How to Become a VC

I get asked often how to become a VC so I thought I would share some thoughts in this post with the due caveat that I have a long way to go (so far 4.5 years in VC). If you look at the backgrounds of VCs you will at first see a huge diversity of backgrounds. But on a closer look some patterns emerge, I see specifically four main paths.

Hierarchy

But before going into any discussion of paths, a quick addendum on VC hierarchy. It’s roughly three levels, similar to consulting or investment banking:

i) partners — full decision makers
ii) principals — decision makers who are being apprenticed
iii) associates — support a decision maker, essentially focused on sourcing and diligence

In very large firms, below Principals, there may be Vice Presidents, Senior Associates (a pos MBA role), Associates (a pre MBA role) and Analysts (fresh out of college). In these firms also partners will distinguish themselves with titles like “Managing Partner” (the big kahuna) or “General Partner” (more senior than “Partner”). That said, standards vary and there is such a thing as title inflation — understand a VC by qualifying their actual role rather than their title.

Path 1: Entrepreneur (Operator) to VC

Without admittedly hard data in my hands I find this is the most common path, at least in a developed ecosystem like Silicon Valley, and definitely for the more influential roles in a firm. Typically VCs will build a relationship with an entrepreneur for years and then invite him / her to join the firm, typically after an exit. The thinking is you will have the credibility, the network and the empathy of what it takes to be an entrepreneur. Occasionally the VCs will bring on operators to be advisors or board members of their portfolio companies, develop a relationship that way, and invite them to join eventually the firm itself. They are typically fairly senior folks who go by titles like “operating partner”, the thinking here is their deep expertise into a particular industry compensates for their limited direct experience in startups. In principle converting from entrepreneur to VC makes sense, it’s like two different sides of the same coin, but consider also how the best players don’t make the best coaches and vice versa. I believe on complementarity — an entrepreneur capitalizes on the reasons a startup could work whereas a VC mitigates the reasons a startup couldn’t work.

Path 2: Investor to VC

This was historically the path in the early days of venture and is the dominant form in emerging ecosystems. It could be an angel investor who decides to start investing beyond his / her own wealth, or an investment banker who decides to translate his / her late-stage skills towards earlier stage deals. If you are in business school and considering a switch from finance, this is arguably the path for you. The obvious risk here is very smart people who are financial wizards may not have the product market insights to truly analyze cutting edge technologies and business models.

Path 3: VC as a Career

This is a long-standing path but my view is has really emerged in the last decade. This will include folks who join a firm as analyst or associate and rise up, the key question to ask if you are in this bucket is if your employer truly offers partner track. Corporate VC, which has been on a steady rise, also falls under this category. For those who believe VCs is an inherently lucrative career my words of caution — like many things about VCs, it is quite skewed. The very best VCs in the very best firms do have high earning potential but for the vast majority it’s not financially life-changing employment. Carry is a subject talked surreptitiously among VCs, the reality is the most senior partners are the ones that take the lion’s share. And you need to live through the full life cycle of a company till exit, likely 5–7 years, to reap that benefit.

Path 4: Starting Your Own Fund

Arguably the least common and most difficult way to be a VC. This is the path for those already wealthy with their startup exit, wealthy through their family, or that hustled to raise a fund. The common wisdom is that 90% of the gains are with 10% of the VCs so a new fund is very likely than not going to fail. Raising a fund is typically a full year of hitting the pavement and often requires significant credibility in your background. I believe that a track record of 10 years as a successful investor is the minimum that LPs will look for, although obviously there are exceptions to this. If you are embarking on this journey it’s in many ways like doing your own startup — understanding your market, figuring out your strengths, and then executing superbly.

Appreciate any like or comment if this helped enlighten your view of VCs, to have them as partners or if you considering your next adventure! I am going out of of office for a few days so will be away from posting for a bit.