Q&A: what its like in software VC / growth equity, to source deals, suck at it and do it again and again.
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1) Consultant to VC/Growth/PE happens all the time. While they may not be model junkies like their peer bankers, they have a very desirable skill set. Through their work they have strong interpersonal skills and commercial instincts. I've work with a bunch of different folks (associate to Partner) who used to be consultants at MBB, and i'd argue they are more impressive than their fellow bankers (they are all talented too). As long as you're smart, I think it's a lot easier to learn how to model and conduct financial analysis (in VC/Growth equity, not necessarily in traditional MF LBO shops) than to learn how to source, work with executives, interact with other VC/PE firms, etc. I'm obviously biased with this point given my path here. You hear this all the time - EQ really matters when you make the jump to VC/PE.
2) Many funds across all asset classes have an operational/consulting function. You often see this when firms have operating partners. The type of operating/consultant structure varies across funds. In many cases, as an associate and above, you are doing portfolio work: implementing GTM initiatives, executive hiring, selling the business, M&A, creating BoD materials, etc. This isn't limited to just folks who have consulting backgrounds. I'm doing portfolio work as we speak and I had neither a consulting nor a banking background.
Another thing I can't stress enough: As a result of being a long term WSO lurker, I've noticed a great deal of emphasis on the idea that financial modeling = success, job satisfaction, value, etc. I urge people to adjust their view. Financial analysis is becoming more commoditized; it is a must have in the PE industry. In pure VC, you're never doing deep hard core financial analysis. As an investor in VC/Growth, you're constantly evaluating management teams and asking yourself: - Is the Founder/CEO capable of growing this business and can I work with him as a minority investor? - How do I best position myself to win this deal opportunity? - What are the market dynamics that will allow this company to achieve a certain level of growth over the next 5-10 years? - What are our competitors doing? - Is the current go to market strategy the right one for scaling this business? - What key management roles are missing in this company? What kinds of people do we want leading sales, HR, product, etc.? - etc. etc.
You're not going to answer these questions by being able to put together a pristine LBO model with a complex capital structure. You need the qualitative data in order to have the inputs for the model. In VC you're evaluating the actual code and product, in Growth Equity you're evaluating market and growth potential and in PE you're evaluating if you can increase price and gross margins. That all requires qualitative work and judgement, which goes into the model inputs.
This is the same in other industries. If you're an MD at a BB or MBB or CEO you're definitely NOT doing modelling. You are managing new and existing relationships to generate business. You are leading others. You're relying on your subordinates to conduct the necessary financial analysis because you've already demonstrated your analytical aptitude and much more.
Note I'm not discounting financial analysis, it's just not the be-all end all. My general advice to a college student is to work on building the interpersonal and leadership oriented skill sets, along with everything else. One of the best and easiest ways to do this early in your career is to network and do so effectively and with purpose.
Hi ilc22,
Thank you for doing this. I really appreciate it! I'm currently in the interview stage for the Analyst position at an early stage VC. I have some questions for you:
Thank you again for doing this. I'm so excited when I saw Patrick posted about this thread.
1) There are many, many different people, blogs, etc. you can follow - Enterprise Irregulars / David Skok (Matrix Partners) - really good stuff. Covers content for specifically software founders and is aimed at helping companies scale, primarily those in their early stages (0-20m ARR) - SaaStr: another SaaS start up aimed blog. Great podcasts too - newsletters: Finimize, Pitchbook, Fortune Term Sheet, Axios Pro Rata - Any top tier VC firm like Sequoia, Bessemer, Battery, Andreesen will have a twitter page. Many of the Partners at these firms will also have twitter page. As you go up in the asset class, that is less likely. - and much, much more
3) I kind of answer this in point 2, but I'll reiterate that it's generally hard for founders/CEOs to scale up and down. If you are a product focused founder, it's more likely that you'll have difficulty in managing a company with 500 people and doing $50-100m in ARR. If you are a F500 CEO, chances are you're not used to managing a 15 person company that's pre-revenue. If there is a common trait, it's wisdom (failures and mistakes) and experience. Again, I am very limited in experience here.
4) I would focus on being structured in how I find and generate opportunities. I've found success in picking a couple of markets and going really deep into them. This means understanding the different sub-segments of a market, laying out the competitive landscape and it's incumbents and disruptors, figuring out the key subject matter experts in the industry, figuring out the different types of customers, etc. Once you find a type of market, then you go all in: conduct market research (talk to customers/partners of companies, review surveys, read Gartner/Forrester), talk to industry experts, attend conferences, and ultimately talk to companies. The more and more conversations you have and become more "in the know", the easier it'll be to understand what types of companies are interesting and have strong, engaging conversations with those companies since you are knowledgeable about their market.
5) Desired output in VC: find high quality deal opportunities! While doing that, provide as much leverage as possible to the Partner. For example, when working on a deal you should think about laying out to Partner: - The game plan for winning over the founder - The diligence plan: what are the key questions we need to answer in order to feel comfortable about doing this deal and how do we execute on finding answers? - Are there people who we can talk to in this industry or in our network that'll give us a a valuable perspective on the deal and market opportunity?
By laying out a thoughtful game plan, you'll build a ton of credibility with the Partner. The key is to give the Partner something to react to. So instead of asking the Partner: "do we want to do this deal?" You should say "I still don't know enough about this deal, but I think we need to think about XYZ in order to come up with the right answer. Here's how I think we can go figure all that out." That statement gives a Partner a chance to REACT and chime in with thoughts. By the way, it is completely fine if the Partner disagrees - just another learning moment for you