PS#017: Big firm or small firm? (Part 1)
Another question that I often get from aspiring investors…
Should I work at a big, established firm or a small, new firm?
It’s a great, great question.
There are pros and cons to both situations, so it truthfully depends on the individual.
With that being said, I am going to help you break it down and make the best decision for you.
It’s all about what you can learn.
First and foremost, especially early in your career, this is all about what you can learn.
The type of firm that you choose (i.e., big vs. small) may help accelerate your learnings in some areas while giving you less exposure in other areas.
So what are you trying to learn?
Well, like most jobs, there are different levels to being a VC investor. As you advance in your career, the skills, responsibilities, and role changes.
The full stack skill set of a venture investor includes the following…
Sourcing and networking
Evaluation and due diligence
Negotiating, structuring, and closing
Portfolio construction, management, and support
Firm management, fundraising, and LP management
That’s the list.
If you can build these skills, you’ll be able to manage the end-to-end process of venture capital. Everything from raising your own fund to closing deals.
Side note: my course How to be a VC Associate will teach you the first three skills.
Big firm vs. Small firm – A framework.
Let’s talk about a framework for deciding between a big or small VC firm.
I would recommend evaluating a situation based on the following criteria:
Deal flow
Exposure
Advancement
Compensation
Responsibilities
Deal flow: Considers the volume, types, and quality of deals that a firm is able to generate.
Exposure: This works on two fronts…
First, how much exposure will you get to the full stack of venture capital skills (i.e., sourcing, evaluation, diligence, transacting, portfolio, fundraising, etc.)?
Second, what exposure will you get to actually building businesses (i.e., communicating with founders, supporting the portfolio, Board meetings, problem solving, etc.)?
Advancement: Is there room to grow (i.e., senior associate, principal, partner, etc.)?
Compensation: How much can the firm afford to compensate you?
Responsibilities: Finally, what will you be responsible for at the firm? This will provide a lot of insight into your day-to-day job and the skills you’ll eventually develop.
Today, we’ll dive into the pros and cons of working at a big, established VC firm.
Next week, we’ll do the same for small, new VC firms.
Big firm – pros and cons.
Deal flow
Deal flow refers to the volume, types, and quality of opportunities that a firm can generate.
Big firms (e.g., a16z, Sequoia, Insight, etc.) often come with an established brand and their own deal flow. This means that the firm has hundreds if not thousands of deals coming through their network, pitching for the firm’s capital.
As a new investor, your role will often be to sort through this inbound deal flow to identify opportunities that are worth evaluating further. You’ll have the ability to look at a high volume of deals across a pretty good spectrum in most cases. Even better, if the firm has a strong reputation in the market, there will often be some quality deals that come in through the partner’s networks.
Pro: In this situation, you’ll have an opportunity to really hone your evaluation skills.
Con: Due to the volume of inbound (and corresponding brand), this may limit your ability to build your own pipeline of deal flow. Early in your career this may not be an issue, but as you advance, you’ll want to be able to bring your own, differentiated pipeline of deals to the table.
Exposure
Think about exposure on two fronts: (1) venture capital skills, and (2) business building skills.
Big firms provide an opportunity to see how things work at scale. Whether it is the venture capital process or business building, these firms have teams of people handling each aspect of the process. There are teams dedicated to the investment process, legal review, portfolio management and support, internal operations, and the fundraising cycle.
Pros: As an early investor, you will have an opportunity to see it all. But, there is a catch. You will need to network internally to see how all of this works. It likely won’t be a part of your normal, day-to-day job.
Cons: Like working at a big company vs. a startup, you’re really learning about how things work at scale. You’re not getting as much exposure on how to build this for yourself from 0 to 1.
Advancement
Do you have room to grow as an investor?
For big firms, this really depends on the situation. A lot of the larger firms have 2-3 year programs for junior investors. This will let you learn the ropes, but there isn’t always room for you to continue at the company. The ultimate goal for a venture investor is to become a general partner at one of these firms (or your own!). While these larger firms will typically allow you to grow in your career for a time, that jump (even from partner) to general partner is a big one.
Pros: These larger firms will help you advance early in your career, but will often require finding a new home later in your career to become a general partner.
Cons: Since it is a larger firm, those early promotion battles will be compounded by competition with your peers at the firm. There are only so many seats.
Compensation
How much can the firm afford to compensate you?
Big firms will typically have multiple funds and a lot of assets under management (“AUM”). This gives them more management fees than smaller funds to support their operations. These firms can afford to pay market or even above market rates for junior investor positions, especially from a cash compensation perspective. If you’re curious about what is market in this situation, check out my guide on VC compensation.
Pros: As an early investor, you will likely be paid well in terms of cash compensation.
Cons: The higher cash compensation may lead to a lower carry percentage or none at all.
Responsibilities
What will you be responsible for at the firm?
This is a big question. Your responsibilities will dictate where you learn and how you grow (for the most part). As I mentioned, Big firms are operating at scale. They are managing multiple funds across multiple investment areas, which means that they have teams specialized in different industries and aspects of the VC process. Your role will also be specialized. This might mean you’re focused on sourcing or initial evaluation or deeper diligence. It will all depend on the role and the firm.
Pros: You will have an opportunity to dive deep into specific pieces of the full stack skill set.
Cons: You may not have as much of an opportunity to practice and learn all of the other areas of the VC investment process.
Next week, we’ll focus on small, new firms.
Next week, we’ll go through the same criteria for small firms, as well as address some of the nuances between the two. Stay tuned.
