I will teach you how to bring your life stories to essays faster with F1GMAT's essay guides. Download below or subscribe to F1GMAT's Service and work with me - Atul Jose, Author/Editor/Founding Consultant, F1GMAT(16 Years of helping applicants gain admissions to M7 and Top 30 schools) In three to seven years, a VC firm expects to sell its equity (stock, warrants, options, convertibles) in a portfolio business, ideally through an initial public offering (IPO). The company becomes liquid by selling its stock to the general public, and the VC profits by selling its equity.
While an IPO is the most prominent and glamorous type of exit, it is far from the most prevalent. Before an IPO, most firms are sold through mergers or acquisitions. Yet another option is recapitalization or reorganization of a portfolio company's debt and equity composition. The VC receives cash in exchange for its stock, the management team receives incentives in the form of equity, and the company is well-positioned for future expansion.
Since each round involves rigorous due diligence and VC firms have unique exit strategies, a professional in the industry should have the following skills:
1) Networking Skills
In VC vocabulary, ‘generating deal flow’ is the foundation for all VC activities. Just like lead generation in B2B business, VC should have channels to receive business plans and reach out to promising entrepreneurs.
30% of deal information is received through professional networks. Modern tools like LinkedIn have empowered even a one-person VC firm to access some of the most influential entrepreneurs with the right introduction. The more active and receptive your professional network is to your requests, the higher the likelihood that you will play a critical role in facilitating a deal.
Business Schools have a huge alumni network that often acts as filter to facilitate conversations. The size of the Alumni network, which has limited relevance in the short-term for job search, has a huge influence on a Venture Capital role.
The responsiveness of the alum is a deciding factor. Another factor is the percentage of alum in the VC industry.
Chicago Booth School of Business, Stanford GSB, and Harvard Business School lead in representation of VCs.
Perception About You in Your Network
Outside professional networks, your relationship with peers in other VC firms is another determinant of your success as a VC. 20% of deal information is referred by investing peers. With a specific mandate and philosophy in investing, there are deals that a VC firm may pass on but would be a perfect fit for your firm. In such scenarios, passing on the deal with high praise about the entrepreneur often happens between VC peers from an MBA program.
Passing on a deal is a give and take relationship. You are expected to be generous with sharing deal information to facilitate a deal funnel that has highly reliable information.
Despite the perception that Entrepreneurs are perennially searching for funds, knocking on the doors of leading VCs, only 10% of the deal information is received through inbound communication.
The most important statistic that you must remember as a person pursuing a career in VC is that 30% of the leads are self-generated.
30% of the leads are self-generated.
If you are hesitant to pick the phone and call, introduce yourself at industry events, or switch on the camera and strategically build a high-value audience, you would be at a disadvantage.
2) Wide Interest, Reading Habits, and Networking
When you start a career in VC, the primary role is due diligence. In research, the margin for error is high if you are relying on a few data sources. The quant exercise to find trends from financial and industry data although essential are often late to arrive.
A candidate with a wide reading habit and interests is likely to find the intersection of technology and business, changes in customer behavior, and developing socio-political trends that often determine policy in a country.
Such close reading of the direction of the markets, competitions, customers, and the government requires a voracious reader with wide interests.
3) Decision Making Skills
With an average deal taking 83 days to complete, due diligence is an integral part of a VC’s career that requires calling references of past investors (angel) and customers (typically early customers). Since there is no protocol to unearth the right information, a good conversationalist has a high potential to find the information that could determine the progress of the deal.
The information is the first part of decision making.
Often, VCs must make decisions that are relative to the risk appetite of the fund and the firm’s past wins and losses. The thesis of the fund determines aversion to certain industries (oil and gas, weapons, real estate) and determine decision making and evaluation criteria.
Close to 70% of deals don’t reach the due diligence stage. Critically presenting your position about the business is essential to influencing the partner meetings where decisions for due diligence are often made.
While making the case, candidates must consider the quality of the management team.
Interpreting the career trajectory, past exits and vision of the entrepreneur and the management team that anchors the entrepreneur’s decisions determines product launch, pricing changes and fund raising – and eventually the competitiveness of the business.
Such skills in interpreting a person are not critical for late-stage funds or funds invested in healthcare where the experience of the founder and the core team has much higher consequence on the business outcome than the vision of the business.
4)Valuation Skills
Internal Rate of Return (IRR) and Cash on Cash Multiple/Return are the two popular metrics used in all VC investments.
Fundamentally, IRR is the return on investment with a time frame, expressed in percentage, and Cash on Cash Multiple is the return in multiple that the fund earns.
When VC investors talk about earning 10x multiple, the time period by which the return was earned is barely mentioned. This thinking is not common in all VCs as most rely on IRR where the timeframe for the investment is closely monitored.
Depending on your VC firm’s thesis of going long on an investment or finding short-term opportunities, your valuation parameters and deal funnel will also vary.
In an early-stage startup in a new technology, qualitative and quantitative valuation skills are also equally important.
Passion – the overused word in popular culture has a ‘unique’ meaning in California based VC companies.
It is a code word for finding entrepreneurs who can withstand the pressure of the market, customers, and regulators.
A VC career is ideal for a person who is part quant, part psychologist, part team player and most importantly – one who is attuned to the changes in the world.
Understand these 4 essential skills before entering the industry.
Reference
1) How Do Venture Capitalists Make Decisions?
Paul Gompers (Harvard University, NBER and ECGI), Will Gornall (University of British Columbia), Steven N. Kaplan (University of Chicago and NBER), Ilya A. Strebulaev (Stanford University and NBER)
You are reading the 2nd part of the Venture Capital Career Series
• Read the First part of the Series - Venture Capital – Career Path, Salary and Best MBA
• Read the Third part of the Series -Top MBA Programs with VC Focus (MBA Curriculum Course List)
• Read the Fourth part of the Series -Top MBA Programs with VC Focus (In-Depth Curriculum Analysis) (F1GMAT Premium)
• Read the Sixth part of the Series -Post-MBA Roles and Career Opportunities in Venture capital
