So Many Eggs in Vee Cee
I went through a few rounds of interviews at the fund that I now call my employer, I was asked insane questions, easy questions, technical questions, and borderline bizarre questions, but I was not asked the most obvious question I expected to answer. What is Venture Capital?
I thank all the deities in the world and nearby galaxies that I wasn’t asked this during the interview process! Had I given the answer I was prepared to give, the one I meticulously crafted after several, long minutes spent browsing the interwebz. I will have been unemployed now.
The first couple of weeks on the job were truly a humbling experience. I got laughed at, called a “Sell Side Scroog”, and umpteen business plans (most of which were rejected ventures) were thrown on my desk while a senior analyst blurted the word “learn” in a tone that suggests sorrow and sadomasochism.
And so I am…learning, and reading and writing and so far I have had multiple and consequential “Duh”, “Aha”, “Reallyyyyy????” , “WTF”, and “Ohh, makes sense” moments. My favorite light bulb ever lit up when I was finally able to tell what Venture Capital is and isn’t.
Venture Capital: investing in entrepreneurial enterprises. By definition, an entrepreneurial enterprise has negative cash flow and three major characteristics:
1- The owners are the managers
2- Highly volatile and unstable
3- Significant portion of the owner’s net worth is tied to it’s success
Why would anyone in his or her right mind invest in a highly volatile - cash burning idea, you might ask?
They don’t. They invest in the promise of three elements:
1- The team
2- The rapid growth potential
3- Realization at exit
How do VCs determine which egg is the golden one?
Sine the traditional sense of financial analysis/modeling doesn’t help here due to the obvious lack of historical data, and since most start up projections would be the subject of eternal jokes for most sell side transplants, the determination happens through:
1- The gut. An educated and honed gut is crucial for success in this business
2- Industry knowledge. If you are evaluating a tech startup you better know your tech industry
3- Risk-Return analysis
4- Belief in the team
Seems easy, how come some golden eggs fail to hatch into cute little chicks?
In a hypothesis where you make only all the right decisions, two out of your three decisions will be less right than right. Two out of three mommy chickens kill the fetus before it cracks the shell.
Why are VCs so uptight and selective?
1- Nine out of 10 startups fail
2- Negative cash flow phase ranges between 36 and 92 months depending on the industry. Feeding mommy chicken for 92 months is a little expensive
3- Exit takes an average of three to seven years – three to seven years! That’s longer than most marriages nowadays
4- If you invest for equity, you want your stake to be worth the most it could
Bullbananas, tech ideas take off really fast and provide off the chart returns
This might be a little shocking, but not all start up ideas are tech ideas. Consumer products is a very prominent player in the scene, so is alternative energy and food & beverage.
Okay this is getting really long and I have some work to do. I might or might not have also realized there are still some aspects that I am not 100% clear on. So I will poke, probe and squeeze some more answers and hopefully I will have more useful information.
If you have any questions, please do ask; that will help me ask more questions to get better answers, and if you can correct or clarify anything I would be forever grateful.
Have a fantabulous weekend, y’all.






Comments
SB for you. Now I only have
SB for you. Now I only have one left. All your fault!
How does one go about getting VC roles at junior levels and what skills are important? I dont even know the typical structure of VC positions. Care to share?
I interviewed for two sophomore-->junior summer but didn't get either.
Frank Sinatra - "Alcohol may be man's worst enemy, but the bible says love your enemy."
Great post. VCs have always
Great post. VCs have always been somewhat of a mystery to me.
3 questions:
1) How do VCs acquire the capital that they invest in potential new businesses? Or are they essentially just middlemen between people with new business ideas and those that are looking to invest in new ideas?
2) What does a VC look for in hiring for potential new employees? Is this typically something that you can get into right out of undergrad, or is experience in a specific industry a must?
3) I understand that VCs invest in startups, and startups mostly fail. Would it be safe to say that VCs are also generally regarded as highly risky businesses themselves, due to the fact that they invest in startups? Or do they have an investment portfolio in safer securities as well to hedge against their riskier investments?
Thanks!
great post d! +1
great post d! +1
WSO's COO (Chief Operating Orangutan) | My story | Connect with me on Linkedin.
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SB'd.
SB'd.
See my other WSO blog posts
Are you afraid of people
Are you afraid of people coming to the general realization that tech is a terrible investment?
History has given us insurmountable information leading to that conclusion. Tech has gotten to the point where it's hurting society more than it's adding value.
ZNGA and FB are having a fantastic day.
"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan
in.
in.
Nice post!
Nice post!
BTbanker: Tech has gotten to
Tech has gotten to the point where it's hurting society more than it's adding.
Please explain.
great post
great post
speaking of eggs, i would
speaking of eggs, i would like to fertilize yours.
BTbanker: A Tech has gotten
A Tech has gotten to the point where it's hurting society more than it's adding value.
.
Said he from his Iphone, logged in via Wi-Fi.
TechBanking: BTbanker: Tec
Tech has gotten to the point where it's hurting society more than it's adding.
Please explain.
Okay, to say tech in general is bad wasn't what I meant, but companies like Zynga, Groupon, Facebook, Instagram, and Twitter really aren't necessary.
"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan
BTbanker: TechBanking: BT
Tech has gotten to the point where it's hurting society more than it's adding.
Please explain.
Okay, to say tech in general is bad wasn't what I meant, but companies like Zynga, Groupon, Facebook, Instagram, and Twitter really aren't necessary.
Do you think Coca cola is ? Or, excuse me, do you think Apple is ? There is so many companies that aren't necessary from one point of view, that doesn't mean that they are.
Thanks for Sharing
Thanks for Sharing
TheSquale: BTbanker: Tech
Tech has gotten to the point where it's hurting society more than it's adding.
Please explain.
o
Okay, to say tech in general is bad wasn't what I meant, but companies like Zynga, Groupon, Facebook, Instagram, and Twitter really aren't necessary.
Do you think Coca cola is ? Or, excuse me, do you think Apple is ? There is so many companies that aren't necessary from one point of view, that doesn't mean that they are.
Can you really compare microsoft, apple, and oracle to overvalued tech startups like fb, znga, and grpn?
Sure, theres a difference between a good company and a good stock, but how can anyone tell me with a straight face that the latter three are good stocks? I don't care if you're an analyst at Piper Jaffray, those are not fundamentally sound companies.
"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan
yeahright: SB for you. Now I
I may not be on the Jedi Council, but I sure am great with the Force.
See my WSO blog posts
oR3DL1N3o: speaking of eggs,
I may not be on the Jedi Council, but I sure am great with the Force.
See my WSO blog posts
Huskies25: Great post. VCs
I may not be on the Jedi Council, but I sure am great with the Force.
See my WSO blog posts
BTbanker: TheSquale: BTba
If your dreams don't scare you, then they are not big enough.
"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.
wolverine19x89: BTbanker:
"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan
I'm with BTBanker on this
BTbanker: Are you afraid of
I may not be on the Jedi Council, but I sure am great with the Force.
See my WSO blog posts
Disincentivy: BTbanker: Are
"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan
Boo, my "it's a trap" image
I may not be on the Jedi Council, but I sure am great with the Force.
See my WSO blog posts
Disincentivy: Boo, my "it's a
"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan
Of course, tarp. How could I
I may not be on the Jedi Council, but I sure am great with the Force.
See my WSO blog posts
BTbanker: TheSquale: BTba
oR3DL1N3o: speaking of eggs,
Great post. I'd love to hear