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Careers in Finance 30/03: Venture Capital

What is venture capital?

Venture capital (VC) is a type of high-risk equity financing where investors provide funding to startup firms and small businesses that are expected to have long-term, high-growth potential. Venture Capital is generally financed by investment banks, private investors, and other financial institutions. Venture capital investment is most commonly conducted on small companies with excellent growth opportunities and on the brink for further expansion in their respective industry. If successful, venture capital investments can result in tremendous profits for its investors, but they also carry a high level of risk due to the nature of startups.

How does venture capital investing work?

VC firms typically begin with an evaluation of a startup’s business model, market potential and team structure, where thorough due diligence is conducted to assess the risks and potentials of the investment. If the investors believe that the benefits outweigh the risks after the detailed evaluation process, they would negotiate the terms of investment with the startup. Such terms may include ownership percentage and the volume of the investment that will be provided. This will depend on whether the company is at a seed funding stage or a series level (A, B and C). After the initial investment, the VC investor then works closely with the startup’s team to offer guidance, operational support and potentially helping to connect the company with potential experts in the industry. The ultimate goal is to help the startup grow, expand and achieve its potential, which may take an extensive period of time. Venture capitalists' returns are commonly generated in the form of profits, acquisition and initial public offering (IPO) depending on the initial stage of the invested company.

How is venture capital different from angel investing or traditional private equity?

Venture capital is a subset of private equity, both operating through the same model whereby investors provide funds to the VC or PE firm, who then invests these on their behalf. The main difference arises in the types of businesses these fund managers invest in, with VCs focusing on startups that have high growth potential. However, they also bring greater risk, through operating in niche emerging industries or new technologies. While traditional PE firms focus on larger, more mature companies that may be stagnating due to inefficiencies and attempt to rectify these and streamline operations, before selling their holdings often in an IPO.

Angel investing is another type of private equity, which like venture capital specializes in early-stage startup funding. The key difference with angel investing, however, is its being made up of wealthy individuals who invest their own money into startups. Whereas VC firms invest other peoples’ money through various equity funds. Further, on the post-investment side, angel investors tend to be more passive investors, providing informal advice where they have expertise or experience. While VC firms demand more formal operational control in their holdings and have more rigorous input in their strategic decisions.

What does a role in venture capital entail and what are recruiters looking for?

VC firms often have large stakes in their portfolio companies and quite hands on approach to managing these. As such, much of their day-to-day work involves advising these businesses and working closely with management on operational decisions. Principals often serve on the boards of portfolio companies, and potentially work for more extended time frames in their upper management through periods of particular difficulty or change. Principals and partners also focus on identifying investment opportunities for the VC fund, whether in particular startups or industries. While also negotiating deals for both entry into and exit from investments. At the more junior, associate level, VC work focuses on gathering information for more senior leaders to make decisions. Often undertaking due diligence to assess the business models of investment opportunities, alongside compiling research about industry and macroeconomic trends.

Across VC roles, however, a key soft skill valued by recruiters is leadership, with venture capitalists often serving something of a mentoring role for the more inexperienced founders whose startups they invest in. The ability to successfully teach others, delegate authority, and cultivate positive team dynamics as a leader is thus highly sought after by VC firms. Due to their more intimate and involved advisory role being quite unique to the VC industry.

Further to leadership, some other soft skills highly valued by recruiters include:

  • Adaptability

  • Attentiveness

  • Empathy (particularly the ability to see things from different stakeholders’ points of view when evaluating businesses)

  • Foresight and anticipation

  • Cooperation

What entry level opportunities are available?

Venture capital is thus a viable finance career pathway particularly for those interested in early stage and emerging businesses. Graduate opportunities in venture capital are quite limited. Many venture capitalists often first enter traditional private equity as a graduate at firms like TPG Capital or Bain Capital. They typically spend 2-3 years in Private Equity before moving to Venture Capital.

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The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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