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."

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