Tuesday, June 28, 2011

How to get into venture capital

I do my best to respond to folks looking to learn more about venture capital, and one of the most common questions I'm asked is "what's the best way to break into venture capital"?

My response seems to surprise, and somewhat dismay, a lot of people

Very few venture capitalists became venture capitalists through entry level positions (analysts or associates). While these jobs do exists, the supply/demand for this type of position does not favor a job applicant. Unlike investment banking, consulting, or even private equity - venture capital firms are structured like inverse pyramids: a lot of senior level partners, and very few junior level investment professionals. This is because most venture deals don't hinge on huge financial models. While any good diligence will include financial, competitive, market and technical analysis - The single biggest determinant in whether an investment is good or bad is the management team.

Thus, I tell folks that trying to get into venture capital from the ground up is not the best or easiest path.

In my view, the best way to becoming a venture capitalist is to join a startup (or, even better, start one yourself). With any luck, and some success, you will emerge with the kind of experience that will make you a great advisor to other startups; which is what being a VC is all about. That is why VCs place a large value on successful entrepreneurs and bring them in laterally as venture partners, Entrepreneurs in Residence, or general partners. If you look at the most prominent venture capitalists today - Vinod Khosla, John Doerr, Marc Andreesen & Ben Horowitz, Peter Thiel - they came from the startup world. The biggest exception of the guys I can think of is Jim Breyer from Accel Partners (Mr. Facebook).

Interestingly, a lot of people I tell this to seem to react negatively to it. I usually bite my lip, but I would hope that if you want to be a VC, joining a startup would sound like an exciting proposition.

Another option is to seek out a business development function at a large corporate that is active in the sector you are interested in. When I say "active", I mean a player that does a fair amount of M&A, JVs, or minority investing. If you're coming out of business school, working for GE, ABB or Siemens might not sound like the sexiest job in the world, but the reality is, those companies are probably the biggest cleantech investors today. They are also great training grounds for young investment professionals, since the deal flow and deal pace is so high; and strategic investors are increasingly becoming more important in the venture ecosystem.

I should note that I followed neither of these paths - as my entry was from the ground up. Then again, it's too early to tell if mine is a career path anyone should want to emulate. Reminds me of how a business school classmate who has become a great investment banker still quotes Goose from Top Gun, whenever anyone comments on how great he is doing in his career: "Are you kidding me? You remember the name of that truck driving school we saw on TV. TruckMaster's I think it was. I may need that."

Wednesday, June 15, 2011

Why IPO Mania May End Up Hurting VCs

Bloomberg published an interesting article yesterday on how the current IPO wave has benefited a select few within the VC community - making the "haves" stronger and the "have nots" more challenged to win deals. I think there is a good deal of merit to the argument that, in the long-term, these dynamics will be bad for the venture community as well as startups, which benefit from increased competition from it's sources of capital (as LendingTree put it, "When Banks Compete. You Win").

However, I would like to focus another consequence of IPO Fever which we should be wary of.

In times like these, every entrepreneur and investor, begins to believe that their company has a shot of going public. That's great. You want that kind of enthusiasm. The problem is, if everyone thinks their company can IPO at $4 billion - they don't mind paying $1 billion in a venture round - which is why you're seeing higher and higher private capital valuations. My argument here isn't that we are in a bubble and that these valuations are crazy. I'm just trying to point out that, statistically speaking the most likely successful outcome for any startup is an acquisition, and when you raise a great deal of capital at valuations in the hundreds of millions of dollars, you effectively price yourself out of the market of being acquired for a good return. Sure, the billion dollar acquisitions grab the headlines, but most acquisitions are in the $0-$300 million range.

Let me be clear. IPOs are a critical part of the business model to venture capital - and what is happening right now in the market is fantastic for investors (albeit to a smaller subset of them, as was mentioned at the top of this post).

However, at some point, the IPO window will close as it always does. The investors that deployed capital at more reasonable valuations will find they have more options for realizing an exit. Those that are only in the "hard to get into" premier billion dollar deals, will have to wait for the next IPO window.

Wednesday, June 8, 2011

An Eye-Opening World Energy Snapshot

Today BP released it's "Statistical Review of World Energy Data", which is impressively comprehensive and the best report I've seen recently in painting the picture of our global energy supply and demand.

I have pulled out a couple stats / graphs that jumped out at me:
  • Energy demand growth is at it's highest in 30 years - outpacing economic growth (not unexpected as developing countries have become more energy hungry). This trend should become more dramatic as China and India GDP/capita explodes.
World Energy Consumption
  • We really are a coal planet. Coal accounts for largest share of energy use (30%) - and is the largest energy source in Asia where demand growth is highest (China represents almost 50% of coal consumption). This is unsustainable in terms of air quality and CO2 emissions, and I view it as a positive indicator for the need for renewables.
Reserves / Production (years) by Source and Region

  • Our reserves to production ratios for fossil fuels are actually increasing - this is counter to the "peak oil" theory of fossil fuels. In essence, we are getting better at finding and tapping difficult to get to resources - however, the incremental resources are at higher costs.
Reserves / Production (years) of Oil