Venture Capital Internships

“I’ve been looking for investment banking summer internships this year but missed the recruiting season and was not able to find anything at boutiques or small firms around here.

I may get an offer to intern at a venture capital firm focused on renewable energy, via a family connection. Given that this is outside New York, how would a summer at a VC look compared to the typical i-banking internship?”

Inquisitor:

This is a great question and brings up a point that I have not addressed on the site (until now, that is).

A lot of undergraduates are interested in pursuing venture capital after (or before) investment banking. In theory, it sounds like a dream job - flying around in jets, meeting entrepreneurs and seeking out the next YouTube and then making hundreds of millions of dollars when Google swoops in and acquires your company for $1.6 billion.

The problem: that is not what working at a VC firm as a junior person is like. Instead, you’ll often be somewhere between an assistant and an investment banking analyst: you will support the Partners and handle administrative tasks. Sure, the hours and lifestyle will be much better, but you might end up doing even less meaningful work.

Case in point: I knew a girl who interned at one of the top VC firms a few years ago and spent most of her summer managing the Partner’s calendar, taking care of errands and traveling throughout the country. While the travel part may sound appealing, you don’t develop skills like financial modeling, sales, or even valuable relationships by being someone’s assistant.

As Guy Kawasaki pointed out on his blog, you want venture capital to be your last job - not your first (or second).

One exception: if you go to a later-stage VC or growth equity firm, those are closer to banking and private equity and will be looked upon more favorably/give you more options.

If this is your only option for the summer, sure, go ahead and do it - just don’t expect recruiters to treat a VC internship as “on par” with a banking one, because it is usually not even close.

On the New York issue, it doesn’t matter much for an internship - location is more relevant for the purposes of networking and deciding where you go next.

Private Equity In China

“I’ve been offered an internship at a small private equity firm in China. The team is very small (only 5 including me) and they focus on small and mid-sized businesses.

They said responsibilities will be similar to PE internships in the US - site visits, due diligence, financial modeling, meeting with owners, etc.

I have no previous finance experience, and would likely be looking for a job in the US once this internship is complete. Will this help me in terms of transitioning to a larger firm in the US?”

Inquisitor:

Internships abroad tend to be more “random” than ones in the US. I know because I interned abroad before and many friends have done the same.

So you usually don’t know exactly what you’ll be doing or learning until you’re already midway through the internship. It’s definitely more of a gamble than staying domestic and working at an established firm.

That said, I would recommend you go through with it and accept the internship anyway:

• You have no finance experience, so it will be quite difficult to break in unless you go this route.
• It’s just an internship and it can be spun any way you want during recruiting - expectations tend to be lower when describing internships vs. full-time jobs.
• There is the whole “China angle” aspect these days, which US firms will like.

Merely having the name “private equity” on your resume makes a huge difference and will get you access to recruiters and larger private equity firms, regardless of how much you actually learned.

Setting Up Firm Visits And Informational Interviews

“Could you explain the process of setting up a company/firm visit, and what I should expect? I’m living and interning abroad this summer and want to take advantage of the opportunity to meet with local firms here. I also wouldn’t mind working abroad in general.”

Inquisitor:

Expectations are not set too high when visiting firms, especially when you’re outside the US. It’s mostly about asking intelligent questions, doing some research beforehand and showing interest in what they do.

It’s about not screwing up more than doing anything perfectly (see: summer internships and proving yourself when you first start).

In terms of setting up a firm visit, I would just ask for it directly - “I’m very interested in learning more about your firm and will be in XX area on XX/XX - XX/XX - I wanted to see how we might set up an in-person informational meeting so that I could learn more.”

I definitely think it helps with recruiting, and more so at smaller companies than larger ones - very few people take the initiative to do this, so you can stand out with something relatively simple.

Like this post? Subscribe via RSS and start understanding investment banking.

-Hicks Musings, The Leveraged Sellout

One common question I’ve been getting lately goes something like this:

“Inquisitor, I just started as a freshman at Harvard.  I am majoring in economics and finance and I’m in the stock market club, the investment banking club, and I even borrowed $500,000 of my Dad’s money to invest in my personal accounts.  So far I’ve earned a 50% return in 6 months.

How can I make sure that I work at Blackstone by the time I’m 25?“

Another variant of this same question:

“I am only doing investment banking so that I can pay off all my student loans in 2 years, but I have no interest in ever doing it again.  What are the exit opportunities like for Associates at boutique banks who want to get into hedge funds?”

For those breaking into investment banking, the exit opportunities are always a big motivation.

It makes sense on paper: you go from working 90-100 hours a week and doing mindless work to working 60 hours a week and doing meaningful work 100% of the time, right?  Right?

The Hours

Lifestyle is a common reason for switching from investment banking into private equity or hedge funds.  Specifically, people assume that they will actually be able to have lives for once rather than sitting in front of a computer for 18 hours a day.

Private Equity Hours

If you go to a large private equity firm, like Blackstone, KKR, TPG or Bain, this assumption is false.  You will be working banking hours for another 2-3 years - bet you can’t wait for that.

I’m amazed at how many people don’t realize this until they get to interviews with these places or until (gasp) they actually start working there.

If you go to a smaller PE or growth equity firm like Summit Partners or TA Associates, then you won’t be working 100 hours a week.  But you will still be doing 60-70 - significantly more than a normal job - and on top of that you will have to travel quite a bit, so forget about a consistent schedule.

And when a deal heats up and you’re close to acquiring a company, your hours may remind you of what it was like to be an investment banking analyst: weekend work and sleeping under your desk for a few nights each week.

Hedge Fund Hours

Hedge funds tend to be better than private equity in terms of consistent schedules.  You work market hours, and weekend work is not required unless you work at a PE-like fund that acquires companies.

However, some travel can still be required for doing “channel checks” (e.g., checking to make sure that the toy retailer you’re acquiring still has Wii stockpiles even in its Minnesota office).

And if you’re at a West Coast hedge fund, you now get to wake up at 5 AM every day so that you’re at work before the market opens on the East Coast.

Bottom Line

Some exit opportunities can indeed offer a better lifestyle, but you’ll never be working 40 hours a week in any of these industries.  And you’ll almost always have a difficult time getting a consistent lifestyle with anything in finance.

Before diving into your next job, figure out what the lifestyle is really like so that you aren’t surprised by the mandatory weekly visits to the Yukon Territory in the middle of winter while doing diligence on an oil company.

The Pay

Yes, private equity and hedge fund pay tends to be higher than those investment banking salaries you always hear about… but that’s not the whole story.

Private Equity Pay

At private equity firms, you will make about as much per year as post-MBA Associates at banks make (e.g. significantly more than you made as an Analyst).  At smaller places and growth equity firms, the difference in pay is not as huge, but it does tend to be higher than banking at the equivalent levels.  At bigger places, it can be much higher than entry-level banking Associates; some even guarantee $500,000 or so per year.

However, the pay difference is much greater at the Managing Director/Partner level than it is at the more junior levels of private equity and investment banks.

So it would not be rational to want to switch into private equity solely because of higher pay, unless you are a very senior hire.

Hedge Fund Pay

Hedge fund pay can vary wildly between different funds.  The standard seems to be a base salary of $100,000 for those coming in directly from banking, plus a bonus that will take you to the $200,000 - $300,000 total compensation level (very similar to private equity Associates).

This is much higher than what you could get as a 3rd year investment banking analyst, and is about on par with what post-MBA Associates at investment banks make.

Depending on the fund, their performance, and your performance, the bonus could be significantly more or less than this; if you have really bad luck, you might just get nothing as the fund collapses before your eyes! (ok, this is unlikely)  And if you do really well, you might make closer to $500,000 total.  That scenario is unlikely except for the largest funds.

However, as with private equity pay, there is a significantly greater difference at the Partner level, where top hedge fund managers can pull in over $1 billion in cash per year.  That is more than private equity Partners make and far, far more than even the CEO of Goldman Sachs made last year.

It should also be noted that hedge fund managers making $1 billion are exceptions rather than the norm and most managers don’t make anything close to that, though in general they still make more than investment banking Managing Directors.

Exceptions Apply

One exception to all these salary figures is prop trading and certain small hedge funds / prop trading firms that could potentially pay you an unlimited bonus.  I know of at least one place that actually pays you 50% of what you earn from trading, and there are several recent college graduates earning millions of dollars per year there.

But most people going into buyside jobs are not going to suddenly be earning millions of dollars at age 24.  Your salary will almost certainly increase, but the really substantial increases over investment banking salaries come at the more senior levels.

The Work Itself

This is where people have some of the most incorrect ideas about private equity and hedge fund jobs.

Yes, there is a lot of stupid grunt work in investment banking that everyone hates doing… changing periods and commas in presentations, editing text in documents 500 times… formatting PowerPoint graphs.

The amount of stupid work you do certainly decreases when you move onto private equity or hedge fund jobs.

But guess what?

If you don’t like Excel or you think analyzing companies, doing valuations, or modeling are boring, you’re not going to like the buyside very much.

The work is just not that different.

You still do financial modeling… you still do diligence, and you still have to do some annoying grunt work.  When private equity firms acquire companies and work with banks, for example, the Associate will be tasked with writing “bid letters” and working with banks on financing, which can often require a lot of number scrubbing and attention to detail.

Sourcing

Not only is the work fairly similar to what you do in investment banking, there is also a new type of work that most people despise: sourcing.

“Sourcing” is a euphemism for cold-calling.  This is more prevalent at growth equity places (Summit is notorious for making its Associates cold-call companies all day) than at large private equity firms.

It may sound impressive at first to say that you’re in charge of bringing in deals.  You may even think to make it part of your private equity resume.

But actually, you’re just in charge of cold-calling; the Partner still owns the deal, even if you “sourced it.”  Some private equity firms do pay their Associates a bonus for closing deals they generated, but it’s paltry compared to what the Partners will make off it.

Managing Directors in finance source deals via their long-standing relationships and through regular communication with prospects.  They don’t cold-call every company on the Inc. 5000 list until someone says, “yes.”

You, by contrast, will be doing this, or at least some form of it.  And it’s one of the most common reasons why people don’t go into private equity or at least avoid the firms with a “sourcing model.”

The Social Aspect

This is one of the most overlooked aspects of investment banking vs. buyside jobs.  With banking, you have a group of other Analysts working alongside you and you chat with them in your downtime, go to Starbucks together and enjoy models and bottles with them outside work.  It’s almost like living in a dorm in college all over again.

With buyside jobs, this disappears.

You might be the only Associate; you might even be the only person under 30 in your office, depending on the firm.

Private equity firms and hedge funds tend to be much smaller than banks and don’t have as much of a need for an army of Analysts and Associates to do work… there simply isn’t as much work to be done.

This may sound less significant than the other factors I list above, but don’t underestimate it.

I actually know of some 2nd and 3rd year Analysts who were reluctant to leave for this very reason - yes, the pay and upside might be better, but not having any close friends in the workplace can make for a bad experience.

The Bottom Line

I don’t agree with those who think investment banking is only a stepping stone to working in private equity or at a hedge fund.

Doing the job only because you think those options are going to be completely different experiences is a bit absurd.  They’ll be better in some ways, but they can also be worse in some respects as well.  No one in banking ever yelled at you for not cold-calling enough companies.

If you want to work in private equity or at a hedge fund, it’s better to go there directly; if that is not possible, just do banking for a year and switch over (harder to do now with the market downturn).

But What About Venture Capital And Other Jobs?

I know someone is going to bring this up unless I discuss it here.

Venture capital and corporate development jobs can indeed offer a significantly better lifestyle than either private equity or hedge funds.

However, you will likely take a pay cut compared to what you were making as an investment banking analyst.  You could actually be as senior as a VP in banking and make less than a 3rd year Analyst!

Plus, you still have the issue of the work not being that much different and the social aspects referenced above.

Don’t get me wrong: if you want to still have a good salary and a much better lifestyle, venture capital or corporate development could be right for you.

But do recognize that, as with any other choice you make, there are tradeoffs between all these options and nothing is “the best.”

Feedback

What has your experience been with buyside jobs?  Am I off on anything here?  I’m curious to know what others think about these issues.

Like this post? Subscribe via RSS and start understanding investment banking.