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  • Peter Lee - Baroda Ventures 5:22 am on June 27, 2009 Permalink | Reply  

    Breaking into the venture capital industry 

    While the topic of career counseling is not the focus of this blog, I get enough requests from people who want to break into the VC industry, I thought it was worthwhile to write a blog entry about it so I can refer people to my viewpoint. There are plenty of articles (Seth Levine has two posts on this topic that are relatively popular – first, second) on the web you can find through a quick search on tips and advice on this subject but I’ll add in my two cents. Just a note – this is specific for early stage tech VC which is my experience (not as relevant for later stage VC/private equity or healthcare VC).

    Before diving into some thoughts around how best to break into the industry, I will assume you have done your homework on exactly what being a VC entails and you still want in. I think plenty of people are attracted to VC for various reasons – many of which only scratch the surface of what being a VC is really all about. There is an aura around VC that doesn’t really reflect accurately what it can be like on the inside. Rather than trying to dissuade you or confirm whether you really know what you are getting into, I’ll spend most of this entry with just the practicalities of preparing yourself for trying to break into the industry.

    Some quick bits of information to start that will set the stage for this topic

    • VC is a small industry (and getting smaller). I believe there are on the order of 1000 venture capital firms with less than 10,000 total investment professionals in the entire industry. Just to put this in perspective, Microsoft alone has around 80,000-90,000 employees. Google has 20,000-30,000. Apple has 30,000-40,000.
    • Most VCs have educational degrees from very select schools – Harvard, Stanford, Wharton, MIT, Yale, Princeton, Berkeley, etc. Most have advanced degrees – MBA, JD, MD, Ph.D., MS.
    • Most VC firms are relatively small in terms of number of investment professions – 5-10 being the most common. Cultural fit is paramount as its often a small team.

    So given this, what are my tips and why?

    • One question I get quite often from people what want to get into VC, don’t think they have an opportunity immediately, but want to know what job to take that would position them best for VC down the line – should they join a startup or join a larger “brand name” company or go into investment banking or go into consulting. My advice is there is no one perfect career path….but whatever you do, just do it REALLY WELL. To get evidence of this, do your homework. Take a look at the bios of as many VCs as you can on the web (almost everyone has a bio on their website or LinkedIn) and see if you see a trend. From my experience, there really isn’t one. Early stage VC is not like later stage private equity where most people have been investment bankers in the past. Early stage VC backgrounds range widely – entrepreneurs, big tech company experience, consultants, finance and a wide range of functions – engineers, sales, BD, etc. The other point I like to make is that arguably the best VC in the world was a journalist. But the one consistent thing is whatever the background, most did whatever they did really well. So, don’t worry about trying to pick the best “VC prep” field. Pick based on what you LOVE to do and will EXCEL at – this is the best way to get to where you want to go, whether it be VC  or not.
    • Every VC will have a different perspective on types of backgrounds that they prefer – and it will vary based on individual partner’s preferences and needs at the time. Because of the diversity of backgrounds, you’ll get the same diversity in what they each view as important. Personally, I look for startup experience and some kind of general business experience (it could be from a startup if you were in a business role or consulting or large company experience).
    • Because the VC industry is so small and hiring can be somewhat opportunistic in many instances, luck and timing play a HUGE role. So, how do you prepare to have better luck and timing? Work your ass off, “you create your own luck.” To do this, you need to be in the right places at the right times. The only way to do this is work it. Network like crazy. Get to know VCs and entrepreneurs. Be known….and hopefully, when a position opens up, you may be top of mind because of the luck you created.
    • Do what you can to get experience early – and not necessarily in a formal role. Internships are a great way to get exposure and experience. Work with very startups in a consulting capacity as a way to get exposure to the fund raising process.
    • Read and track the newest trends. I (like most early stage tech VC’s) track a number of site regularly in my area of focus. For me, its sites like TechCrunch, VentureBeat, Socaltech, PaidContent, PEHub, etc. Also, a long list of blogs through RSS feeds to Google Reader. Why do this? Well, hopefully you do it because you are already interested in this stuff because you love it. Practically, the way you’ll often break the ice with a VC is by showing you know their industry very well and can show real insight into spaces they are looking.

    Again, there are plenty of other important things to consider aside from just the specifics of how to break in. How to prepare your background to be a successful VC. How to know whether you will actually like the work on a day-to-day basis. How to add real value once you are a VC. How to rise to partner once you break in (assuming you don’t enter as a partner).

    Ultimately, there is no silver bullet that will be your answer to what you can do to get a job in VC. Its highly individual. It varies widely. It takes a lot of timing and luck….and, if you’ve made it down this far in this blog post and you still want in, its a good sign – perseverance and optimism in the face of tough odds could be your edge.

  • Peter Lee - Baroda Ventures 12:04 am on June 18, 2009 Permalink | Reply  

    Partners vs non-partners – clarifying their role and importance 

    I was at a Dealmaker Media event the other week and was asked a question about the role of entrepreneurs dealing with partners vs non-partners at venture capital firms. Its a very interesting and relevant question for many entrepreneurs starting out who are unfamiliar with the fund raising process. Since I’ve been in both roles, I think I have a pretty good perspective on this dynamic.

    To differentiate the roles, I’ll actually split them into two groups, not based on title, but on their “authority”. From my experience, it really comes down to check-writers and non-check-writers, Hopefully this distinction is fairly self explanatory but really comes down to  do they have the authority to decide (obviously with the general agreement of the other partners in the fund) on whether they will fund a startup or not and serve on the board. Rarely do even check-writers decide completely on their own – that’s why they call it a partnership since there is a level of trust, influence, and sharing of responsibility.

    Titles, just like in companies, often mean very different things in venture capital firms. With titles ranging from Analyst, Associate, Senior Associate, Vice-President, Principal, Senior Principal, Operating Partner, Associate Partner, Venture Partner, Principal Partner, Partner, General Partner, Managing Partner, Managing Director, etc – it can get confusing very very quickly. Basically, its really hard to tell who is a check-writer vs not. VERY GENERALLY, if forced to bucket them, the breakdown is (not 100% across firms but maybe 90% accurate)

    • Check-writers – Managing Director, Managing Partner, General Partner, Partner
    • Non-check-writers – Analyst, Associate, Senior Associate,  Operating Partner, Associate Partner
    • Can go either way – Vice-President, Principal, Venture Partner, Principal Partner

    The unfortunate thing (or fortunate depending on your perspective), even VCs (not just entrepreneurs) themselves often can’t tell the different when it comes to another firm unless they are very familiar with that particular firms structure and the individual’s involved. It gets even more complicated because many non-check-writers at firms want to project to the outside world that they can write-checks (trying to boost their credibility and influence in a firm to the entrepreneur) even though they can’t.

    Essentially, if you want funding, you need to get to a check-writer (pretty obvious at this point). They will be the one who champion’s your deal in their partnership and can push to get it funded – putting their own reputation on the line with their decision.

    The area that is less clear is the role of the non-check-writer. Simple advice – they are valuable and can be your greatest ally or your worst barrier to getting funding, but they are often a necessary and intermediate step to get to the check-writer.

    To get into more detail, the non-check-writer (typically an associate) is often the “first line of defense” for a VC firm. They are responsible for screening deals so they at least pass the initial sniff test. Unless you get a trusted referral directly to a partner in a firm, the associate is generally the one who will do the first pass and often take the initial pitch. Often due to bandwidth limitations (or laziness), the partner will just pass deals they receive directly onto their associate anyway. This initial review by the associate is important as they are the gatekeepers to get access to the check-writers. Impress them and they will convince the partner to take a meeting as they often will have the ear of the partner.

    In addition to being the gatekeeper, pitching the associate can be extremely valuable to get feedback on how the partnership thinks about investments as they will have a good sense of what excites the partners in the firm. Use this time well to hone your pitch, get feedback, and prepare yourself for the next one. Often, the associate will also have a good read on the personalities and preferences of the partners that can be immensely valuable as well as fund status.

    The things you want to watch out for is continuing to meet with the associate over and over again without any sense of moving forward to that partner meeting. This can be a slow and painful death….but, don’t necessarily expect that you should get to that partner meeting after just 1 meeting with the associate. Often, if your pitch isn’t quite ready or there just wasn’t enough information to “let you through the gate” they will ask you for some additional information and another meeting to make sure. This can be a worthwhile exercise as you typically will only get 1 shot with the partner and if you screw up, its over. You’ll just need to read the associate well and/or ask them directly about what additional information they need before a partner meeting might be expected. Be straightforward but realistic about the questions and diligence items that are being requested but generally, if you aren’t getting invited in at least after a 2nd meeting with an associate, better to just cut bait and fish somewhere else – its likely a dead end.

    Ultimately, an associate is balancing trying to find a company to “get a deal done” and making sure his filter is tight so he doesn’t waste the partners time. Understand the associate’s motivations, listen carefully to their feedback, and treat them professionally and you’ll maximize your chances of getting through. Treat them poorly and ignore their feedback and you’ve likely just shot yourself in the foot. Remember, VC’s judge teams (not just experience and qualifications but personality) as much or more than the business itself. Leave a bad personal impression with the associate and it will absolutely get passed onto the partner.

    Going through fund-raising can be a long and confusing process – even in the smoothest of deals. The associate can be a huge ally to guide you through this so work with them and take advantage – you’ll be better off….but keep your eye on the goal – get to a meeting with the check-writer and convince them as they are the decision makers in the end.

    • Scott Shapiro 9:22 am on June 18, 2009 Permalink | Reply

      Great post, Peter. Everything you said resonates very strongly!

      It sounds like this dynamic will change a little bit in the next few years as more, $25 to $75 million funds arise. Many of which seem to only have “check-writers” on board.

    • marksuster 7:25 am on June 22, 2009 Permalink | Reply

      Peter, great post. It is important for people to understand the role that associates play. It is a very important one as they often the first screen as you say. I view the best associate as your “guide” to getting funded in the same way that when you are trying to sell to enterprise customers you usually meet people with “influence” (I) but not “authority” (A) (e.g. check writer) – and your goal is ultimately to get to the person with authority. You always need to make sure that you’re at least meeting either the I or the A. And as I always coach people – just be careful not to spend time with NINAs (no influence, no authority).

  • Peter Lee - Baroda Ventures 7:22 am on June 11, 2009 Permalink | Reply  

    Valuation optimization vs maximization – what is the real goal? 

    One of the most confusing and misunderstood concepts to entrepreneurs is around valuation – not only in how it is determined (that is an entire post itself which I won’t try to tackle right now) but more importantly, what should the goal be?

    I think for entrepreneurs who haven’t been been through fund raises already, the first and obvious reaction is the get the highest valuation possible and if you do, you’ll have “won the battle”. I guess it makes sense that this viewpoint is commonly held – in many other areas of negotiations, auctions, grades, sales deals, etc, the goal is to get to the extreme (either lowest or highest) and the closer you get, the better you did. Its how they got to where they are now – by winning and excelling in everything they did. They view the “valuation negotiation” with a VC just another competition to win.

    So, why isn’t this the right approach for entrepreneurs? (and the answer is not because I’m the VC writing this and I’m trying to convince you to take a lower valuation – but good try!). The reason is because a) the funding is a financing event, not an exit (the exit is when its decided whether you win or lose) and b) the prior valuation has a significant impact if and when another financing round is required. The exception to this is if this is definitely the last financing round the company will need before exiting – and even this has it pitfalls when it comes time to exit (see my earlier post about entrepreneur and investor alignment specifically regarding exits and the VCs need for high returns and a multiple on their investment).

    For the entrepreneur, the financing event and resulting valuation merely puts a number on the company value which then affects the percentage ownership the founder has in the company – but this doesn’t translate to real money that the owners can walk away with (I’m sure those of you who were at startups during the dot.com bubble but didn’t exit before the crash can relate to this quite well…). Its paper wealth. Funny-money. Remember 100% ownership of nothin’ is still nothin’…

    Valuation becomes a real issue for those companies that need to raise another round of financing (this may be where many of the entrepreneurs who raised money in the last 18 months before the market crash last fall start to perk up…). A high valuation (which 12 months ago seemed like a huge success) is now feeling like a huge albatross – a heavy burden on the company that may stifle their ability to raise money from an outside investor. This occurs because the prior round investors want to be rewarded for putting money in earlier through getting a higher “step-up” valuation in the next round. The new investor is often wary of companies with valuations too high as their expectations for a smooth round getting done is put at risk as they worry about spending a lot of effort for a down round that gets resistance or just gets done by the insiders (prior investors). In a startup, momentum is very important on how the world perceives your succes. When things continue to be on the “up-and-up” across all areas of the business – great team is built out, revenues increase, customer base grows, metrics improve….and valuation continue to rise round-after-round, everyone is happy.

    Now, just to be fair, on the other side of the table, it isn’t in the best interest of the VC to drive to the lowest valuation possible either. This is because if the founder/entrepreneur doesn’t have enough of an ownership stake in the company (especially after several financing rounds), there is a real risk that the founder may leave if he feels like the reward for staying isn’t big enough vs doing something else (starting another company, taking the big corner office at a cushy large company job, etc) – remember, being an entrepreneur is hard work and people need to be rewarded for their commitment.

    Somewhere in the middle between a valuation so high it risks future financings and a valuation so low it dis-incentivizes (I know this isn’t a word but it should be….) the founders is the optimal valuation. For the entrepreneur and VC, the goal should be to find a fair valuation for everyone. The entrepreneur/VC relationship is a long-term one, often 5+ years. Raise these concerns with the VC and get it on the table so both of you see each other’s perspectives and motivations. Its a good initial step in a very long journey that will ultimate be in both of your best interests. Remember, “winning the war” is the goal – exiting the company so that both you and your investor makes money through an exit. The fund raises and valuations are just a step along the way towards the final goal.

    As this topic can be a bit confusing, feel free to sign up for my office hours to discuss at greater length.

    [Update: 6/19/2009 Thanks to Ben Kuo at SoCalTech for the posting. ]

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