Venture Capital
The venture capital industry is a major shaker in the U.S. economy, funding
companies developing technological and service innovations long before they
become mainstream. After suffering a slowdown in recent years, many venture
capital firms have changed their strategies and are investing in more
late-stage companies, giving them less risk. As investors cozy up again to
initial public offerings (IPOs), so have VCs with venture-backed stock
launches reaching 11 in one month during the first half of 2007. That’s the
highest level since 2004. In the second quarter of 2007, more than $7
billion of venture capital was poured into nearly 980 deals. Evidence also
suggests that venture-backed firms are better performers: According to a
National Venture Capital Association’s 2006 study, companies that had
received VC financing between 1970 and 2003 accounted for 10.1 million jobs
and $1.8 trillion in revenue in 2003, representing approximately 9.4% of
total U.S. jobs and revenue. These companies registered a net gain of 6.5
percent in jobs and an 11.6 percent increase in revenue between 2000 and
2003, while nationally employment fell 2.3 percent and revenues rose 6.5
percent in the same period. These are impressive results for what insiders
describe as a “cottage” industry.
Underneath their moneyed mystique, venture capitalists are essentially
glorified middlemen, and their modus operandi is easily explained. In a
nutshell, a VC firm acts as a broker for institutional or “limited partner”
investors such as pension funds, universities, and high-net-worth
individuals, all of whom pay annual management fees to have their money
invested in high-risk, high-potential-yield start-up companies.
After amassing a certain sum from the limited partner investors—usually
between $25 million and $1 billion—the VC firm parcels out the fund to a
portfolio of private companies at various stages of maturity, from
fledgling to much more established. The company, in turn, hands over an
equity stake in its business. In other words, the VC industry is predicated
on a simple swap of the VC’s financing for an ownership stake in the
company’s success, often (but by no means always) before the company has
begun generating revenues. VC funding has nourished some of corporate
America's greatest success stories when they were still baby
businesses—FedEx, Intel, Sun Microsystems, and Apple, to name a few.
Since the VC firm has a vested interest in its start-ups’ success, partners
will generally sit on several boards of directors, offering advice and
additional resources to help businesses grow. In the event that one of its
startups merges with or is bought out by a larger company or goes public,
any windfall is divvied up between the company, the VC firm, and the
limited partner investors. Typically, the VC firm distributes 70 to 80
percent of the return on its investments to the various limited partners
and keeps the rest for itself.
Bigger Is Better
The field is undergoing dramatic change. VC funds are getting bigger with
two of the largest funds in history raised last year—Oak Investment
Partners and New Enterprise Associates both broke the $2.5 billion mark. As
a result, the stereotype of a VC fund coming to the rescue of some guy
working out of his basement is a bit dated. These funds are investing more
in established companies that represent less risk, and as some funds get
bigger, they are beginning to squeeze out some of the smaller players in
the market. But there are still opportunities for smart smaller VCs with
good management teams who can spot opportunity. Some even argue that the
smaller firms are more nimble and able to react to opportunity more
quickly.
More Money to More Experienced Companies
Forget the garage-based startup. These big VC funds are ready to fork over
big bucks (the median deal size in Q2 2007 was $8 million) to more
established companies that are showing promise. Still, deals are up across
all phases: Early-stage deals accounted for 36 percent of overall deal flow
with 254 financings in the second quarter of 2007. That’s up 17 percent
from the same period in 2006. Later-stage financings made up 41 percent of
the total, with 253 financings, the largest number of deals in more than
six years. Second rounds accounted for 23 percent with 160 deals, the
highest total since 2002.
Going Global? Maybe Yes. Maybe No.
While globalization is a buzzword in almost every sector of business, it’s
not so much so for VC firms. A 2007 report by Deloitte finds that, while
some VC firms are thinking about crossing U.S. borders with their cash,
fewer are actually doing it. They’re finding adequate deal flow in the
U.S., first of all. Plus, concerns about the costs and risks of doing
business overseas—from costs of quality control and compliance with local
laws, to issues surrounding protection of intellectual property under
foreign laws—are a deterrent to shelling out international bucks. Among
those markets that do get mild interest are China and India, particularly
among smaller firms.
The venture capital world is made up of only a few hundred small
partnership firms, usually employing between two and 40 people. These firms
include the famous players—Kleiner Perkins Caufield & Byers, the
Mayfield Fund, Bessemer Venture Partners—and many others. At first glance,
these firms appear to be remarkably similar. They have few employees, lots
of money to invest in entrepreneurial ventures, and they want to be part of
the next phenomenally successful startup. Though the firms compete
aggressively for deals, they also often combine into syndicates and invest
in favored startups as teams.
Despite these shared characteristics, each firm has adopted its own
approach to succeeding in the competitive and risky world of start-up
financing. Firms differ in fund size, regional focus, industry focus, and
stage of investing.
Although some firms specialize in low-tech investments, in recent years
most VC firms have focused on technology-intensive fields such as software,
biotechnology, and telecommunications, forgoing traditional investment
areas such as manufacturing. Other hot industries include alternative
energy, environmentally sensitive technology, and nanotechnology.
Divisions of large corporations, affiliates of investment banks, buyout
firms, venture leasing companies, small-business investment companies, and
other wealthy private investors also evaluate, fund, work with, and sell
entrepreneurial organizations looking for capital. During the bubble years,
an increasing number of nontraditional venture investors joined the start-up
funding wagon, though some, hurt by poor returns, have reduced their
commitments or gotten out of the business entirely.
Finding a job in VC isn’t hopeless, but it will be hard. Firms are
selective, and finding a job requires good luck and networking. One way to
gain access to this industry is to do something great that is visible to
people in this industry. So, being a rising young star at a biotech company
or a product manager at a hot electronics company can get you on the VC
radar. Operating experience at a technology company is a must in today’s
environment.
To make contacts, work your network. Find out who knows someone in the
field and work on getting introductions. Go to VC fairs and make contacts
with representatives of those companies. If you’re hell-bent on a career in
VC, don’t give up. “If you strategize, are smart about looking for the
opportunities, there will be some amount of opportunity for you to get in
there,” says an insider. Be strategic and persistent to get the doors to
open for you.
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Helping Build Firms
The greatest feeling for a venture capitalist is to see a firm that he or
she has backed for years complete a successful IPO or grow into a thriving
company. Not only does this confirm that you backed the right horse; it is
also exciting to be around a startup when it takes off. VCs get to observe
and participate in the growth of startups, with the excitement of getting
the first customers, making its first profit, finding smarter ways to
operate. It’s a job where you get to the see the results of your efforts
firsthand.
Bird’s-Eye View
Since you don’t have to deal with the operational details of running a
business and since you are constantly evaluating new business proposals in
a given industry, you really get a broad view of how an industry is
changing and developing. You’re not running one business—you’re evaluating
big-picture trends and spending money based on those market conditions. As
one insider says, “You come out of business school thinking that running a
business will be your main function in the business world. In venture
capital, that’s not the case.”
Money
Though the income can be more deferred than in other industries, it’s
pretty darned good. One insider says dryly, “It might take a few years
before a venture capitalist gets wealthy.” Successful venture capitalists
can make huge amounts of money with less risk, and less chance of burnout,
than entrepreneurs can. As the firms—and deals—get bigger, there’s more
money at stake, but also more potential to become wealthy within a shorter
period of time.
Necessary Evils
It’s hard to find a venture capitalist who doesn’t firmly believe that he
has “added loads of value” to entrepreneurial startups and to the world at
large. But it’s relatively hard to find a true entrepreneur who doesn’t
look at venture capital with some significant reservation, if not worse.
Starting and funding companies is a high-stakes business. Venture
capitalists are often criticized for pushing companies too hard to grow too
fast and go public at the earliest possible date. It’s not uncommon for
them to step on toes and use their ownership stake to force a company to
make controversial moves.
Not Every Idea Flies
VCs have a real financial stake in their business. And among the many
start-up successes, there are always going to be failures. “People are less
aware of it in the good times,” says one insider, “but losses are a reality
of this business. There are painful stories of layoffs and dreams that
didn’t work out. They’re the ones that keep you up at night.” This is a big
part of the reason why more VCs are focusing on more well-established
companies. However, the risk is still very real.
A Different Kind of Operator
As a venture capitalist, you’re advising companies, but you’re not
operating them. Some people may prefer the hands-on work that goes on
within an organization. This may be tough for people with operating
backgrounds, who like to get in there, roll up their sleeves, and get to
work. “People with operating backgrounds may not be satisfied in the role.
They may miss working on products and having an impact. You’re not in there
running the company on a day-to-day basis,” says an insider. “If you like
to have that impact, it might not be as satisfying [to go into venture
capital].” It’s an interesting quandary for VC associates, because you’ll
need that background to break in, but you usually won’t be able to apply
it.
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Top Venture Capital Firms, Ranked by Number of Deals in Q2
2007
|
|
Rank
|
Company
|
Deals
|
Headquarters
|
|
1
|
Draper Fisher Jurvetson
|
25
|
Menlo Park, Calif.
|
|
2
|
Intel Capital
|
23
|
Santa Clara, Calif.
|
|
3
|
New Enterprise Associates
|
17
|
Baltimore
|
|
4
|
InterWest Partners
|
16
|
Menlo Park, Calif.
|
|
4
|
Foundation Capital
|
16
|
Menlo Park, Calif.
|
|
6
|
Sevin Rosen Funds
|
15
|
Dallas
|
|
6
|
U.S. Venture Partners
|
15
|
Menlo Park, Calif.
|
|
6
|
Venrock Associates
|
14
|
New York
|
|
Source: PricewaterhouseCoopers MoneyTree Survey.
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Staffing needs and titles vary greatly from one venture capital firm to the
next. Many funds consist solely of partners and support staff. Others hire
a limited number of undergraduates and MBAs as analysts and associates with
the expectation that most will return to get their business degrees or join
startups within a few years. (Keep in mind that while the terms
"analyst" and "associate" usually refer to undergrads
and MBAs or experienced hires, respectively, at some firms the titles are
reversed.) Even at the lowest professional levels, compensation is tied to
the performance of the fund. But because of built-in fund-management fees,
no one ever starves at a venture capital firm—and as a rule, venture
capitalists do very well for themselves. Top-tier partners at major funds
are worth many millions of dollars. Lower-level professional staff and
junior partners can expect total compensation exceeding (often vastly
exceeding) $250,000 per year. Compensation at corporate venture funds is
lower.
General Partner
These are the people with their names on the door. General partners raise
the money for the fund and make the final decisions on which companies to
invest in. General partners, the professional members of a venture capital
firm, are usually required to contribute a small amount of their own money
to their fund. They manage the fund’s investments and generally take a 20
to 30 percent cut of the carry from the fund. General partners are expected
to provide a wealth of business advice and industry contacts to the
entrepreneurs they back. They often sit on the boards of many companies and
are deeply involved in decisions about exit strategies—that is, when to
cash out by taking the company public or selling it. Salary range: up to
$500,000, plus the potential of millions in profits.
Junior Partner
Junior partners are just that: junior versions of the general partners.
Usually, junior partnerships are viewed as training for general
partnerships, and junior partners perform similar duties albeit on a
reduced scale. Also reduced is their personal stake in the fund itself.
Salary range: $206,000 to $270,000, plus a limited amount of carry, or
percentage of profits.
VP or Associate
Some firms hire MBAs or people with business experience (usually in
leveraged buyouts or investment banking) as vice presidents or associates.
Associates screen business plans, make cold calls on prospective
investments, and on occasion make on-site visits to portfolio companies. At
this level, compensation, while still tied to the overall performance of
the fund, can take the form of a flat bonus rather than a percentage of the
fund. Salary range: $177,000 to $267,000, including bonus; VPs earn at the
higher end.
Analyst
Most venture capitalists have advanced degrees. However, a very few venture
capital funds—generally those that are more established or are later-stage
investors—hire undergraduates as analysts. Analysts screen business plans
before passing them on to senior staff and do due diligence, or research,
on promising industries and entrepreneurs. A background in finance and some
outstanding college internship or business experience are musts, but
venture capitalists also stress the interpersonal and networking skills
that are essential to anyone working in VC. The typical stay for an analyst
at a VC firm is three years, after which most get an MBA, work for a
portfolio company, or move over to another VC firm. Salary range: $100,000
up to $120,000, plus bonus.
As mentioned earlier, this is not the easiest industry to get into. VCs
don't recruit on campus and they don't put out ads in the newspaper
or online. As a rule, you have to have a top school and relevant industry
experience on your resume to get a shot at a coveted spot at a VC firm.
Even then, you'll have a lot of competition. Here are a few things you
can do to improve your chances:
-
A lot of the work at a venture capital firm involves gathering
information about companies and industries. Show off your research
abilities—at a minimum, know the VC world’s terrain like the back of your
hand, and nail the characteristics that distinguish the firm with which
you are talking. You should also have a compelling story about why you
want to work there.
-
Since VC firms don’t hire many people on a full-time basis, you might try
to get your foot in the door by doing a project for one of them.
Alternatively, you might use a class project as a pretext to get an
interview.
-
The best way to get into a VC firm may be to have a meaningful experience
in a specific industry. Insiders tell us that people at middle or senior
levels in high technology firms, usually with engineering backgrounds,
are the most attractive candidates.
-
Since VC involves a lot of long-term projects with not much close
supervision, you need to impress upon your interviewer that you are a
very independent self-starter.
-
Being liked can be a big factor in getting a job at a VC firm. To save
yourself the trouble of having to fake it, make sure you choose firms
that are genuinely interesting to you. Chances are, you’ll get along
better with people with similar interests. Having a passion for whatever
the firm’s focus is will come across in an interview and make you someone
they’ll want to have on their team.