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I would love some clarification on VCs. I'm trying to "follow the money", if you will. A few questions answered on this subject would help me greatly.

  1. How does someone "become" a VC? It's not like there's a corporate ladder to climb.
  2. What is the VC's relationship to the money? I know that sometimes they put in their own money, but I've heard more often than not they just manage the funding of the portfolio of companies. I'm curious though, what the relationship and path is to the actual source of the cash that funds their portfolio.
  3. What's their relationship to the startup itself? Many times they get a board seat, but I'm sure there is more to it than just that.

I'm most interested in #1 and #2, so any insight into the VC world relating to those questions would be fantastic.

Thanks in advance.

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4 Answers

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One common way to become a VC is to start up a business, get funded, and have a successful exit. Then the VC firm involved will sometimes bring the founder on board as an “Entrepreneur-In-Residence”; from there, it really is about climbing the corporate ladder. Easy, right? :)

You're right that VCs are usually managing other people's money. In venture capital and private equity, what the entrepreneur rarely sees is the fund raising stage, in which the VCs go around to various institutions and HNWIs (high net-worth individuals) to get the financial commitments that ultimately form the investment fund.

In terms of the VC's relationship to the startup: when they invest, they are buying equity (that is, a stake in the company), but they are usually also getting much, much more. They get preferred stock, which comes with whatever rights they can negotiate. They nearly always are first in line in any cash-generating transaction, so that their coffers are filled before the entrepreneur sees penny one. They generally position themselves so that you have to come to them for the next round of financing, should there be one. And, as you noted, they ensure that they control at least as much of the board as their equity stake permits.

These are all reasons why, as I've noted elsewhere, it is vital to consider other approaches to raising capital, in addition to looking at VCs.

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Thanks for the info Scott. I appreciate the reference link as well. – nate ritter Oct 13 '09 at 22:09
An EIR is not really a VC – TimJ♦ Dec 2 '11 at 18:25
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There are two tracks to become a VC.

  • Be a successful entrepreneur and make your VCs a lot of money, at least twice. Then you stand a good chance of being invited to the club
  • climb the corporate ladder from the investment banker side, starting with very late stage deals (M&A), moving to earlier stage deals

What usually doesn't work is getting a job in a VC firm as a principal (meaning a young MBA with limited operational experience). It's a dead-end job in most cases, in the sense that it will not lead to a partner position (but it can lead to many interesting openings in hot startups).

My take on all of this? If you truly have the entrepreneur spirit, then start your own VC firm, don't wait for anyone else's approval. That's the entrepreneurial way.

Start with a very small fund, be succesful over a few years, then other rich people will start giving you their funds to manage. For instance, Y-Combinator put together AngelConf earlier this year for people who want to become angels.

If you invest in 10 startups, once a month, at $10K per startup, you may get some good returns within 3 years. That's a $100K investment, doable after a few years of savings working for a corporate job.

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Very practical advice. Thanks Alain. – nate ritter Oct 13 '09 at 22:13
You also need to be an accredited investor, at least in the US. en.wikipedia.org/wiki/Accredited_investor – Ricardo Dec 2 '11 at 18:21
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A couple of noted VCs have answered this question well. Most recently, Seth Levine: http://www.sethlevine.com/blog/archives/2008/04/how-to-get-a-jo.php

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Great! Thanks for that post. That's a good read. – nate ritter Oct 13 '09 at 22:02
You're welcome. I liked the behind-the-scenes that the VCs give. (I found it via Fred Wilson or Brad Feld who essentially said "I agree".) – jeffreypriebe Oct 14 '09 at 22:45
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  1. How does someone "become" a VC? To the best of my knowledge, it's not easy if you want to get in with a good firm. With so few great VC firms, and so many people trying to get into those firms (ie. Kleiner Perkins, Sequoia, etc), there is a lot of competition. Simply put, connections, track record, and smarts are probably the 3 big factors.

  2. What is the VC's relationship to the money? My understanding is they will often use the 2 and 20 rule.... 2% on funds managed, 20% of profits. They get their money from wealthy individuals, pension funds, insurance companies, companies, etc.

  3. What's their relationship to the startup itself? They will often get control... and they will position themselves as the ones who should get control, given their experience across companies and industries. If it all start to hits the fan, and you've got a good VC partner, the last thing they will do is panic. Instead, they'll roll up their sleeves, bring out the rolodex and do everything in their power to see to it that the start-up is a success. It should theoretically be a win-win for both the entrepreneur and the VC.

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Thanks so much BJ. Great information. – nate ritter Oct 13 '09 at 22:03

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