[5 min reading time]
So you want to get into venture capital (“VC”). You want to be part of the investing elite and spend your days flying to business meetings on private jets and enjoying your models and bottles lifestyle right? Woah! Hold your horses, Tex. That’s the movies and we need to talk.
I’ve been approached a number of times recently and asked for advice about how to become an investment manager at a venture capital fund. I thought I’d write a series of blog posts to try and shed some light and help others get an idea of what it’s like on the inside – especially if you’re a junior hire.
I’m hoping that it might leave you with a better idea about whether it’s REALLY what you want to do, if NOW is the right time to do this in your career / personal journey and shed some light on how to do it.
This post will deal with VC at a high level and will cover the following:
- What is a VC fund and how it works
- The different stages and sectors
- Internal organisation and culture
- How venture capitalists can differ
Part 2 will deal with the day-to-day, remuneration and career progression and why you might choose startups over VC. Finally, Part 3 will deal with some tips on how you can position yourself for a role and what to do when you become one.
However, before I launch into all of this, I’ll ask the same questions that I ask anyone I meet who wants to work in venture capital (or weighing up career options) – WHY do you want to do it and what really motivates you? It’s really worth considering this as you read through the following posts and, if you are still just as passionate – go for it – but if you feel that you might be better suited or interested in something else, don’t defer doing what you truly want to do. You’re more likely to succeed (and get a multiple of your successful performance) if you truly love what you do.
What is a VC Fund?
Let’s start with a view over where VC fits in the grand scheme. VC is simply a source of funding for companies that are looking to grow very, very quickly and dominate fast growing, or already very large, markets. A VC fund will provide money, advice and access to a network of contacts in exchange for equity (i.e. a share of the company) and therefore a startup will have access to the fuel and knowledge it needs to grow faster and hopefully make less mistakes along the way.
To illustrate where VC fits, the diagram below shows how a company might grow from startup to mature company (note that a company can skip entire stages):
How do VC funds work?
At its core, a VC fund is about making money for the “Limited Partners” (“LPs”). These can be high net worth individuals, large institutions and even other funds that are looking to invest in more risky investments in the hope of a higher return. The VC’s role is to take this money, put it to work and (hopefully if things go well) return not only their original investment but several times the amount. In return for managing this money on behalf of the LPs, a VC fund gets to charge management fees and gets a share of the profits of the fund.
Management fees usually equate to around 2% of the total fund size taken annually during the investing period and reduce over time during the harvesting period (a VC fund will probably “charge” around 15% in fees over the entire period). However, if the fund over performs (i.e. returns more than the original total fund size), the fund is entitled to a share of the profits. This is usually 20% (the “Carry”) and acts as the incentive to ensure that VCs work as hard as they can to catch a proverbial unicorn. Sounds attractive, right?
Generally speaking, the majority of VC funds run a 10-year lifecycle (with the possibility to extend by a year or two) with the first five years used to invest funds and the remaining five years used to “harvest” the portfolio and exit the investments.
Additionally, VC funds will also raise funds of different “vintages” i.e. they will raise a second fund when they are most of the way through investing their first. Why? So that there is an overlap and investing momentum can be kept up. If you’ve spent all your cash and you’re a “zombie” fund, entrepreneurs will get wind of this and deal flow will dry up. Note that a fund will also get the benefit of management fees from both funds during the overlap period.
Different Stages and Sectors
To keep things simple, I’ll split VC into “Early Stage” and “Late Stage” Funds and it’s worth having a think about which stage you would prefer to work in.
Early Stage funds (an example would be Passion Capital) will invest small amounts in a lot of companies and it’s more about the idea and market potential. Companies will come to you with a pitch deck, some early metrics and are usually pre-revenue. The onus at this stage is on “hands-on“ operational execution, testing hypotheses and iteration to make the company scale. The fund sizes are smaller than Later Stage funds (<£100m) and focus will be on bridging the gap to a “Series A” investment made by a Later Stage fund that will essentially takeover in terms of playing coach.
Later Stage funds like Index Ventures, Balderton Capital or Accel have much larger fund sizes (>£100m) and therefore invest in larger rounds. At this level it’s more about further fuelling growth and keeping up the momentum that a startup has to become a market leader and dominate a sector or industry. From a fund perspective, what’s important tips a little more towards the financial and strategic and the focus is on structuring operations, putting key hires into place and on execution and feeding the company’s growth through access to networks etc. to scale the company.
Episode1 is more Early Stage in terms of our methodology as most of our companies have little to no revenue when they first come to us even though we could fund what could be considered a Series A size round in principle.
It’s also worth noting that some funds revolve around specific investment themes (for example, Fintech, Fashion, Marketplaces) and are often led by partners that have deep knowledge and expertise in these areas or are “bullish” about specific sectors and are trying to harness synergy across a narrower portfolio and better or less risky exits.
Organisation and Culture
Within firms the structure is actually very flat – it’s usual for there to be just two levels – partners and associates aka investment managers. At larger firms, there can be more of a hierarchy or more titles but it really boils down to just those two tiers.
Obviously culture will differ from fund to fund and it’s worth considering. It’s true that culture is set from on high and the partners of the fund will dictate whether a fund is more “startup” or “corporate” in terms of internal culture. In addition, the responsibilities of non-partner roles can vary enormously from fund to fund so it’s definitely worth doing some research and talking to people to get a sense of what a fund is like to work for and whether it would be a good cultural fit. It’s more important than most people realize (you’ll spend a great deal of your waking hours with those people) and can make or break the role if you get it. I’ll go into more detail on this in part 2.
The types of venture capitalists
Whatever the stage, VC is very much driven off your network and experience – especially as you become more senior. To be able to raise a fund in the first place takes credibility in the industry and that comes with both experience and a solid network so (and yes, this is a generalization and probably more applicable here than in say, the Bay area, but) you will often see more operational type partners at Early Stage and more finance type partners at Later Stage.
At any stage, entrepreneurs want “smart money” (i.e. VCs who know how to scale companies and can provide advice and contacts – not just funding) but this is especially important at Early Stage. The onus is on those with operational experience and this means that you’re only likely to succeed long-term if you’ve (a) been in the game for a long period of time and have a track record, (b) have operational credibility (been a founder / senior hire in a startup) or (c) ideally both.
At Later Stage funds and beyond, the team are more likely to be made up of ex-management consultants and investment banking types but people who have some kind of startup experience or experience in the tech industry are still highly regarded and those that have exited startups successfully can be found at partner level.
Every VC fund will say that they are “hands-on” but the truth is that some VCs just don’t pull their weight in this regard while others go above and beyond. It’s difficult to juggle bringing in new deals, managing your portfolio and admin of the current fund and (possibly) be working on the fund-raising of a new fund. However, ultimately, a VC’s reputation will often precede them and word gets around about those who really add value.
That’s it for Part 1. In Part 2 I’ll talk specifically about the work that you do, salaries and career progression and whether it might be worth going down the startup path instead. If you’ve already read that, jump to Part 3, where I share some tips.