The Holy Trio of High Finance Part 2 - Venture Capital

Welcome back, let’s talk about venture capital this week. Again everything I say is generalization. 

You can WATCH this article below:

What is Venture Capital?

Venture capitalist is a form of private investing. They invest in start-ups by providing capital and advice.

Venture capitalist follows the power law: a very small number of successful investments will be responsible for most of the return for a venture fund.

Raising VC money for your start-up can be a seal of approval and a big milestone, but in exchange you have to give up ownership in your creation. Those of you who have watched Shark Tank know how this works.

This is Sand Hill Road, it’s just a road in Menlo Park, California in the Silicon Valley, but many prominent venture capital firms are headquartered there so it has become symbol of VC industry. 

Entry Points

  • Entrepreneurship: because there is no better to prove you have the experience to assess whether a start-up and the founder can achieve success
  • Investment banking, management consultants: because you sold your souls for exit opportunities so you deserve a shot at every high-profile career, which includes VC
  • “Product people”: Product Manager or Engineers, they have the right skills to know whether a product can solve a problem or know ways to fix a product
  • I have seen sell-side equity research people covering growth sector get a shot in VC
  • MBA: cuz you paid for the optionality, but it’s very predicated on your pre-MBA work experience and how you approach the recruiting during MBA.

One big difference between VC and the other two members of the Holy Trios is the Tier 1 VC firms have consistently generated the majority of the returns of the entire industry. The reason is VC investing is very relationship driven and start-up founders want guidance from John Doerr (Kleiner Perkins), Doug Leone (Sequoia) or Bill Gurley (Benchmark) of the world so the winner tends to keep winning. The implication for you is if you are dead set on only working for Sequoia, Kleiner Perkins, or a16z, you can’t just bring your A game, but your triple-A game because it’s going to be insanely competitive.

Day-to-Day

  • Reviewing start-up pitch decks, number crunching, and writing investment memos
  • Support portfolio companies
  • Source investment opportunities
  • Fundraising

Org Structure

  • Analysts and associates: they crunch numbers, analyze companies, write investment memos, look at pitch decks, basically anything their seniors don’t want to do
  • Principals: they still perform diligence, but they are more involved in sourcing investment opportunities by building and leveraging their networks to meet entrepreneurs and start-ups under these buzzwords and also they are very “hands-on” on supporting their portfolio companies
  • Partners: Most senior people. They have final say on whether to make an investment and have big stake in the VC funds so they share both the upside and downside. They are also involved in fundraising. Every VC firm has a managing partner who oversees the strategic direction of the firm itself. For Sequoia, that will be Roelof, used to be Doug Leone, which you already met moments ago.

Compensation (base + bonus)

  • Analyst, $100k
  • Associate / Senior Associate: $150-250k
  • Principal: $250-400k
  • Junior Partner: $400-600k
  • Partners: $500 – millions

    Similar dynamic to a private equity firm, the action is really in the carry and that depends on firm size and fund success. I don’t have the actual numbers, but use your imagination. Let me try to paint you a picture by mentioning some big dawgs in the space:

    • Doug Leone is worth $6 billion, he invested in ServiceNow.
    • Bill Gurley is worth $8 billion, he did Service A in Uber.
    • John Doerr is worth $13 billion, if you didn’t know, John invested in Amazon and Google, no big deal.

    Pros

    • Unlike private equity, everything you will look at in VC is by definition sexy. You get to learn about products and businesses who try to solve biggest problems of the future (insert clip).
    • VC is very suitable for the social butterfly type because you must be networking constantly to find the next Zuckerberg or SBF and bet them to take your money instead of your competitor VC’s money. And of course you won’t know whether they are Zuck or SBF until afterwards.
    • Decent work life balance.
    • Similar to private equity, VC is not secularly challenged because it’s very relationship driven and especially the Tier 1 VCs have consistently created value for their investors. So it’s at risk of being disrupted by robots.

    Cons

    • Similar to at a hedge fund, you will always be on: People will constantly hunt you down to pitch you their start-up or ask for intro to the partners
    • Venture capital is fun but it’s still a big risk taking job. Very topically, we just saw Sequoia and Temasek taking huge L on the FTX investments. Doesn’t feel great to blow $150 million and 250 million, does it?
    • Exit opportunities are limited, especially if you have never done investment banking or private equity
    • It takes long time for your big payday which the carry because venture investments take 7-10 years to play out, if it works out via IPO or getting sold to a big tech firm like Microsoft or Salesforce or Meta, it’s always one of those. So you need to 1. Make the right investment 2. wait

      Grass is Greener

      • If you want to move to HF or PE, I hope you have done investment banking because you are going into a more fundamental focused style. And hedge funds and private equity firms are looking for someone with financial analysis skills, not some napkin math or finger-in-the air analysis.
      • Going into a HF: I don’t know anyone who has made that move or why.
        • If you have done IB, it’s doable. You will need to network and then prove you can do the job. Dealing with the minute-by-minute “mark to market” will be something new to you
        • Hedge Fund is much less stable and is secularly declining, especially single-manager style
      • Going to private equity:
        • If you currently do VC, you probably don’t want to do LBO anyways. So you need to rely on your IB experience to network into a growthy PE investment style. The drawback will be longer hours, dealing with the processes, and other negatives associated with private equity.

      That’s it for this week. You can read Part 1 on Private Equity if you missed it last week. 

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