There are multiple paths to becoming a venture capitalist, but what does being a VC entail?
Sure, it can be a lucrative career. Pop culture and the media tend to focus on the money associated with success, so it might seem to some that's all there is. But the motivation to break into "VC" shouldn't be purely monetary. For many in the space, a perhaps even greater appeal lies in the opportunity to meet inspiring, talented people who are building things to resolve problems, literally changing how business is done. It is thrilling to be a partner to such innovation.
As a venture investor, your role is to serve two very different parties. First, you owe the highest commitment to those who invested in you and your team. You must act in their best interests to make a return on their investment. The other commitment is to those entrepreneurs in whom you have invested. You must support them to help them achieve their vision. The two endeavors actually go hand in hand, as you can't achieve one without the other.
At the end of 2019, there were 1,328 venture capital firms in the United States managing 2,211 active funds totaling $444 billion in assets under management. And while that may seem like a lot of firms and dollars, breaking into venture investing as a career can be challenging. From an experience perspective, there are several routes into venture investing. The first is to begin a career in some type of finance organization in which there is formal investment training. Professionals gain finance experience and can then proactively pursue a leap to venture capital.
The second way is to have a background in business operations. Working at startups and high-growth companies is a way for people to prove that they know how to work in and scale a business, which is a necessary skill for a good VC investor. A derivation of this path is an entrepreneur who founded and successfully sold a business, then segued into investing in other companies. In this case, that person may eventually join a venture capital firm, or create their own.
The most successful venture investors tend to have both a background in finance as well as experience in building and growing companies.
VCs need to be able to not only recognize companies with potential, but also be able to work through deal terms and structure to fund them. Afterward, they must serve as advisors to their investments in terms of how to scale, go to market, acquire talent, etc., and also be able to navigate the financial implications of a proposed exit. There is a totality of the job that requires a wide range of skills — business development, financial modeling, research, and other aspects that aren't that glamorous. As with most careers, hard work and discipline are required, which is balanced with the joy of success when one of your portfolio companies "takes off" and begins to scale.
The entertainment television show "Shark Tank" provides a misleading look into venture investing. Entrepreneurs give a brief pitch to the "Sharks," who then make an on-the-spot decision to invest or pass. In reality, Forbes spoke to 74% of people who were offered funding in seasons one through seven and discovered that the deal fell apart 43% of the time, and the actual deal changed 30% of the time. In the real world, funding companies is a much longer and more analytical process.
Our team reviews over 1,000 companies in a year and ends up investing in only a few. The reason? While venture investing does carry risk, that risk is carefully calculated. There has to be a match between the company and the investors where 1 + 1 is greater than 2.
While venture investors are identifying and vetting potential investments, they're also helping their current portfolio of companies to accelerate. A venture investor is part hunter, always scouting for the next great company, but they're also a farmer, nurturing and growing what they've already invested in.There are generally two ways that venture investors find companies they want to pursue. The most common method is "inbound," meaning that startup founders apply for consideration, or are introduced to the VC firm through its network. Alternatively, firms typically have a series of investment theses and practice more proactive "outbound" methods to find companies working on those solutions through university incubators, accelerators, and pitch competitions.
Within my own firm, different investors have different areas where they offer deep expertise, such as in Healthcare IT, Cybersecurity, Digital Media, Dev Ops, and so on. Investors tend to "stick to their lanes" in finding companies within their specialty verticals. Regardless, they're looking for innovations that offer solutions to acknowledged but currently unsolved problems.
Venture investors rely heavily on the ability to handle multiple things at once and constantly reprioritize. VCs get up each morning with a list of things they want to get done. Then something almost always happens that requires a "reshuffling of the deck." Maybe there's a sudden market announcement that's impacted a portfolio company, or the company has an unexpected crisis like a resignation in a key leadership position. Just like that, the day and the list have changed. Being nimble is what makes the job so interesting and exciting.
Venture investors pull from many different experiences and areas of knowledge to keep multiple plates spinning, pivot on a dime as needed, and ultimately help their investments succeed. Above all, the goal of any VC should be to give their invested-in companies an "unfair advantage" to win. VCs can assist their companies in achieving this advantage through continual mentoring and guidance that help them to scale effectively, overcome obstacles, and remain on a glide path of growth. Venture investing is a serious undertaking that is not for the faint-hearted, but when executed properly, the results can be highly rewarding.
This article was originally published in Forbes and reprinted with permission.
