VCs are jacks of all trades. ©
In the few weeks that I've been interning at a London based venture capital firm, already one thing is clear: a venture capitalist needs to be a jack of all trades, i.e. competent in many skills. Further, to be a really good VC - it is necessary to be master of a lot of these skills. Whereas a career in consulting might be a full time mostly soft-skills based career, or career in banking might be a full-time mostly quantitative-skills based career, a career in venture capital is a mixture of many things.
To illustrate, here are a few of the skills called upon:
- People management: For each portfolio company that a venture capitalist manages, there is a relationship with the entreprenuers of the company that needs to be nurtured and tended to. The entreprenuers might want to build the best product in the world, whereas the venture capitalist will want to just generate 5x returns of his/her investment within 3 years. These expectations need to be managed and a relationship of trust built so that everyone is pulling in the same direction. If things don't work out, the VC will need to be prepared to change the CEO and/or other members of the management team.
- Business acumen: A VC's main management control of a company is via their seat on the company board. To this meeting will be escalated any issues the company might be having. The age old classic with internet startups is the problem of monetization, but it could be issues related to market traction or even the startup's team composition. The VC will need to be quickly add value to these discussions based on the shallow knowledge he/she has of the company and industry.
- Quantitative: Some of the deal terms that are discussed in the process of funding a startup can get very complicated. In fact, some people say these complications have only become possible as Excel, over the last 20 years or so, has become capable of modelling them. To illustrate, there may be several investors investing in a company. One investor may have liquidation preference. This means that in a future sale, that investor can specify to have returned a multiple of the shares of other shareholders. This multiple can be dependent on the sale value, e.g. "2x shares if sale value is $50M+, 1.5x if $75M+ and 1x if $100M". In addition to this, the investor can also stipulate anti-dilution, which means that if the future value of the company is lower than when investment was made, that investor gets their returns at said multiple while all other shareholders are squeezed. This is all for just one round of funding. Over several rounds, with several more variations of stipulations added by several different VCs, it quickly becomes possible for the model to run wild.
- Networking, Sales and Negotiation: Building a reputation in the industry and "attracting deal flow" is a virtuous circle. For the industry that a VC is investing in, the VC will need to build contacts - with the big conglemerates as well as budding entrepreneurs. The conglemerates may become future customers of a portfolio company. The entrepreneur could be a future star the VC they'll want to invest in later. The VC will also need to build relationships with Limited Partners ("LPs"): insurance firms, pension funds and others providing the funding for a VC's investments. The sales element of all this comes in when convincing an LP to provide funding or a startup to take your investment. An attractive startup may get the attention of several VCs, in which case it becomes important to negotiate well and project a strong impression in the competitive process between VCs. At other times, it will be necessary for a VC to bring in another VC to spread the risk and the investment. It's a murky soft skills world.
- Entrepreneurial Skills: There are not many people within any VC firm, and little or no direction is provided. It will be down to the VC to "make things happen": bring in investment, attract deals and manage companies. In much the same way that entreprenuers do, to make all this happen, a VC will need to attract and gain access to resources that are beyond their immediate control. They might do this through networking, running mini programs with incubators or other means. The VC will have to take the initiative; it is pretty much like running a little firm - except done in a partnership.
- And there is more... VCs need to quantify the value of companies not listed on any stock markets, which is a skill in itself, and conduct due-diligence on companies targeted for investment. VCs need to keep abreast of deals that are being made in the market and new technical developments of major companies. They also need to have strategic foresight to guide their thinking of the types of firms they think will be successful.