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So You Want to be a VC?

March 27th, 2008 · 1 Comment

Several people have asked me how to break into VC. That’s a tough question on many levels because there is no one recipe to get into the industry. Prominent VCs are former lawyers, entrepreneurs, CEOs, consultants, bankers, and engineers. But because so many people are asking I will try to answer the question. I’ll answer the question by walking through the skills necessary to be a good VC.  In my opinion a VC’s job is to make money for his/her limited partners by helping entrepreneurs succeed. To do this VCs have to make good investments in good companies. Let’s talk about identifying a good company first.  

Stealing liberally from Bret Maxwell, VCs assess a good company by assessing three criteria:

·         Market Risk: is there a market for this idea?

·         Technology Risk: is this service/product achievable?

·         Execution Risk: can this company pull off the business plan?

To answer the first question VCs need to have experience or deep domain connections within the industry in question. That means knowing enough about the domain to engage in a vigorous conversation about what customers in that industry really want and being able to test those assumptions by being able to call up friends within that industry. I personally spent some time today calling up potential customers for a startup to test theories about a startup venture. VCs also need to have a good handle on rival developments within the industry, which they can get from their personal knowledge of the space and through a variety of intelligence mechanisms.

To answer the second question a VC needs to be able to answer technical questions him/herself or have access to people who can through their network. This is where the engineer/ codernaut/scientist VCs really shine. One of the real problems with Cleantech investments these days is in assessing how many Nobel prize-worthy breakthroughs are really necessary for an idea to be feasible.

The last question is by far the most important, and is only really answerable after starting up a few businesses yourself. A VC needs to look at the startup team and decide if the talent and resources are really there to execute the hundreds of tasks required to launch and grow a new business. If the team can’t pull off those tasks alone, it’s the VCs job to provide suggestions for candidates to complete the team from his/her personal network.

Answering all of these questions can only tell you if you are investing in a good company. A VC still has to decide if he/she is making a good investment. Fortunately this is the easy part, and picked up using a few quick DCF or comps models which you can learn in any good MBA program.

To summarize my ideal VC candidate:

·         Industry experience at a major player to gain industry connections and market expertise

·         Startup experience within the domain to learn about execution risk

·         An MBA from a major school to gain a broad network and some modeling experience

Like I said though, there are many different ways to get into this industry, and strength in one area may compensate for weakness in another. Regardless of your qualifications, breaking into this industry is still extremely difficult which is best illustrated by a few shocking numbers:

·         There are only 798 Venture Firms in the US with around 3000 employees

·         In 2007 only 58 funds invested in 20 or more deals. My guess is that these investments were made by less than 500 VCs.

·         DFJ, the largest VC fund for the past three years in a row, only has 3 associates (although some are buried in the geography funds like me).

·         NEA, the second largest fund, only has 4 associates.

·         Most funds don’t have associates

 

Tags: Venture Capital

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