VC vs Hedge Fund
Lets say you are at the beginning of your career, just out of college and have an offer from
- a VC firm (Investment Analyst position) from which you would go on to do more VC later on
- an Asset Management firm (Equity Analyst position) from which you would aim to move on to a boutique L/S hedgefund.
Which one would you choose and why?
VC hands down
Why? Just curious about your reasoning.
VC is just way more interesting. You work with companies with potential to change the world, meet interest founding teams, give out money, do interesting due diligence on up and coming industries. You have an idea of how you think the world should/could be in 20 years and then act on that world view. This is the best it can get in finance!
Asset management is increasingly moving toward passive investing. Automated rebalancing, etc.
I agree with your first point, not with your second one though. I actually think deeper fundamental analysis on the public markets will have a comeback in the coming years as the increase in passive investing has distorted price discovery.
These are fundamentally different jobs with fundamentally different mindsets...
The VC role in generally will probably be much more "chill" with regards to hours and sociable as you'll have to source deals, and do analysis and look at a ton of different things/industries/spaces/companies. There won't be much or any public information on the stuff you are doing so the research process will probably be different from a HF/LO. Also your fund's capital is locked up so (in theory) you have time.
The HF role will probably be much more intense. You ahve to find ideas but stocks are publicly traded and everyone talks. The numbers are there for you to manipulate and you may be pegged into a certain industry/set of companies/country (or not). Lots of hedge funds aren't long term holders so you'll be doing all kinds of like quarterly/semi-annual estimates or trying to figure out some catalyst. Plus your firm's capital usually isn't stable which means lots of short term thinking, deadlines etc.
Just very different mindsets...
I'd probably choose VC with the understanding that it is extremely feast or famine and hyper cyclical because I'm more social and like learning about a ton of different things.
VC
Speaking as a hedge fund guy, it would be great to not deal with mark to market and risk limits. In VC land you get to really focus on the business rather than the trading dynamics.
Man, grass really does look greener from the other side doesn't it
I've worked for a few years in VC/growth and am currently trying (without much success) to move over to the HF/AM world. A few points: 1) VC money really isn't particularly good, 2) VC is a sales job, not an analysis job, 3) the firm name really really matters in VC, and 4) politics plays a bigger role in VC.
VC money is not very good - just the nature of the industry. a16z manages $16.5bn with an investment team of 57. Yes, 57 (!!!!). How many hedge funds have 57 investment professionals? Fund sizes are also capped by deployment pace/capacity - if you're investing in 10 companies a year writing an average check of $10mn, you'll deploy $300mn in 3 years. There are not that many attractive investment opportunities available in general each year, so all of the funds are fighting for that handful of great deals. There simply isn't room for a multi-billion dollar early-stage fund. With limited fund sizes and lots of mouths to feed, compensation is obviously lower. Comp increases the later-stage the fund is, and there is always the chance for outsized outcomes (if you're the Coinbase guy at a16z, for example). But extraordinary outcomes are obviously very rare.
VC is a sales job - contrarianism in VC is rare and overrated. Most VCs see the exact same data, do the same analysis, and reach the same conclusions. As a result, the best founders with the best companies go straight to the best VCs and nobody else. If you're at Sequoia, you could be an idiot and still underwrite great deals (although, to be fair, you'd probably get fired for other reasons). If you're at No Name Ventures in Kansas, you will pretty much never see a great deal no matter how smart you are (especially if you're a junior investor and are not in a position to underwrite at some crazy valuation). When you're an investor, you need to convince the best entrepreneurs to take your money. And you spend a lot of time just cold emailing founders (yes, even the top funds do this). Andrew Reed at Sequoia tweeted once that his job is 1/2 SDR, 1/2 analyst - that is probably the best available description of the job.
Firm name really matters - see above.
Politics play a bigger role in VC - if you're not a very good investor, VC is great because you can hide your failures for 5 to 10 years. At that point, you're probably working on your third or fourth fund, and unless you're extremely unlucky or you're at a terrible fund, you've probably had at least one somewhat successful exit under your belt. As a result, your chance of promotion and career progression is tied a lot more to how much the GPs like you (it's hard to judge purely on performance because there won't be any performance data for damn near a decade).
If you're not a politically-savvy person, or a good salesperson, VC is probably not the dreamland it sounds like from the outside. Also, as I'm very much realizing now, it's much harder to move from VC to HF than the other way around.
Since you are in VC: how important is industry focus when moving from for example a fintech VC to another that focuses on digital health?
Also, is there a negative view about corporate VCs? Is it harder to move from there to a regular VC?
Finally, you mentioned that VCs are basically half salespeople half analysts. Don't you also help portfolio companies with other things such as HR, reporting, scaling the organization, etc.?
Industry focus - less important starting out, but gets more important over time. I think it really becomes part of your brand at the senior associate/VP level, but it's not as important at the analyst/associate levels.
Corporate VC - depends on the parent company. FANG corp dev, corporate VCs that are more financial returns-focused (Comcast, Google), and prestigious companies in specific verticals (e.g. GS PSI for a fintech gig) are treated better than other strategic VCs (e.g. Japanese conglomerates, auto manufacturers, airlines, etc.)
Portfolio work - yes, there is some of that work but it is not particularly involved. At the junior investor level, most of this tends to be 1) portfolio reporting/monitoring [EOY valuation marks for the firm], 2) strategic and financial support [who are some VCs to contact for the next round? can you review my pitch deck? what do you think of our financial model?], and 3) board support for the GP [notes before a board meeting, summarizing key questions/takeaways, taking notes at the board meeting, tracking deliverables for the firm, etc.]. At most VC firms, there tend to be a few specialists (former recruiters, salespeople, lawyers, etc.) to handle the more specific portfolio support projects.
Didn't a16z lead the Series B in Coinbase? Obviously a big win, but the Coinbase opportunity was largely de-risked at that point.
The thing about Coinbase is that they were not the hottest company when they were out raising their seed round (first capital into the company). They graduated from Y Combinator in 2012 but struggled mightily to raise money. Garry Tan of Initialized (who was a no-name investor back in 2012) was the first check in the company, and then a couple other no-name Y Combinator alumni also invested, but none of the big-name investors would initially touch Coinbase.
I disagree with this to a certain extent. The "best entrepreneurs" (which I interpret to mean the ones that are price setters rather than price takers due to their reputation, being a repeat founder with a successful exit under their belt, etc.) will always be able to turn away money, but the vast majority of founders (even in these frothy market conditions) are default struggling to raise money.
Homophily is a problem in the VC community who are obsessed with their highly overrated "pattern-matching" ability.
Honestly, if the no-name VCs were willing to look beyond their backyard and into the neglected parts of the country like Kansas where there is much less competition for deals, they would probably have a better shot of identifying those outliers that return their funds multiple times over.
One of the biggest problems with VC today is there is too much capital out there desperate for yield that even people who have no business being in VC are able to raise funds. They invest at the seed stage and force their portfolio companies to blow their money on paid acquisition to show that up-and-to-the-right hockey stick growth (which is low-quality growth that is completely unsustainable) in order to convince their friend at the Series A fund to lead the Series A (who then repeat the same process to persuade the Series B fund to lead the Series B, and so and so forth...), showing "markups" that they can use to raise their next fund.
I have bolded some stuff in the post above and responded to them. Apologies for being a cynic...
1. Contrarianism is very rare throughout the industry. Everyone has generally gone to the same schools, received the same training and chase the same jobs. I've seen this across PE, HF, and in the allocation world in my over a decade career, across geographies as well. Places like WSO perpetuate that (And this is not a negative comment on WSO...). Much of the game is trying not to fail rather than trying to succeed.
2. I think Politics is too rarely mentioned on this board. People can hide due to politics for years, decades or their entire career. Combine that with being in the right place at the right time and voila, you may be seen as Midas or a rainmaker despite not being at all gifted/talented/informed/any good at your job... Politics can be brutal at hedge funds as well but I would argue there is less room to hide when compared to IB/PE/VC. That said, to any young kid reading this post or others, do your best to have a pulse on who is in power/influential at your job and above all DO NOT CROSS THOSE PEOPLE. If you can't be their buddy/ally, at the very least be seen as "harmless/team player/vital". I cannot tell you how many times I have (unwittingly) been on the wrong side of politics and how it has impacted my career. Looking back it's really obvious, but at the time it wasn't.
Beautifully said. Sales, however, can be very fun!
I Choose VC over AMF. Because you have an early access to the company info and it it hard to collect information about new company, how it actually generates Profits, it's business model and also what are the growth perspective of that company. And it is challenging for venture capitalist to find the real value of company. So anyone who loves challenges and to do interesting every day will choose VC over AMF.
Wanted to bump this up as I am currently in AM (Long-only) and have thought about transitioning to VC. Great points so far and happy to add my two cents on the AM side.
Positives
Great if you like in-depth analysis with a mixture of quantitative and qualitative information. Its great in a sense that it provides a lot of room for sensitivities and running different scenarios. We are long-term holders (5-10 years) so we never try to guesstimate quarters but instead stress test our comfort levels with the valuation and fundamentals. The fundamental analysis includes speaking to the management team, evaluating competitors, understanding economic moats, long-term financials, capital allocation, where we differ from the market, etc. Quantitative work can vary but mainly includes DCF modelling, TAM analysis, comps and M&A analysis. I personally find all of this work very intellectually stimulating and it requires a certain amount of discipline given the market movements. If you have significant AUM, then you will get to interact with some very interesting people leading some of the top companies across the globe.
Work life balance is pretty good for a front-office buy side role (50-60 hours). Progression to PM will depend on your shop and their team structure so I won't comment on that.
Negatives
You are at the mercy of the markets. Unless you're lucky, there will always be a disconnect between long-term performance and short-term incentives. You can know that your entire portfolio consists of winners but still be killed in a year. This brings political scrutiny (again depending on the shop) and can also significantly hurt your comp. Even for a long-term shareholder, the public markets can be brutal given the daily mark-to-market. This means that you have to really understand what's "priced in" for your investments. Its not enough to just identify good businesses but you have to have valuation discipline and know when to buy/sell which can be really difficult. As others have pointed out this can be a con if you don't enjoy corporate finance concepts and/or trading (depending on the investment horizon).
The investments are ultimately passive unless you work for an activist fund. You do all this work then sit and watch from a distance to see if the investment thesis plays out or if it doesn't. There is not much you can do to influence the management team, strategy or capital allocation.
Your skillset becomes increasingly more niche as you stay longer in your career. Yes you can identify good businesses and understand industries but ultimately you're a stock picker. Private investments which allow for more active involvement with the company keeps doors open if you wanted to go to corp dev, start a company, etc. I am also a believer that active investments will always be around but there's no doubt that more of the total equity AUM is flowing to passive. This means more potential long-term career risk, especially if you're at a smaller shop.
Probably missed a bunch of things but happy to elaborate. I'm hoping to hear more about the VC side from those who have done both or are in VC right now.
Super helpful info. I just made a post about this in the HF forum but would probably have gotten better answers in AM - what are your favorite tools or databases for analysis?
I use Bloomberg, Gartner, GLG and Statista. Most of the work is simply done in Excel. For more industry specific data, our team will sometimes pay for it on an ad-hoc basis.
Interesting re: statista, that's the sort of thing I'm looking for... do you consider it a solid value add?
A multi-strategy HF firm like Coatue or Tiger Global that operates in the private markets, because they can target VC or Growth Capital deals faster and more agressively than VC firms.
it's usually two separate funds employing separate teams at those types of firms.
Yeah man, I already know that.
Analyst 1 is right that's it's usually separate funds but do know some LMM (<$2B AUM) at times have crossover funds that collaborate closely with the same IPs
Bump
Bump again
Both good options. Depends on more specifics. Given so little info hard to make a decision just based on that. But either seem fine at this point. Maybe whichever one was first
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