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Venture Capital

Overview

The venture capital (VC) industry began in 1946 when Georges Doriot (whom many consider the “father of venture capital”) and others started American Research and Development Corporation, the first publicly owned venture capital firm. Arguably its best investment was the $70,000 it spent in 1957 to help fund Digital Equipment Corporation. Eleven years later, that investment was valued at more than $355 million after the company’s initial public offering.

Venture capital consists of funds obtained from backers that are invested in young, innovative companies (often in the tech and health care sectors) in exchange for an equity stake that hopefully can be translated into a profit when the company goes public or is merged with or sold to another company. The National Venture Capital Association (NVCA) reports that “venture capital is a catalyst for job creation, innovation, technology advancement, international competitiveness, and increased tax revenues.” Some of America’s most well-known businesses were founded with the help of venture capital, including Facebook, Apple, Amazon, Whole Foods Market, Google, FedEx, Starbucks, Staples, and Intel.

Associates, analysts, managing partners, general partners, and entrepreneurs in residence are the key players in this industry, but venture capital firms also need chief financial officers, controllers, accountants, lawyers, and marketing, public relations, computer security, information technology, and office workers.

Venture capital firms are located throughout the United States, although most are headquartered in major cities. There are also opportunities throughout the world—especially in Europe, Israel, China, and India. Most VC firms have fewer than 15 employees. In fact, the NVCA reports that the average VC firm had 7.1 principals, down from nearly 9 principals in 2007. Many funds have only a few partners and support staff (secretaries, receptionists, etc.). As a result, VC firms need new hires to hit the ground running and begin producing immediately. This means that there are few opportunities (except in support positions) for those with just a bachelor’s degree and no industry experience. Most venture capital firms seek workers with a college degree, plus several years of experience at a management consulting firm, private equity firm, or investment bank. Others seek experienced professionals from the information technology, health services, engineering, or biotech sectors, or offer partnerships to successful entrepreneurs who are in their 30s and 40s.

Venture capital partners have excellent earnings. In 2016, managing general partners/chief executive officers at venture capital firms received base salaries of $548,898 and total cash compensation of $667,002, according to Compensation and Employment in the Private Capital Industry, from Preqin and FPL Associates.

In 2017, venture capital firms invested about $85 billion into 8,000 companies, according to the NVCA. This was the highest annual total since 2000. New commitments to venture capital funds in the United States increased to $32.8 billion, up significantly from $17.7 billion from 2013. Thirty-four percent of venture capital investment was concentrated in startups in California. The next most-popular states for VC investment were New York, Massachusetts, Texas, Florida, Washington, Illinois, Utah, Pennsylvania, and Colorado. 

Uppers
  • Fun and challenging: There’s a reason that very few people ever willingly leave their VC careers. Where else can you have so much fun investing other people’s money (plus some of your own), while being “in the middle of it all?”
  • Financially rewarding: You could suddenly become rich if one of your companies does extremely well and you were able to co-invest or you have carry. Over the long term, financial security will cease to be an issue, because the job is well paying and you should eventually get “carry” or equity in the firm.
  • Interesting coworkers: You have access to the best minds—the people you work with are typically some of the smartest and most interesting people in the world. Successful venture capitalists have interests and hobbies as diverse as mountain climbing to playing jazz in nightclubs.
  • Less pressure: Yes, you’ll be busy and work long hours when you start out, but there are no quarterly sales or revenue targets to hit.
  • The chance to make a difference: Once you become a partner, you’ll get the chance to work with companies you’re interested in, many of which will offer products or services that you personally believe in. It can be very rewarding to back aspiring entrepreneurs and see their ideas come to fruition. 
Downers
  • Unless you work with a hands-on early-stage VC firm known for taking an active role in building successful companies, you don’t have pride of ownership in anything. You’re just an investor, not a builder.
  • VC is a slow path to wealth compared with the immediate cash income you get in investment banking, hedge funds, or even management consulting.
  • It can be argued that venture capital is fundamentally a negative process. Because you reject 99 of every 100 plans, year after year, over time you focus on figuring out what is wrong with a company. You can then reject it and get on to the next deal. What is wrong with the management? The technology? The deal terms? The strategy? If you tend to have a contrarian disposition, after just a few years, that mentality may bleed into your life. What is wrong with my partners? What is wrong with my spouse? What is wrong with me? Oh, the angst! If this reaction hits too close to home, venture capital might not be for you. What fun is it to search through hundreds and thousands of business plans and ideas for that one rare gem, if you aren’t an eternal optimist?
  • Because you reject 99 of every 100 entrepreneurs, you can make some enemies, no matter how nice and helpful you try to be. No one likes rejection, and passionate entrepreneurs have long memories.
  • You’ll work long hours. Fifty-one percent of venture capital and private equity professionals surveyed by PrivateEquityCompensation.com reporting working at least 70 hours a week. Thirty-nine percent said they worked 60 to 69 hours per week; 8 percent, 50 to 59 hours; and 2 percent, 40 to 49 hours.