Finance: Careers in Venture Capital
Part 2 of a 4 part series
Venture Capital
Venture Captial firms act as the middleman between people who have money to invest and people who need money to start innovative businesses. Potential business owners look to venture capital firms when they seek a large amount of money to start a high growth company. Many of the dot com companies were kicked off by venture capital funds and there are many biotech companies that rely on venture capitals to get started.
How it works
First, a venture capital firm must amass a sum of money, usually an amount between $10 million and $1 billion. Then the people at the firm seek out or hear proposals from entrepreneurs seeking money from the venture capital firms. Depending on the firm and the fund, a specific category of business is targeted. For example, a fund may only target biotech startups or target only companies looking to get acquired by a larger company within 5 years. The firm determines their target based on how long they want to invest their money and how much risk they want to take.
After the firm has chosen a selected few companies that they want to invest in, they exchange capital (money) for an ownership stake in the company. The amount of ownership that they have in the company comes in the form of stock in the company and also decision making power in the company.
The venture capital firm not only offers money for the companies to start with but they also can provide valuable contacts within the industry of interests to allow the companies to connect to potential resources.
The companies hope to use the money that they have received from the funds to grow their company. They use the money to employ workers, start marketing campaigns, fund research and development and fund any other expenses necessary to grow their company. When the company becomes valuable enough and have enough potential, it may get bought out by a larger company or it can go public (offering stock of the company to the public).
At this stage, the venture capital firm can liquidate it’s investment in the company. If the company was sold, the venture capital fund receives a percentage amount of the money received based on the percentage of ownership. If the company goes public, the venture capital firm can sell its stock in the company for cash. The idea is to make more money than was invested in the company in the first place.
This is the ideal situation, however, often times companies fail. In situations like this, the venture capital firms and their investors lose money. However, they offset these losses with the large growth of the other companies that they invested in.
The appeal
Venture capitalists enjoy a high amount of job satisfaction. They get the chance to work with very smart people who start up very innovative companies with brilliant ideas such as the next Google, Yahoo, Genentech or Kinkos. By funding start up companies, you get the chance to sit on the corporate boards of these high growth companies and help make critical decisions. They may choose the executives to head the company.
How to get a job in Venture Capital
Everyone wants to do it. However, insiders say that there are very few spots available. Generally, venture capital firms aren’t looking for undergraduates with little or no experience. They are looking for MBA’s with years of experience in a specific industry or executives with extensive experience. However, recently, MBA’s have gotten the chance to jump straight to venture capital firms. However, according to some insider sources, most of these are from the Harvard Business School and Stanford. Venture capital jobs are acquired almost exclusively through inside contacts and networking. The Kaufman fellowship is also a sure shot way to break into venture capital. The Kaufman fellowship sponsors 12 MBA’s to work in venture capital.
Major Venture Capital Firms are:
• ARCH Venture Partners
• Accel Partners
• Battery Ventures
• Bessemer Venture Partners
• Hummer Winblad Venture Partners
• Institutional Venture Partners
• J.P. Morgan Partners
• Kleiner Perkins Caufield & Byers
• The Mayfield Fund
• Menlo Ventures
• New Enterprise Associates
• Sequoia Capital
• Sutter Hill Ventures
from Wetfeet.com
Compensation
Venture capitals are generally structured as a limited partnership. The limited partners are the investors that put the bulk of the money into the fund. The people who manage the fund are called the general partners. They can put a small amount of money towards the fund. General partners (venture capital employees) are paid a management fee usually a sum of 3% of the fund. If a fund is $100 million dollars, the management fee is $3 million. With 3 general partners, that is $1 million each. Then the limited and general partners split the upside of the investment. This is usually split 80% to the limited partners and 20% to the general partners. With fund sizes reaching in the billions of dollars, careers in venture capital can be very lucrative.
Bottom Line
So it appears that venture capitals do not recruit from undergraduate schools. So this looks like a job that we can look forward to after we gain experience excelling in other things that we decide to do. It appears to be a very fulfilling job in which you help fund, make decisions and basically help shape the future Microsoft’s and great companies. Of course, you’ll also see many companies fail but that is all part of the risk one must take.
