By Kenn So
Here's a PDF version if you want to print it out, though its not updated
I'm an early stage venture investor at Shasta Ventures that loves to take long walks.
I am sort of an oddball when I decided to recruit for VC a few years ago - a foreigner without a network. I'm fortunate to be where I am today so I'm writing the book I wish I had when I was recruiting for VC - lessons and tactics for those without the network and background.
If you have any feedback, please reach out to [email protected]. Would love to hear what you think.
If you're interested in reading the sequel and updates, I'm starting a monthly Substack publication where I write about the craft of early stage venture. I also write on Medium about spaces I'm interested in and on my personal site for other thoughts.
©️ 2020 Kenn So
This book is focused on getting you prepared to recruit for an analyst or associate role in early-stage venture capital (VC) - especially for those who don't have the network and don't know how to start. A lot has been written about the 'what' of venture. This book hopes to fill the 'how' and a bit of 'why'. How to research venture funds, write an investment thesis, and so on. Why venture capital is a good fit, or not, for you. There are detailed case studies on what it is like to be a venture capitalist. But these are written from an investment partner's perspective, not a junior's.
There's a discussion of whether junior VCs should even have the mindset that there are ranks. An investor is an investor, regardless of title or rank. That's the right mindset when you are already in the industry. But it isn't easy to have that mindset when you are just learning about and trying to break into the industry - whom this book is for.
This is geared towards the San Francisco Bay Area venture scene, which tends to focus less on technical questions about deal terms and finance concepts during interviews.
I always like to preface with what my work is not about to save you time (and help me focus):
This book is relatively long. So if you just want a punchy guide, here are some great alternatives:
Venture capital is a segment of private equity that invests in small businesses with long-term growth potential. The tech titans of today - Google, Apple, Amazon, Netflix - are venture-funded. VC firms raise funds to invest in a portfolio innovative startups. As with a lot of innovation, there is a high risk of failure. It is common for 90% of the fund's portfolio return 0-1x the amount of capital invested. The balance of 10% generates all the profits. A key characteristic is giving capital in exchange for a minority equity stake in young companies with the potential to return 10-100x in 5-10 years. This is different from 'traditional' larger private equity funds that buyout existing shareholders of mature companies and target a 3-5x return in 3-5 years.
So what are venture investors like? They like to take the risk betting on the next big thing. They believe that the little guys will beat the big guys. They want to be the cheerleaders supporting the best entrepreneurs. They, even the introverted ones, love meeting new people and learning new business models.
Those are the common characteristics of the cast. We'll dive next into the different roles and know more about what a junior VC dies.
Investing roles
This book focuses on junior investing roles, which tend be to 2 year programs. The expectation for pre-MBA associates is to pursue their MBA after and for post-MBA associates to either do really well and transition to a principal or find what's next.
Non-investing roles
There are two groups of non-investing roles in a venture fund. First is the fund administration that runs the operations of finance, LP relations, and HR. Second is portfolio support which helps companies get new customers, hire talent, and so on. In small funds, the investment team acts as the portfolio support team. In larger funds, there is a separate team. Andreessen Horowitz is well-known for having approximately 200 portfolio support staff.
At the junior level, venture capital is fundamentally a sales and marketing role. The job is to find startups that the partnership wants to invest in. The clearest KPI is the number of companies that you sourced & diligenced that the fund invested in. This is the milestone for junior VCs in the first 1-2 years. There are many others like helping a founder navigate downsizing, shutting down a company, going to IPO, etc. But these are for when you are further along your career in venture. The day-in-life of a junior VC, if ever there is one, is spent 20% reaching out to new companies, 20% talking to investable companies, 20% diligencing, 20% brand building, 20% anything else (usually related to sourcing). The distribution varies significantly across firms and roles. A friend's KPI is to source two deals a year that the partnership invests in. Another targets talking to 20 new companies each week.
We'll talk more about this in the next chapter.
As an industry at the early stage, no. Junior VCs come from multitudes of backgrounds from journalists to MBA graduates to homeless people. But each firm has its preferences. Some give additional points for experience at a successful startup relevant to the stage at which the fund invests in. Product managers and engineers tend to be preferred. Then business operations & GTM. If you are a founder of a startup that exited for a lot of money, you'll either join as a partner or go start another company.
For growth stage venture, yes. They like to hire investment bankers from bulge bracket firms like Goldman Sachs and Morgan Stanley.
What about MBA grads? No correlation. The value of an MBA is mainly access to alumni that are VCs. In early stage venture, having one doesn't hurt. In growth stage venture, its more valuable.
<aside> 💡 Note to MBAs. Interviews at top consulting, banking, and tech firms are handed to you. Venture recruiting is the opposite. You are on your own. A common story of MBA students who got venture roles is they spent most of their 2nd year recruiting outside of the campus, skipping out on academic and social activities.
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Classic business school feeder industries are investment banking and consulting. Increasingly, working in big tech and startups. A good way to think about is in terms of breadth of skills and autonomy. Know yourself to find the best fit. (Here's a link to the image in case it doesn't load: https://ibb.co/MpQFdrz)
Including bonus, analysts get paid $80,000 - 120,000. Associates, $130,000-180,000. Growth stage funds tend to pay 10-20% more. Junior VCs usually get no carry. According to John Gannon's survey 13% of analysts and 30% of associates get carry. It takes several years for your carry to payout, if any. For more info, refer to the surveys:
Primary activity: finding amazing startups to invest in
The first step is to find companies that you are excited about that you'd like the fund to invest in. It is like marketing lead generation and you can do it inbound or outbound.
Inbound
Outbound
Diligence
After you find investment opportunities, due diligence is next. This is to evaluate whether it is a good investment. What a good investment is differs from firm to firm, accordingly how due diligence is done differs. The culmination of the due diligence is an investment memo sent to the partnership for review. I've met junior VCs who write 6-page memos for Series A investments, to 50-page memos for Seed investments. See resources chapter for sample investment memos. Below we cover the three main areas that will be part of any diligence and memo.
Product
The key question to answer here is "is the product amazing?" What is considered amazing? For some it is being 10x better, faster, cheaper than the status quo. Sometimes the status quo is a competitors' product, other times it is current behavior. For consumer startups, VCs can evaluate the product themselves. They can crowdsource product feedback quickly with friends and family. A new meditation app or dog food delivery service - its all within reach. For business startups, this is trickier especially enterprise products. You have to rely on a much smaller and less accessible group of users who can tell you about the product. Leverage the fund's network and conduct direct & indirect customer references.
Market
The question that VCs have here is "can the startup become a unicorn in 5-10 years?" There are three dimensions to this: size, growth, and timing. What metrics to hit depend on what sector and business model the startup is in. But in a B2B SaaS, the ideal is $100 million ARR in 5 years - kinda guaranteed unicorn. Most SaaS companies don't reach that.
So let's talk about the dimensions. Size. The market has to be big enough for the startup to reach scale amidst competition. In consumer, there tends to be a winner-takes-all dynamic. Think Facebook. Less so in B2B. Even CRM behemoth Salesforce has only 20% of the market. Growth. This is important because that means new customers that are open to evaluating new products. Taking market share from others is difficult and expensive. Lastly, timing. This is difficult to evaluate and matters more to seed-stage investors who are investing in new product categories. Size and growth are signals of timing. But these signals are absent in seed stage companies. Seed investors have their own framework to evaluate markets and ideas.
<aside> 💡 FWIW: I like Floodgate's framework for evaluating seed ideas.
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Team
There are characteristics that VCs look for in a founder. Hustler, committed, visionary, operator. The difficult parts is there is no way to objectively measure these characteristics (well, there is. But it'd be weird to ask all founders to take personality test). So to understand the entrepreneur better, VCs ask specific questions to gauge certain characteristics, understand their story, and conduct indirect and direct personal references.
One aspect that does not get talked about as much is founder-VC fit. Founder-lead investment partner fit, to be specific. This is important because both parties may have to work with each other far longer than the average US marriage. The average S&P company lifespan is 18 years while its only 8 years for US marriages.
What happens after the diligence? There is the art of convincing the partnership that your deal is a good one and offering a term sheet to the company. After that, there is the process of convincing the startup that you and your fund are the best ones positioned to help them. In a competitive deal, things get pretty intense from having portfolio company CEOs vouching for you or using the company's product to deliver the term sheet - just like what Bessemer did to convince Twilio to take its Series B offer. But we won't get into that. It is not relevant for recruiting.
Secondary activities: helping startups and the fund
We won't go into much detail here since junior VCs tend to do less of these but its good to know what "everything else" means during informational interviews.
Portfolio management
Primarily helping out the companies with ad-hoc projects. It can go anywhere from interviewing candidates to building cap tables to introducing a potential customer. What you do depends on the fund. Large funds have separate portfolio teams. The stage at which the funds invest in matters too. Seed companies need help finding great talent, even at the junior level. Series A companies need help with their GTM stack. Series B companies want seasoned executives.
Fund management
Fund management can be broken down into deal operations, internal reporting, and LP relations. Deal operations is managing deal flow, setting up the right processes and technology, etc. Internal reporting is analyzing portfolio company financials or fund performance. LP relations is preparing annual meeting and fundraising decks and ad-hoc LP requests.
Pre-seed-Seed
Series A-B
Sourcing: How much time a junior VC spends here differs from firm to firm. Most are expected to bring in deals but a good chunk are not, surprisingly. On average, there is less emphasis here on sourcing than seed-stage because of volume.
Diligence: This is where investors start to dig into company data seriously. The main question here is are there early signs of product market fit. What does that mean? It depends on a number of factors. The easy answer is over $1 million in revenue growing at least 100% YoY. The more nuanced answer is it depends on more factors. For example, how much of the revenue comes from the founders' network, for enterprise software, or by paid ads, for consumer. The less revenue coming from founders' network the stronger the signal that customers are finding and buying the product not because of a personal favor, which is not scalable. On the consumer side, the lower the CAC and higher virality-driven growth the stronger the signal that the product is resonating with consumers. There are lot more nuances like business model, churn, net retention rate, etc. Since its early stage, there are no metrics to fully capture early PMF.
<aside> 💡 FWIW: I like Tribe Capital's quantitative framework to product market fit
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Portfolio Management: Similar to seed, let's go back to first principles. At series A & B, the goal is to find the repeatability.
<aside> 💡 If you want to dive deeper into what it is like as a VC, consider subscribing to my upcoming Substack publication where I reflect on the craft of early stage venture
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I don't have enough experience with growth venture to write something thoughtfully aside from it requiring more financial rigor akin to private equity. Sourcing dynamics are different from early stage venture because everyone knows the set of series A and B companies. It is rare to find "stealth" growth startups.