Venture Capital
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A Venture Capital (VC) firm, like the name suggests, invests capital (money) in business ventures (a startup that intends to make a profit). More specifically, VC firms makes equity investments in early-stage private companies. What does this mean?
- Equity investment – The purchase of a percentage of a company.
- Early-stage company – A company, like a startup, with a lot of potential to grow in the future.
- Private Company – A company that is not actively traded in a public stock market.
VC investing is a form of private equity investing. However, firms titled “Venture Capital” differ from firms titled “Private Equity” because VC firms invest in earlier stage companies.
If you’ve ever seen the show Shark Tank, VC is similar. Of course, VC firms make their investment decisions differently than on Shark Tank. Keep on reading below to understand Venture Capital within minutes.
What is the goal of a Venture Capitalist?
The goal of a VC firm is to find as many profitable investment opportunities as possible. This is done by analyzing prospective companies and deciding whether or not to invest.
Typically, the types of companies VC firms invest in have a “high risk and high reward”.
- The risk in this case is investing in a company that ends up not being successful. Since these investments are in younger companies, their future success is not clear yet.
- The reward is the large return on investment (aka profit) the VC firm makes if the company does eventually become successful.
For example, if a VC firm invests in 5 companies, and 4 of them fail but the 5th one is the next “Facebook”, they still are very profitable. While VC investments are known to be risky, the best VC firms identify the companies with the highest probability of success.
What do Venture Capitalists do?
Often, the main VC responsibilities are split into the investment process and the post-investment process.
Investment Process:
Below are tasks that need to be completed before making an investment in a company.
- Sourcing of (aka finding) potential investments – Via outreach to company CEOs, word of mouth through other VCs, or attending industry events to find promising startups.
- Investment due diligence – Research that helps you decide whether an investment is a good one or not. Some portions of research include:
- Financial analysis – Evaluating the value of a company based on its financial metrics (like sales, costs, profit, and other accounting terms).
- Market analysis – Research on the broader market such as size of the market, competitors, target audience/potential users.
- Further research on company – Need to do extensive research on the company before investing in it. For example, understand their product, their management team, and how they operate.
Post-investment aka “portfolio company initiatives”:
After a VC firm invests in a company, this company becomes a part of their “portfolio” and is called a “portfolio company”. Since the VC firm now owns a percentage of the portfolio company, they want to ensure they are run well and positioned to succeed. As a result, VCs work closely with their portfolio companies, even after an investment is made.
VC Investment Process Analogy
Below is an analogy for early-stage VC investing. In this analogy, we relate the VC investment process to investing resources into professional athletes at different stages in their careers. Here, Eric’s choice to invest in a rookie player is similar to a VC firm investing in an early-stage company.
- Eric owns a baseball team and needs to fill a specific spot on the roster. (1) a rookie player with a lot of potential but unproven success, or (2) a veteran all-star in the prime of his career.
- The younger player costs Eric much less money to hire than the veteran. This can be an attractive route if Eric does not want to spend a lot of money and does not need such a high-caliber player (like the veteran all-star) right away.
- While it is riskier to invest in a player who has not proven his success yet, Eric has a team of scouts who study the younger player’s qualities (like his baseball skillset, his work ethic, etc) and determines whether it is a good idea to bet on his future success.
- Let’s say Eric signs the younger player to a long term contract. Since he has made this investment he works to develop the player into an all-star.
- Eric did not pay him very much but the rookie became very valuable. As a result, Eric’s return on this investment is very high.
- Eric’s investment in a young, unproven talent, is similar to an early-stage VC investment since he is making a bet early on in the player’s career. However, in doing so, Eric positions himself to benefit significantly if the player turns into a superstar.
How does the investment process at a VC work?
The structure of this process varies from firm to firm but, below are some general steps:
- The process of sourcing investments typically include direct outreach to prospective company CEOs (via email and phone calls).
- Furthermore, VC roles have very hands-on networking processes. In other words, entry-level analysts/associates often lead an intro call with a new potential company and act as the first-line filter.
- After getting interest/approval from the junior VC employees, typically a more senior team member or Partner gets involved and speaks with the potential company.
- Once an opportunity is sourced, there is a constant research process that occurs along the way to an investment.
- Finally, the VC team invests if they deem the company a good opportunity.
Portfolio Company Project Analogy
After an investment is made, why would you still work with the company you invested in? Because their best interests are also your best interests. Here’s a simple, real-life example:
Let’s say you invest some money to acquire 25% ownership in a local restaurant. Since you are now a partial owner, you share the benefits of the restaurant’s performance. Chances are, you’ll
- want to eat some meals at the restaurant
- frequently check in on how they are doing, and
- give advice/feedback along the way to help them be successful because their success is your success too.
For example, if your friends order a particular meal and think it is too salty, it is in your best interest to tell the restaurant. Making their food less salty helps make your customers happy and helps you sell more meals!
What is an example of a project a VC firm works on with one of its portfolio companies?
A portfolio company might need some help conducting a thorough market analysis. Meaning, they want to understand who their target users/audience is, who their competitors are, what their competitors are doing, what their potential future users are looking for, etc.
Going through this process helps the portfolio company best prepare to succeed and grow, which benefits both the company and the VC firm. Below is an example of how a market research analysis might look:
Venture Capital Portfolio Company Project Example
- “Company X” is a taxi E-hail company, currently only in New York City, evaluating new markets to expand into. Meaning, they want to offer their service to more people or a different demographic (in this case, new cities).
- The VC firm communicates closely with the CEO and other management of the portfolio company (“Company X”) to analyze different potential cities.
- The VC wants to analyze how large the potential markets are, what makes Company X’s product grow or fail to grow in this market, and which types of users/consumers exist in this market.
- So, the VC spends about one week using data sources including industry reports from consulting firms, census data, LinkedIn data etc. to analyze many different potential markets/cities for Company X.
- Then, the VC discusses the findings with the CEO and VP of Corporate Development.
- As a result, Company X decides to explore a new market: London.
- Furthermore, Company X researches competitors that already operate in London.
- After the research is complete, the VC and Company X decide if there is an opportunity in London.
- If so, they need to present the new findings at the next company board meeting, where important business decisions get approved.
What’s the difference between Private Equity and VC?
What are the different “funding rounds”? (Seed, Series A, B, C)
Funding rounds are when a private company/startup raises money from outside investors. They are chances for investors to invest in private companies (before the companies go public). There are a few funding rounds that occur over the life of a startup. The main rounds, from earliest stage to latest stage, are:
- Seed – This is generally the earliest official funding round. Companies often do not even have an established product yet, but usually are raising money before putting their ideas into practice. Even though these companies have not proven their success yet, their seed investors believe in their potential to grow.
- Series A – When a startup now has a bit of a track record (has some users and a product). They raise additional funds to help them increase their user base and develop their product(s) further.
- Series B – When a startup is slightly more established (aka has more experience under their belt). They wish to expand beyond product development and increase their market reach (become more of a leader in their space).
- Series C – At this stage, companies usually have been around for 3-7 years. They are more established, but investors at this round believe they still have plenty of growth potential.
Since companies that are more established and have a proven track record tend to be less risky investments, investing in later funding rounds tend to also be less risky. As a result, it is usually more expensive (need to invest more money) to invest in a company at a later round than an earlier one.
What are some differences between a role at a VC firm that invests later-stage (Series C/”Growth-Equity”) versus early-stage (Seed/Series A)?
The differences depend on the specific firm’s strengths and strategies, however, some common differences are detailed below.
- Growth-stage/later-stage venture investing – Compared to an earlier-stage VC firm, research and due diligence processes are more financial analysis heavy because the companies that growth-stage VC firms invest in have a financial track record of 3-7 years. Overall, the due diligence process might include the following portions when evaluating a potential investment.
- Product analysis – How is the company’s product? Need to analyze the strengths, weaknesses and areas of future growth for the company’s product (and compare it with what else is out there)
- Market analysis – Who are the current and potential users of the product? How big is the market? Does the company have any competitors?
- Evaluation of team – How is the company’s management team? Do they seem like they’d run the business well?
- Competitive analysis – Research major competitors. How is their product? How are their marketing and sales strategies?
- Financial analysis – Dig into the financial metrics (like their sales, costs, profit, etc.) of the company.
- Go-to-market/sales & marketing analysis – How is the company marketing their own product?
- Valuation analysis – Use financial models to find a fair price or valuation for the company.
- Early-stage venture investing (Seed and Series A) – Since early-stage companies have less of a financial track record than later-stage companies, the research and due diligence process is more qualitative and focuses mainly on product analysis, market analysis, and the management team than growth-stage venture investing.
Typical VC Company Hierarchy:
While this varies depending on the firm, a general structure looks as follows:
What types of Venture Capital Jobs are out there?
When considering a VC Job there are two questions to consider:
1. What type of companies does the VC firm invest in?
“Types of companies” VC firms invest in can mean:
- Industry-focus – some VC firms specialize in a select number of industries, like technology, healthcare, etc.
- The stage the company is in – For example, some VC firms make “seed” investments, which are very early-stage investments in companies. Whereas, other VC firms (also called “growth-equity” firms) might make slightly later stage investments.
2. What is your specific role on the team?
“Specific Role” can mean many things, however, one example is your daily responsibilities. For example, some VC firms hire entry-level analysts to specialize in a single task (like sourcing/finding investments or investment due diligence/company-specific research). Whereas other VC firms have their analysts do a little bit of everything. Knowing exactly what your role will be is an important consideration before you take any VC job.
Some general examples of tools/methodologies someone in Venture Capital might use
- Powerpoint – for presentations to management and companies
- Excel – for managing data, financial analysis, financial modeling, etc.
- Capital IQ – for getting public company data
- Crunchbase – can see information on companies, and prior funding rounds
- AngelList – similar to Crunchbase. Allows VCs to track companies.
- LinkedIn – good for networking purposes (and getting additional information on prospective companies).
What types of skills, mentality, etc. are necessary to be successful in Venture Capital?
- Curious and Interested – Need to be eager to learn about different companies out there, so you can source strong potential investments.
- Entrepreneurial – Having a business savvy mind can be very helpful in identifying winners, and helping portfolio companies succeed after an investment is made.
- Creative – Being able to identify winning investment strategies and develop creative business solutions.
- Organized – VCs come across potentially hundreds or thousands of companies every year. So, managing all of your work and research in an organized manner is essential to being efficient.
- Communication Skills – you need to communicate with management from other companies that you might invest in, with your teammates, and with your portfolio companies.
- Knowledgeable of the market – knowing what else is out there, having an idea of trends, staying up to date on current events, etc.
What are some challenges of being in Venture Capital?
- Many investments fail – as a VC investor, many of your investments lose money, and working through the losing investments can be difficult.
- Working with portfolio companies – sometimes working with portfolio companies (aka companies you’ve already invested in) can be difficult if there are disagreements or the portfolio company is led by poor communicators.
- Market Research and Sourcing takes a lot of time – you spend a lot of time reviewing prospective companies to invest in. Most of these end without an investment taking place. However, in order to find the next big winner, it is essential to look for as many opportunities as possible.
What are some benefits of being in Venture Capital?
- Although many investments do not work out, the occasional winner can be very profitable for the VC firm and rewarding.
- You get exposure to earlier stage companies, which can be very exciting to see how they grow and create world-changing products.
- The networking process is very hands-on, which is especially beneficial for entry-level employees.
- Additionally, you build strong relationships with companies you invest in, but also your colleagues and other VC firms.
- You learn the fundamentals to build and identify successful businesses.
- Also, you gain experience trying to predict and invest in future trends.
- Compensation tends to be high, but definitely varies depending on the firm.
Typical Salary?
Below are the total compensation numbers for a typical VC firm across different seniority levels:
- Analyst – $75k-150k.
- Associate – $120k – $250k.
- Vice President (VP) – $200k-300k + $0-1million Company Performance Bonus.
- Principal/Junior Director – $500k – $700k + $0-2million Company Performance Bonus.
- Managing Director (MD)/Partner – $1 million +
Should I go into Venture Capital?
If you are interested in early-stage companies, entrepreneurship, or identifying industry/market trends, you should consider exploring Venture Capital. Venture Capital is one of the most exciting careers, where you gain exposure to high-growth startups and companies that build products for the future.
You learn what makes startups successful, make great connections and you can make a good salary along the way. Furthermore, some common career paths are other VC firms, Private Equity Firms. Startups, Consulting, and Hedge Funds.
Common Careers Before & After Venture Capital
Related Careers:
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