So Many Eggs in Vee Cee

Mod Note: Throwback Thursday: this post originally went up on 10/5/12.

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 (29)

 
Oct 5, 2012 - 1:26pm

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."
 
Oct 6, 2012 - 1:53pm

yeahright:
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.

I can sell you some bananas at 110 on the peel. Let me know if you're interested.

The general structure of a VC is something like this:

General Partner
Principal
Associate/Senior Analyst
Analyst

There are some other members of course who play very important roles, such as:
Project Manager
EIR (entrepreneurs in residence)
Legal consultant
Exec/Admin assistants

I will talk about the skills you need to be a VCist next week, so, stay tuned.

I may not be on the Jedi Council, but I sure am great with the Force.

See my WSO blog posts

 
Oct 5, 2012 - 1:21pm

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!

 
Oct 6, 2012 - 2:16pm

Huskies25:
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?

The partners put their money in, the use it to invest in startups, so in essence it is their own money.
If the partners disagree on a certain investment, they can connect the startup with outside investors and if the transaction goes through, they get a "fee" or a percentage.
So they act as middle men under very specific circumstances, otherwise they are the investors and more often than not, they sit on the boards of the companies they start up.

Huskies25:
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?

I will talk about this in depth next week, because this was also a nagging question I had earlier and I am still in the process of talking to the people who know best so I can give an informed answer.

Huskies25:
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?

It would be a risky business if they make the wrong investment decisions. There is, of course, a very high level of risk, but most people who are passionate about entrepreneurship have a bigger appetite for risk. Let's keep in mind that in the startup phase, we mainly depend on management and operations, so having the right team is undebatable. A good VC knows which people to bet on.

Also, the portfolio of companies they invest in dictates a lot of their risk level. Focusing mainly on bio-tech will bear a higher risk thank diversifying between bio-tech, energy, and retail.

My understanding is, the cash is not just sitting there in a bank account, it is definitely working for the fund, either through some type of less riskier investments with an outside HF or through an in-house arm of the VC fund itself.

Hopefully that covers your questions?

I may not be on the Jedi Council, but I sure am great with the Force.

See my WSO blog posts

 
Oct 5, 2012 - 2:37pm

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.

 
Oct 5, 2012 - 3:55pm

in.

Disclaimer for the Kids: Any forward-looking statements are solely for informational purposes and cannot be taken as investment advice. Consult your moms before deciding where to invest.
 
Oct 11, 2012 - 10:25am

oR3DL1N3o:
speaking of eggs, i would like to fertilize yours.

Lol

Disclaimer for the Kids: Any forward-looking statements are solely for informational purposes and cannot be taken as investment advice. Consult your moms before deciding where to invest.
Start Discussion

Total Avg Compensation

September 2020 Investment Banking

  • Director/MD (17) $704
  • Vice President (45) $323
  • Associates (255) $228
  • 3rd+ Year Analyst (37) $203
  • 2nd Year Analyst (141) $153
  • Intern/Summer Associate (133) $141
  • 1st Year Analyst (561) $129
  • Intern/Summer Analyst (543) $82

Leaderboard See all

1
LonLonMilk's picture
LonLonMilk
98.3
2
Jamoldo's picture
Jamoldo
98.3
3
Secyh62's picture
Secyh62
98.2
4
CompBanker's picture
CompBanker
97.8
5
Addinator's picture
Addinator
97.6
6
redever's picture
redever
97.6
7
Edifice's picture
Edifice
97.6
8
frgna's picture
frgna
97.5
9
NuckFuts's picture
NuckFuts
97.5
10
bolo up's picture
bolo up
97.4