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December 4, 2011

I had a meeting this week with a friend of a friend who was interested in getting into the Venture Capital Business.  I have a few of these meetings every year, usually around the time that grad school students are thinking about jobs.  Usually, the person wants to jump into the question of how one goes about finding a VC job.  Instead, I like to spend a bit of time giving more color into the venture capital career path and give a sober view of some of the non-obvious but less attractive facets of the job.  I tend to say the same thing each time, and it occurred to me that I’ve never shared these thoughts on my blog.  So here it goes.

So, you want to be a VC?

VC is a relatively glamorous job from the outside.  There are a lot of positive reasons to do it, and I obviously love it or I would not be doing what I do.  But it isn’t for everyone. In fact, there are a lot of reasons to think twice about whether this is the right path for you. Here they are.

1. VC is more negative than you think. Here’s why.  You’ve heard it said that VC’s will invest in 1/100 investment opportunities they look at. The odds are actually probably worse than that.  As a result, you end up saying “no” a lot.  Some investors don’t say no – they just ignore, or hope that entrepreneurs get the hint and just stop asking.  That’s not great either, and it’s still pretty negative. Also, when you are evaluating companies, you are essentially hearing entrepreneurs pour their heart out and share their dreams to solve problems they are dedicating their life to.  But we have to think about the risks.  Why won’t this work?  Is this idea really “big enough”? Do I believe this team can achieve this ambitious goal?  Pretty critical and negative (although the best investors I find try to constructively help entrepreneurs solve these problems rather than just point out flaws). Finally, when you work with portfolio companies, you end up helping out more when things are going wrong.  Companies that are on a great trajectory typically take less time than the companies that are in trouble and are facing really tough, often negative decisions.

2. Being a VC ends up being a somewhat lonely experience. This obviously differs from firm to firm.  But step into a VC’s office on a non-partner meeting day.  Do you see a team of VC’s huddled around a table trying to solve a problem together?  Usually not.  Often, the offices are empty.  The partners are travelling, or meeting companies, or fundraising, or something else.  The overhead of a VC firm is pretty limited, so in many ways, each investor acts as an independent unit, scouring for deals, trying to help portfolio companies, and reporting back to their team once a week in a very long partner meeting.  Now, clearly, this differs by partnership.  Some firms are more a band of solo investors.  Others have greater camaraderie.  But it’s not that same as being in the trenches with your team building product day-in day-out.  Now, it’s true that venture is a very social job – even if you aren’t with your team, you are meeting with people all day long.  But personally, I find it quite different compared to spending lots of time working together with team mates towards a common goal.

3. VC is a risky career path. It’s a lot of fun for a couple years.  But after two years, even if you were an operator before, your skills become stale and you are realistically not going to be as good at your former craft as you were before joining venture.  Your hire-ability is still pretty high at that point, but in years 4-6, you start running out of options.  It’s also on those years that you face the pressure of establishing yourself as a partner in the firm and hope to get meaningful economics in the fund.  As as I’ve blogged about before, the deck is kind of stacked against you.  Here’s why: a typical VC will do about 2 investments per year.  A principal or junior partner might be on a slightly slower pace.  So in years 4-6, you are realistically responsible for ~3 investments.  This is also the time when your partners (or other firms) are making the decision to make you a meaningful partner in the fund. So, in a way, your prospects as an investor are largely linked to these 3 investments.  Those odds aren’t great, in a world where most startup companies fail and only about 20%-10% drive a meaningful return to the fund. Do you really want to be evaluated on those 3 shots on goal, when a) it may be way too early to tell if any of them are winners but losers are usually identified more quickly, b) broad market fluctuations have a huge impact on the success of these companies, and c) most VC’s will agree that there is a huge amount of luck involved in this business?  Tough odds.

4. VC is about being an investor.  I find that I tend to have these conversations more often with former operators or folks with a professional service background. VC seems attractive because you get to work with entrepreneurs, see companies across a broad set of sub-sectors, and can help multiple companies facing a variety of important decisions.  All of this is true.  But what’s underlying all of this is that as a VC, you are an investor of other people’s money.  Your fiduciary responsibility is to generate a great return for your limited partners. I find that there is a different way that investors tend to think about things.  It’s hard for me to put my finger on it exactly, and it’s not true for everyone in the VC business.  But I often tell people to think of that friend of theirs who somehow, always find a way to win when he goes to Vegas or plays poker.  There’s something about that person’s psyche that is well tuned to evaluating risk, managing emotions, and generating a return on capital. And I think you need a bit of whatever that special mojo is to be a good investor.  Now, many of the best VC’s out there have been terrific entrepreneurs and many work very hard with entrepreneurs to help their businesses succeed.  But those folks are also great investors, and sometimes, your responsibility as an investor will come into conflict with your desire to be supportive to entrepreneurs.

If this post feels like a debbie downer, it is kind of meant to be.  This is one side of the story, which I think is quite real but non-intuitive.  There are many reasons why I love what I do, and I feel very lucky to be able to do it.  It’s been even better since starting NextView, because some of the drawbacks I mentioned above are addressed by being a founder of one’s own firm.  VC isn’t really a career path as it is a lifestyle.  It’s pretty all engrossing, so if you are going to jump in, make sure it’s right.  It can be a great path, but it isn’t for everyone.

  • CuriousJane

    I am an investor who wants to switch industries, in a way. I’ve been a real estate investor for many years and now have $1M in net worth. I would like to explore the path of being a VC (or Angel) to medical device start up companies (I have 20 years of experience in the med device industry as an engineer/manager). What advice would you give me? I loved the article. I’m based in Silicon Valley.

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