1. Venture Capital: Definition, Categories and Top Global Funds

1.1 Definition

In short, Venture Capital provides financing offers or other offer formats, such as technical or managerial expertise, in exchange for stakes in that company. Venture Capitalists will nurture a new business until it reaches a sizable scale and can be sold to a corporate or IPO (initial public offering).   

Venture Capital fills the gap of the current capital market, the void that investment banks and public equity firms can not jump into because of regulation and operation constraints. With Venture Capital, start-ups can access the capital market in their early stages and without much hard assets. 

Because of the high risk business model, Venture Capital has a diverse investment portfolio. Not all of those ideas will fly, but if only 1 or 2 of them can be successful, Venture Capitalists earn high return on investment. 

Here-in-after, Venture Capital is referred to as “VC” for brevity purposes. 

1.2 Type of Venture Capital

Depending on stage of investment, industry, and geography, VC categories themselves into different groups to identify its market and focus 

  • Investing stage: a start-up can have several funding rounds, beginning with initial pre-seed round, and/or seed round, then progressing to series A, B, C and beyond. Each firm, with different expertise, will build up different investing strategies depending on their stage focus. .   
  • Industry wise: a firm can focus on one or several industries, such as technology, health care, education or energy. 
  • Geography wise: except for global firms, there are firms that focus only in one country or one region. 

1.3 How does a Venture Capital work?

The chart below shows how a VC raises funds from its Limited Partners and invests to its portfolios.

Venture Capital stakeholder

Limited partners (LP) are institutional funds – such as pension funds, endowment funds, insurance companies, etc – and high net-worth individuals that committed capital to that VC. 

General Partner is the one who raises funds for the firm, decides when and which companies to invest in, and chooses when to exit the investment. 

Venture Capital firm will operate everything to select investing targets, protect and grow that  

Investment portfolio is the list of companies or start-ups that the fund is putting capital into. 

But how do they make money?

VCs often charge management fees of about 2% of the fund. This fee will be used to pay for operating activities in the firm. 

After an investment is liquidated, around 20% of the return will become carried interest. Most of them will go to the General Partners. The rest will be shared among Junior Partners, Principals/VP and Post-MBA associates. We will talk about how this interest is splitted across levels in the “What do Venture Capitalists do?” session. 

80% of the return will be shared among Limited Partners according to their contributions.   

1.4 Difference between Private Equity and Venture Capital

We may hear a lot about VC vs PE (Private Equity). So what is the difference between Private Equity and Venture Capital and which one fits a candidate the most?

We mentioned why there should be a VC and a PE in the capital market (Please visit our Private Equity article). The chart below can give a brief summary of the involvement of those two institutions in a company’s life cycle. 

PE vs VC

PE and VC have the quite same way of working: both raise funds from their LPs, charge a certain ratio of fund management fee, then search for companies to invest in and pay around 80% carried interest to their LPs. The rest 20% will be allocated among levels in the firm. It seems that those are the rare “same same” among “plenty of differences”.

Overall Private Equity Venture Capital
Industry focus Invest in a diverse portfolio across industries Focus on some certain industries, namely  information technology (mostly in the software sector), biotech, cleantech or fintech.
# of investments 10 or fewer investments per fund 20-40+ investments per fund
Returns expectation Expect that all of investments have positive returns If only 1 or 2 companies among VC’s portfolio can successfully go public or be acquired, VC can achieve its expected returns
Source of investment Use both equity and debt to invest. (LBO – Leveraged Buyout). Use equity to invest
Due Diligence More complex and expensive due to involving multiple 3rd parties specialists, such as lawyers, management consultants or auditors Simple, even sometimes the investment is made just because the firm believes in the founders’ ideas.
Stage of Investment Growing and Mature startups Early-stage startups
EBITDA of investees EBITDA > 0 EBITDA <=0
Control extent PEs do control investing and gain controlling interest (the act of holding a majority of a company’s voting stock) in their portfolios VCs do minor investing, in which the firm owns a small percentage of stake and will not involve much in the decision making process. VCs’ main objective is to grow a startup.
Portfolio Management Have operating partners to work directly with portfolio companies to improve operations, drive profitability and grow initiatives. Support to hire talents and build team  
Recruitment Private Equity Venture Capital
Process & Timeline Highly-structured process and clear timeline Recruitment is a need-based process. Hence, there is no standard process and timeline
Compensation Higher than that of VC due to bigger fund sizes Lower than that of PE due to smaller fund size and the number of investments.
Preferred background Skew towards former Investment Bankers. Diverse background: Consultants, Entrepreneurs, etc, can get into VC if they have relevant experience, for example: knowledge about the industry the firm focuses on
Traits of a potential candidate High requirement of financial modeling and technical analysis.

(1) Startup lovers. 

(2) Financial modeling is still a must but not as heavy as PE’s requirement. 

(3) Networking/ Interpersonal skill is preferred as there are more qualitative work in VCs

Identifying the backbone of each firm type will help a potential candidate to highlight his or her experience throughout the recruitment process. For example: industry and market knowledge should be both highlighted to get into a VC firm while financial modeling will be weighed higher in a Private Equity recruitment. 

To have more details about Venture Capital vs Private Equity, you can visit our comprehensive comparison article. 

If you are also interested in PE career track, here is our series about Private Equity career and how to get into this industry

1.5 Top global Venture Capital firms

Top VC fundsSource: CBInsights

2. What do Venture Capitalists do?

2.1 Venture Capital jobs zoom-in 

VC jobs are not significantly different from PE’s ones. The main works are similar between those two, but with different focus: PE Analyst & Associate spend a lot of time on complicated financial modelling and deal execution, while VC people spend more time on qualitative research and networking.  

  • Deal Sourcing and Screening: Market research to look for the next investment targets and set up initial meetings.    
  • Deal Execution: Perform due diligence on potential start-up investment and discuss further about investing strategies, partnerships, managing and so on
  • Portfolio Management:  Assist and support companies within the portfolio with committed resources so that VCs can protect and increase the value of their investment.    
  • Networking and Brand Building: Attend networking events and conferences, and talk to different stakeholders such as potential investors, lawyers and start-ups. 
  • FundRaising and LP Relations: Raise new funds for the firms and report current portfolio’s performance to Limited Partners. 
  • Managerial tasks: Other internal tasks in a firm, such as managing human resources, training and coaching, etc

2.2 Venture Capital career path

Basically, there are 5 main levels, including: 

  • Analyst
  • Associate: there are two levels: Pre-MBA Associate and Post-MBA associate 
  • Principal: in some firm, there is Vice Principal title as well
  • Partner or Junior Partner 
  • Senior Partner or General Partner

Depending on the scale of a firm, there can be more middle positions, such as Vice President (Principal-to-be). As Junior Partners take less responsibility and receive less carry than do General Partners, we clearly identify those two as separated positions while combining Vice Principal and Principal. 

Venture Capital Analyst and especially Venture Capital Associate are open to newcomers of this industry. It does not imply that an outsider cannot get a job in VC at a higher level. The opportunity is just not too often and is only for people with specific knowledge and skill sets that the firm is looking for.

Position Responsibility Salary & Bonus Carry (% of 20% fund profits) (*) Duration to be promoted
Analyst Perform deal sourcing $80K – $150K NA 2-3 years
Pre-MBA Associate Perform both Deal sourcing and Deal Execution; the ratio depends on working experience in VC $150K – $200K Rarely, except for new VC firms 2-3 years, then go for a prestige MBA program
Post-MBA Associate Perform more Deal Execution, less Deal sourcing but possibly Be the firm representatives in meetings $200K – $250K +/- 5% (shared between Associate and VP/Principals) 2-3 years
VP/Principals Execute deals, and Manage Portfolio $250K – $400K +/- 5% (shared between Associate and VP/Principals) 3-5 years
Partners or Junior Partners Raise fund, Network, and Manage LPs; basically it is a transition position between Principal and General PartnerRaise fund, Network, and Manage LPs; basically it is a transition position between Principal and General Partner $400K – $600K +/- 15% 3-5 years
Senior Partners/General Partners Raise fund, Network, Manage LPs and Make final investment decisions. Only the GP can decide which company to invest into. $600K – $2M +/-70% NA

Source: Firm Research, Glassdoor

(*) The rest 10% will go to Strategic Advisors and Deal-by-deal exceptions. 

Venture Capitalist salary is quite attractive compared to other normal jobs while people in VC enjoy much better work life balance than ones in Investment Banking, Private Equity and Hedge Funds. 

3. How to Get into Venture Capital?

To break into VCs, any candidate has to define a strategy, which is the candidate’s background, and how to execute that strategy via resume, networking and interview. 

3.1 Preferred background to join Venture Capital?

There are 3 main entry points to get into VC: as a student, as a Pre-MBA professional and as an MBA graduate. Of course, VCs can recruit professionals with years of experience in start-ups, but the chance is low. Those recruitments are to source individuals who understand markets and can hands on managing companies in the portfolio. Our focus will be on the most popular opportunities to be in a VC firm. 

You can find a holistic view of different background in IB, PE and VC via our WallStreet Career planning tools

Generally speaking, VCs prefer and are also more suitable for professionals, who have 2-3 years of working experience. Rather than recruiting junior analysts to run sophisticated models, those firms direct their energy to qualitative research, networking, and building the firm’s brands among investors and startups. Therefore, they also look for talents who have those skills on top of the fundamental financial knowledge. 

VCs are also more open to candidates with background in consulting, product management, business development or startup. Taking people from the industry is the fastest way to gain market insights and upgrade VCs’ support to companies in their portfolios. 

3.2 Recruitment process

A VC firm does not need plenty of juniors to do financial analysis; therefore, they do not have a standard recruitment timeline and process. If you are familiar with PE recruitment, VC one is quite the same as a PE’s off-cycle recruitment. Some firms hire a headhunter to fill in the vacancies, but it will be a need-based process and there is no talent pipeline or anything close to it. Having said that, you have to be proactive to land a job in this industry. Networking events and LinkedIn seem to be the two best channels. 

Also, there is not any fixed duration for the whole process. If the firm has an urgent need, it can take several weeks to finish all steps; but if the firm is busy with other activities, the process can be dragged out for months. 

A candidate will have to pass the resume round, phone interview and F2F interview to get a job in VC. 

3.3 Resume

There are some ground rules that you should follow here

  1. You should choose 2-4 achievements under each position. Do not put only 1 achievement as it will raise the concern that you did not achieve much. There is one exception here: IB Analysts who have just started their jobs in the last 2-3 months.
  2. Change any relevant word into “deal”, if possible. People who scored 1-3 in the table above often slip this rule but this principal can help them have a more PE-driven resume.  
  3. In each achievement, remember to put the size of that deal, type of that deal, and your action/involvement.
  4. The order of deal size, deal type and your involvement should be consistent across bullet points. We often recommend this order [Your action/responsibility][Deal size][Dealtype]. Consistency will help the hiring team catch up all the information quickly. 
  5. Start your point with an action verb to get the attention and clearly express what you did 

3.4 Interview 

The interview round is not only a chance for the firm to get to know you more, but for you to learn about the firm as well. Thanks to a series of interviews, recruiters can decide how suitable you are at the firm, so showing up unprepared is like wearing a suit without a tie. 

The interview process will include multiple rounds. Normally, the first round will be conducted with a phone screen, the final a series of F2F interviews, in which you nearly meet people across levels in the firm.

3.4.1 What does a VC firm evaluate?

Interview questions in a VC firm can be categorized as below:

  • Fit/background questions
  • Market/Industry
  • Firm related questions
  • Technical questions
  • Deals/Clients
  • Case study/Modeling tests

3.4.2 How to prepare and ace an interview

#1. For fit/behavior questions, this is the part where you tell your stories with interviewers. Thanks to these questions, recruiters will learn how your previous academic and work experience fits into the private equity and also strategies of the firm you apply for.  

The questions in the first place always surround:

  • Introduce a little bit about yourself  / Walk me through your resume
  • Some of your strengths, weaknesses
  • Your achievements and failures
  • Future plan and why Venture Capital but not Private Equity?

What you should prepare here are crafting your own stories (reflecting your achievements, past experience, transferable skills and leaderships), and backing up small personal stories to answer questions related to strengths and weaknesses. 

If you have some disadvantages in your profile such as low GPA, non-target background, fewer outstanding accomplishments, fewer finance internships, and etc., you have to prepare stronger responses to make up for these “real weaknesses”. 

#2. For technical questions, what you will be interviewed always sticks with accounting, finance, valuations, and practical deals. 

  • Accounting: Financial statements (types of financial statements, links between different types of financial statements), revenues, operating costs, EBITDA, debt & equity, etc.
  • Finance: Equity Investments (stocks), Fixed Income Investments (government bonds, corporate bonds, commodities, currencies) , Derivative Investments (options, futures, forwards, swap), etc.
  • Valuation: Valuation metrics and multiples,  (Discounted Cash Flow, LBO modelling, etc.), knowledge about mergers and acquisitions, etc.

Although VC is less technical-heavy than PE, you should also prepare for technical questions that can come along in the interview

#3. Other non- technical questions: Beyond technical comprehension, Venture Capital also wants to test your knowledge about the market and companies, especially start-ups. Your work is to keep abreast of news about markets, imminent IPO, investing trends, etc on a daily basis. They can also ask your opinion about the firm’s portfolio and what you will do accordingly. The questions largely depend on your experience on your profile. That means if you present your active involvement in transactions/deals, you might get many questions about it. 

4. Conclusion

Venture Capital can be considered a sub-branch of Private Equity, in which funds focus more on early-stage start-ups. Although the salary and bonus in VC cannot be compared to those of Private Equity folks, the work-life balance is better and total compensation package is still better than average jobs. However, VC is for start-up lovers who are passionate to invest in new ideas and new business models because the returns will not come back too soon and you have to invest in hundreds of ideas, or even thousands, to have the next Facebook or Google.  

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