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!
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No, You Can’t Have It All: Why Finance Does Not Guarantee You $10 Million and Your Own Beach in Thailand
“Life is either a daring adventure or nothing. Security is mostly a superstition. It does not exist in nature.”
– Helen Keller
I almost decided not to publish this article.
But it needed to be said.
This one is long – so grab some yerba mate, take a seat, and close your YouTube window before you start.
How It All Started
“I’ve been keeping up with your blog for quite some time now and I’ve noticed that a very diverse group of people eventually “discover” that they want to become a banker (former premed students, engineers, lawyers, entrepreneurs, …).
That said… do you find it odd that so many people always ask you about exit opportunities in the first place when they’re still trying to break into the industry? This makes me suspect that some people have the wrong mindset going into the game (models & bottles).”
Yeah, of course *I* find it odd.
But does anyone else?
No, apparently not – just look at comments like this one:
“Damn… there goes another profession I was aspiring to do go down toilet. I thought the travel involved in consulting was just exaggerated. But I was wrong. I heard from Kevin that consultants at McKinsey travel 50-75% of their time. I’m sorry but I just can’t handle that. My only other alternatives are PE and HF. How are the hours and travel like for each of those professions. I’m praying that at least these jobs don’t screw up my life…”
At least he’s done his homework though: he understands some of the trade-offs between these different options.
But he’s still searching for the magic-bullet solution: a way to become a deca-millionaire with no risk and no 100-hour weeks.
About twice a week I get emails asking, “So, if I work at a boutique can I go home at 10 PM rather than 2 AM each night?”
If you don’t work in the industry or if you haven’t done an internship, I can understand why you don’t “get it” yet.
But then the other day a friend at a top bank emailed me saying:
“Man I’m so tired of banking right now, do you know anything else that would pay me this much and give me much better hours?”
And that’s what pushed me to hit the “Publish” button on this one anyway.
What Do You Want?
It’s a broad question, but most “goals” can be reduced to:
“Become a deca-millionaire without doing much work and also getting my own private beach in Thailand while having the best life ever.”
This brings up a slew of other issues – such as, “Wait, so what then? You’ll get bored in a week of doing nothing” but we’ll put those aside for now.
Based on this goal, you may have already decided that finance is the best route to becoming rich with no risk – and sure, the hours may be bad, but they get better over time, right?
Not so fast.
If this is your plan, you don’t understand the trade-offs between finance, different fields within finance, and different options altogether.
There are an infinite number of variables, but we’re just going to look at the most important ones here.
This is one of the biggest lures of finance: just work for a few years and you’ll become a millionaire instantly, right?
But it’s also one of the most poorly understood trade-offs: most people in finance save little money, and any money they do save they either manage poorly or not at all.
$500K per year doesn’t mean much when it’s only $250K after taxes and $240K of that goes into models, bottles, and sports cars.
I almost cringe writing this one – but it needs to be addressed here.
The secret that no one tells you about prestige: no one in the real world gives a crap where you work or where you went to school.
I can’t even remember the last time I told a stranger where I went to school, even though it’s supposedly one of the top universities in the world.
And not to turn this into a dating column, but citing a “prestigious” school or company won’t attract members of the opposite sex – at least not the ones you want.
Sure, your life may suck for awhile but once you hit 35 and have $10 million you can just deposit it all in bonds, make $800,000 per year in tax-free income, and then retire to the Caribbean right?
Except I know of no bankers or other financiers who have actually done this.
To quote a friend who finished the Analyst program at Goldman Sachs a few years ago: “Even Partners take calls in between their kids’ soccer games on weekends.”
If you’ve been working that much for that long a period of time, you’re going to be bored out of your mind if you actually “retire early.”
You might actually get a thrill out of running around and being on-call all the time; you might like traveling every week; or maybe you just want to relax.
So it is relative.
But we can say a few things with certainty: for example, banking has a lot more grunt work and repetitive tasks than other fields. So you’re probably not going to “like” what you do on a daily basis compared to other options.
This one seems like an afterthought: who cares how many friends you have at work, right? It’s all about the dollars!
Well, not quite. Certain fields are lonelier than others – and one untold benefit of banking is that you’ll make a lot of close friends because you spend so much time at the office.
But in most other fields you’re either alone most of the time, or you don’t have close peers.
And what good is money if you have no friends?
“You might get rich if you start your own company, but it could also fail, you’ll go bankrupt and your life will be over. On the other hand, if you go into finance you will easily become a deca-millionaire with almost no risk of losing money or getting laid off.”
If you haven’t been hiding under a rock for the past 2 years, you know that the second statement here is false.
But you may not realize that the first statement is also just as wrong. The real risk of starting your own company is not going bankrupt – it’s something else that nobody ever tells you about (yes, you have to keep reading to see what it is).
Ok, Now Let’s Get Specific
“Ok,” you say, “but what about all the fields I’m interested in? Why are you saying I’m wrong about everything?”
But there’s more.
Besides the pay being extremely variable, you should note that most bankers save nothing in their first few years.
$60K-$70K base salary is barely enough to get by in New York, and your bonus just pays off credit card debt. Even at the VP-level and up, plenty of guys make $500K, then spend it all and have no savings.
Think you can avoid that and still save a lot? Peer pressure is tough to resist.
If you really want to “get rich,” you have to stay in the game until you’re at the MD-level, and then be a seasoned MD with regular business coming in.
And that doesn’t happen in 5-10 years.
Prestige? Well, your parents can brag about it to other prestige-obsessed parents but otherwise it has no effect on your life.
Lifestyle: if you have clients and live transactions, you’re always on call – no matter what level you’re at. MDs spend a lot of time answering email and checking their Blackberries “on vacation.”
But despite other drawbacks, banking is good for forming real relationships with people – you spend so much time at work, it would be hard not to. And that keeps you (relatively) sane.
Everyone has heard about “risk” in terms of layoffs and hiring freezes, but actually getting laid off at the entry-level doesn’t matter much: when you’re young you have plenty of options.
But when you reach the mid-levels it gets very, very difficult to “jump back in” if you get cut – which is a big problem when you have 2 mortgages, 3 BMWs, and 2 kids.
Sales & Trading
“Ok,” you say, “so banking is not that great – I know, I’ll do Sales & Trading instead and make as much or more money but also have a life!”
On the surface the lifestyle is better because you work roughly market hours – it can go beyond that, but you’re not going to be pulling all-nighters.
And hey, you can tell people you work at a bank, so it must be prestigious right?
Plus, the social aspect is quite similar to banking: you make a lot of friends because of the environment you’re in. Sure, you might get hazed but that’s just a part of any fraternity trading desk.
And many traders like their work more since there are no pitch books and there’s much less grunt work and coffee-fetching (unless you’re an intern).
So what’s the catch?
Risk and exit opportunities. Most entry-level traders at large investment banks get paid roughly the same, and it’s more dependent on group performance than individual performance.
But as you move up the ladder that changes – more so than in banking, where even a crappy VP might get paid well just because his MD did well.
So yes, if you’re a rock-star trader and can make millions effortlessly year after year, you’re set – but if you have a bad year, don’t say I didn’t warn you.
And no matter what area of trading you’re in, you don’t have as many exit opportunities as bankers: as one reader pointed out, this doesn’t make much sense – but that’s the way it is.
If you’re an intern or you’re relatively new you can move elsewhere but you don’t have the flexibility that banking analysts do.
Ah yes, the Promised Land: private equity. Better pay, even more prestige, and much better hours to boot – right?
Well, not exactly.
Let’s start with prestige: whereas 99% of people have heard of Goldman Sachs, the average person doesn’t even know what “private equity” means. KKR or Blackstone may sound prestigious to you, but anyone outside finance is unlikely to know them.
Pay: despite rumors to the contrary, it’s not dramatically different for most people moving into PE. Yes, if you come in from a banking background you’ll get a higher base salary and possibly some sort of guaranteed bonus, but you’re not going to instantly start making $1 million at age 25.
Yes, Partners at the largest PE firms make 10x more (or more) than the top bankers do.
But very few people make it to the top, the industry is much smaller, and if you’re responsible for one bad investment you could be done.
The risk of getting laid off as a junior guy or girl in PE is lower than in banking – but advancing is just as difficult, if not more difficult.
There is less grunt work than in banking, but just a quick reality check: if you don’t find valuing companies, building models, and doing due diligence interesting, you’re going to hate PE too.
The social aspect always gets overlooked – once you move to the buy-side, you lose that large group of friends you used to hang out with, and your co-workers will be much older.
Yes, lifestyle is generally “better” but that’s not true if you go to a large fund – it’s banking hours all over again. And when you get busy with a deal, you’re going to work. A lot.
Much of the above applies to hedge funds as well. The average pay may be higher, but there is so little reliable data on what people at hedge funds actually make that I’m reluctant to say this.
And once again, the lifestyle is not much different from banking at the largest and most well-known funds: You work. A lot.
The risk is even greater with hedge funds, for one simple reason: they have a habit of collapsing.
I’ve been compiling lists of regional banks, private equity firms, and hedge funds, and as I was going through the hedge fund list I kept coming across “As of last year, such-and-such fund has ceased operations” in the “business description” fields.
This isn’t meant to scare you away from hedge funds: it just means that they are more risky than you think, pay is more variable than in banking and private equity (more similar to Sales & Trading), and the lifestyle may not be as good as you think.
I had already given consultants a good beat-down last year, but hey, let’s give it a go once again.
First, the pay is less than any of the other fields mentioned above – unless you’re at a small prop shop that pays $0 base salary.
It’s hard to say whether McKinsey or Goldman Sachs is more “prestigious” – but the average person is more aware of “consultants” than they are of “private equity guys.”
And then there’s the travel aspect: this seems fun at first, but you quickly get tired of flying to the Yukon Territory every week to “advise” on a new oil drilling project.
Most travel is not that bad – but if you don’t want to be away from home every week, you’re going to hate the consulting lifestyle.
One of the big lures of consulting compared to banking is that there’s less “grunt work” and what you do is more “intellectually stimulating.”
But is that true? There’s certainly more “variety” than in banking but I know plenty of consultants who find it very repetitive and think that most of the “research” you do is just fluff.
Still, on average there’s probably more “fun” in consulting.
Another big lure: exit opportunities. One consultant once told me, “Management consulting is the only industry that gives you unlimited options.”
But ask any consultant who’s interviewing for PE or finance-related jobs, and they’ll tell you a different story: yes, it’s possible to get in coming from a consulting background but it’s significantly more difficult than if you were a banker. It’s hard to “prove” you know how to model an LBO if you’ve never done one before.
It’s good preparation for business school or for “management” jobs at companies, but if you’re coming from a consulting background you’re at a disadvantage next to bankers for finance jobs.
I don’t get many emails or comments about this one, probably because no one wants to do it or because you already know the trade-offs.
But I do get a lot of emails saying, “I want to do corporate development after banking to get a better lifestyle. Can you tell me about it?”
My take on it is simple: it’s similar to private equity, but with reduced hours, pay, and upside.
Your chances of getting laid off are very, very low unless you’re at a new startup that happens to fold – but your chances of moving to the top, especially at a huge conglomerate, are slim.
The lifestyle is definitely better than the other options presented here: not much travel most of the time, and the hours are fairly standard except for when you’re working on a live deal.
The other trade-offs vary by what company you’re at and how your group runs – sometimes you might be the only person who isn’t married, and sometimes there’s a bigger group of people your age.
If you go into this after banking – or anything else on this list – you’ll find it very slow since you’re used to constantly running around and being on-call 24/7.
Also, there’s no clear “exit opportunity path” as there is with some of the other options here. Most likely, you’ll end up going to business school or moving to a different company.
I have a theory that everyone who goes into banking secretly wants to start their own company instead. I get a lot of comments and emails that start out like this:
“Hi, I want to stay in banking for 2 years and then use all my money to start a company afterward. Do you think this is a good idea, and if so which group do you think I should be in?”
No, that’s a stupid idea because: 1) You will barely save any money over 2 years. 2) Banking is terrible preparation for entrepreneurship.
This one is almost impossible to write about because it depends on what kind of company you start – offline, online, products, services – and whether you aspire to be the next Google or you’d rather just start a bar with your friends.
But there are 2 important points that no one else ever brings up:
- The real risk is not going bankrupt or ruining your life, but rather wasting time going nowhere.
- This is the loneliest of the options here, because you don’t have peers – you’re either flying solo, or you have employees.
Yes, you could completely fail, but your life isn’t over – this happens all the time in Silicon Valley and everyone bounces back. More often than not, you might spend months or years on something and not get much traction – so you don’t get rich, but you also don’t lose everything.
On the social aspect: even if you end up with employees, you can’t really “hang out” with them. Especially if you started everything alone or with 1 other person, it’s quite lonely.
Pay, enjoyment, and lifestyle vary so much by what you do that it’s impossible to generalize: you could work 100 hours a week and hate your life, or you could treat your business as a simple part-time job.
If you’re wondering why everything I do is online, it’s for exactly those reasons: offline requires far more work, doesn’t give you as much leverage, and restricts your lifestyle a lot more.
Ok, that was really long. And maybe you didn’t read everything.
So here are the major points:
- Wanting to stay in finance for “just a few years” to “get rich” or “have enough experience to do something else” is a poor strategy. You’re not going to be rich after that short a time – and if you want to do something else, be like Nike and just do it.
- Most finance-related jobs entail a lot more risk than anyone ever talks about. And the lifestyle never matches what people with “normal jobs” get, no matter how high up you are.
- If you want to reach the top of anything listed here, it requires work, sacrifice, and risk. This doesn’t happen in “a few years” – it happens by spending 10-20 years or more excelling. There’s no magic bullet.
- The social aspect of all these options is huge and it’s something that almost everyone ignores. Hopefully you’re thinking about it now.
- Be aware of limits on exit opportunities. Hardly anyone tells you, for example, that once you’re at a specialized hedge fund it’s tough to move somewhere that uses completely different strategies.
So, What Should You Do?
Hey, I can’t give you all the answers.
I’m just like Fox News: I report, you decide.
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