What do companies like Uber, SpaceX, Robinhood and Airbnb have in common? They were once backed by financial institutions called venture capital. Venture capital has been the driving force for global start-ups ever since the inception of the concept after World War II. So what is venture capital, and how does it work?

1. What is Venture Capital?

Venture capital provides financing technical or managerial expertise, in exchange for stakes in a company. Venture capitalists will nurture a new business until it reaches a sizable scale to be sold through an M&A or go public through an initial public offering. Venture capital is a small subset of the much larger landscape known as the private market.

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 even 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 3 or 4 of them become successful, venture capitalists earn high return on investment.

1.1. Venture capital vs. private equity

Venture capital and private equity are the most common financial institutions operating in the private market. They both pool money from accredited investors to invest in companies, but they are fundamentally different in the type of companies they invest in, their investment stage, stakes in their investees

Both VC and PE pool money from accredited investors known as limited partners to invest in privately-owned companies. They both seek to increase the value of the businesses they invest in to later sell them for profit.

Venture capital firms fund and mentor start-ups in their early stages. They are usually rapid-growing companies and the firms will provide them with the necessary capital in exchange for a minority stake (<50% ownership). 

Private equity firms usually buy majority stake (>50% ownership) of matured companies that are deteriorating due to inefficiencies. They are then directly involved in the companies’ operations, looking to resolve the inefficiencies so that they can become profitable once more.

You can see their differences through this image here:

1.2. Venture capitalists vs. angel investors

Venture capital and angel investors are similar in that they both invest in promising start-ups in exchange for ownership of the business. But venture capitalists raise funds from limited partners to invest, while angel investors are wealthy individuals themselves who invest their pocket money. Mark Cuban and investors on Shark Tanks are examples of angel investors.

1.3. How does venture capital work?

Venture capital firms raise capital from limited partners such as pension funds or insurance companies to invest mainly in high-growth sectors such as technology (mostly technology). These investments are extremely risky, and in reality firms expect most of them to fail. But if they happen to find the next Google or Facebook, the returns will make up for all of the losses.

That’s why firms usually invest in dozens of companies at a time, hoping that 3 or 4 among those will actually succeed and bring them massive returns.

Their investment process usually focuses on three stages:

  • Seed stage: VC firms provide early-stage companies with a relatively small amount of capital for their product development, market research or business planning. Seed stage investors are usually compensated with convertible notes, equities or preferred stock options.
  • Early stage: VC firms invest a larger amount of money for companies in the development phase since new businesses need significant capital to start productions once they have a good product and plan.
  • Late stage: VC firms provide fundings for more mature companies that may or may not be profitable yet, but have proven growth and are generating revenue.

The chart below shows how venture capital firms raise funds from limited partners and invest in their portfolio companies:

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 firms will do everything from selecting investees, to nurturing and growing their portfolio companies.

Firms 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.

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

2. What Do Venture Capitalists Do?

Venture capitalists spend their time raising capital, searching for potential start-ups, negotiating deals and mentoring young companies.

Their jobs could be divided into five main areas:

  • Deal sourcing: finding and reaching out to potential start-ups
  • Deal execution: conducting due diligence on potential investments
  • Mentoring: helping companies with their operations
  • Networking: increasing firm’s exposure by attending events, conferences, or speaking with people from different industries
  • Fundraising: helping the firm raise new capital, maintaining limited partners’ relations, finding new investors

They will spend the majority of their time on the first three. Junior venture capitalists will focus more on deal sourcing and execution, while senior VC roles such as partners will focus on mentoring portfolio companies and helping them grow.

3. Venture Capital Career Ladder

In a normal venture capital firm, you will start off as an analyst. After 2-3 years, you get promoted to associate. This will be the most senior position you can get unless after this you attend business school for an MBA, then you become a senior associate. Spending another 2-3 years with the firm and you reach principal level. 

After about 5 years with good performance, you are promoted to junior partner, and after another 5 years with good performance, you become the senior partner, the highest position in a venture capital firm.

Here’s a wrap up so you can get the overview:

LevelMain responsibilitySalary range & BonusCarry
(% of 20% fund profits)(*)
Duration to be promoted
AnalystPerform deal sourcing$60K – $100KNA2-3 years
Pre-MBAPerform both Deal sourcing and Deal Execution; the ratio depends on working experience in VC$100K – $200KRarely, except for new VC firms2 – 3 years, then go for an MBA program
Post-MBAPerform more Deal Execution, less Deal sourcing but possibly Be the firm representatives in meetings$200K – $250K+/- 5%2-3 years
PrincipalExecute deals, and Manage Portfolio$250K – $400K3-5 years
PartnerRaise fund, Network, and Manage LPs; basically it is a transition position between Principal and General Partner$400K – $600K+/- 15%3-5 years
Senior Partner/ General PartnerRaise fund, Network, Manage LPs and Make final investment decisions. Only the GP can decide which company to invest into$600K – $2M+/- 70%NA

3.1. Venture capital analyst

VC analysts are hired directly from college.

As an analyst, you will work mainly on industry research and support work, such as helping associates with due diligence and internal processes. This position is more like a training role, and most analysts leave after a few years to join a portfolio company, pursue business school, or move to a different firm as an associate. 

In reality, firms rarely hire for analyst positions, and it is a much worse option compared to investment banking.

3.2. Venture capital associate

You can join VC firms as an associate after gaining experience in related industries such as investment banking or management consulting.

You will mostly work on deal sourcing and execution. Your job is to screen out start-ups, pre-qualify and recommend them to principals and partners.

Associates usually stay for a few years, then pursue an MBA to continue as senior associates.

3.3. Venture capital senior associate

After completing an MBA, ideally at a prestigious school like Harvard or Stanford, you can be promoted to senior associate. The job is similar to associate, but you have more influence on principals and partners, and are on track to become one.

3.4. Venture capital principal

Principals are usually the most senior investment team members that are directly involved with deal execution and contract negotiation. They will also spend more time working with portfolio companies than associates.

3.5. Venture capital partner and general partner

Partners and general partners are the highest positions within a venture capital firm. Some firms distinguish these two, some just call them partners in general. They are less focused on deal execution than principals, and more on fundraising, public relations and making final investment decisions.

Partners also contribute a significant amount of capital from their personal pockets, making much of their upside carried interest.

4. Venture Capital Work-Life Balance

In general, venture capital offers much better work-life balance compared to investment banking or private equity. Working hours vary from 50 to 60 hours per week, though the pay can be far less. Stress level can still be as high as any buy-side jobs, since a lot of money is at stake, and bad performance means no payday.

However, your work-life separation can be disrupted. You will always be in networking mode, and your friends and acquaintances may start pitching you their business ideas once they know you work in venture capital.

5. Venture Capital Salary & Compensation

A venture capital analyst may earn between $60k-100k, with no carried interest. Pre-MBA associates’ total compensation ranges from $100k to $200k, depending on firm size and personal performance, and carry is unlikely. Post-MBA (senior) associates earn a bit more at $200k-250k, and from this position, you start to get more carried interest, though this number is still really small.

Principals can make $250k-400k annually, with some more carry. Partners earn between $400k-600k, with additional carried interest. General partners can make millions per year, with carried interest in the multiple of that number, or nothing at all. GPs earn so much carry because they put their own money in the investments.

6. Venture Capital Exit Opportunities

Exit opportunities for venture capital is limited due to the industry being extremely niche. You can either move to another VC firm, or move to one of the portfolio companies, and those are pretty much all the best options.

Usually venture capital is an exit opportunity itself. Investment bankers and management consultants who look for better work-life balance or a different experience will join VC firms at associate level.

7. Top Venture Capital Firms

Some of the biggest venture capital firms by assets under management are:

1Tiger Global Management$79 bn
2Sequoia Capital$38 bn
3New Enterprise Associates$20.2 bn
4IDG Global$20 bn
5Andreessen Horowitz$29.2 bn
6Lightspeed Venture Partners$10.5 bn
7DST Global$10 bn
8Kleiner Perkins$9 bn
9Accel Partners$3 bn
10Index Ventures$2 bn

8. Venture Capital Pros & Cons

8.1. Benefits of working in venture capital

  • Interesting work scope: In venture capital, you get to do interesting work and meet brilliant entrepreneurs, instead of boring modeling and revising pitch books like in investment banking.
  • Great work-life balance: Venture capital also offers a much better work-life balance than in investment banking, private equity or hedge funds. You’ll work at most 60 hours a week, while in IB or PE, 80-100 hours per week is a common occurrence.
  • Social contribution: You actually do something good for society, because you are helping companies that could potentially change lives or transform industries. That’s not something you can say for other finance careers. Investment banking has always been criticized for questionable ethics, while hedge funds (especially short-sellers) are notorious for bringing down companies.

8.2. Drawbacks of working in venture capital

  • Lower pay: Compared to investment banking, private equity or hedge funds, venture capital doesn’t pay that much, though the job can be just as stressful since so much money is at stake. You’ll only make big paydays if you reach more senior levels, and it’s not easy getting to those.
  • Your work may get difficult to handle: You will also be saying no to a lot of start-ups, working with struggling portfolio companies, and it will take a few years to assess your performance.
  • Limited exit opportunities: Exit opportunities are limited. You will only exit to other VC firms or to one of your portfolio companies.

9. How to Get Into Venture Capital

To break into venture capital, you will need to clear strategy, from your background, networking, to understanding what firms want and what firms ask in their interviews.

9.1. Preferred background for venture capital

Venture capitalists prefer and are also more suitable for professionals with 2-3 years of finance experience. They can hire junior analysts but they’d rather direct their energy to qualitative research, networking, and building the firm’s brands among investors and startups. Therefore, firms look for talents who have those skills on top of the fundamental financial knowledge. 

Candidates with backgrounds in consulting, product management, business development or startup are also targets. Taking people from the industry is the fastest way to gain market insights and improve their support to portfolio companies.

9.2. Venture capital recruitment process

Venture capital firms have no standard recruitment timeline, since they don’t need to fill a lot of junior positions. Their recruiting is similar to private equity off-cycle recruiting. Some firms hire a headhunter to fill in vacancies, but it will be a need-based process and there is no talent pipeline or anything close to it. You still need to be proactive to land a job in this industry. Networking events and LinkedIn are the two best channels.

There is no 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. 

You will have to pass the resume round, phone interview and face-to-face interview to get a job in venture capital.

9.3. Venture capital interview

The interview round is a chance for the firm to get to know you more and for you to learn about the firm. Through 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 face-to-face interviews, in which you nearly meet people across levels in the firm.

9.4. Venture capital interview questions

Firms will ask questions on specific topics such as:

  • Fit/background 
  • Market/Industry
  • Their respective firm
  • Technical knowledge
  • Case studies

For behavioral interview, some possible questions are:

  • Walk me through your resume
  • Why venture capital?
  • Where do you see yourself in 5 or 10 years?
  • Your strengths and weaknesses
  • Why not private equity or hedge funds?

Some possible market/industry questions are:

  • Which start-up would you invest in? Elaborate.
  • Which markets are most attractive to you? 
  • Which markets should be avoided in your opinion?

They will also ask you about themselves to see if you have any idea what you are applying to. Some possible questions are:

  • What do you think of our portfolio? Which companies would you have invested in or not invested in?
  • Who are our main competitors? How do we differentiate against them?
  • How would you evaluate one of our portfolio companies? 

Venture capital technical questions have a bit of VC’s twist. They will still ask about accounting/valuation, but with some differences:

  • What’s the difference between pre-money and post-money valuations?
  • What are the trade-offs of traditional equity financing vs. convertible notes?
  • What are some of the key metrics and ratios for SaaS companies?
  • How would you value a company with negative cash flows for the foreseeable future?

Case studies and modeling tests are not very common in VC interviews; your investment ideas should be more focused. But in case you get one, it may look like this:

“Consider Startup X. Describe the company, its market segment, its market size, and do a brief competitive analysis. Estimate the company’s future revenues, profits, and growth, and use those to determine its potential value in an IPO or M&A exit. Also, describe the biggest risks the company faces.”

10. Should I Work for a Venture Capital Firm?

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 the 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 soon and you have to invest in hundreds of ideas, or even thousands, to have the next Facebook or Google.