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How to Become a Venture Capital Investor: A Complete Guide

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Venture Capitalist Investor

Venture capitalists are considered wealthy, ambitious, and generally successful in life. Many startup veterans and newly minted MBAs desire to be venture capitalists.

However, there are extremely few VC jobs, thus making the prospect of becoming one unlikely for most people.

So then, here’s how to become a venture capital investor.

Becoming a venture capital investor requires a substantial amount. An average American VC investor makes roughly $400,743 a year in addition to an average bonus of $150,000.

Their investment comprises stocks and bonds because they have a higher return on investment (ROI). You can start as an angel investor who supports a young business before establishing your VC firm. 

How Do I Become a VC Investor?

Becoming a venture capital investor can take different routes. An entrepreneur can become a VC, a highly-skilled investment banker, lifelong financial advisors, technical business process experts, equity research analysts, and more.

The popular belief surrounding the concept of becoming a VC investor is that you do necessarily need a huge bank account. Well, it’s not a must for you to invest your own money to become an investor. However, having a big bank account can make it easier to join the VC investment scene.

Many people are not conversant with the difference between VCs and equity investors. A VC can invest directly or through a VC firm. Therefore a VC firm deploys third-party assets to grow a young company.

On the other hand, private equity firms look for a person with the ability to grow certain aspects of the bottom line like profit and cash flow. They want experts who can use tools such as marketing and economies of scale to grow the company.

Here are ways of becoming a venture capitalist:

Educate Yourself: Becoming a VC doesn’t require a college degree or any other formal education. However, you need some basic knowledge which you can read from many books written by experts and available on the internet. Still, nearly 50% of VCs have an MBA degree, and out of them, 60% are Stanford or Harvard University, graduates. Therefore, having a college degree or an MBA is not a bad thing.

A VC Mentor: If you’re serious about becoming a VC, you can search for a good mentor. Such a person will introduce you to the venture capital world. A mentor will teach you how to pick winning startups and the basics of running a business. Still, you can join their firm as an assistant or technical advisor so that you can get on-the-job mentoring.  They will teach you the ropes if you tell them what you want.

Entrepreneurship: Becoming an entrepreneur first si the best route to joining the venture capital scene. This gives you the necessary experience on how to run startups and their challenges. The knowledge you gather from this will help you to advise new entrepreneurs when you become a VC.

Investment Banking: You can opt to work with a tech-oriented bank that works with startups, which will give you the knowledge to get started.

Angel Investor: Becoming an angel investor is an excellent way of jumping into venture capitalism. This allows you to first test the waters before investing as a venture capitalist. Angel investor invest in a startup directly, while venture capitalist mainly invests their capital through a firm. A good bank balance and a keen eye for picking promising startups are the targets for becoming an angel investor. Also, your experience as an angel investor will help you decide whether to become a venture capital investor or not.

How Can I Start a VC Fund?

Starting your VC firm requires some good investments, but you can begin by working at a VC firm first, make substantial investments and then start yours.

Assuming that you have such investments, here is how you can get started.

Start as an Angel Investor: Beginning as an angel investor will help you make reasonable investments and gain some experience that can help you prove yourself as a successful investor. So raise a small fund from your following, such as through Angelist’s Rolling Funds.

Join a Venture Capital Firm: Starting at an established fund can help you build a track record. So search for a firm that has invested in more than two startups that grew to be unicorns.  While this is not enough proof of a successful VC, it will help you raise a small fund.

Partnership: An investor starting a VC firm will need an operational partner, or a less branded but successful VC will need a partner with a brand but less established. Why not be that partner? Going straight from being a founder to a first-time VC is not the best route to take, even with a reasonably big fund.

The limited partners (LPs) want not an amazing company but how you’re putting institutional capital to work.

Can anyone be a VC?

Anyone can become a VC as long as they have the necessary skills and knowledge needed to become one. The following are additional qualities that can help you become a successful VC investor.

Talent to Pick Promising Startups: The biggest task that a VC has is to find the right startup to invest in. Generally, startups are young businesses without concrete numbers, so your VC intuition will play a huge role.

Skill to Conduct In-Depth Background Checks: The ability to pick promising startups is not the only task VCs have. They have to check a lot of information about the founders to ensure that they’re credible and honest. In-depth industry research is one of the methods of finding out startup entrepreneurs. Otherwise, without such a skill, you will be required to invest through a venture capital firm.

Risk-taker: Investing in startups is risky. No matter how skillfully you conduct background checks or analyses, you will still be exposed to some risks. Therefore, you must be comfortable with some risks when you dive into venture capitalism because your chosen business venture might fail while the one you refused might succeed.

Negotiation Skills: The next step after picking a startup is to disburse the agreed amount. This depends on the amount the founders want, how the future finances look like, and the returns. Since startups give VCs equity in exchange for their capital, you should have excellent negotiation skills to help you get a reasonable share so that you get outsized returns upon exit.

Ability to Decline an Offer: A lot of young businesses will approach you with financing requests. Some of these ventures might be backed by inexperienced founders, or their business model lacks potential. So part of being a VC is to have the ability to say no, thus crush someone’s dream instead of losing your money.

Networking: VCs operate in a small world, and they invite each other when they find a good investment opportunity. So getting good deals here depends on who you know. Therefore, grow your network if you want to succeed as a VC.

Is Venture Capital a Stressful Job?

A VC job may seem exciting, but truthfully, it’s a challenging job. Many people want to break into the venture world because of the outsized returns at every exit. This misunderstanding of what a VC does makes the job look attractive to most people.

The following are the reasons why venture capital is a stressful job.

1.    Spend a Bigger Part of Their Day in Boardrooms or Studying Excel

VCs don’t just sit on a throne interviewing entrepreneurs with brilliant business ideas; neither do they write multimillion-dollar checks. Instead, they spend much of their time with excels in boardrooms.

Startups are busy pitching to VCs to raise millions in order to grow their businesses. VCs can invest individually or through VC firms. So these firms are also busy raising funds from individual investors in order to invest in promising startups. Therefore, VCs are always busy auditioning younger companies in order to discover opportunities with good returns.

2.    Always Saying No

A VC can say no to over 200 deals but finding the right one. Actually, a good tech investor is the one skilled at saying no. But spending most of your day and life disappointing founders who are determined to change the world can get to you.

3.    Hard to Strike a Good Connection with All Founders

Entrepreneurs are looking for investors who not only bring a check but also value. It is common to hear founders complaining about how investors get too involved or digging for too much information than they need. Just a few startup founders will say that their investors are perfect because they are not too involved although involved.

It’s extremely hard to provide strategic money and still avoid the temptation to be overly controlling. Most investors don’t know how to maintain that balance, and many entrepreneurs will conclude that you don’t know how to do your job.

However, it’s hard to find a company that appreciates your involvement and balancing act.

4.    Too Many Odds against You

Generally, startups have low chances of success. Still, VCs have a much lower potential for success. This is so even for those entrepreneurs with an incredible eye for success. Even so, getting it might last 7-10 years.

While working as a VC has its challenges, this role can be fun and insightful. Still, you can get bored and have intense pressure as you try to deploy your capital and the waiting period to see the return on your investment.

Does Venture Capital Pay Well?

VCs make money as long as the businesses they pick flourish. These investors are well compensated, and so they end up rich or madly rich.

Carry is the first key element to VC’s wealth. It refers to the percentage of the winnings allocated to partners before paying investors their profits. The standard share is 20%, although some VC firms may take home 25-30%.

In other words, a startup company that generates $100 million will give its partners $20-$30 million before sharing the rest with its investors.

Layer factor is another way to make money. Companies raise funds every 2-3 years, and VCs charge management fees for over five years. So a single VC firm can collect a management fee for more than one fund aside from the carry shares they receive when these companies make a profit.

What is the Difference between Venture Capital and Angel Investors?

Venture capitalists and angel investors are two common sources of funding. These two alternatives targets innovative startups firms in technology or science fields.

Venture capitalists are different from angel investors in the following ways.

  • Angel investors are high net worth individuals who invest their own money in startup businesses or young companies. Venture capitalist investors are individuals, companies, or firms that invest pooled funds from different investors in emerging businesses.
  • Angel investors tend to be risk-averse because they’re investing their own money while VCs take on a greater level of risk.
  • While angel investors back early-stage businesses engaging in market research and technical development, VCs invest in startups that they know their founders or are successful. They prefer well-established emerging companies and support them through their growth phase and exit at IPO, acquisition, or merger.
  • Angel investors mostly invest $1 million and below while venture capitalist starts with $3-5 million and above.
  • Angel investors share their industry experience and connections with startup founders but are reluctant to participate in running the business. Venture capitalists are highly involved in making decisions and may even demand a seat on the board of directors.
  • Angel investors tend to invest for a shorter period of 2-5 years, while venture capitalists stay for 10 years and above before exiting.

Is Angel Investing Profitable?

Angel investors are high net worth individuals who manage their funds and decide where to invest them, unlike VC investors, who have options of creating a venture fund and getting experts to control it.

An angel investor, also known as an angel funder, informal investor, business angel, or seed investor, has to choose brilliant early-stage startups in exchange for preferred shares or equity in the business.

Angel investing is a good investment opportunity because it allows such investors to support entrepreneurs in turning their excellent ideas into helpful solutions to change the world. Traditional banks always turn down startups and young companies because they feel they don’t have viable businesses and may lose their money.

So such entrepreneurs turn to angel investors for funding in exchange for a stake in the company. Such investors demand a bigger percentage because of the high risk on their investment, their knowledge, experience, and skill they bring to the company.

Actually, some investors demand close to ten times what they have invested in order to cover the risks taken if the startup fails. Additionally, getting a higher stake is a good exit strategy when the business fails because it helps investors recoup their investments.  They can also exit during initial public offerings (IPOs) or acquisitions.

Most angel investors receive a 22% internal rate of return from their successful portfolio. This is quite expensive for an entrepreneur with a young business, but it’s the cheapest source of funding. Banks tend to shy off from early-stage business ventures.

Angel funding is the primary source of financing for startups for it fosters innovation that translates into economic growth. This has grown this type of investment because of its profitability.

Who is the Richest Venture Capitalist?

Venture capitalists are credited for backing some of the biggest fortunes across the world. Some of the founders backed by VCs are Mark Zuckerberg of Facebook, Sergery Brin and Larry Page of Google, as well as Steve Jobs of Apple.

So, these VCS have not only made billions for themselves, but they have helped create jobs, companies, and billionaire entrepreneurs. VC is indeed a fascinating profession, and investors good at picking promising startups can earn fortunes commensurate with the startup business or entrepreneur they fund.

The following are some of the wealthiest VCs

John Doerr: He serves as the chairman of Kleiner Perkins. Some of his notable investments are Amazon, Google, Netscape, and Microsystems. His estimated net worth is $11.5 Billion.

Douglas Leone: He joined Sequoia Capital in 1988, served as the managing partner from 1996, and global managing partner since 2012.  His notable investments are Aruba, Meraki, Netezza, Rackspace, and ServiceNow. It’s estimated that Leone’s net worth is $5.7 billion.

Michael Moritz: The former journalist is a VC with Sequoia Capital and a philanthropist. His net worth is $5.6 Billion, and his notable investments are Google, PayPal, Yahoo, YouTube, Webvan, and Zappos.

Yuri Milner: He is the co-founder of Mail.ru Group and the founder of DST Global. He has a stake at Habito, 23andMe, Planet Labs, and a minority stake in Cadre. Milner estimated worth is $4.8 Billion, and his notable investments include Facebook, Flipkart, JD.com, Twitter, and Zynga.

Mark Stevens: The Silicon Valley VC formerly invested through Sequoia Capital but now does so through S-cubed Capital, a family office. He has a minority stake in the Golden State Warriors NBA basketball team, serves on Nvidia’s board. Other notable investments are Documentum, Nvidia, Quickturn, Quicklogic, and Pixelworks. Stevens’s net worth is $3.7 Billion.

Others include Jim Breyer, Peter Thiel, Ram Shriram, Vinod Khosla, Ron Conway, Marc Andreessen, Tim Draper, Chris Sacca, Chamath Palihapitiya, and Nick Hanauer.

These VC investors invest through venture capital firms such as Bessemer Venture Partners, Greycroft, Bain Capital Venture, Andreessen Horowitz, Canaan Partners, Anthemis, General Catalyst, TCV, Balderton Capital, RRE Ventures, Khosla Ventures, Sequoia Capital, Accel, New Enterprise Associates (NEA), Kleiner Perkins, Intel Capital, and more.

Some notable venture capital funds are General Atlantic, Hillhouse Capital Group, Iconiq Capital, New Enterprise Associates, Tiger Global Management, Norwest Venture Partners, Andreessen Horowitz, Bessemer Venture Partners, Sequoia Capital, Sapphire Ventures, Greenspring Associates, and Redpoint Ventures, among others.

I'm a passionate full-time blogger. I love writing about startups, how they can access key resources, avoid legal mistakes, respond to questions from angel investors as well as the reality check for startups. Continue reading my articles for more insight.

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