Venture capital firms concentrate their investments in a handful of industries and look for very specific characteristics. Below is an overview of the typical VC target:
Venture capitalists are very selective in deciding what to invest in, and will only pick one company among several hundred or more, as companies that combine the ideal characteristics are very rare.
The company has a proven concept but lacks the infrastructure and professional management to grow successfully. The company is usually only a few years old (sometimes few months old).
Ideal targets are firms that have products or services that are just "catching up" and are at the very beginning of potential explosive growth. Venture capital money is then used to fund internal growth, mostly intangible investments such as research and development of products as well as marketing expenses. Venture capital money is never used as "exit money" for the founders.
Given the high rates of startup failure, VC funds generate a good portion of their returns from very few investments that have enormous returns. Big potential means not only fast growth, but also substantial target market size, scalability (i.e. low cost of expanding the software products), and specific competitive advantage. The key question is: can this company be sold in three (3) to seven (7) years and generate 10 to 20 (or more) times the initial investment?
Targets are private companies owned by one or a handful of founders.
Approximately 70% of all VC money is invested in only five industries:
Other industries include energy, media and entertainment, equipment, IT services, electronics, business services, consumer products, financial services, computers, healthcare services, and retailing.
Interviews at venture capital firms are much more informal than the type you would expect to encounter at investment banks or private equity firms. The questions are less technical, and much more oriented toward motivation and fitness. However, just because these interviews are simply a chat between two people, that doesn't mean they're easier. There is no typical venture capital interview process, and the only common point is that you will have to meet every member of the firm and be subjected to a 45-minute to one-hour chat. We have classified typical interview questions into several buckets to give you an idea of what to expect:
Prepare for this question well, as it will likely be the opening question of your every interview. Good reasons include the love of the technology / science, excitement for investing in companies, enjoying communication with interesting people, the thrill of looking at new ideas and chasing the next Google, etc.
Simply do your research about the company – find out its unique points and how it matches your skills and ambitions. You can mention the company track record, any favourable press articles or friends' recommendations, great investments they have made, a specific focus they have, etc.
Make sure to read specialised press articles and are able to talk about key sector trends. You need to be able to clearly articulate the key drivers of a specific sector, explain why this is interesting, and use clear facts and statistics. You don't need to be an expert in the area, but you should be able to demonstrate awareness of the big trends.
Pick two or three sub-sectors (i.e. renewable energy, software as a service [SaaS], online education, medical services, etc.) and do in-depth research. You should be able to explain the trends in great detail and know the key players in the sector. Very likely, this question will also be followed by "who should we buy in that sector, then?" There is no secret formula. The best way to prepare for this question is to keep reading blogs/articles within a sector - prominent venture capitalists often maintain blogs and those should be your starting point.
Prepare a list of two to three interesting companies that should include a description (of three or four sentences maximum) why the sector in which it operates is interesting, and why the company itself is interesting.
Simply read up on their portfolio companies, and prepare to answer on two or three companies to be on the safe side.
Read up on two or three interesting deals that have happened in the industry (either acquisitions, IPOs, or sales), then make sure you understand what has happened and know some details about the company itself.
Talk about whether the IPO markets are doing well or not, whether you think there is a bubble, etc. The state of IPO markets is critical to venture capital firms because this is one of the most common way for them to realise their investments, so you need to be able to demonstrate whether the markets are doing well (lots of high-profile IPOs, high valuations) or not (stocks going down, IPOs postponed, etc).
Pick your favourite venture capitalist blog and be prepared for follow-up questions such as, "So what was the latest post?"
A simple question that you should be able to answer with some research.
With this open question, there are no real answers - it is perfectly fine to mention that you may want to be an entrepreneur someday, or that you want to stay in venture capital and become a partner, or focus on a specific niche.
Good answers include these: you prefer to look at a large diversity of companies, you want to focus on investment and strategy, or you don't have a great idea yet.
Private equity and venture capital are two very different worlds. Good answers include these: you prefer to invest in early stage companies, you do not like the use of leverage by private equity, you feel that there is more potential in venture capital, etc.
See our post about VC investments.
Ideally, you need to show that you have one or more of these four assets: great communication skills, an interesting dynamic, a driven personality, and/or an entrepreneurial attitude. Good examples could be that you tried to start a company, you worked on a very interesting but difficult transaction, or even that you achieved something extraordinary on a personal level (i.e. sports, extracurricular activities).
You may sometime come across mini-case studies that test the way you think about problems. The way to answer them is to always break down the problem into various drivers. In the Coca-Cola case, estimate the population in London, allocate the number of soft drinks they may drink every day, then estimate the percentage (%) market share of Coca-Cola to get an answer.
During an interview with a Venture Capital firm, you may be asked, "Imagine you are a VC investor. What kind of questions would you ask an entrepreneur who has come to present his business to you?" Alternatively, if you have started a business yourself, what kind of questions should you expect from a VC investor? Below is our compilation of the most likely questions you will face:
1. What is the potential total market size for your product today? What is its growth rate?
This is one of the most important questions you will face. If the market is too small (say, below $1bn), or if it’s not growing much, then it might not be worth the investment. Also, this question checks whether the entrepreneur has a good understanding of their market. A follow-up question will be: “How did you calculate these numbers?”
2. How much potential market share can you achieve?
This question goes hand-in-hand with the previous question, offers an idea of the potential of the company, and also tests whether or not the assumptions are realistic. Again, there is a follow-up question: “How did you estimate this?”
3. Why will people buy your product (and not something else)?
What will make people buy this product or service? What need does it address? Why will people buy your product instead of buying something else from the competition or a substitute?
4. What's is your competitive advantage and why can't it be copied? (Alternative: "What are the barriers to entry?")
Is there a first mover advantage, do you have copyright or IP protection, special knowledge, lower cost of production, etc.
5. Why do you think your team is best placed to deliver your business plan / forecasts?
It’s important to see that each team member is critical to the business, and understand the dynamic contribution brought by each team member.
6. What risks are you facing?
This question will test the honesty of the entrepreneur, and also check that the entrepreneur has done the necessary homework.
7. Who do you sell to (and how do you get customers)?
You need to understand the end users to know what drives their purchase decision. Also, distribution is another key point - you may have a great product, but for fast growth you will need to be able to distribute it quickly.
8. Why will customers stay or do repeat business with you?
This also ties in with the barrier-to-entry question, but it is also important to understand how "sticky" customers will be. Will it be a one-off sale or repeat business? Will customers go somewhere else once others start to copy your product?
9. Have you considered any alliance / partnership?
Useful question to test the market knowledge of the entrepreneur and discovery any opportunities that may arise.
10. What are your cash flow projections? When will you break even? How much will you need in investments?
Every serious entrepreneur will have done some cash flow and forecast analysis, and should be able to answer those questions very clearly: number of employees they will need to hire, amount they need to spend on R&D, equipment, etc.
Below is a list of venture capital firms operating in Europe. These are companies that mainly focus on IT, media and consumer Internet; some also cover healthcare. Note that the companies in the list below only includes some of the most active and largest venture capital firms, as there are hundreds and possibly thousands of venture capital firms in the UK alone, the majority focusing on very small investments.
Global Founders Capital (www.globalfounders.vc). Early to late stage, global investors with a track record of building billion dollar businesses around the globe including Facebook, Linkedin, etc. Offices in Europe, Asia, Latin America and USA.
Accel (www.accel.com) - global venture and growth equity firm funding companies from inception through the growth stage. Invested in Facebook, Macromedia, Walmart.com. The firm is based in Palo Alto, California with major offices in Bangalore, Beijing, London, and Shanghai
Advent Ventures (www.adventventures.com) - Advent Venture Partners is one of Europe's most successful growth and venture capital investors in market-leading tech and life sciences businesses. Based in London, it invested in video website Dailymotion
Amadeus Capital Partners (www.amadeuscapital.com) - Based in Cambridge and London, they invest across the technology spectrum in industries that include communications and networking hardware and software, media, e-commerce, computer hardware and software, plus the medtech and cleantech sectors
Arts Alliance (www.artsalliance.co.uk) - invests in high growth companies in Europe with a particular focus on technology-enabled services. Key areas of interest include media & entertainment, mobile services, retail & logistics, marketing services, outsourcing and energy
Episode1 (www.episode1.com) - Episode1 Ventures is a software-only venture capital firm that invests £250k to £1m in early-stage, revenue-generating startups and plays an active and supportive role in turning them into growth businesses. With experience of startups from the inside, it provides frank and fast feedback to founders as well as strong entrepreneurial ‘know-how’ and a passion for building successful businesses
Index Ventures (www.indexventures.com) - Well established VC fund based in London, Geneva and Silicon Valley, investing in Life Sciences and Information Technology. Famous for investments in Skype, Lovefilm, Betfair and MySQL.
JamJar Investments (www.jamjarinvestments.com) - The 3 innocent drinks founders set up JamJar Investments based in London to support exceptional teams with money and mentoring. They back early stage consumer products and services, including both tech and non tech businesses.
Kinetic Investments (www.ki.uk) - Ki's mission is to invest in anyone operating in the online space with exceptional ideas, coupled with the ambition and drive to make them a reality. With a unique builder-style startup studio, Ki offers equal parts investment, strategy and hands-on support.
Passion Capital (www.passioncapital.com) - Partnership of entrepreneurs and operators who are applying their experiences to helping founders and early-stage teams build great digital media/technology companies
Piton Capital (www.pitoncap.com) - Piton Capital is a London based venture capital firm investing in online marketplaces, exchanges and social networks. They invest between €100k to €1m at the early growth stage.
There is in fact no "perfect profile" for VC jobs, because VC firms themselves can be very different and have different strategies. So how can you know if you would be attractive to VC firms? There are still a few characteristics that will give you an idea of your chances:
You will have much more luck if you studied science at school: engineering, biotechnology, computer science, etc. The reason is fairly obvious: the large majority of VC deals occur in the technology space, so it helps if you are actually able to understand the technology in which you are investing. PhDs are quite popular too. Marketing studies can also be a useful background to some degree (as you need to sell a product in all cases), but it is not as popular/common as a science background. Accounting / Finance / Business degrees tend not to be very popular except at the largest VC firms where more financial modelling would typically be required.
How about MBAs? Again, this is not a very popular degree at most VC firms unless you have a related experience beforehand (in VC, engineering, sales, etc.), but the degree tends to be more popular at the larger VC firms.
Again, it varies. However, these are the most popular backgrounds:
- Product development
- Sales or operational experience at firms with a similar focus to the VC fund investments (Internet companies, software companies, etc.)
- Entrepreneurs who have experience launching, managing or working for high-growth startups (even if it failed – failure actually teaches you a lot)
How about bankers and consultants for Venture Capital?
Investment banking (M&A) and strategy consulting (McKinsey, Bain &Co, BCG), while useful experiences, are not among the most popular professional work experiences and can sometimes even be a disadvantage. The reasons are obvious if you think about it:
- Bankers and consultants tend to work with larger, more established companies > VCs work with small companies that are growing fast.
- Banking and consulting are very hierarchical > VCs are always very small and have very flat structures.
- Bankers and consultants are used to be given clear tasks to do > VC is much more informal and independent.
- Bankers and consultants tend to have a lot of pride (i.e. arrogance) about working for big firms on big deals with big clients > VCs need to be very humble to be able to get business with startups.In brief, the only reason why VCs would hire a banker or consultant would be largely because that is where you tend to find bright people, so bankers and consultants with the right personalities and experience still stand a chance, particularly at the bigger VCs. But often those that can break into VC can combine banking/consulting experiences with some kind of entrepreneurial experience.
This is the most important differentiating factor, in our opinion. VCs will look for this type of evidence:
- Entrepreneurial drive: a curious personality (knowing about the industry, asking questions), originality of thought (coming up with ideas), "street-smart", the ability to get the seemingly impossible done
- Raw intelligence: the ability to evaluate interesting opportunities quickly (i.e. calculating or estimating market size), and use tangible facts to support arguments and decisions
- Charisma: an ability to convince people to work with you, and find the right people to help,
- Great communication skills: an ability to communicate your passion, solve conflicts, and fire people when necessary
There are a lot of excellent books to read on the VC topic, and blogs of famous venture capitalists are also a good starting point. Below is a selection of the books we recommend:
Smarter Ventures: A Survivor's Guide to Venture Capital Through the New Cycle
For anyone wanting to raise money from VCs (or for wannabe VCs) this is the book to read. The author details how the VC industry works in practice (not all of it flattering). The great part is that the author also spends time explaining critical differences between the VC scene in Silicon Valley and that in Europe.
Angels, Dragons and Vultures: How to Tame Your Investors... And Not Lose Your Company: Capital Advice for Entrepreneurs
Written by an experienced venture capitalist, this book gives all the practical details you need to understand VC, but doesn't get too technical. Its also a very easy read and quite entertaining, and part of the curriculum of several business schools.
Art of the Start
Written by well-known West Coast VC investor Guy Kawasaki, this is more of a practical guide to entrepreneurship. It uses quite a bit of jargon, but is full of very useful tips and highly recommended.
Raising Venture Capital for the Serious Entrepreneur
This "VC Bible" explores the details of how to set up a business plan, finance a deal, agree on term sheets, and align interests between founder and VCs. It’s written for entrepreneurs but nevertheless quite useful for those looking delve a bit more in-depth into the technical aspects.
The Facebook Effect: The Real Inside Story of Mark Zuckerberg and the World's Fastest Growing Company: The Inside Story of the Company That is Connecting the World
This list wouldn’t be complete without a book about Facebook. There are piles of books about the company but this is probably one of the most interesting. It captures the personality of the founders, and offers details about how the company was created as well as its future prospects.
I'm Feeling Lucky: The Confessions of Google Employee Number 59
There are also plenty of books about Google, but this one is probably one of the most enjoyable and easy to read, as it was written by a Google insider. Importantly, it doesn't just praise Google, but also highlights some of the mistakes of the company.
People working in VC firms are called "venture capitalists". The background of venture capitalists varies broadly, but generally speaking, venture capitalists either come from corporate or consulting backgrounds (they know how to run operations), entrepreneurial backgrounds (they' know how to start companies), or finance background (they know about managing investments). Titles in VC firms vary but there are five broad categories:
Those are the most junior professionals in the company, and usually have one to two years’ prior work experience, either with a startup, an investment bank (very often focusing on technology sectors), or a strategy consulting firm. The key role of the analyst is to network, take part in industry and VC events, keep an eye on latest industry trends, and cold-call potential target companies to learn more about their business and obtain a meeting with the founders. They also might have some degree of involvement into the deal process (i.e. due diligence, market analysis, some valuation work) but their focus is largely on "origination". This is a very entrepreneurial role, and analysts in VCs are often very well connected and aware of the latest happenings in the industry. Analysts can be promoted to the associate level after a few years, but many of them choose to do an MBA or go the entrepreneurship route, founding their own businesses.
Associates reach the next level in the hierarchy, and are on the "partner track", which means that they are expected to stay until they make it to partner. Associates are usually ex-bankers, consultants, investment professionals (i.e. private equity, other VC funds) or operational leaders with three to five years’ experience, sometimes with an MBA or a PhD. The role is more focused on due diligence, business plan analysis, executing transactions, analysing interesting industry subsectors, and helping out portfolio companies. It is the more analytical and deal-making role within the VC fund. Associates usually get promoted to principal after a few years of successfully executing deals. Some of them also leave to create their own businesses.
Principals are in charge of making portfolio companies run smoothly and will be on the board of a few portfolio companies. In addition, their role is to network and identify interesting opportunities for the fund to negotiate terms of acquisitions, and also to exit portfolio companies successfully. Principals tend to stay until they are promoted to partner level, which happens once they have proven their ability to generate good deal for the firms and generate returns.
Partners and principals have very similar roles in the firm. However, partners tend to be less involved in the daily deal-making and are more focused on high-level tasks such as identifying key sectors to invest in, giving the green light for investments and exits, sitting on the board of some portfolio companies, networking at a high level, representing the overall firm, as well as raising money for the firm (every five to seven years) and communicating performance to investors.
Venture capital is a form of capital provided to early-stage and high-growth companies, also known as "startups". The key characteristic of venture capital is the high level of risk associated with the investments. Venture capital firms are a very important source of funding for new businesses, because small businesses usually do not have access to capital markets (too small) or bank debt (too risky).
Independent venture capital firms are essentially pools of money coming from institutions and wealthy individuals. These individuals are often successful entrepreneurs who have cashed out of a business and would like to reinvest their cash in sectors they know well. The money is typically managed by a team (ex-entrepreneurs, consultants, bankers, or industry experts) who will spend time looking for the next Google or Facebook. There are also corporate venture capital arms, most often owned by large technology or healthcare companies. The money comes from the parent company; for example, a large healthcare company would frequently invest in startups that have new ideas for medical devices or new drugs.
Venture capitalists invest money in startups with the hope of selling them in a few years' time at a substantial profit (reaping many times the initial investment), either to another VC fund, to another company, or via an IPO. Venture capitalists add value to the companies they buy not only by giving them access to cash, but also by providing them with specific expertise and giving them access to their large networks and contacts in the industry.
Private equity firms invest in stable companies using a lot of debt, and typically want a majority or controlling stake. The private equity firm aims at a two to three times’ return on their initial investment. Venture capital firms invest in high-growth companies using no debt and are usually happy with a minority stake. Venture capital aims for a five to ten-plus times return on their initial investment.
Venture capitalists invest in companies across all sectors, but most commonly in the high-growth areas of technology, Internet, or healthcare.
Required feature: Very strong growth. Think about how companies such as Google, Twitter, and Facebook took on the world within a few years. Therefore, venture capitalists are looking for the next big idea; they want to see (at minimum) a double-digit revenue growth, and ideally over 30%+ growth per annum in large markets. Some companies may be growing fast but if they are in a small niche, they will quickly mature and be less attractive investments. The best companies for venture capitalists are those that can address many products in many regions, and target many people.
Scalability. Companies that can easily expand and reach very large audiences at a low cost, such as Google and Facebook, are attractive. The same applies to software companies, or even medical companies; once the product is created, it is cheap to sell globally.
Great management teams. Venture capitalists will always look for smart and very ambitious management that will be able to work very hard to make the company succeed.
Venture Capital firms are usually quite small, so there are few jobs available and this makes the industry extremely competitive. Salaries tend to be lower than those found in private equity groups or investment banking, because the funds managed are smaller, so most of the remuneration comes from a share of the returns on the investments. This share of investments, if the fund performs well, can be very substantial. The kind of people who work in Venture Capital Venture Capital funds tend to hire people with scientific backgrounds (technology, biology, healthcare, etc.) and also often hire entrepreneurs and people who have experience working in startups. However, there is a large number of ex-bankers and ex-management consultants at the larger firms who were focused on technology, media or healthcare sectors.
You can check our list of European VC funds
Venture Capital investing sounds like a very glamourous and exciting career path. Like every career, however, it has a number of upsides and downsides. Here is our list of what is great and what is bad in venture capital.
- Helping companies grow into something big is very rewarding, both personally and financially! There is a sense of ongoing accomplishment that you cannot find in many careers.
- Getting to see the latest technologies can be a fantastic experience for those who love technology.
- Meeting interesting, different people is a major plus as you'll get to meet people from all walks of life who are passionate about the business they are trying to build.
- Not having to deal with the boring, day-to-day operational stuff is great. As a VC investor, you're only involved in the strategy and key decisions, which is the most interesting bit.
- The lifestyle is much better than what you would get at banks or consulting firms (although you may need to spend a lot of time on the road trying to find the next Google), and gives you a lot of freedom.
- If you make the right investments, you can earn astronomical amounts of money.
- You don't make much money as a junior employee, and reaching partner level can take a lot of time. Even when you make partner, you need to work very hard to find the right deals.
- VC is very cyclical - you tend to make a lot of money and get good returns when the stock market is moving well, because that means you'll be able to do great IPOs.
- Not every deal is a success. You'll have lots of failures, lots of problems, and lots of disappointments. Failures are the norm, and big successes the exception.
- VC investing can be a nasty business. You need to invest at the cheapest valuation possible (which means "pressuring" the owners). You will need to replace people through sometimes not-so-nice ways (see the movie Social Network). Also, you need to fight hard to find and keep the most promising companies, not only against other VCs, but also against other partners/colleagues in your fund who may want to compete and appropriate the deal to themselves.
Potential investments are often classified in different "stages": seed stage, early stage, expansion or "growth" stage, and later stage. Venture capital firms also sometimes focus on a very specific stage. For example, you might hear people say, "I work on an early stage VC", or "we only do later stage investments".
The target company has a concept or product under development, but is not fully operational. It does not sell anything yet, and is just at the "idea" stage. Usually, the company has been in existence for fewer than eighteen months.
The company's product or service is in testing or pilot production. The product may be commercially available but as an early version, and it might be generating some revenues already. Usually, the company has been in business for fewer than three years.
The company is selling its products commercially already. The company demonstrates significant revenue growth and its products have proven to be popular, even though it might not be profitable yet. The company would usually not have been in business for more than three years.
The company's products are widely available. It demonstrates revenue growth and has achieved or is close to profitability (or at least generating positive cash flows).
One of the very common interview questions you'll encounter in VC interviews is about an investment thesis. There are some basic methodologies to follow when putting together an investment thesis and below is some advice on how to tackle venture capital investment thesis questions.
1. Thesis versus thematic driven approaches
Thematic investing involves identifying big themes and then going after companies that will benefit from those big trends. For example, trends such as "the shift to mobile" or "social media", etc. This is about identifying themes and spreading your bets across various companies that will be exposed to those trends in a positive way.
Thesis driven investing is more narrowly focused, and involved trying to evaluate where a specific sub-sector is going. Under this approach, each company is evaluate on a standalone basis.
Choosing the right startup to work for is a difficult task - often you'll have to give up a higher salary for other rewards that may come much later (if you are granted equity) or be intangible (working at a fast pace company, more responsability, fun). Below are a few questions you should consider asking the CEO of the startup before signing up with your new job.
How large is your market?
How different are you from your peers and what market gap are you filling?
What are the track records of the founders and the top management team?
What are the top priorities for the company right now?
What's the culture like?
What is the exit strategy?
At what product stage are you?
What is the shareholder structure?
Will I be grated equity or options? What would be the vesting period?
How much money has been raised so far? When do you intend to raise the next round of funding? What are the valuation rounds?
What is the company current burn rate (how much cash do they use per month)
What are your targets (revenues, customers)? How is the current growth?
Are you able to share a business plan / fundraising deck with me?
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