I’ve worked with Lux Capital over the last six months as both a part-time and summer associate. I’m writing this blog post to reflect on some of the lessons I’ve learned. In this post, I plan on covering a number of topics including how to add value to a venture capital firm firm, what VCs do day-to-day, how to evaluate whether you’re a good fit, and how to think about getting a job in venture.
How To Add Value To A Venture Capital Firm
Constraints such as industry and investment stage focuses can have a big impact on which activities add value, and venture capital firms pursue different mixes of these activities to benefit their stakeholders. Here are the primary ways to add value to a venture capital firm:
- Sourcing – Sourcing looks very different depending on the firm. Some firms have big brand names that attract so much inbound startup interest that they spend more time filtering than they do hitting the pavement to find startups. Sourcing channels look very different across industries as well. For example, although it’s possible to find cool consumer software startups on Product Hunt, biotech breakthroughs might be found only through people connected to academic systems or university tech transfer offices.
Sourcing is finding reasons to say yes to investing in a startup. Questions one might ask include:
- Are the founders the right people to build the product?
- Is the market opportunity big enough for a venture return (in the billions not millions)?
- Is there product-market fit?
- Due Diligence – Due diligence looks very different from firm to firm, and many firms rely heavily on the lead investor to take on the brunt of the due diligence with the assumption that they will do sufficient diligence, given that they are taking the largest risk.
Diligence is finding reasons to say no to investing in a startup. Questions one might ask include:
- Are the founders ethical?
- Does the startup have a moat/competitive advantage?
- Is the startup missing key people that they will need to successfully execute?
- Portfolio Company Support – VC activities that may add value to a portfolio company include providing introductions to relevant people, helping find and introduce key hires and providing a sounding board for key business decisions. Entrepreneurs should do just as much (if not more) diligence on their investors. Speak with other startups backed by investors to understand whether potential investors are good board members and value adding.
- Investor Relations – AKA fundraising. Most venture capital firms are in a perpetual state of fundraising whereby they are deploying capital from the last fund at the same time that they are raising money for the next fund. Some funds attached to other entities (think corporate VCs, large asset managers, etc.) don’t have to bother with fundraising, although they may dedicate extra time pitching to investment committees or integrating portfolio companies into the corporate side of the business.
- Other (Portfolio Strategy, Attending Conferences, Operations, Marketing, etc.) – Given the dynamic nature of venture capital firms, there are a number of important activities outside of those previously listed. These vary in relevance depending on a firm’s size and investment focus, so your experience may vary.
What Do Venture Capitalists Actually Do? Are You a Good Fit for Venture Capital?
Beyond professional competencies there are a few functional traits that are common to VCs:
- Hustle – Do you have the ability to work with little to no direction, or do you need structured problems and projects to succeed? This is a key difference between venture capital and traditional MBA paths like consulting/investment banking, where there are clear projects and workstreams. Hustle is NOT the same as working long hours – it’s the spark and drive to get things done without someone else telling you to do so. My own hustle has ranged from academic to professional: I took organic chemistry at age 17 at an accelerated high school program and ended up graduating early from UT Austin. I played poker professionally to pay for school and help support my family financially in the early days of my career. I chose to do an internship this summer before starting my full-time job while many MBAs were on vacation.
While there is certainly mentorship and apprenticeship, venture capital firms are not structured like consulting firms and investment banks with in-depth, structured training programs. Thus, you must be a self-starter if you hope to succeed in venture. Even more important, all the entrepreneurs you are funding have insane amounts of hustle. If you can’t hustle as much as your entrepreneurs do, you aren’t the right investor for them. While it is important to be 80/20 while sourcing, you’d better hustle and learn as much as possible during diligence and after investing if you want even a chance of being able to add value to your portfolio companies.
- Ability to manage cognitive dissonance of cynicism and optimism – A somewhat cliché quote from F. Scott Fitzgerald states, “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
Let me be the first to say that this quote is somewhat narcissistic. That being said, VCs face a very difficult problem: New businesses that will eat the world 10 years but don’t exist yet look absurd today. Absurd businesses also look absurd today. Successful venture outcomes rely on fundamental changes in human behavior that are rooted in Extremistan. Black swans are impossible to predict, because the data we have today do not show the scale of the coming change. Most VCs address this problem by talking to people. Constantly. They try to find both confirming and disconfirming data and opinions. Decisions for truly revolutionary products will by definition always have more disconfirming than confirming data.
- Intellectual Curiosity/Passion – VCs are passionate about not only what a product is today, but what the business will be a decade from now. It’s going to be near impossible to find and evaluate startups if you’re not passionate about new products. If you’ve never beta tested a product in your life, it will be very difficult for you to understand an early stage startup’s customer base.
In addition, VCs love learning, and that learning converts into both sourcing interesting startups and connecting with people that help develop frameworks to evaluate whether a startup is a good investment. Do you enjoy talking to other people about their work, even if their work is not something you’d like to do yourself? I am extremely curious in people, and one of my core life assumptions is that everyone has different life experiences and unique points of view that I can learn from. If you ever see me on an airplane, I’m likely talking to the stranger next to me. Although I can be introverted and need alone time to recharge, I feel extremely excited about the prospect of a day of back-to-back one-on-one meetings with interesting, passionate people.
- 80/20 – VCs see lots of deals. Tons of deals. Because of the time constraints of having 24 hours in a day, VCs have to say no to deals all the time. Sometimes, they say no to great deals. VCs are constantly trying to filter between signal and noise, and they need to be able to get to 80% of the “truth” quickly to decide whether they should continue to invest time in a startup or an idea. Often, the “truth” you find leads you to say no quickly. Sometimes, you find something interesting and continue digging. Rarely, that digging leads to an investment.
80/20 in VC looks very different from 80/20 in private equity or management consulting. Because the markets are totally nascent, the analysis is much more qualitative than quantitative. Consulting cases generally dig into every last branch of a framework through multiple workstreams. VC diligences hit on the high level branches and dig into only a few of the branches that they deem interesting. That’s not to say that they don’t go deep at all, but they are not exhaustive diligences that last weeks or months. One big reason for this is that you can do too much diligence.
Certainly one important question anyone interested in VC should ask themselves is: “Do you believe in venture capital as an asset class?” If you’ve never thought about this question before, you should read this Kauffman report.
Paths Into VC
There are a few ways people tend to get into VC, including:
- Entrepreneur – Or other operational roles in early stage firms generally with a fairly successful exit and good relationships with VC backers
- Journalist – Usually covering entrepreneurship and technology
- Finance – Asset management with exposure to early stage private equity/venture capital, or consulting/investment banking in relevant industries, such as tech or healthcare)
- Networking – Few venture firms post job openings like traditional companies. Many hires are people that are previously known through networks
Many who get into venture have a stellar academic track record, and most have some background in technology, investing, or both. That being said, there are no reliable pathways into VC. Like most opportunities in life, opportunities in VC come from some combination of luck, timing, and surface area for opportunities (read: network). If you’re coming from one of the aforementioned paths, you’re still going to have to hustle to get in the door.
Ask the questions that nobody else asks because they assume the answer is no. Add value before you’ve even asked for a job. Don’t take no from an answer, and find out what it will take to convert a no to a yes. The hustle and preparation for getting a VC internship parallels what actually being in the job is like: VCs are very busy people with a substantial amount of inbound interest. Great entrepreneurs are extremely busy building their businesses and have tons of inbound interest from customers, partners, potential employees, and investors. Knowing how to get someone’s attention who has high demands on their time is an important skill to have, whether you’re trying to get into VC, or just trying to accomplish something great.