How to get into Venture Capital – Part 2

by Martin Afshari Mehr

[5 min reading time]

OK – so you’ve hopefully read the first part to this blog series that laid the foundations, here is some of the detail about what working in a VC fund might mean for you. I’ll cover:

  • What VC funds look for when hiring
  • What your day-to-day might look like as a VC
  • Salary and Career Progression
  • Why you might choose the startup path over VC

What do VC funds look for when hiring?

Well, first, it won’t come as a surprise that it has always been very challenging to get into venture capital.

Why? Well, funds run very lean and with a low headcount, and this is partly driven due to fund size given that they run on management fees which are, in turn, tied to the size of the fund (larger funds = more management fees, more money to spend on hiring) and partly due to business need and the amount of work that needs to be done. The partners are the ones that entrepreneurs want on their boards and, if the partners can handle the workload themselves, why hire more? Less headcount means less of the fees (and potential carry) need to be shared out.

At a junior level, and as they run lean, VC funds usually favour people with some kind of operational experience or strong startup connections (e.g. senior product managers, digital marketers and ex-founders) at an Early Stage and, especially at the bigger / Later Stage Series A funds, those that have several years of finance or consulting experience under their belt (e.g. ex-strategy consultants (McKinsey, BCG, Bain) or ex-Investment Banking types).

The reasoning has a lot to do with the needs of the startups at those funding stages and the experience brought to the table by the junior hire. At Early Stage, it’s more about hands-on operational skills; at Later Stage, it’s more finance and strategy.

Junior hires will usually also cover what would be considered analyst duties in other types of professional services institutions like banks or consultancies. If extra junior headcount is needed, it’s usually sourced via interns.

Your day-to-day work

This can vary enormously depending on the ethos of the fund. In some funds, a junior hire could spend his or her entire time just deal originating – i.e. going to pitch sessions, reviewing pitch decks, talking about business plans and essentially acting as pre-sales for the partners. At other funds, especially those larger and/or more operationally focused, the work is split between deal origination and actively working with the entrepreneurs in terms of market research, financial or operational advice and anything else needed to support the portfolio.

To give you an idea of how a deal plays out, I’ll walk you through an example:

  • The first step is connecting with a startup that is looking for funding and meets the investment criteria and thesis of the fund (each fund will differ on this). Usually it’s the invest manager / associate that will have the initial meeting and see if the company would be a good fit for the portfolio and then introduces the startup to the partners.
  • If the company looks right for investment, the partners (and/or more senior members of staff) will negotiate terms on the amount of funding and the valuation of the company (e.g. £500k investment at a pre-money valuation of £2m = 20% stake) and will issue a “Term Sheet” (you can see the Episode1 example here).
  • The Term Sheet is a Letter of Intent stipulating the general terms of the deal that will be formalized in legal documentation later. It’s worth noting that it’s non-binding – i.e. either side can potentially walk away but it’s extremely damaging to the reputation of either side to do so once agreed unless there is some very serious reason (e.g. misrepresentation, fraud).
  • Once signed (or sometimes during negotiation), the due diligence process begins where time is spent reviewing the financial model and projections in more detail, doing background checks on the team and technology and building a “cap table” (i.e. what the shareholding of the company will look like after investment). If everything works out and there are no skeletons in the closet, legal agreements are signed, the funds are transferred to the startup to fuel the next stage of growth and the startup becomes a portfolio company of the fund. At this stage, it’s often the partners that take over the relationship (although you may get the opportunity to sit on the board as an “observer” and help provide advisory support).

In addition to deal work, an investment manager may assist on helping with other projects either for the portfolio (e.g. market research, follow-on investments) or the fund (fund-raising / marketing materials / reporting information for the LPs).

Salary and Career Progression

Whether your salary is great or not is obviously relative to what you were earning before. It will usually be made of a base and an annual cash bonus (dependent on length of tenure and seniority) but you’re not going to make Private Equity or hedge fund type level money at a junior level (size of fund / management fees related – see “How do VC funds work?” in my first post) so if money is your key driver and motivation, I would look elsewhere. Over time, you MAY get the option to invest in the fund and/or get a share of the carry but it will obviously be far less than the partners’ share (they raised the fund and it’s their reputation after all) and this will vary from fund to fund.

The other thing to consider is that, as most funds are pretty flat in structure (although some funds have hierarchical investment banking type labels), getting from associate / investment manager up to partner can be very difficult (even if you bring in great deals, it’s no guarantee).

Most people become partners through raising their own funds, get headhunted by other funds (with a fast-track to partnership given their ability to “pick” winners) or build and sell their own startup and then join a VC at partner level given that experience. There are also a number of people who will dip in and out of VC (usually the more operationally focused / founder types who may have the title of Entrepreneur-In-Residence (“EIR”) – EIRs work alongside the partners as an investor usually with a view to having the inside track to raising funding directly from the fund for their next startup or taking a senior role in one of  their portfolio companies). I’ve also come across a number of people who started in VC and have left to run their own startups.

The VC vs. Startup Path

Yes – I know they’re not the same – but if you want to work in tech, and are thinking of where you might fit, it’s worth thinking about the pros and cons of working in VC vs. going to work for a startup especially in terms of personal development and career potential.

One of the benefits of VC is that it opens doors; you can move around the industry with relative ease (everyone wants to know people with money!) and therefore can build up a good network quickly. You also get to see a lot of different types of businesses, different problems and solutions and bleeding edge emerging tech in different sectors so it’s great if you love variety.

The downside (depending on your likes and dislikes) is that you can spend a lot of your time just trying to originate deals by going to endless pitch sessions and talking through business plans. Not bad if you’re a natural sales person / extrovert type but unlikely to suit your personality if you’re more of an analytical technocrat. You’re also unlikely to get much exposure to helping a company actually build the business – you’re an investor, a facilitator of what they are trying to do – you’ll always be one step removed from the company and it will be the partner that the entrepreneur wants advice from and who will sit on the board. Therefore if you’re more interested in actually building things and/or want to develop operational skills you’re probably better suited to working in a startup.

Things to ponder

So, at this point and based on all the above, I would strongly suggest that you have a think whether VC is REALLY what you want to do – especially at a junior level – if you just want to work in tech, I would be more inclined to join a fast-growing startup and get some heavy-weight operational experience (and ideally some equity!). You can sometimes end up getting paid MORE as a senior hire in a startup than a “junior” hire in a VC fund and it can be more fun (happy to share examples!). Irrespective of whether you succeed financially, you’ll learn a lot and can always join a VC at a later stage given that experience. Alternatively, go work for one of the Four Horsemen (Google, Apple, Amazon, Facebook) or similar (e.g. Cisco, Rocket) and then find your way into VC whether through startups or direct.

It’s worth noting that people with “real” tech experience are highly valued and you get massive credibility from the community (shout out to our partner, Paul McNabb who is ex-Cisco and a heavyweight when it comes to B2B / SaaS / enterprise software etc. – the list goes on). Another thing to be cognisant of is that the emerging markets tech scene is growing and it’s (arguably) becoming easier to build companies and get funding in places like India now with startups commanding larger and larger valuations given the size of these markets. If any of these markets are where you hail from, you may want to consider building a career there.

If you’re still focused on VC, in the final post I’ll provide some tips and pointers that might help.


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