Early Stage VC 101: 5 Questions You Better Be Able to Answer

There are lots of posts on WSO about getting a job as an early stage VC analyst. People ask things like what major should you be in college, should you go into Ibanking first, or should you try startups first. By this point, many have identified that the best way to approach this is to first first go work at, or start a startup. The first two doesn't really matter that much

Still, this only address what you should do, and not why this is the best path.

Startups are usually the most viable path because early stage venture investing is so qualitative that only startup experience will teach you some of the relevant skills. The old VC adage is that they rather invest in a B idea with an A team than the opposite. Comparing that with someone coming out of IB, you can see how crunching excel numbers does not translate well into recognizing a good team from a bad team, or recognizing operational mistakes before they occur.

Looking for people with operational experience at a startup is probably the best way of screening for candidates with possibly relevant skills. It's the only experience that translates well into early stage investing. VC firms can't afford to hire someone to learn everything on the job like in IB because most venture funds aren't structured to have high operating head count. The only exception to this rule, and hence sometimes dubbed the most "inefficient asset management firm" (jokingly of course) is ff ventures.

The truth is, people work really damn hard to even get a low level position at a VC firm. If you can't answer the following five questions easily, most likely you're not yet qualified.

  1. Do you have an advantage in sourcing deals.
  2. What is Networking Effect
  3. What are some current trends/markets on the rise.
  4. What are the 5 hottest startups right now and why.
  5. What is a company you are really excited about.

The first questions is the most important one. In a typical early stage firm, the analysts are responsible for a lot of the actual deal sourcing and screening before passing it on to a principal or partner for further consideration. VC boils down to being a people's business. The more people you know, the more that people trust your opinion, the more access you will have to early deal flow. You want to be that person that people go to for suggestions on a startup idea. If partners know that you are a well respected person in the tech community and can find good deals for the firm, you are more likely to make it.

Networking effect plays a huge part of startup investing and it's closely related to the scalability of a business. It's hard to define network effect but as Benchmark Partner Bill Gurley describes,

Can a better experience be provided to participant N+1000 than participant N as a result of adding 1000 more participants.
Many of the best companies in recent memory such as Uber, Airbnb, Facebook, Twitter, Tumblr, Linkedin have very strong networking effects. (Yes I do realize the aforementioned examples are very consumer skewed)

The other three questions deals with generally having true passion about technology. The best venture investors predicted that a certain trend was rising and saw a star player riding on the crest of that trend. As Paul Graham put it, a great startup needs a combination of market + timing + team that can execute that vision. Thus, if you don't have the knowledge of things going on in the tech world and companies that are exciting, you can't possibly pickup on market trends and understand the individual players and their positions. You won't be able to timely and correctly identify competitive advantages and operational advantages. As you see, this knowledge isn't something that can be built up over a week but instead is accumulated over a long period of time by reading and immersing yourself in the world of startups. Taking the time to keep up with current news and events shows that you have a strong interest in startups and have what the VC is looking for.

All in all, almost all the important factors are not easily built. As I mentioned earlier, people spend a lot of effort trying to successfully get into the world of VC. When you work at an early stage VC firm, you're rarely singled out by the title of "Analyst" as you would at an IB. You're part of the "Investment Team" and it shows that you are someone essential to the firm. You want to have the aforementioned qualities and much more in order to become a successful VC. Firms are much more likely to hire someone who has partner potential rather than just another analyst. The analysts aren't there to do grunt work but is instead very crucial to the firm.

Having said all that, if you want to get started on learning these things any way, I would suggest first reading Venture Deals by Brad Feld. There is no other person that is able to give the insights that he is able to. Then you must become active on social media and read all kinds of tech news. Make TechCrunch, PandoDaily, AllthingsD your best friend. Read every word on FeldThoughts, Mark Suster's Blog, AboveTheCrowd, Chris Dixon's Blog, Avc and more. And last of all, truly enjoy working with people and relish the experience. One of the best perks of being a VC is working with all the amazing entrepreneurs out there.

Comments (14)

Nov 8, 2013 - 10:59pm

This is great, there are not enough meaningful conversations about venture capital on this site. Thank you for sharing.

I am permanently behind on PMs, it's not personal.

Nov 15, 2013 - 5:09pm

I interned at a Venture Capital firm during my senior year in college and know quite a bit about the VC industry and tech startups, so here is my input about how to get that entry level job.

Basically, you cannot apply directly. You have to be referred by someone (preferably someone, who works there). Thus, you need to:

1. Network
2. Network
3. Network
4. Use head hunters (that may work, so try it)
5. Know someone who works there (alumni, fraternity friends, or just friends).

When you do get an interview, make sure to show that
a. You are genuinely passionate about startups and technology (or whatever your sphere of specialization)
- So when you get questions about startups and trends, there should be no problems since you probably have been discussing this with your friends every single day.
b. You can hold an interesting conversation. Show that you are a nice person. Show that you are a good fit for the company.
c. You are not stupid. You won't get very hard (if any) quantitative/excel questions. Just make sure you can do basic valuation (pre/post money, multiples). You might be asked about your excel skills but that's easy too. Knowing how to make pivot tables and do basic formulas is usually enough.
d. Show that you know what you will be doing in your role. Analysts usually spend a lot of time on the phone, email, excel, and powerpoint. Lunches are usually delivered to the office. Partners travel a lot, especially when they are raising a new fund.

In my experience, I have never seen our analysts/associates/MDs ask questions like "Why do you have an advantage sourcing deals" or "what's a network effect".
The questions are more subtle:
- Why venture capital? (if you are new to it)
- What company would you invest in right now?
- What are the trends? What are current problems?
- What have you done in the past that's relevant to our company?

Sometimes, we used to give more interesting questions like:
- Draw me an idea maze for this company. Basically, you need to list all competitors/ideas for a company across different business models and sub-industries.
- What's better for the business? 10 million one-time users that don't pay and never come back or 1,000 monthly users that pay $5 per month?
Both of these options are actually bad and don't qualify as a good choice.

Finally, if you do meet people before the interview (at a bar, conference, or some other event), then you have a huge advantage.

Good luck

Nov 17, 2013 - 4:07am

Thanks for the thoughtful comment! I definitely agree with a lot of your points but again analysts roles differ across different firms. These were some questions I thought one should ask him/herself rather then questions a firm might ask for interview. It's a good standard to judge if they understand various aspects of VC knowledge they should know.

The questions you had mentioned overlap with some of mine, but you said you haven't seen questions about network effect or sourcing advantage. To answer that point, you had mentioned yourself that networking is crucial to VC. That plays directly into your sourcing advantage, do you know a lot of people in the space. Overall though I would describe my post as a super quick overview and starting point to learning much more about VC.

P.S Sourcing advantage is extremely important if you are at a smaller firm, I'm thinking USV in my head right now. If you're at insight ventures, ok maybe it won't matter as much. Should've made that clear so thanks!

Nov 16, 2013 - 6:55pm

Thanks for the amazing insight! Exited my first startup and always wanted to move to the other side- so this is quite helpful insight! Thanks!

Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us.
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