interventions" that show social and financial efficiency and ROI. The sector is a great place for those who want to combine the above skills with social impact.
- Media / Events / "Thought Leadership": If you love a specific sector, you might want to join the thinkers and connectors helping shape and enhance the sector, e.g. writing books, hosting events, connecting companies and angel investors, etc. Some folks have stumbled into VC in a sector by doing this as well (but again, choose a pathway you actually like, not just one that might get you into VC in 5 years).
How do VCs/GEs think about valuing companies?
Valuation is the estimated value of an entire company, which an in investor generally buys a piece of. For instance, if a company is valued at $10 million, I might buy shares from an existing investor for $1 million, and afterwards own 1/10th of the company. When investors are valuing companies, they're asking: How much would this company cost if I bought the whole thing today?
The simple answer to this question is: How much will someone else pay for this company in a reasonable time frame, and how big is that number compared to the money I might put in today? VCs invest with a targeted return when they sell their stake at a later date (e.g. 5-15x their initial invested capital) expecting that some investments will hit or exceed this return and some will go down to $0. For GEs, this range is constricted (i.e. few to no investments significantly decrease in value, but the upside may be lower), but the same thinking applies.
For example: Say I've found a company offering the next big thing in transport: "The Uber for unicycles." I believe this top-notch product will soon replace walking and e-scooters: unicycles are more fun to ride, cheaper to make and maintain and therefore to provide to consumers, and who doesn't love the adrenaline rush of riding a single wheel next to oncoming traffic? Here are some questions I'd ask when valuing this company:
How much can I "afford" to pay for this company based on my targeted investment return?
- How much will this company be worth in [1] year? Say I think that if the company can achieve $1 million in revenues within a year, another investor or company (for instance, Uber) will pay $10 million to acquire it. That means my projected future value of the company is $10 million.
- What return will I expect on my investment? Say I'm a VC who expects my investments to return 10x the amount I initially invest. If I want to reach a 10x multiple a year from now, that means I'll need to invest in the company today at a $1 million valuation ($10 million future value divided by 10x). [*Note that this is complicated slightly by expected dilution, i.e. others might also invest in the company between now and then and reduce my total stake, which means I might need to invest at a valuation lower than $1 million. For technical details, see GETTING THE JOB.]
VCs/GEs ask multiple questions when determining whether a company will really hit its future valuation target. Here are a few:
- Market and Customer Questions: How big is the total market today (total people who might buy this product x total price they'll pay), and how quickly is that number growing? How well-penetrated is this market today by other unicycle providers, or by competitors to unicycles (e.g. scooters)? Who is the end user, and what drives success for this user: is it convenience (e.g. customers being able to hop on a unicycle wherever they go during the day), price, quality, or other factors? Based on these factors, what drives provider success (e.g. if convenience is high, companies will need to figure out how to distribute unicycles across the country).
- Company and Product Differentiation Questions: Given the market dynamics, why is this specific company positioned to grow? For instance, do they better serve customer needs? Does the company have unique assets (say, great branding) or alliances that help reach these customers (say, agreements with local cities that allow them to place unicycles at major crossroads)? Do they have other "moats" that shield them from being replicated by competition (say, an e-unicycle patent)?
- Team Questions: Does the management team have a clear vision and mission for what they do, a strategy to get there, and a plan to execute? What is the management team's experience and skillset that makes me believe they can execute (e.g. have they built and sold a company before, are they unicycle experts with transportation PhD's, are they killer salespeople, etc.)? Are there any critical gaps in this team (e.g. no one knows how to actually ride a unicycle, so they may have trouble connecting with customers)? Are there are red flags (e.g. does the team get along, and are they ethical)? How does management plan to grow and manage this team as needed to drive revenue? Many investors, especially in the early stages, believe that these questions are the most important in a valuation process.
- Risk Questions: Beyond the team, are there are growth risks (e.g. Uber mimicking the company's unicycle model instead of buying it)? Are there risks in exiting the stake (e.g. given recent investor concerns about Uber's profitability, are we concerned that no one will want to buy shared consumer transportation companies in a few years)?
- Financial Questions: How much profit does the company have left over after expenses? If the company isn't profitable, how much does the company spend (or "burn") annually? How will the team use the money I invest, and how long will it be before they run out of this money and need to raise more money? When will the company break-even on its operations (and potentially not need additional capital)?
Veteran VC blogger John Gannon tracks this in an annual report.
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