Venture Capital Salary versus BB and Private Equity
Hi everyone. I wanted to get some candid advice from all of you about a job I'm thinking about taking. It is a VC role at a top-tier firm. I'm being directly hired as an associate (so I'll skip the two-year analyst role). My only concern is that I believe that the salary is slightly low. I'll basically be making a little less than 100K on an annual basis. I know that this is a unique opportunity but I have a number of banking offers that would allow me to make your typical BB type salary. However, I strongly want to be in VC long-term. This VC role would clearly set me up to be a partner well before I'm 30. So should I really not be emphasizing salary right now given that I can make quite a lot in a few years?
I don't have much time before these offers explode so any help at all would be much appreciated.
VC analyst salary compared to Investment Banking and PE Salaries
Our users generally feel that if VC is your end game, you should focus on that rather than chasing a higher salary in the short term at PE or IB.
However, some users cautioned against firms claiming that you will make partner before 30 while also offering what you consider to be a low salary. This can be a method to lure people to work for less than they should.
You can learn more about venture capital with the below video.
Read More About Venture Capital on WSO
- Private Equity Vs Venture Capital - Differences And Similarities
- Venture Capital And Growth Equity: Pipeline And Industry In General
- Private Equity Vs. Venture Capital In 2018
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You've already taken the role, so this is probably a moot point, but I'd make sure you a get a good idea of your trajectory at the firm.
It is very rare, especially at large VC shops, for anyone to be able to make it from Associate to Partner. I'd say its ever harder to make that leap in VC than it is to do the same thing from a traditional Megafund PE as more of the skillset is based on sourcing, relationship building and the right background(which usually means successful founder)
Unless you've already had a successful exit or are extremely well networked in whatever location you're working in, making it to partner from an Associate role is tough.
Brand name VC will never hurt you, but I'd make sure to figure out quickly if you actually have a chance to stay at the firm for 10+ years or if they're just saying "well with good performance you might be able to move up"
If you want to do VC, and you have an offer at a top tier VC, take it. Salary right out of school is essentially meaningless as long as you can pay your bills.
Personally I hate vc right now. I mean it’s sexy and the ideal place to be but the deal quality looks awful to me. Instead of putting 50 million into fb ten years ago the competition is now forcing firms to put 100–500 million with some founder cash out into marginal firms with 20 competitors. Especially anything remotely connected to “platform potential”. Returns are going to be awful in vc and though you get a nice 2% carry the ability to generate the longer term 20% performance fees seem impaired.
Personal opinion i would take the banking job just because vc seems saturated now.
Good luck. I would really look outside the box as a lotion investments now look really challenged.
I'd agree that there is too much money in venture right now, but it'd be rash to dismiss joining a top-tier VC as a bad career opportunity. A few observations:
Top-tier VCs will continue to see the best deals. While there is a lot of capital flowing around, the top funds (Sequoia, Benchmark, a16z, Greylock) still manage funds that are "small" enough to generate great returns (context: IVP has generated 40+% IRR for 36 years now. Sequoia's and Benchmark's funds are rumored to regularly return 40+% IRR also. a16z was noted to be "underperforming" other top VCs but still has 20+% IRR, and it's too early to tell). Venture returns are driven almost exclusively by outsized returns on outliers, and the companies that are getting these home run exits largely have their pick of who to raise capital from. This means they're always going to be raising from top-tier funds, and top-tier funds will always have access to the best deal flow. This won't change. The main concern is with the mediocre funds who don't have the pedigree to chase great deals, so they chase companies high up on the hype cycle that may not have great products. This will likely lead to subpar returns. But this isn't new - we've been seeing this consistently for a very long time now.
It's kind of a misconception that VCs can choose the best investments, and not the other way around. Top-tier VCs get top-tier returns largely because they see better deals, not because they choose better companies.
There are reasons platforms are backed by so much capital. 1) It's very expensive to build out, and 2) the platforms getting a ton of funding are largely winner-take-all (due to network effects) with few exceptions, and therefore a platform in a large market will be able to generate outsized returns as well.
Softbank is a new development that has changed the entire landscape of venture. The firm's investment thesis appears to be 1) find a category you like, 2) find the category leader, and 3) give that leader enough capital so that they will never need to raise ever again, and use that capital to complete crush the competition. We'll see if it works. Interestingly, Softbank also provides essentially an alternative to IPOs - it can theoretically provide even unicorns with more than enough liquidity to remain private forever.
Yes, blockchain and AI are high up on the hype cycle, but they're there for a reason. Both technologies have the ability to fundamentally change the way the world operates. And most companies in both spaces will fail, but the few who succeed will likely be backed by top-tier VCs, and so those funds will be able to achieve top-tier returns.
The IRRs for IVP, Sequoia and Benchmark are referring to historical results, so they will not change. IVP's number is on its website, Sequoia/Benchmark are secondhand info. With regards to a16z - if anything, the returns are probably going to go higher once things are said and done, not lower (due to a16z's uniquely conservative valuation methodology for investments in its portfolio. They have a blog post about it, you should read it). Then again, nothing's done until it's done, and we don't know how investments will shake out until the companies have IPO'd, sold or closed.
Pointing to a few bad deals is not symptomatic of a problem for top VCs as most companies in a VC's portfolio are expected to fail or deliver low returns, and the few who exit at outlier multiples are going to be the primary driver for overall returns. As an example - Benchmark's Uber investment is likely going to return more than 10x its entire fund. Sequoia reportedly made $3 billion on Whatsapp alone, which is ~6x its entire fund. These returns are definitely abnormal but not rare for top-tier firms, who regularly hit home runs that can return multiples of the fund. These funds also often hit singles and doubles (exits ranging from a few hundred million to a billion or so) that nobody talks about (they're often boring companies) but offer fantastic returns on investment.
There's a reason why Sequoia could probably raise a new $500m early-stage fund in about ten minutes. These firms have zero issues raising capital, and every fund is oversubscribed several times over.
Also, I honestly don't believe your characterization of deals over the years to be correct. We've seen the companies from 10 years ago reaching maturity now (which is why we can point them out as runaway successes) but that's not indicative of the current environment at all. The maturation period for a VC fund is 10 years, so we'll see in 10 years whether or not you're right, but I suspect you're not. Companies getting backed right now are obviously not going to look like great investments (just as the current batch of successful companies didn't look like successful companies ten years ago) as they're still in a high stage of growth.
We're in a very different environment for tech companies now vs 2000. I know that "this time it's different" is an awfully dangerous thing to say but this time it really IS different. Back then, any company with a .com domain name could raise capital on the public markets, while nowadays you need real revenue and a path to profitability. There is ZERO chance that a company with no signs of real traction could ever IPO in the current market environment.
The Internet was a lot smaller back then, and we didn't have smartphones which limits the Internet's overall utility for individuals. It's extremely difficult to overstate the importance that mobile has had on our markets.
Bandwidth was a lot slower, which means the Internet's capacity to disrupt was far more limited. Technologies that gained a lot of hype but no traction back then are now being executed successfully (Webvan vs. Instacart/Amazon) because we now have the infrastructure to support such ideas. Even established giants like Netflix (streaming video) could never have succeeded back then due to networking constraints.
Lastly, Marc Andreessen wrote a blog post a few years ago stating that "software is eating the world." You should read it because it's true. Software is eating the world. Technology is no longer just the technology industry - it's infiltrating the way we make things, the way we drive, the way we communicate, the way we get food - pretty much everything. And that level of disruption will only increase over time as technologies like AI/ML (which have been enabled in recent years by leaps in hardware engineering) begin to mature and seriously increase human productivity.
VCs will get bigger exits because the entire tech industry will be bigger, most likely at the expense of every other industry out there.
Tone is hard to get across in text - I assure you that was the opposite of my intention, and apologize for any misinterpretation.
Regarding your points: I'm not cherry-picking returns, I'm talking about consistent historical returns over decades for IVP, Sequoia and Benchmark. I am not discussing the specific fund returns from 2007 to 2017. I work in VC and haven't heard anything about inflated returns - gossip spreads quickly in the Valley, so I find it hard to imagine that these firms would put out misleading numbers. Then again, I am not an LP to any of those funds, so there's a small possibility I'm mistaken.
With regards to deal quality - again, it's unfair to put up a few bad deals as examples that the entire industry has gone to shit. Outcome Health is not a company I'm familiar with - I'm sure my firm looked at them, and I'm sure we passed. That was before my time. Facebook was obviously a deal that turned out to be fantastic for investors, but at the time I'm sure it wasn't at all obvious how big it could get, or how it was going to get there. To note - Airbnb was passed on by some of the world's best investors until it gained some traction. Slack started as a failed gaming company before the chat platform was commercialized.
I only know how we do diligence at my firm, and I know we do a lot of work around unit economics, market sizing, the strength of the team, growth sustainability, etc. We obviously make mistakes investing at the early stages (where most of it is just judging management and market), but at later stages (where I focus) I believe our theses are sound given the information we had at the time of investment. I cannot speak for other firms (like GV or Goldman Sachs). I assure you that diligence remains comprehensive, at least where I work, and I'd be skeptical that the standard would be any lower at our competitors.
I'll reiterate my earlier point - I don't believe deal quality has gone down. The causes of macro deal quality decline could result from only two things: 1) more companies are getting backed, meaning the average quality of each deal is decreasing (as the companies on the tail end of the quality distribution are getting funded), or 2) the companies being backed are of lower quality on average because the ultimate achievable outcome is, on average, worse. 2) isn't true (given incremental advancements in the industry, TAM has only increased), so I'd imagine you're talking about 1).
While more capital is being invested year-over-year, the deal count is actually declining, which means just more capital per deal, not necessarily more deals. It also means that great deals are being hotly contested, driving up valuations and amount raised.
Also, it is easier to start a technology company now than it was even a few years ago (given proliferation of cheap dev tools, cloud resources, etc.), which means, in theory, there should be more good companies getting started now.
The companies raising contested rounds have their pick of VCs. They will choose to work with the best firms in the Valley because that would increase their overall chance of success. Top VCs are not raising significantly larger rounds at the early stage, with incremental capital largely flowing to later-stage vehicles (which haven't gotten much larger either, as much of this capital goes just to follow-on rounds).
So if you join a top VC, I don't see a problem. The key point is that capital is not created equally in VC - an entrepreneur would rather take a dollar from Sequoia than they would from Costanoa Ventures, for example. Top VCs maintain a competitive advantage, stay in top deals, and therefore can continue to generate very good returns.
I'd agree that there is too much capital in VC. It seems to be flowing not to top-tier investors, but new funds (including private investment vehicles for hedge funds), which are far more likely to be vulnerable to competition in private markets.
I'd caution people to stay away from small new funds with unproven management.
I was discussing individual venture capital firms, the article discusses the broad topic of private equity returns. Not sure it's all that relevant.
I'd agree that it seems we fundamentally disagree.
The merits of the deals that you're talking about are your own opinion. I disagree in principle, as I see the logic behind most deals I see on a daily basis, but I can't really discuss this with you without specifics. I will say that 1) top VC firms invest in early stages, so even if the growth-stage companies are raising at high valuations, they still profit, and 2) there are a lot of factors you can't see publicly. I know that seems super dismissive, but that's not what I'm intending - I'm just saying it's hard to make judgments on the merits of private investments when you don't know any of the numbers.
IBM had over 80% PC market share in the 1980s - that was who Apple was competing with. Microsoft had 20+% share in the early 2000s. Yes, there's a lot of competition (especially in consumer) but that doesn't mean that there aren't opportunities for disruption (as evidenced by the rise of companies like Uber, Airbnb, Lyft, etc.) A few observations: 1) Startups are able to move faster than their well-capitalized counterparts, which means they can scale without the big guys noticing until it's pretty much too late. 2) It's very cheap to start a company nowadays, so the incremental scale and capital that the legacy players have isn't really that much of a competitive advantage. 3) Network effects often prevent even mega-cap companies from making a solid competitor (best example = Google+ and Facebook). 4) Consumer is challenging, that is widely known. Enterprise still presents plenty of opportunity for new companies (that's where I've seen most dollars being invested)
I don't know enough about Uber's economics to be able to intelligently answer your assertion. I'll just say I share some of your concerns regarding the economics, but not about the defensibility. Uber has very strong network effects (being a large-scale two-sided marketplace), which makes it extremely difficult to replicate.
Facebook definitely was not self-funding after an initial round (they raised several hundred million in venture funding across multiple rounds prior to IPO). Apple released the iPod as a public company, which largely isn't a relevant comparison.