PS#073: What to look for in a firm?
Alright, if you’ve followed until this point, we have covered 3 of the 4 aspects to consider when choosing a venture capital firm, including…
Now, it’s time to discuss the 4th aspect – the individual firm.
As I mentioned at the start of this series, your first firm might not be the right one for you and your long-term career. If you’re not thinking about the long term, this may not even matter.
But, if you are, there are a few things to consider…
Firm reputation
Learning & development
Capital and the fund’s lifecycle
The decision-making process (and your role)
With that being said, let’s get started.
Firm reputation.
In an increasingly competitive venture market, a VC firm’s reputation becomes more and more important, especially in the context of closing new investments.
Now, just because it’s important, doesn’t mean that if it’s not a name-brand firm, it’s not a worthwhile opportunity. It just means that the value your firm provides to startups becomes even more important when capital is a commodity.
It’s a simple question – How will your firm differentiate itself in the market?
So, depending on your approach, a big, name-brand firm might be the right choice for you.
On the other hand, being a part of an up and coming firm can be a really great opportunity. You will have more insight into how the rest of venture works (outside of the deal process) and typically get more experience within the deal process itself. You might even have a hand in building that reputation over the long term.
Learning & development.
For those taking the long-term approach, I think this is the most important component.
Find a place where you can really learn the skills of venture. I often tell young or aspiring investors to take a “5-year view” when thinking about their career as a venture capitalist.
Essentially, this means to think about the skills and experience you’ll need to be hitting to be in the range of a senior associate, principal, or vice president (depending on your starting point) in that time frame. The development to that point may not be linear, but that’s OK. This industry isn’t linear. That’s the whole point. The idea is to make sure you’re ready for your opportunity to take a larger role as an investor when said opportunity presents itself.
Just remember, venture is an apprenticeship industry. If you can find a firm that is willing to help train and develop you, that’s worth its weight in gold, especially early in your career. Having someone (or a group of people) committed to investing in your development can greatly impact your trajectory in this industry.
Capital and the fund’s lifecycle.
Time to get into some of the logistical components.
It’s important to find out a few things about the firm in question, including…
How much capital does the firm have?
How much capital is available to deploy?
Where is the fund in its investment lifecycle?
Is the firm currently fundraising? How is that going?
Another issue I see with aspiring investors is that they find a firm that checks so many of their boxes, but the firm doesn’t actually have capital to deploy. They may be in the middle of raising their very first fund, they may have deployed their first fund and are raising a second one, or they may have raised many funds but are in limbo on raising a future fund.
None of these situations are necessarily a deal killer, but it’s important to be aware.
You might decide that you want to be a part of raising and launching the very first fund (or second) for a venture firm. It might be a great learning experience. Of course, you do run the risk of failing to actually raise a fund.
My general recommendation is to learn the investing skill set before moving onto the fundraising skill set, which is a whole different level to this game.
The decision-making process (and your role).
In the venture world, there are decision makers and non-decision makers.
If you’re in this for the long haul, your goal is to become a decision maker. You want to be the person who is signing off and approving investment opportunities.
When choosing your firm, you’ll want to understand the decision-making process. Who is on the investment committee? Who drives the decisions? Who holds the power? In doing so, you’ll begin to understand the political components of the venture firm in question.
This is really important. It will be a big part of understanding (1) how successful you can be when it comes to making investments in the near-term, and (2) how you can pursue the potential “partner track” in the long term.
In my experience, this is one of the harder pieces of the puzzle to understand. Sometimes it requires being a part of the firm for a bit to really get it.
At the end of the day, your role as a junior investor (a non-decision maker) will be to build the case and push for new investments. But, figuring out the path to becoming a “decision maker” is the ultimate goal.
One final note.
I’ve purposely left compensation out of this discussion.
I talk about compensation a lot in some of my other issues (here, here, and here). If you’d like to learn a bit more about it, I encourage you to check them out.
But, if compensation is a driving force behind choosing venture, I just want to be clear that venture is not a “get rich quick” strategy. If that’s what you’re looking for, I actually recommend taking a swing on the operating side.
Again, this is a long game. The big compensation opportunity (i.e., carry) awaits at the end of a 10+ year fund lifecycle. So, if that's what you’re after, buckle up. There’s a lot of work that needs to be done before being able to reap those rewards.
With all that being said, I still think this is one of the greatest jobs in the world.
