Venture Capital Industry Overview
Whereas most people associate venture capital with the investments during the dot-com era, this industry reaches far beyond the confines of internet start-ups. Venture capital firms invest in the fastest growing industries in the world today ranging from alternative energy to social networking communities. All this investment activity creates tremendous opportunity for jobs in venture capital.
Venture Capital Business Model
Fundamentally, venture capital firms invest in companies that are too risky for standard debt-issue, which is especially true for start-up firms due to their short history. Investing in these young ventures creates a highly entrepreneurial atmosphere in the VC firm as well. Balancing the risk-to-reward ratio, venture capital firms expect large pay-offs for the risk they take. The exit strategy, whether through an IPO or acquisition, is always a primary concern.
Entrepreneurs (and investors) have learned their lessons and today know they have to produce real value and revenues. There’s less money available to new ventures and it more difficult to access than in the late 1990’s. Venture capital will continue to flow to tech companies that prove their model works. And with fewer companies seeking an IPO, exit strategies are based on getting acquired by an established industry player who takes a buy vs. build approach to innovation.
For those who have the drive and business intelligence, there are ample, lucrative venture capital job opportunities. As is typical in the private equity world, most people find their first venture capital job through their professional or personal network. VC firms are small and do not hire dozens of people at a time. They have specific roles to fill, typically for a particular industry. If you have the domain expertise the firm is looking for, you’ve got a big leg up on others interested in that same venture capital job.
A career in venture capital involves the selection of portfolio companies, investment of funds, product launch and growth management. In the venture capital career path, the partner will oversee the management of many companies who exchange equity for funding. In addition to cash, VC firms add value to these enterprises through active participation in the affairs of the company, often taking a seat on the Board of Directors. The ultimate goal is to assist these companies with the successful launch of their products and services into the marketplace and position them for long term profitable growth.
If considering a venture capital job, significant due diligence should be done. Take a close look at the compensation plan and gather as much information as possible about past fund performance. As most firms are small and often fairly political, you need to talk to others in the firm you before evaluating a venture capital job offer. The hours are typically long and the work challenging. Consider the work environment and firm culture to make sure it meshes with your preferred work setting.
A Look into Venture Capital Firm Structure
Funding for the activities of venture capital firms are made by its investors, who are referred to as limited partners. These limited partners can be wealthy individuals or financial institutions, such as insurance companies, banks, and pension funds. These investors have little or nothing to do with the daily operations of a venture capital firm, but serve mainly as the funding source for business activity.
Commonly structured as a limited partnership, venture capital firms are usually directed by several general partners, who bridge the management gap between the funding partners and the vested companies. Each general partner has extensive business experience, especially as a senior executives in a financial institution or industry corporation.
It is from the roles that support the general partners in locating, analyzing, and managing profitable investments, that many venture capital jobs arise. Indeed, entry level venture capital jobs that lead to a lucrative venture capital career are available for savvy, intelligent business-minded individuals.
Challenges in the Venture Capital Model
There is buzz about a presentation by Adeo Ressi, founder of TheFunded.com, on how the venture capital business model is breaking down. The theory is based on the fact that there is more money flowing into VC firms than they are generating from their investments. In other words, VCs are creating a negative balance on the economy. This contradicts what VCs typically espouse about their industry – that venture capital creates stock market growth and job creation.
The thoughts supporting this position include:
- Too many investors poured too much money into Silicon Valley, even after the 1990s, with too few deals to support it. So valuations were driven up to unreasonable levels.
- Larger companies like Yahoo, Microsoft, Google and Cisco are buying up start-ups earlier in their life cycle, thereby keeping the start-ups from becoming huge companies – and future competition.
- Greed on the part of some venture capitalists, who are tempted to raise even larger pools of money because of the fees they get on these funds, even if early-stage start-ups can’t absorb all the money thrown at them.