From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 3 – The Dotted Line
“She thinks $60 million is a discounted price? Can someone shoot her with an animal tranquilizer gun until she snaps out of it?” John says, looking around in disbelief at all the other Partners.
David turns to you and his eyes light up as a new idea percolates to the top of his head, and then sputters out of his mouth.
“You do know about the special analyst bonus, right?”
Everyone else in the room laughs, as you contemplate whether or not they really want you to tranquilize the CEO.
$60 million would be 6x EBITDA – a reasonable price for a larger company – but significantly higher than what you’d pay for a small, Founder-dominated business in a niche market.
David speaks up once again as the laughter subsides.
“And let’s not forget about her other demands: she wants to roll over 20% of her ownership and put aside 5% in an options pool for the management team.”
“So we’re paying for an overpriced business and then giving up 25% for no apparent reason. This sounds like a better investment than finding Google in 1998,” John replies while rolling his eyes.
Everyone else sits there in silence as you weigh your options before speaking up.
“Well,” you say, “On a positive note, I think I could call in a few chips to get the financing in place.”
“What bank would even look at this? It’s too small for any of the usual suspects,” David points out.
“Right now everyone’s desperate for business – in normal times they’d say no, but beggars can’t be choosers.”
Calling in the Chips
You crawl back to your office and wonder if you can pull off the financing for this deal – your line to all the Partners was a desperate bluff, and you don’t actually have much to offer bankers.
Plus, you’ll have to hear even more tales of $1500 bottle service bills now that you’re going back to the usual suspects to ask for help.
“This is definitely below the bar,” says your banker friend after you finish outlining the deal.
“I realize $30 million of debt is on the low side, but with the way the market is -” you respond as he cuts you off.
“Look, even if this were the apocalypse and banks were failing left and right, we still wouldn’t look at this – the fees are just too low and it’s not worth our time.”
“We’ve sent you guys a lot of business in the past few years – probably more than any other firm…”
“Yes, and they were all small deals. I appreciate the effort, but the MDs want us to pursue the big game from now on.”
You’ve left your door open for this call, so your favorite unannounced visitor happens to be walking by, overhears your conversation, and steps into your room.
David motions for you to step away and then puts the call on speakerphone.
“We’re willing to give you all future business from our firm over the next year, including refinancings and all sell-side mandates. No competition at all for you,” he promises without hesitation.
“Can you… actually guarantee that?” the banker asks with a rising tone.
You fold your arms and squint at David, wondering what he’s gotten himself into this time.
“We’re planning to flip it in a year or two, and possibly do a refinancing before that – should be at least $10 million in fees for you altogether,” he states without so much as a blink.
“OK then. I’ll run this up the chain and see what they think. Thanks for the offer,” the banker replies.
You turn off the speakerphone, spin your Aeron chair around to face David, and wait for him to explain what just happened.
“Don’t worry,” he reassures you, “They’re bankers – they’ll all be fired or will be at another firm in another year or two anyway. No harm done, and now this deal goes through if we can work out the price and rollover.”
“Sorry, but we just can’t get our heads around $60 million,” John says to Nancy, who’s sitting at the head of the table in your conference room in front of all the Partners.
“We could get to $50 million max, but even that’s pushing it. Nothing personal, but the numbers just don’t work out in that range.”
Nancy continues staring at the slide presentation in front of her and attempts to make sense of the returns analysis, but it might as well be Martian to her.
“Understood, but $60 really is the bottom of my range here. With the margins we have, I could just keep running this business for years and make more money than what you’re offering. And unless I can retain at least 20% ownership, my incentive just isn’t strong enough.”
Both sides of the table stare at each other for a few seconds before John breaks the silence.
“We’ll be in touch if anything changes.”
Nancy stands up and walks out of the room, waving goodbye to everyone before closing the door behind her.
“It’s 100% posturing,” David points out, “There’s no way she seriously expects to get $60 million for the business and keep 20% for herself. And we know she wants to leave anyway, so it’s not as if she’s seriously considering running it for another 5 years.”
“That may be true,” says John, “But the numbers really don’twork at those levels – there’s so much uncertainty around the exit that this only makes sense at $50 million max. So we either convince her or we don’t do this deal.”
It’s time to don your Captain Obvious Hat and point out what everyone else is missing.
“What if we just flip it after a year or two? It’s much easier to get to a solid return over a short time period, and that way we can even tell her that she can leave the company after a certain period – once it’s no longer owned by us,” you propose.
David sits back in his chair and puts his hand on his chin as he contemplates your idea.
“That’s true – I doubt she’ll even understand why we’d offer that. And she won’t understand the risk to her if she does leave, so it might just work if we pitch it the right way.”
He cleverly fails to mention how the bankers doing the financing are already expecting you to flip it quickly – hearing that might cause John to toss him out the window.
“OK,” John agrees, “Go back to her and propose $50 million with a 20% rollover and say that in exchange for the lower price, we won’t make her stay beyond 2 years or sign a non-compete.”
Limited Partners = Limited Support?
“And we see this as an exciting way to start investing in the technology space – without all the risk that a bigger investment would entail.”
John is presenting IonX and a few other investments they’re looking at – all of which are much further away – and hoping that the LPs remain confident enough to keep investing in future funds.
Most of them produce nothing but poker faces as John goes through all his slides.
“We’re getting this at a discounted price, and we think it could be a quick-flip for a 20% return in less than a year.”
One of the LPs at the end of the table immediately stands up, slams his binder of materials shut, and scurries toward the door.
“Is… something wrong, Paul?” John asks while folding his hands in front of him.
About to open the door and leap away from the meeting, Paul turns around, drops his binder on the table, and grabs the door knob before speaking up.
“Yeah, you. You and your firm.”
Everyone else turns around to face him as whispers fill the crowded room.
“You raised $750 million for your new fund from all of us, claiming that you had all these great opportunities – and what do you do? You sit on that cash without doing anything for a year, and then you finally bring us a piece of dog crap, put a ribbon on top, and try to call it a gift.”
John raises both hand, blinks, and motions for Paul not to leave the room quite yet.
“I understand why you might be upset, but with the way the market’s been lately…”
Paul cuts him off before he can finish, turning around and removing his hand from the doorknob. “Then why are our other private equity funds still doing real deals? I can’t veto this or tell you not to do it, but I’m not happy about it.”
John walks toward him, binder in hand. “Look, I understand why you might not like IonX, but we have plenty of other…”
Paul opens the door, storms out, and slams it shut.
Back at the Office…
You and David are reviewing the loan documentation from the bank and are looking at different financing options for the deal.
“With the margins they have we should just pick the cheapest option – I’m more concerned with broken covenants than with interest payments,” David points out.
You turn toward your monitor and look at an LBO model with the different financing options built in before swiveling around in your chair and responding.
“That’s true, but we still don’t even know if Nancy is going along with this. I’m not convinced she’s gonna take the bait.”
Just as David leans back and prepares to respond, your phone rings. Time for the speakerphone.
“Hi, it’s Nancy,” the voice announces. “I’ve considered your offer and I’m prepared to move forward as long as you don’t make me sign a non-compete.”
You and David look at each other with your eyes widened and mouths gaping open. But there must be a catch – what would it be?
“But,” she continues, “Some of my managers have figured out what’s going on, and they’re not about to accept a new owner. They know me and like me, and they’re nervous about what will change.”
David puts his hands down on your desk and responds, “We’re not going to change a thing. You will still be running everything; it’s just that you’ll have all of our firm’s resources at your disposal…”
“That may be true, but I think they’d be more confident if all of you came to meet them in-person,” Nancy retorts.
“That would be a great idea,” David says while rolling his eyes and searching for your stress relief ball. “We’re all looking forward to flying out and meeting you.”
“I’ll be in touch with some dates,” she responds, “And please make sure it’s everyone – we should plan for at least a week so they can get to know your team.”
As she hangs up, you and David sit there looking at each other and David turns his gaze toward your window.
“Think they’ll have any beaches there?”
One Door Over…
John is cycling through the call history on his phone and looks down at the 15 unreturned calls he’s made to Paul in the past week. Limited Partners might be “limited,” but that doesn’t prevent them from being passive-aggressive and ignoring contact when it suits them.
He walks over to his whiteboard and looks at the pipeline of potential investments, noting that everything else is at least 6-9 months away.
His phone rings and he slides back to his desk to answer it.
“So, John, ready for some more news on IonX?” David announces.
“Can you start with the good news first?” John replies.
“No good news this time. Do you have a free week in your schedule anytime soon? They want us to fly out and meet their team.”
John glances back at his whiteboard and then the call log on his phone. “Whatever it takes – talk to Suzanne about my schedule,” he says before hanging up.
Leaning back in his chair, he dials the main line, finally resigning himself to his “Plan C” option.
“Get me the new guy, Martin.”
A minute later, Martin shows up at John’s door and attempts to open it three times before finally gathering enough strength to push it open on his fourth try.
“You… wanted to see me, sir?” he stutters while wobbling into the room.
John laughs, stands up, and walks across the room to Martin, standing an inch away from him as he recites his speech.
“There’s no need for formalities. I’ve heard good things about your family. I’d like you to tell me more.”
He smiles and stares Martin straight in the eye, waiting for his response.
It’s the next week, and all the Partners have flown out to meet IonX in-person. Apparently “everyone” means “everyone except for the person who’s actually doing the work.”
But the office is quiet again, and no one is checking your calling logs now that you and Martin are the only ones there. You’ve been handing off all the grunt work to him – anytime a banker or lawyer has a question, he’s the one in charge.
David has been updating you the whole time, and it looks like the management team is growing more confident that nothing will change post-transaction.
And you’ve been forwarding the in-progress definitive agreement that the legal team has been drafting.
“You should have seen these guys when they saw us,” David says at the tail-end of one of his update calls.
“It’s like they had never seen people dressed in suits before. They were waiting for us to morph into Gekko or Bateman and start murdering people.”
“Sounds like a fun trip,” you say, putting the call on speakerphone and standing up before moving over to your window. “Is it going to close?”
“90% certain now,” David reassures you, “And since bonus season is only a few weeks away, you can bet that we’ll remember everything you’ve done here.”
Your eyes light up as you peer out the window and see a BMW parking right next to your usual spot.
“That’s great,” you say, “So are there any beaches there?”
Pension Power Play
Paul strolls into the entrance of the Ritz Carlton, going on about another investment on his phone and simultaneously typing like a fiend on his Blackberry.
He’s met by a tall, lanky man walking in with a grey suit and a binder of printouts in his hands. He walks over to Paul but gets rebuffed as Paul points to his phone and rolls his eyes.
Finally the call ends, Paul turns toward him and shakes his hand, and they walk toward the interior of the restaurant.
“I was surprised when you called,” Paul says in a cheery voice. “I didn’t think I would see you again after what happened on the Fincher account.”
“Let’s let bygones be bygones,” says the other man. “We’d both do much better as allies rather than enemies.”
They sit down and order medium-rare steak along with a $1000 bottle of 1982 Haut-Brion.
“So why did you really call me, Simon?” Paul asks as he sips his wine and arranges his napkin on his lap.
“I wanted to tell you about a few new investments we’re looking at. In this market no one’s doing any deals except for the distressed funds, which are a huge part of our portfolio.”
“So you’ve just mysteriously decided to extend the olive branch and give me access to all these funds that are actually beating the market?”
Simon turns to the bottle and pours himself a glass, holding it up and reading off the label.
“This is the 1982. Have you tried the ’72 before? I hear it’s even better.”
Paul rolls his eyes, puts down his glass, and then reaches over and takes the wine bottle out of Simon’s hands and places it down on the table.
“Cut the crap. I know you’re not just giving me this gift out of the kindness of your heart, so what do you want in exchange?”
“I want you to look the other way on John and his firm’s performance over the past year. And when they raise another fund, I want you to invest – and I want you to let me into the deal as well.”
Paul starts laughing so hard that he snorts, with red wine nearly bursting out of his nostrils.
“So John put you up to this. Ignore his horrible investments, and you’ll give me a piece of these distressed funds.”
“I didn’t even hear about this from John,” Simon says, “But word of your… displeasure… has spread. They’ve had great performance in the past, and I want to get in on their next fund. The only way that’s gonna happen is if you continue to support them, and then bring me in as well.”
Paul stops laughing for a second, glances up at the chandeliers on the ceiling, and then over at Simon once again.
“Even if I were stupid enough to do this, what could you give me in return? No fund is up more than 10% this year…”
Simon opens up his binder, takes out a few documents, and tosses them across the table to Paul before he cuts him off with his response.
“Those 3 are up 50% year-to-date. They’re closed to new investors, but I can get you in – if you look the other way and keep investing in John’s fund.”
Paul stares at the fund performance documents before tossing them aside and looking up at Simon once again and smirking.
“This just seems too good to be true. And I don’t know why you’re offering me this deal. You’re sure your son isn’t working for John or something?”
The Dotted Line… and Your Bonus?
You stand outside John’s door, waiting for him to summon you in. It’s bonus season, and everyone in the office is acting like 10-year old kids on Christmas morning.
He opens the door and greets you in a cheery voice.
“Congrats!” he shouts, “We did it. The funds were just wired the other day, the loans are in place, and Nancy hasn’t even run off to a tropical island and abandoned everyone. Yet.”
He waves around the signed definitive agreement while leaning back in his chair and pointing to the dotted line on the page.
“So, about your bonus. We realize how much you contributed to the IonX deal, and we really want to reward you for your performance.”
This better be good – anything less than a 20% raise over last year might cause you to jump out your window after what you’ve been through getting this deal done.
He hands you a slip of paper, and you stare at it in disbelief as your mouth drops open and stays there until you look up to face him once again.
“This is down 10% over last year – I brought in the IonX deal and got it done. Without me, you’d have 0 closed deals this year.”
“We know that. But look at what happened to the market – it’s a train wreck everywhere. Everyone else’s bonus was down 30%. And let’s be fair, David also helped get this deal done. You know we can’t just give juniors arbitrary pay.”
An image of David sitting around on the beach while “getting to know” Nancy and her team pops into your head.
“And if it weren’t for Martin, we wouldn’t have had LP support. He did terrific work for a new guy!”
Up until now, you hadn’t even known that Martin contributed anything aside from confusion and answers to random due diligence questions.
“His family’s very well-connected. But I’m sure you understand that, right? You really have to be a team player to succeed as an investor.”
You thank John, turn around, and leave the room, trying your hardest not to slam the door behind you.
You walk back to your office, slump down in your chair, and pick up the phone to call your friend at a larger fund and learn what bonuses at normal places were like this year.
But as you place the call, you decide that there’s something else you’re more curious about first.
“Hey there,” you say, “Just wanted to find out about bonuses this year. But before we get to that, I just wanted to know – are you guys hiring?”
The Full Series
In case you missed parts 1 and 2, you can get them right here:
- From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 1 – The Idea
- From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 2 – The Deal?
Coming Up Next: The Web Series
I’m excited to announce that we are turning this 3-part short story into a 6-episode web series that loosely follows the storyline here, but is significantly different – “different” as in better.
I (Brian) am writing the series and financing it, and my good friend Goldie will be producing.
There were a few suggestions to write a novel, but I am much more interested in turning this into a series. And if you follow me on Twitter, you also know that I am borderline obsessed with serialized TV shows and films.
We are aiming to film and edit this by the end of 2011, and then release it in early 2012.
There will be a trailer, and if you’re good you might even get to read the script for the first episode.
Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews
How to Break Into Asset Management in Germany – from a Part-Time, Non-Target, Distance Learning MBA Program
So, what about those part-time MBA programs? Do banks and finance firms take them seriously, even if they’re online? What about continental Europe recruiting vs. the UK?
Today you’ll learn about those and other topics from a reader who recently broke into the finance industry in Germany.
This reader also did an internship at a Fund of Funds (FoF) so as an added bonus you’ll get a crash-course in all things FoF as well.
That’s quite a lot to cover in one interview, so let’s get started.
Walk Me Through Your CV
Q: You mentioned before we started that you had a unique history.
Can you tell us about your background and where you were coming from before getting into finance?
A: Sure. I started out doing engineering at a non-target university in the UK – finance firms ignored it, but engineering and technical companies and even the government recruited there.
It was right after the dot-com bust when I graduated and the job market back then wasn’t great for IT people – so I went to the UK Government and worked there for around 8-9 years as an engineering project manager.
A few years ago I had the opportunity to go work for the government in Germany – around that time I had realized that engineering wasn’t for me and that I wanted to move into finance instead.
Toward the end of my contract working for the government, I started a part-time (2.5 – 3 years) distance learning MBA program from a university in the UK. The goal was to re-brand myself and get a business background in the process, and then to use the degree to move into finance.
I did a lot of networking to find contacts while in Germany, and finally found a private equity fund of funds that was looking for English-speaking interns.
I worked there for half a year, and recently landed a full-time offer at the German office of a US-based asset management firm.
Q: That’s quite a story. Before we jump into recruiting and how you got your current role, let’s take a step back: why did you like Germany so much and what made you want to stay there? I’m just curious personally.
A: It was quite random – I was just placed there by the UK government and happened to like it quite a bit. I had also spent 3-4 months there previously, so I jumped on the chance to move back.
Q: And you managed to get the internship and the full-time role without being from Germany originally and without knowing the language?
A: I do speak German conversationally, but I’m not quite good enough to use it for business. So if I were applying for an M&A role at an investment bank, I would never get in (see: more on investment banking in Germany).
They are looking for native-speakers there because you’re working with domestic German companies all the time and for the times they do deal with English-speaking companies in Germany, the level of English of most German graduates is of a very high standard, so they have little reason to recruit a non-native speaker.
A lot of HR departments here list the German language as a requirement, but outside of IB/M&A-type roles it’s rarely required to do the job.
When I applied to the asset management firm I just joined, I went through a recruiter – the original ad I saw asked for a native German speaker, but then when I spoke with the recruiter they indicated that it wasn’t really necessary.
You can get away with this because in fields like trading, asset management, and so on you’re dealing with global investors where English is the standard language.
Recruiting and Breaking In
Q: Right, that makes sense. I think in most countries for traditional IB/PE roles you need to know the local language but outside of that you can get away without being a native.
So what were the key steps to breaking into finance in Germany? Did the part-time distance learning MBA program actually help you to re-brand yourself?
A: It helped a bit and allowed me to meet people who worked in the industry, but overall it wasn’t terribly helpful in terms of actually getting interviews through the degree. My program was not very consulting or finance-centric so there wasn’t much of a benefit for those fields.
Networking also proved to be quite difficult – I reached out to a lot of contacts via LinkedIn and similar online databases, and made plenty of cold calls and cold emails, but most people were simply confused as it is not as common here.
That is a big cultural difference and traditional networking is not accepted like it is in the US / UK. I made some good connections for the future, but wasn’t able to find anyone who could directly help me to get a job.
I found both my positions and won interviews by looking at job postings and ads online and then contacting the recruiters directly – you’ve mentioned before that that’s not a good use of time in the US / UK, but unless you’re currently a student at a well-known university here, that’s about all you can do to get in.
Q: I’m surprised that the degree didn’t help you at least in terms of being taken more seriously when you contacted people in the industry. Did they just not respect distance learning programs?
A: Actually, the main issue was that MBAs are not viewed the same way here as they are in the UK and US.
The university system in Germany is much different and you complete the equivalent of Master’s-level study at the undergraduate level – so getting an MBA won’t necessarily get you more points.
The other factor working against me was that I had an engineering degree from undergraduate – many places here won’t even consider you unless you’ve studied accounting or finance in undergraduate.
Q: Wow. I guess I should add a clarification to that “Your major doesn’t matter that much” advice.
What about the recruiting process itself? Is it similar to the UK with assessment centers and competency questions?
A: First off, since I wasn’t going through standard graduate recruitment, I had no assessment centers.
Beyond that, it was quite different for the Fund of Funds and for the asset management firm – the FoF process was relaxed since it was an internship, and most of the interview questions were “fit”-focused.
The investment managers sat down and spoke with me for 30-60 minutes each, and chatted about my background and knowledge of finance – but they never went in-depth into advanced technical questions or anything. A few weeks later I received an offer there.
Since the asset management firm was US-based, interviews were very similar to what you see at banks and asset management firms in the US – several rounds of interviews with people from different groups, with more technical questions thrown in and a more diverse set of questions overall.
This one was also not for a graduate-level position, so I imagine it would be somewhat different if you were just out of school or in school and interviewing for the same role.
Q: What types of people were they looking for? Were many of your co-workers also foreigners?
A: It varies, but at the Fund of Funds the investment team was mostly German with a few others from Europe and further afield. They wanted people who knew a bit of German and who had the technical skills to analyze investments – it was very small, so they were much more focused on fit there.
At the asset management firm, as I mentioned, the technical bar was higher and they were looking for people to spend more time at the firm and not just hop to the first exit opportunity that comes their way.
As with most other countries outside the US, there is not as much of an obsession with exit opportunities and hopping around constantly, so people actually stay at the same company for more time on average.
Q: Any other differences with recruiting in Germany that we should know about?
A: Oh yes, I could probably write a book about that one:
- You need to include your photo on your CV here. Technically firms are no longer able to discriminate against you, but you’re at a huge disadvantage without a photo as everyone includes them.
- CVs are usually at least 2 pages and emphasize Education over everything else – it’s at the top even if you have years and years of work experience. Sometimes CVs go on for 3-4 pages and list every single academic achievement.
- If you’re a non-native German speaker, you should include your language skills in the Personal Information section; you also list your Date of Birth and Marital Status at the top.
Q: I think requiring that information in the US or UK would result in lawsuits.
A: Yeah, the culture is quite a bit different here.
In terms of language skills, if you see an advertisement from a multi-national company in English, you can assume it’s OK to apply in English and work there without knowing the language – but if it’s all in German then the language is probably required.
Job references are also very important here. After every job you’ve been at, you receive 1-2 pages of written references stating how well you’ve done there and what your achievements were.
Even at US-based and other foreign companies here they still expect to see these references, and you’re at a big disadvantage if you don’t have them or if they say anything negative.
Q: More lawsuit material if you requested those in the US / UK – and it’s written evidence, too.
What about CV review and interview selection?
A: In general, it’s difficult to get the first interview here but once you’re in you have a high chance of moving forward. They spend a lot of time reviewing CVs and selecting first round candidates based on those, sometimes inviting only 1-2 people to interviews.
That’s the opposite of what you see in the US / UK where they might invite dozens to interview, only intending to hire a few.
Finally, some advice for you if you’re not a native and you’re interested in working in Germany: going through recruiters can work to your advantage. They are actually helpful here and can get you past HR staff when you don’t meet the officially stated language requirements.
And as I’ve mentioned, go for asset management or trading rather than M&A.
All About Funds of Funds
Q: OK, that was quite a download of recruiting-in-Germany information.
Moving on, I’ve gotten a lot of questions about Funds of Funds, what they are, what you do there, and how you get in – can you explain briefly what a Fund of Funds is and the work you do there?
A: Sure. A Fund of Funds is simply an investment firm that invests in private equity funds rather than buying companies directly.
To give an analogy, it would be like an index fund that invests in other index funds in the stock market as opposed to the original index fund that picks individual stocks to invest in.
Funds of Funds may invest in anything from venture capital firms to small and large buyout firms to anything else within the world of private equity.
Most of the day-to-day work consists of due diligence – analyzing existing funds, seeing what kinds of investments they’ve made, and whether or not they would be a good fit for us.
You make 2 main types of investments at a FoF: primary and secondary.
- Primary: You invest in a PE firm as it’s doing a round of fund-raising and looking for new investors.
- Secondary: You buy an existing stake in a PE firm from someone else in the secondary market who’s looking to sell.
Most of the work on the primary side consists of due diligence, analyzing investment teams at PE firms, looking at previous deals, historical returns, and so on.
We did a lot of benchmarking of funds against the sector as a whole and against other funds within the geography we were looking at, and we discussed everything with General Partners. Most of my time there was spent writing up due diligence findings and there was a lot more qualitative work than quantitative work.
On the secondary side, there was more quantitative work since we were looking at funds that had already made a few investments. So there was some price modeling involved to see what was reasonable, what type of carry and management fees made sense, and so on; we also did some basic DCF analysis to verify the valuation but it wasn’t anything hardcore.
Q: So are Funds of Funds a big asset class in Germany? Is the industry there developed?
A: It’s not yet a big asset class here – there are quite a few buyout and VC firms, but only a handful of FoFs and most of them are part of bigger financial institutions here.
PE has been hit hard following the financial crisis and Funds of Funds suffered even more than normal PE firms – many institutional investors backed out or decided against investing, so firms never had a chance to grow properly.
Q: What about recruiting for FoF? What kinds of questions did they ask you?
A: They didn’t ask me much about investments, investment ideas, or which funds I would invest in – it was more about my motivations for wanting to move into finance, what my future goals were, and so on.
That was mostly because I was career changer – other interns received more technical questions about accounting and valuing companies, the economy, and the European debt crisis.
Overall I would say that FoF interviews are similar to investment banking overviews, but generally less technical even though they’ll still ask the normal accounting/valuation-type questions.
Q: What about the work culture there? I’m assuming it was quite a bit different from what you see in private equity / investment banking?
A: It was much more relaxed than what you see in banking or at direct investment funds (PE/VC).
There wasn’t much time pressure to do things because we weren’t competing for specific deals that banks were marketing to PE firms – so we had more time to discuss investment ideas internally and talk through things.
They delegated quite a lot of work to the interns, so we did many of the initial assessments and the screening, and then sat down with the investment managers to talk through ideas. They were quite receptive to well-thought out investment ideas, even though we were interns and had limited experience.
Q: And now I have to ask the obligatory hours / pay question…
A: Hours at the Fund of Funds were generally between 9 – 6 each day, with work sometimes extending a bit later depending on how busy we were at the time. Work came in peaks and troughs – if a lot of direct funds were fund-raising, we would have to analyze everything at once and make decisions quickly.
But during other times of the year (especially the summer months), things were very quiet because hardly any funds were fund-raising.
The investment managers themselves might work later due to internal investment committee meetings, but the latest was normally 8 or 9 PM, with weekend work extremely rare.
Base salaries were close to what you would earn starting out in IB or asset management, but maybe a bit less overall (possibly also due to being in Germany, which has a lower cost-of-living than the UK).
Bonuses were substantially less than IB and perhaps even other asset management firms – there’s just not as much money to go around since Funds of Funds don’t have the same levels of management fees and carry that you get in direct Funds.
Q: After working at the Fund of Funds, you moved onto asset management – but what do most people do? Is it possible to get into private equity from FoF?
A: Most people who start out in FoF stay there and build their careers there – you don’t really have the required skills (LBO modeling) to go into private equity.
If you do leave, the most common and obvious exit opportunity is moving into asset management – quite a few people from my firm actually left to move into larger asset management firms.
Q: So why did you make the move, personally, rather than staying in FoF?
A: I could have stayed there and had a comfortable lifestyle – but there were a few things I didn’t like:
- There wasn’t much career progression aside from becoming an Investment Manager and then a Partner – it’s not like banking, PE, or even trading where you have levels in between.
- I wanted faster-paced work because that suited my personality much better; I also wanted more of a front-office role where you make investments directly.
All along, I was actually more interested in trading but it was a long-shot where I live as the majority of trading desks are located in Frankfurt.
The job that I ended up with at the asset management firm was actually different from the original one the recruiter set me up for, so I would reiterate something that you have said before: that you are not necessarily interviewing for the job you think you are!
Q: So you’re planning to move into trading from there?
A: Yes – maybe stay here for a year or two, and then leverage my connections to move into a trading role.
That’s a very indirect path to trading, and it probably wouldn’t work as well for IB/PE – but luckily trading is one field in finance where they do care more about results than pedigree/work history.
Q: Right, well good luck with making the move – and thanks again for taking the time out to chat!
A: No problem – hope you learned a lot.
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What Do You Do as a Venture Capitalist?
Now we’re going to jump into all the questions you’re really curious about:
- What you actually do each day as a venture capitalist
- How you advance to the Partner-level
- How much you work and how much you get paid
- The economics of VC firms and why your pay is so dependent on the firm’s size
- Trade-offs of venture capital vs. investment banking, private equity, and entrepreneurship
So let’s dive right in.
A Day in the Life
Q: So what’s an average day in the life of a VC like? I’m assuming that you don’t have to fix printers or run to Starbucks quite as much.
A: A lot of meetings. Most days are dominated by meetings with entrepreneurs and portfolio companies and networking at conferences and other events.
You do spend some time on research and due diligence for active deals, but most of my days were spent meeting people and networking.
After the close of business each day, you might go home “early” or you might stay late depending on what’s going on – just like investment banking, you’re busiest when you’re working on a deal and it’s close to the finish line.
Q: When you say “meeting people,” are you talking about tagging along with Partners, or going out and setting up meetings yourself? How much independence do you have?
A: At my old firm, the pre-MBA Associates contacted companies and set up everything by themselves. Sometimes Partners and Associates would go to the same meeting, but more often than not I did everything by myself.
Associates are the “front-line filter” – they meet with companies initially and figure out which ones are interesting, which ones might be good investments, and so on.
Once I pre-qualified the company, I would bring it to the Partners and say, “This company might be interesting – we should take a closer look at them” and then the Partners would become more involved and start meeting with them as well.
Q: So it sounds like your firm was very sourcing-heavy. How much of your time was spent on sourcing vs. deal execution?
A: I don’t have an exact split for you, but early-stage firms tend to do more sourcing and late-stage firms do more due diligence, modeling, and deal execution work.
Although my firm was late-stage, they still focused on sourcing and the majority of my time was spent meeting with companies we might invest in.
Even when deals came along, 99% of them would never go anywhere – we might start doing due diligence, find something we didn’t like, and cut off the investment process right there.
This is very similar to PE firms, where you might look at hundreds of companies each year but only make 1 or 2 investments.
On the buy-side you spend a lot of time saying “no” to people.
Q: On a similar note, I’m assuming that you didn’t do much modeling?
A: For truly early-stage companies – pre-revenue – we didn’t do much modeling.
For later-stage companies with revenue and profit, we did the usual modeling and valuation exercises.
It’s not as “intense” as what you see in investment banking because we don’t spend time trying to make everything perfect and adjust for every last non-recurring charge.
All About Advancement
Q: So that’s what you do as a junior VC: find interesting companies, filter the best ones, and bring them to the Partners who make the actual investment decisions.
How do you advance to the Partner-level? Is it just a matter of finding the next YouTube, getting a 41x return on investment in a year, and then moving to the Bahamas?
A: It depends on the firm you’re at and how their partnership works, but you need to find good investments and generate solid returns for the firm in order to advance.
You don’t need to find the next YouTube to advance to the Partner-level – that only happens once a decade. It’s more about getting consistent base hits rather than the elusive grand slam.
You need to build a track record over time and become genuinely involved with your portfolio companies – source the deal, sit on the Board, advise the company and help with strategic issues, and then achieve a solid exit.
You don’t need to wait for the actual distribution of proceeds from your exited investment to advance – an acquisition, IPO, or even a situation like Facebook where they’ve grown an incredible amount and are clearly going to have a huge exit – are good enough to “prove” yourself.
Q: Right. But what about making the move from junior Associate to more senior levels at a VC firm? How does that happen?
A: First off, 90% of the time if you come in as a pre-MBA Associate you won’t be able to advance to the Partner-level at all.
You’re not on “Partner-track” and no matter what companies you find, you’ll be expected to stick around for a few years and then go to business school or do something else.
Most of the time you need to come in at the post-MBA level to have a chance at advancing to Partner.
The exact process is tricky to describe, but the more interesting companies you source and the more work you do, the more the VC firm will trust you to start making decisions on your own.
Until you’re an official Partner, you can’t make investment decisions but you can present your case to the Partners, argue for investment, and become actively involved with the company itself.
So as you start finding better investments, the Partners will give you more responsibility, then you can use that added responsibility to find even better companies, and that process repeats until you reach the top.
Q: Ok. Now let’s play devil’s advocate and assume that you’re just not a good investor no matter how long you’ve been in the game, and that you can’t find any quality companies.
What happens if you can’t make the investments you need to reach the Partner-level?
A: Unlike investment banks, VC firms will rarely make a show of firing people just to say they fired people.
Instead, they might just pull you aside and say, “You’ve been here 5 years but haven’t built up much of a track record and we’re not sure you can get to the Partner-level. We can keep you on awhile longer, but you need to get some good results soon.”
Other times, they might just reduce the economics for you and pay you less if you’re at the Principal-level (just before reaching Partner) and use that as a signal for you to leave.
There’s no formal layoff process – VCs are far more subtle about hiring and firing than bankers.
Q: So let’s say you’ve been working in VC for a few years but can’t advance, so you get asked to leave. What’s your next move?
A: Common paths are to join a portfolio company, start your own firm, or go into business development.
As you move up in venture capital, you focus 100% on developing your network, making lots of contacts, and getting to know your industry well – all of which are useful for business development or working at a portfolio company.
Starting your own VC firm is tougher to pull off and you need more of a track record to do that – if you’re a junior Associate with no investments behind you, you won’t be able to raise capital at all.
Experienced investors can struggle to raise even “small” amounts of capital, so starting your own investment firm is the most difficult of these options.
Pay, Hours & Likes and Dislikes
Q: Let’s talk about money – specifically, how much money did you make?
A: Do I need to give you an exact number?
Q: I like numbers. But estimates are fine if you don’t feel comfortable with that.
A: Your base salary in VC will be higher than what you earn as an investment banking analyst – similar to how your base salary generally increases when you move into private equity.
Bonuses are lower at early-stage firms because there’s not as much money to go around and the fees are not high enough to pay everyone millions of dollars.
At late-stage VCs and more PE-like firms, bonuses are higher and are closer to what you’d make in banking or traditional PE.
Pre-MBA Associates usually won’t get carry, whereas post-MBA Associates may or may not depending on the firm.
Q: Let me stop you right there because some readers may not be familiar with “carry.” Can you explain what it is and how you get paid in VC?
A: Sure. There are 3 ways you make money as a venture capitalist:
- Base Salary
- Year-End Bonus
“Carry” refers to money you invest alongside the firm when they invest in a company.
Let’s say that your firm is making a $5 million investment in an early-stage company – if you have carry, you might be allowed to invest $50,000 of your own money along with the firm.
Then when they exit, you’d also reap the profits – or losses – on your investment.
Carry is seen as a big perk because of the potential to make a lot of money, but it’s quite rare to find the next YouTube that gets you a 41x return on investment.
More often than not you’ll get a small bonus but you won’t become a billionaire with these investments – to benefit from carry, you need to be at the firm a long time and invest in dozens of companies.
Q: You mentioned how bonuses are lower at early-stage firms because there’s not as much money to go around – can you explain the economics of VC firms?
A: Sure. Let’s say the firm has $100 million under management – they might charge investors a 2% management fee each year and 20% of their return on investment (the carry).
That 2% management fee – $2 million each year – is used to pay base salaries and bonuses.
So a fund like this with $100 million under management would not be able to hire that many people – maybe 1-2 Partners and a few Associates.
Everyone wants to make millions, but if you have less than $2 million to go around that’s not possible unless you consistently find winning investments.
That’s why larger firms pay bigger bonuses: if you have $1 billion under management rather than $100 million, 2% now represents $20 million each year.
And just because they have 10x as much capital doesn’t mean they’ll hire 10x the number of people – so there’s more bonus money to go around.
Smaller firms don’t want people who are in it only for the money.
Q: Speaking of hours, how much did you work as a junior VC?
A: Less than in banking. Weekends were free most of the time, but sometimes I stayed late at work if we were busy with deals.
On average I put in 60-hour weeks, though that dropped when we were in “sourcing” mode and rose when we were in “deal execution” mode.
Off the Record
Q: A lot of people hype up exit opportunities because they view the end game as superior to banking itself.
Having worked in investment banking, then at a late-stage VC firm, and now at an early-stage firm, what did you honestly like and dislike about the industry?
A: One of the hardest points to assess when you’re recruiting is cultural fit – you can chat with Partners all day long, but it’s hard to say how well you’ll fit until you actually work there.
VC firms are more like family businesses than rigid conglomerates – sometimes they treat you like a temp, and other times they treat you as a peer.
But it’s difficult to ask them about this directly and get good answers – so joining any VC firm is riskier than moving to a bank, where there are lots of people and many sources of information.
If you compare venture capital to investment banking, obviously the work/life balance is much better – but on the flip-side, you also lose a lot of the camaraderie you find in banking.
You work alone 90% of the time, and you’re going out there and making things happen on your own.
That gives you a sense of empowerment, but it’s also lonelier than banking because you’re always meeting new people but rarely getting to know anyone well – and you don’t hang out with your co-workers.
It’s like how you pointed out before that the buy-side and entrepreneurship are both lonelier than working on the sell-side.
VC is similar to being a “mini-entrepreneur” because you have to make decisions without following specific orders – completely the opposite of banking.
Q: Right. When I explain to people “what I do” I give the same type of summary and they look at me like I’m crazy because they don’t understand how there are downsides to everything.
What are your future plans now that you’ve done banking, VC, and returned to VC?
A: Once you work in venture capital, it gets more difficult to become an entrepreneur – you can’t beat the lifestyle, and you can bet on companies without taking nearly as much risk as the founders themselves.
I was thinking of going the startup route, but I decided to go back to VC and work at an early-stage firm after I graduated from business school.
I had planned to pursue startups while at b-school, but it was impossible to fit in – you have a lot of work, and unless you’re also networking constantly it’s a waste of time and money.
So I’m planning to stay at my current firm for the near future, and then pursue my own projects on the side in my free time.
Everyone interested in venture capital wrestles with the investor vs. startup founder choice, and that’s what I’m debating right now.
Q: Yup, I know how that goes. Thanks for your time – that was a great interview and I learned a ton about venture capital.
A: No problem. Let me know if your company is looking for investors!