Most venture capital funds are set up as independent limited partnerships. This includes well-known coastal names like Kleiner Perkins Caufield & Byers, Draper Fisher Jurvetson, and Highland Capital Partners, as well as regional up-and-comers such as Renaissance Venture Capital Fund. The venture capital firm acts as the general partner (GP) with third-party institutions investing the bulk of the capital to the fund, filling the role of limited partner (LP). During the fundraising phase that every venture firm goes through in building a new fund, the GP seeks out investment commitments from accredited investors. The VC firm distributes a private placement memorandum (PPM) or prospectus to potential LPs, and might expect to raise the necessary capital over the course of the ensuing six to 12 months.
Funds generally raise anywhere from $10 million to several billion dollars from their limited partners. According to the National Venture Capital Association (NVCA), more than 50 percent of investments in venture capital come from institutional pension funds, with the balance coming from endowments, foundations, insurance companies, banks, affluent individuals, and other entities who seek to diversify their portfolio with an investment in risk capital. Venture capital firms raised $32.97 billion in 2014, according to Dow Jones VentureSource, an increase of 62 percent from 2013, and the highest total since 2007 (before the Great Recession). It is the GP’s job to invest this capital in privately held, high-growth companies. In order to make these investments, the venture firm has to “call in” its LPs’ commitments through tranches or “capital calls.” Venture firms have synchronized these calls (sometimes also called “takedowns” or “paid-in capital”) to their funding cycles, allowing funds to be available on an as-needed basis.
A partnership agreement sets forth the relationship between the GP (the VC firm) and their LPs (investors). The returns of the venture capital fund are distributed back to the LPs as dictated by the partnership agreement, but naturally lean toward the later years of the fund. The reason for the preponderance of partnerships, as opposed to corporations, is the security that partnerships give venture capitalists to make long-term decisions. Once an agreement is signed and the capital commitments are made, the LPs are generally stuck with this group of venture professionals for the duration of the partnership (VC funds are generally organized as 10-year partnerships, but, in recent years, have expanded to more than 10 years). For the duration of the partnership, the institutional investors cannot remove their capital from the fund at will. Liquidity is realized when a viable exit option becomes available.Liquidity Options
Both IPOs and M&A transactions are credible exit strategies. A liquidity event can take several forms, including a cash deal, stock, or both. Capital or shares of stock are then distributed back to investors according to the partnership agreement, unlike a mutual fund where invested cash can be withdrawn at any time. As a result however, the arrangement allows venture capitalists to act as a relatively reliable pool of risk capital. Plus, VC firms will rarely “go bankrupt.” If unsuccessful, they are more likely to be wound down over time without the ability to raise an additional fund.
For example, a typical 10–year venture capital fund may cash flow something like this:
Not unlike a mutual fund, a venture capital firm may manage several individual funds at any given time. The individual funds are distinct entities with their own set of limited partners, although LPs do sometimes overlap across funds. As one might imagine, this creates a pile of issues that we will not try to go into here (if you really want to know how the story of VC partnership ends, both Josh Lerner and Joe Bartlett have leading books on the subject).Distributions and Carried Interest
Typically, venture capital fund profits are distributed as follows: 80 percent to the LPs and 20 percent (carried interest) to the general partner after the limited partners have recovered their initial investment. There are as many variations on carry, distribution, and similar terms as there are firms. The terms are ultimately established through negotiations on a case-by-case basis.Management Fees
The general partner (VC firm) charges a fee for its role as portfolio manager. This management fee covers the fund’s costs such as rent, salaries, and keeping the lights on. The fee is usually 1 to 2.5 percent of the assets, or committed capital. The actual percentage can vary based on fund size, the partners’ prior investment history, etc. Although the management fee is often paid quarterly over the life of the fund, it is not uncommon for it to diminish over time (toward the end of the fund’s life-cycle). Why is all this important? Because at the end of the day, this is how you get paid. That 20 percent of carry is split amongst the employees of the firm at the discretion of the managing or general partners.Finance Industry Affiliate VC Programs
Some venture firms are born as the affiliate or subsidiary offspring of an investment/commercial bank or insurance company (e.g., Goldman Sachs Private Equity Group). Depending on these funds’ reasons for being, they make investments on behalf of the parent firm’s partners, management, or wealthy clients. Others bring in outside limited partners, and run their funds no differently than any other venture capital general partnership.Corporate Venture Capital Programs
Corporate venture capital programs typically begin as subsidiaries or affiliates of large non-financial corporations such as Intel, GE Capital, Microsoft, and Merck. Most of these subsidiaries have a charter or mission statement which calls for making direct investments that are of “strategic” value to the parent corporation. The dynamics of how investment opportunities are found and deals get done differ from firm to firm. However, since many of these companies are publicly held, there is often a two-pronged approach to deal sourcing. The perfect corporate venture investment is one where the corporation’s business unit (depending on the industry/space/etc.) champions the deal. This makes sense, since with every signed term sheet the corporation concludes a Memorandum of Understanding (MOU) spelling out what both the startup and the corporation itself will contribute as future partners in this relationship. As the strategic component to the investment, the business unit will be intimately involved with the portfolio company after the deal is done. If this turns out not to be the case, all of the highly touted strategic value is likely lost.
Business units of publicly held companies need to deliver the numbers every quarter, so the investments they source reflect an effort to tackle current pains. On the other hand, venture groups like Intel Capital have historically also had hard core techies on the deal team, who have the breathing room to look out at 12–18 months. They search for “cool” technologies, without being fettered by either practical current application or connection to their core business. Either way, strategic value is king.
Although it is extremely difficult to quantify said value, the objective of this investment strategy can be to fill an R&D role (buy vs. build), penetrate new markets, or help sell more core products. While a few of the more experienced corporate investors have a good handle on the balance between strategic value and financial return, this has been a trouble spot and point of contention with less seasoned corporate venture teams. The bias toward strategic investing has the potential to create confusion, poorly aligned goals, and disincentives within/between the venture team, management, and corporate shareholders. The most probable ensuing conflicts from this and other corporate investment issues include:
1) Public for-profit corporations prioritizing strategic value in venture investments, without sufficient focus on ROI (return on investment).
While there is much to be said for strategic value, the point—the only point—is to make money. It is not always possible however, to calculate how an investment in a start-up today will impact Oracle’s bottom line on a recurring basis three years from now. Yet as a public company, Sun’s management must answer to shareholders once every quarter. So, unless the dollars invested can be demonstrably proven to either move more product or in some other way increase net income, ROI must play a more central role within corporate venture programs.
2) Companies sometimes compartmentalize their corporate venture groups.
For example, one multibillion dollar Silicon Valley corporation launched its venture program by dividing responsibilities between sourcing investments, negotiating deals, and managing the investment portfolio. This structure lends itself to lack of ownership or accountability by any one team. The sourcing group looks for the “gee-whiz” gizmo factor, with little regard for business model or financials. The deal team then has to complete enough diligence to decide whether this investment should go forward. If the decision is “no,” then the team faces an uphill battle and the political repercussions of trying to kill the deal. Worse yet, portfolio start-ups are forced to work with someone new every several weeks throughout the deal negotiation and funding process.
3) Board seats are a serious liability.
Board members are held accountable when their company stumbles. To avoid this conflict, publicly held firms should only accept board observer status. This gives corporate investors a window into portfolio companies on a month-to-month basis, without exposing the parent corporation to litigation and undue liability.
Some corporate investors do place a strong emphasis on financial returns, and may even function purely as financial investors capitalizing on the technology, know-how, reputation, and access to capital of the parent. Players in this realm include Dell Ventures and Nokia Growth Partners. While somewhat controversial, these programs can produce some of the most enviable returns in the industry, and successful programs are often spun off as separate venture funds.Quarterly Evaluations
Hundreds of venture programs have been shuttered in the past decade, with many of them closing in the immediate aftermath of the technology bubble, and others closing during or after the Great Recession (defined by the federal government as beginning in December 2007 and ending in June 2009). Others have been cut back, restarted, and cut back again. While the economy played a large role in this contraction, it has historically been difficult for corporate VCs to retain good venture capital professionals, and to stay the course when shareholders have a quarter-by-quarter view.
Nevertheless, it looks as if corporations will continue to be an increasingly important part of venture capital. We have only to look at Microsoft, Merck, and Intel as leaders in the business. As other corporations have retreated or completely withdrawn from corporate investing, others have stepped up their interest in discovering and building new companies. Google has become a major player in corporate venture capital—and, at the same time, annoying some of the more established VC firms along the way. The tech giant is scooping up upstart tech companies at a relatively bargain-basement price, giving itself new opportunities by luring entrepreneurs with its name while boxing out venture capitalists at the same time. Its VC subsidiary Google Ventures was the leading corporate venture capital investor from the start of 2013 to May 30, 2014, according to PitchBook.Other Venture Capital Structures
Venture capital firms can be effective with structures other than the ones outlined above. Limited Liability Corporations (LLCs) such as Granite Ventures LLC in San Francisco are an alternative form of structuring a fund, but for our purposes, these function in a similar manner as limited partnerships. The venture capital firm MVC Capital Inc. (NYSE: MVC) is an example of a closed end publicly traded venture fund. Harris & Harris Group (NASDAQ: TINY) is also a publicly held venture capital firm, operating as a Business Development Company (“BDC”) under the Investment Company Act of 1940.Smaller Alternatives
The National Venture Capital Association outlines other organizations, including government-affiliated investment programs that help start-up companies either through state, local, or federal programs. One increasingly popular vehicle is the Small Business Investment Company (SBIC) program administered by the Small Business Administration (SBA), through which a venture firm supplements its own pool of funds with federal money at a ratio of two government dollars to every dollar raised via limited partners (with a cap of $150 million). Meanwhile, the SBA only requires a limited return on their investment. While SBIC funds create more paperwork and bureaucracy for the general partnership, they can be a good deal for the limited partners. Between the inflated power of their leveraged investment and limited ROI upside for the SBA, LPs in an SBIC have a good thing going during the good economic times. Don’t forget however, that returns are based on timing. SBA funds require interest payments, and the GP might have to pay 6 to 7 percent when only making 10 to 12 percent annually.
Despite the endless maturations for organizing venture capital firms, atypical structures should set off a red flag for the applicant. “Why are they not a fund?” is the first question that a job-seeker should ask herself. While many alternative methods of organization have merit, a prospective applicant should be comfortable that the firm in question has sufficient unencumbered capital and is not just trying to look as if it does.
The venture capital industry has bounced back since the Great Recession. Although investment activity is roughly half of what it was at its 2000-era peak, the following statistics from the National Venture Capital Association (NVCA), PitchBook, and EY demonstrate that the VC industry is experiencing a renaissance (all statistics refer to the U.S. VC industry unless otherwise indicated):
One noteworthy trend is the rapid growth of corporate venture capital units. Global Corporate Venturingreports that the number of corporate-venture units doubled from 2009 to 2014, and 25 of the 30 firms that comprise the Dow Jones Industrial Average had a VC unit. “Companies as diverse as convenience stores (7-Eleven), chemists (Boots), financial firms (Visa and Citigroup), and carmakers (BMW) are all getting into the game,” reports The Economist. “They are looking for quicker, cheaper, and better sources of innovation than research and development, which often disappoints. In return, the startups they invest in benefit from their capital, expertise, and connections.” The insurance industry has become an especially big corporate player. Tech startup deal activity by insurance company VC units increased 460 percent from 2013 to 2014, according to CB Insights, a venture capital database and angel investment database. Since 2010, insurance VC units have provided $1.78 billion in funding to tech startups such as Uber and Betterment.
The recovering VC market is creating demand for skilled professionals. One fast-growing career is that of financial analyst (although they may be known as “analysts” or “associates” in the VC industry). Job opportunities for analysts who work for securities, commodities, and other financial investment and related firms are expected to grow by nearly 37 percent from 2012 to 2022, according to the U.S. Department of Labor, or much faster than the average for all careers. Employment for analysts who work with funds, trusts, and other financial vehicles will increase by nearly 26 percent during this same time span.
Other fast-growing careers include those in accounting/compliance, computer security, and marketing. Although demand continues for experienced VC professionals, it’s important to remember that the industry remains small and very difficult to break into (especially for recent college graduates with little or no operational or deal making experience). Aspiring venture capitalists are advised to earn an MBA, obtain several years of experience in related industries (e.g., private equity, investment banking), and develop a strong professional network in order to increase their chances of landing a job.
Although fundraising efforts and the IPO market are gaining strength, some industry watchers fear a repeat of the 2000 dot-com crash, during which many tech startups became overhyped and overvalued (before falling flat after the IPOs), resulting in many dot-coms folding, others losing a large portion of their market capitalization, and still others riding out the storm and bouncing back.
The dot-com crash not only had a negative effect on the tech industry, but also on the entire U.S. economy. Industry experts acknowledge the possibility of a dot-com bubble, but believe that the potential crash will be nothing like the one in 2000 because many VC-backed companies currently going public (or about to) are more mature and better equipped to grow and perform well in the free market.
Venture capital firms remain bullish on startups, according to the 2014 Global Venture Capital Survey, which was conducted by professional services firm Deloitte & Touche LLP in association with the NVCA. According to the survey, “confidence in the U.S. is increasing which is driven by strong IPO markets, innovative companies, and increased confidence in investors being able to fundraise, all of which bodes well for entrepreneurs.” In its 2015 Venture Capital Report, the law firm Wilmer Cutler Pickering Hale and Dorr LLP says that “technology companies leveraging the massive adoption of smartphones and mobile applications and the ever-increasing level of broadband connectivity, as well as companies deploying Software as a Service models or focused on major business challenges such as cybersecurity, should continue to be prime targets for VC funding.” Additionally, healthcare Information Technology and life sciences firms will continue to attract VC funding.
Demaria, Cyril. Introduction to Private Equity: Venture, Growth, LBO, and Turn-Around Capital, 2nd ed. Hoboken, N.J.: John Wiley & Sons, 2013. This book covers current trends (such as venture capital in emerging markets, crowdfunding, etc.) and discusses how these and other developments will change the alternative investment industry in the future.
Gerken, Louis C., and Wesley A. Whittaker. The Little Book of Venture Capital Investing: Empowering Economic Growth and Investment Portfolios. Hoboken, N.J.: John Wiley & Sons, 2014. This book, written by the founder of alternative asset manager Gerken Capital Associates, provides an overview of the origins and evolution of the U.S. VC industry; details the key role it plays in funding companies in the life sciences, Internet, and alternative energy sectors; and discusses a variety of VC concepts and strategies—from investment options and the importance of due diligence to exit strategies and prospering in bull, bear, and sideways markets.
Gravagna, Nicole, and Peter K. Adams. Venture Capital For Dummies. Hoboken, N.J.: For Dummies, 2013. This useful resource provides a concise overview of the VC industry for entrepreneurs who want to obtain venture capital funding. Readers will learn how to find ways to become attractive to venture capitalists, pitch to potential investors, and develop and grow their relationships with VC firms.
Lerner, Josh, Ann Leamon, and Felda Hardymon. Venture Capital and Private Equity: A Casebook, 5th ed. Hoboken, N.J.: John Wiley & Sons, 2012. This book uses both historical and recent cases of venture capital and private equity to provide an overview of how these sectors work and will evolve in the next decade.
Ramsinghani, Mahendra. The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd ed. Hoboken, N.J.: John Wiley & Sons, 2014. More than 25 leading venture capitalists provide advice on what it takes to launch, manage, and exit a successful venture capital fund.
Sources: MoneyTree Report by PricewaterhouseCoopers LLP, National Venture Capital Association, Wall Street Journal
Steve Jurvetson is one of the world’s leading venture capitalists. He is a partner at Draper Fisher Jurvetson and was a founding venture capital investor in Hotmail, Interwoven, Kana, and NeoPhotonics. Jurvetson was chosen by Forbes as one of “Tech’s Best Venture Investors,” by Fortune as part of its “Brain Trust of Top 10 Minds,” and by Venture Capital Journal as one of the “10 Most Influential VCs.”
Jurvetson attended Stanford University, completing his B.S.E.E. in 2.5 years and graduating number one in his class. He also holds an M.S. in electrical engineering and an M.B.A. from Stanford.
Before entering the venture capital industry, Jurvetson was a research and development engineer at Hewlett-Packard, where seven of his communications chip designs were fabricated. He also worked in product marketing at Apple and NeXT Software, and as a consultant with Bain & Company (specializing in the software, networking, and semiconductor industries).
Jurvetson is a self-professed space aficionado. His office is full of Apollo-era NASA artifacts. Jurvetson’s love of space exploration began as a fun activity with his young son as they built and launched progressively more complex rockets at amateur aerospace events. He was an early investor in SpaceX and Planet Labs, and sits on their corporate boards. “There were not obvious venture opportunities in space for a long time,” Jurvetson told Fortune in a 2014 interview. “From when I started in 1995 until 2005 or 2006, I didn’t see anything that looked even worth a first meeting. Now it’s very different—there are a whole bunch [of opportunities].”
Sources: Draper Fisher Jurvetson,Fortune
Adapting and Evolving Global Venture Capital Insights and Trends 2014 http://www.ey.com/Publication/vwLUAssets/Global_venture_capital_insights_and_trends_2014/$FILE/EY_Global_VC_insights_and_trends_report_2014.pdf
Asian Venture Capital Journal
BrightTalk: Venture Capital:
The Economist: Venture Capital
The gateway: business and careers newspaper for students
Global Corporate Venturing
Journal of Alternative Investments
Mergers & Inquisitions
MoneyTree report (PricewaterhouseCoopers)
National Venture Capital Association Yearbook
Private Equity and Venture Capital Career Advice http://www.jobsearchdigest.com/private_equity_jobs/career_advice
Private Equity and Venture Capital Glossary
Private Equity International
Regional- and State-Level Venture Capital Associations
Resume Advice: Private Equity & Venture Capital
Small Business Administration: Venture Capital
Top 50 Venture Capital Blogs
Ventureblogs: A List of Venture Capital Blogs
Venture Capital 101
The Venture Capital Aptitude Test
Venture Capital Career Resources
Venture Capital Journal
Venture Capital Post
Venture Capital Review
Venture Capital’s Next Venture?: Women
The Wall Street Journal
Finding a job in the venture capital industry is all about who you know. But some job seekers—especially those still in or just out of business school—may not have an extensive network. In this instance, an alternative strategy is to use the services of a VC recruiter. “Private equity executive recruiters have firmly established themselves as a visible and highly valued fixture in today’s venture capital and private equity job market,” advises Private Equity Jobs Digest.
Not all VC firms use recruiters, also called headhunters. The largest and best-known firms are the most likely to use them, while small firms may prefer to rely on their networks or personal contacts to identify strong candidates.
There are two types of recruiters. Contingency recruiters are paid by the company only if the candidate they recommend is hired. Retained recruitersare paid by the firm whether the candidate is hired or not. Be sure to clarify the compensation format before agreeing to work with a recruiter. Another tip: ask for everything in writing so that there are no surprises.
A good recruiter can be an asset to you during your job search. He or she can assess your qualifications and provide honest advice about whether a job is the right fit for you or not. They can help you review your résumé and cover letter and prepare for interviews. Quality recruiters speak the “language” of the VC industry. They know tons of venture capitalists, and can provide information on VC firms, investment sectors, and trends. On the other hand, a poor recruiter is easy to spot. They exaggerate their placement records and promise far more than they deliver. They don’t return your phone calls and e-mails. Avoiding these “bad eggs” is much easier in the VC industry because it’s so small. If you stick with well-known recruiters, you won’t have a problem. And if you decide to use the services of a new VC recruiting firm, conduct some due diligence (e.g., Web searches, conversations with professors and colleagues, etc.) to make sure it’s reputable and has your best interests at heart.
Here are some additional tips on working with recruiters:
Only a small number of recruiting firms work with VC placements, including:
You can use the company search feature at LinkedIn.com to find and follow additional recruiters. The career networking site also offers groups for VC recruiters and professionals, including the Private Equity & Venture Capital Recruiters Group. Some VC recruiters are members of the Association of Executive Search Consultants (AESC, https://www.aesc.org). To join the association, firms must go through a stringent vetting process and commit to the AESC Code of Professional Practice.
An excellent way to get a post-MBA job in venture capital is the Kauffman Fellows Program. Ewing Marion Kauffman created the $1 billion Kauffman Foundation in 1992 to support youth development programs and to accelerate entrepreneurship in America. The two-year fellowship is one of the foundation’s innovative programs. Its mission is to increase the number of well-trained venture capitalists in the U.S. by placing and paying top candidates to work as associates in prestigious venture capital firms. It is an excellent program, and has been responsible for a significant percentage of the next generation of venture capitalists over the last few years. Kauffman fellows now represent their own alumni group within the VC industry and use that network to help other alums. Visit http://www.kauffmanfellows.org for more information.
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