What Is a Venture Capitalist?
By Indeed Editorial Team
Updated April 1, 2021 | Published February 4, 2020
Updated April 1, 2021
Published February 4, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Venture capitalism can be an adventurous and potentially very lucrative career. Historically, venture capitalists have played an important role in nurturing innovation and exciting new business ventures by investing in unknown and unestablished startups. In this article, we discuss the venture capitalist profession, what the job entails and some positions in the field.
What is a venture capitalist?
A venture capitalist (VC) is a person or a company that provides funds for startup companies that show high growth potential in return for equity shares. In most cases, venture capitalists grow their funds through Limited Partners (LPs), for instance, insurance companies, pension funds, foundations and wealthy individuals. Although all limited partners have part ownership over the fund, it is the VC firm that finds new investment opportunities and makes the decisions.
VCs typically search for startups that offer a unique product or service that has the potential to draw a large audience, as well as knowledgeable and effective management teams. As VCs tend to make large investments in companies to earn higher returns, they typically invest within industries they are familiar and comfortable with. Industries that are currently exhibiting the highest growth potential are in the fields of technology and healthcare. However, VCs are also investing in other industries like retail, education and hospitality.
Related: Q&A: What Is a C-Level Executive?
What do VCs do?
In general, the activities of a VC firm incorporate the following:
Sourcing new startups: The main focus of a VC is to search for startups that show high growth potential.
Executing deals: Once a VC has targeted a startup, they will analyze the potential of the investment by conducting due diligence and analyzing the market and financial projections. If all seems promising, the firm will start the negotiation process.
Supporting startups: A VC investment is typically a long-term commitment that may last from five to eight years. During this time, the VC firm will not be involved with daily operations but will probably supply a board member and take an active interest in strategic matters. The firm may even exercise veto rights over things like business expenditure or the sale of the company. However, having a VC on board also benefits a startup as the VC will provide support where needed, be it fundraisers or administrative issues.
Networking and brand-building: VC members stay up-to-date with new developments and players in their industries by attending conferences and events.
LP relations: VCs supply their Limited Partners (LPs) with regular reports and updates and are also always on the lookout for new investment partners.
Internal operations: Internal operations include administrative, accounting and IT tasks, as well as internal reporting.
How do venture capitalists make money?
VC investments are high risk because firms typically invest in startup companies that are facing challenges in securing the necessary startup capital due to a high-risk profile or a lack of cash flow. Even though VCs only invest in startups that show promise, there are always risks and uncertainties involved when it comes to unestablished businesses. Also, because venture capital is a form of financing that aims for higher returns than other entities like the stock market, firms tend to make large investments.
Although VCs may experience high failure rates, they also earn massive returns on investments if startups do succeed. However, to mitigate risk, VCs rarely invest all of their money in one company. Instead, they tend to spread their investments across multiple startups, with the expectation that most companies may fail but that one or two startups will succeed. In a high-risk environment, the profits are such that a few successes are more than enough to offset failure.
Positions within a venture capitalist firm
Although the roles within VC firms may differ, there are generally four types of venture capitalist positions:
Analysts are typically individuals who have just completed their undergraduate degrees. As such, this job can be a valuable training experience. The job mainly involves researching industries and supporting associates with due diligence and internal processes. Analysts may also attend conferences and do scout work for the VC firm. Typically, analysts gain experience and then move on to complete their MBAs or join another firm as an associate. Although analysts can move vertically within a firm, it is not common.
Associates typically have some entry-level experience in a related industry such as investment banking, product management or business development. The primary duties of junior associates include sourcing the best startups and sharing updates with principals and partners; analyzing business models and industry trends; and supporting companies in the firm's portfolio. To earn a promotion to senior associate level, a junior associate would typically need to earn an MBA and work for three to four years.
The role of the senior associate, or post-MBA associate, is a coveted position. The duties of the senior associate are similar to those of the junior associate, except that the former also acts as a firm representative and has more influence with principals and partners. Senior associates often act as apprentices under the guidance of principals and partners. Senior associates need to prove that they can recognize profitable startups. If a senior associate does not get promoted, they often leave the company.
Principals are partners in training. Typically, candidates need an MBA and at least three to five years of industry experience. Those who do not hold an MBA probably need around seven to 10 years of experience. Although VC firms tend to often promote senior associates into this role, industry professionals with many years of experience in fields like business development or sales may also assume this position. To become a partner, a candidate needs to prove that they can increase the company's profits.
Although principals are the most senior members of staff that are directly involved with the execution of deals and negotiation processes, they also become more involved with existing portfolio companies. To execute their duties well, these professionals need knowledge of both the technologies of the industry, as well as the business and finance side of things. As senior members of staff, they sit on boards but they do not make final investment decisions.
As is the case with associates, VC firms distinguish between junior, senior and general levels of partners. Principals often move vertically within a VC firm into the role of junior partner, but, at times, VC firms will recruit industry executives and successful entrepreneurs. The trajectory from junior to senior partner roles often increases from deal execution towards supporting portfolio companies and LPs. As such, junior partners are still involved with deal execution but their focus shifts to working directly with startups.
General partners either have extensive VC experience or are highly successful entrepreneurs or executives. These professionals do not get involved in sourcing or deal executions. Instead, they focus on honing relationships with LPs, acting as a firm's representative by speaking at conferences, serving on boards and making final decisions concerning investments. General partners also invest sizable amounts of their own capital in a fund, which means that they could potentially multiply their worth—or lose a lot of money—depending on their firm's performance.
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