The hours in VC is why everyone wants to work in the buyside. A lot of our investment team members are ex-ibankers, ex-consultants who burned out and became frustrated at their old jobs. At my fund, the hours are approximately 8AM-7PM every day. We never work weekends or pull all-nighters. The latest I have ever gone home is 11AM, and that was for an internal project that was being sent directly to the investment committee (i.e. all the partners who make investment decisions). Travel is fairly light too, I travel around 2 to three 3 times per month. Mind you, it's much much worse at the senior level. The partners typically travel 2 to 3 days per week.

From my informal conversations with people in the venture industry salaries are approximately as listed below:
(Base/Performance Bonus/Deal Sourcing Bonus*/carry)
Analyst: 60,000/30,000/5-10,000/0
Associate: 100,000/50,000/10-20,000/0
VP: 200,000-250,000/?/?/0M-1M**
Principal/Junior MD: 500,000/?/?/1M-2M***
MD: 1M/?/?/3M-9M***
*Deal sourcing means finding and executing an investment opportunity
**VP carry based on performance of portfolio companies with board level representation only (i.e. not carry of all companies in portfolio)
***MDs are typically compensated based on performance on entire portfolio

I received quite a few PMs asking me about what the job entails and specific financial skills required, so allow me to elaborate.

80% of the job duty of an analyst straight out of college is deal sourcing. In English, this means generating investment leads that can be transformed into real investments. 20% of the job is assisting in due diligence following a "Hot Deal" lead. Again, this means constructing financial models and marketing strategies that will help the investment team determine whether or not to invest. Usually, the technological evaluation will be performed by an expert within the team (i.e. a software deal with a VP with software experience/CompSci degree, a telecom hardware deal with an advisory board member who is the ex-CTO of BellSouth, etc.)

Deal Sourcing
In the case of a "good" venture capital fund, deal sourcing starts out by targeting a certain industry. Proactive deal sourcing is a better practice than reactive deal sourcing. Let's say I'm targeting the candy industry (silly example, I know). First, I research relevant aspects of the candy industry (dynamics, key players, market size, product leaders,etc.). Then the analyst sits down with other VPs/Associates/MDs and tries to answer the question: OK, so where is this industry headed ? This is a really really difficult question and is where you appreciate the value-added of a senior MD. Let's say we hypothesize the candy market is moving towards sugar free products. Once you answer this question, you figure out: OK, so what are the characteristics of a startup or mid-stage company that can exploit these changes. With this question answered, you now have a good mental picture of what kind of company you are looking for.

We are looking for a candy company that creates candy with revolutionary sugar-free products (no one else has come out with them), has defensible technology that will ensure its market leadership, and can be scaled nationally using venture capital. We expect the underlying technology used to become the dominant design in the industry, and there are no major health or security issues emanating from the technology. In addition, this investment candidate is open to management changes that the VC/PE partners will request using its rolodex of contacts. Bingo! Now we have a target company. Now the analyst goes out and starts looking for such a company. How? Reading trade journals, attending industry conferences, even cold-calling relevant professors in a university department related to the candy industry.

Due Diligence
Most VCs have a few investment bankers with strong financial modeling skills for tech companies. So these senior professionals train the analysts in financial modeling for technology startups. The financial modeling aspect of VC is really quite simple and this knowledge can be easily transferred. I would not stress financial skills too much (esp. for early stage, would stress for growth equity, mezz finance, and obviously LBOs), although it is important for an analyst to construct financial models from scratch.

In addition, you will learn due diligence on an ad hoc basis by sitting in on meetings, talking to associates and pretty much through osmosis. There is no "formula" or "checklist" for due diligence (like in accounting or law). Good VC firms develop individualized methodologies for a prospective deal. Once you've done intense research on one sector, you'll be able to contribute a lot to the due diligence process. If you are an analyst you should request a mentor for weekly 1 hour meetings. I've found this to be very helpful.

You'll notice sometimes VC funds insist on technical majors (i.e. CompSci). This is not because CompSci majors know everything about IT investments, it is because they have the "technical basis" to understand new technologies (even outside their domain of expertise). So having a technical aptitude is important.

Let me know if you have any other questions.

So I got a few questions about the financial skills required to join a VC fund, specifically financial modeling.

*General Disclaimer: If an early/mid-stage VC fund demands strong financial modeling skills, you should run for the hills. Why? Because venture finance is not about complex deal structures, layers of debt or dividend payments. Venture is about fundamental company investing. The complex transactions only occur with very large and later stage deals or LBO deals.*

There are two models that VCs need to understand: valuation models and capitalization table ("cap" table) modeling. In English, this means (1) constructing some kind of analysis to derive the value of a startup and (2) doing a scenario analysis to evaluate returns for the investors and management of the startup.

The first exercise, valuation, is different from public company valuation. In a DCF analysis, a venture capital investment candidate will typically have a discount factor of 40%+. This means that even small changes in cash flow will cause gigantic differences in NPV. So for most early and mid stage companies you can cross out DCF. Comporables valuation, on the other hand, is very valid. Generally, startups valuation will be relative to other venture deals in the same space AND NOT publicly traded companies. Why? Venture capitalists assume all kinds of risks that publicly traded companies do not have, i.e. risk of board dynamic failure, risk of new critical hires, risk of failure of technology adoption, risk that management will not be able to operate in both a startup and hypergrowth environment, etc. Typically, valuation will start by asking, what's the lowest valuation that is reasonable for such a firm (given how many other VCs are chasing the deals). If many other VCs are chasing a particular deal (i.e. PayPal, Vonage, etc), sometimes the valuations become ridiculous and you'll see the top-tier VCs pulling out of the rat race. So valuation is based on either (1) what are the valuations of similar startups or if that is not available (2) what is the lowest value we can negotiate given our reputation and value-added?

Capitalization table modeling on the other hand, is quite complex. Basically in cap table model, you need to determine the different dynamics and returns in the future, given various scenarios. The different scenarios may be: many new rounds of Series A/B/C/D investments with new terms for the preferred shares/an M&A at a very low valuation/a succesful IPO/the founder selling his shares and exiting the company/the consequences of firing the CEO who is a significant shareholder/a sensitivity analysis for an IPO at different prices, etc. Needless to say, this can become very very complicated especially if there are more than 2 VC investors in multiples investment rounds. Note that if there is a "down round" (i.e. the valuation of the company falls from one round to the next), this triggers anti-diluation, which has all kinds of nasty consequences for the financial model.

How do you learn all this modeling? It's not too difficult. If you have a minimum level of financial aptitude (have taken finance classes, investment banking, etc.) you can learn the modeling based on old models developed in-house by the venture fund. If you study an older model, you should be able to pick it up fairly quickly.

BTW: almost all the information I post on the board is publicly available. So even though this information may seem "secret", it has been posted in many different blogs and forums relating to entrepreneurships and venture capital.

As always, keep the good questions coming,
VCMonkey