What you should consider when pursuing a career in private investing
In this two-part investing series, we have attempted to share our perspective on private investing. In Part I, we outline three questions you should be asking yourself, along with how you should think about answering them. In particular, we speak to the delineation between venture and private equity — the two most common industries we are asked about. Part II is more of a smorgasbord of best practices that we’ve learned from mentors, careers, and mistakes we’ve made in our early careers.
Over the last few years on campus, we have talked to an extensive number of fellow students about breaking into private investing. We frequently get asked questions like why venture or why private equity? Why did you choose to follow this path? Honestly, we are not experts but we would love to share insights with those looking to embark on a similar professional journey.
Our goal: to help you understand if and where you best fit into this industry along with what it takes to be successful. With these thoughts, you can make smarter decisions about choosing this career vs. others that may make more sense for you.
Where do you want to sit along the fundraising journey?
If you understand the fundamental difference between early-stage and late-stage private investing, then feel free to skip this piece. If you don’t, then you certainly need to ask yourself where you’d like to operate and why.
Venture capital, in a simplified definition, involves making riskier, minority investments in fast-growing companies (a.k.a. startups) early on in their life cycles. Depending on where you operate in this world, some companies may be pre-revenue, pre-product, or even pre-business (yes, some funds invest in founders at the idea stage). These companies, as mentioned, come with a significant amount of risk, as much of their value propositions are yet to be validated and many of which will fail. With minority ownership comes less control and less influence on company decision-making — once an investment is wrapped up, investors may move on quickly to search for a new deal. VC fundraising often is conducted in the form of syndicates, which means that multiple investors contribute money to a company’s fundraising round. Terms will likely be set by a “lead investor” while smaller check writers file inline on the same investment terms. As a consequence, lead writers bear more brunt of the work, but own more of the upside in the business and typically gain board representation. A lot of the bets in venture are based on unique insights into trends and verticals. Consequently, much of the work involves identifying companies on the bleeding edge of innovation, giving junior investors truly unique learning opportunities.
Later-stage private equity firms make much larger investments for majority stakes and demand lower return thresholds. These investment decisions are made after a more thorough investigation of the merits of the business, including financial, legal, operational, environmental, tax, accounting, and market diligence (a number of which are often outsourced). With these higher stakes, private equity funds have more control over integral business decisions, management composition, and company strategy. That said, these companies have de-risked their businesses significantly, so strategic decisions are typically less visionary but more practical in efforts to enhance the existing business. Usually, sponsor targets are undergoing some sort of transformational change, and a private equity firm’s role is to optimize the non-core components of the business. Funds will make initial equity investments and will typically set aside other equity capital to help portfolio companies fund acquisitions or other major capital needs.
TLDR: Venture investments come with smaller ownership stakes and much larger risks. With higher risk also comes higher upside, although investors have little control over company decision-making. Conversely, at the later stage, investors take majority stakes, with which they can control overall strategy and management. These businesses should be less risky, so firms spend more time in diligence confirming the absence of risks or how to mitigate the few that exist.
What’s your personal risk profile?
Investment careers and roles come with their own inherent risks, which typically decrease as one moves downstream in the investment cycle (i.e., from venture to private equity).
At earlier stages, investment professionals are hired into roles that are defined by relatively low guaranteed compensation and unstructured upward mobility. Due to the small size of the venture capital asset class, funds don’t generate endless management fees, which means guaranteed compensation isn’t staggeringly high. For a quick illustration (overly simplified), a $100m fund charging a 2% annual management fee would have $2m to cover annual operating expenses. Whatever your compensation expectations are, it’s straightforward to understand that 4 investment partners and another 3 mid-level / junior investors won’t be offered life-changing compensation if the fund is to also pay rent, benefits, travel expenses, and other costs of doing business out of that same $2m.
Aside from compensation, professionals face uncertain trajectory at early stage funds as most operate with partners solidified at the senior level. Unless a firm plans to increase its fund sizes (i.e., investment strategy and scale) or plans to manage more funds at once (relatively uncommon), then there will be little need for internal promotion to the partner or general partner level s — they just won’t be able to afford it. This is why venture is so tough to get into: funds just don’t need more headcount. This dynamic makes access to promotion challenging for most new hires in the space. Shortly put, the money you get as a junior investor comes directly out of the pockets of your partners.
Through that same lens, there is naturally a dearth in clarity surrounding success metrics and what it takes to move upward. Before choosing to work with a firm, do your research on mobility and definitions of success; every firm promotes differently, and some may not at all. Depending on how you view job tenure and your own goals, you might choose one type of firm over the other. One important note to add here is that many fund managers will live and die by their current partnership, and aren’t interested in generational expansion. In these unique cases, upward mobility may be out of the question.
Downstream, investment roles typically come with more clarity and structure along with more security in compensation. In private equity, investment professionals are hired into positions best known for long hours and high guaranteed pay, so if you love the day-to-day and are willing to sacrifice some work-life spread, then these roles may be a good fit. These funds deploy much more structure in hiring (often through headhunters and talent scouts) and have established norms, clear performance metrics, delineated titles, and clearly-defined trajectories. When you have multiple, $5–10Bn funds, the management fees really stack up, so implementing structure and top-tier compensation becomes quite affordable.
As an investor in private equity, norms in function vary across firms but will be fairly consistent within an organization, so you will know what to expect. The scope of work in this stage is more narrow, but certainly less volatile and fairly easy to master with a few solid reps under your belt. While these deals may end up leading to less life balance, guaranteed compensation is significantly higher than the early-stage world (roughly 2–3x in some cases), so life decisions are supported with more financial stability. In the same light, recently-hired investors are typically communicated clear timelines for existing roles and are more frequently updated on performance, areas of improvement, and overall trajectory — as these firms have more established HR functions and a need for more growing expertise.
Some professionals find these investing roles compelling due to their compensation in the form of carried interest (a.k.a. carry). From what we know, most venture and private equity funds begin to provide this type of compensation at the mid-level, but every firm works differently. When carry compensation is granted, an investor will receive an allocated percentage of the “upside” of the fund. Upside, defined very simply, is the profit a fund earns above the amount of original committed capital. A 20% carry on the upside of a $100M fund can be very different than that of a $5B fund, especially when funds have differing terms. However, drivers of fund success vary across private investing as well; while venture might require 1–2 home-runs in a fund, a private equity fund will require more consistent performance across a larger portion of their portfolio to achieve a good outcome.
TLDR: Venture capital careers and their relative compensation and structure often reflect the nature of their investments: risky, high trajectory, and uniquely dynamic. It’s often that special mix of dynamism and high stakes that fuel so many people to seek that type of career. In later private equity, you’ll find that investment roles come with tighter job security, more clarity, and higher compensation — ultimately trading off with less spontaneity and more standardization. Both ends of the spectrum present upside in the form of carry, but it will be up to you to understand and estimate the value of that compensation to you.
What kind of relationship do you want to have with founders and leaders?
Arguably the most rewarding aspect of this industry is the unique ability to work with company founders, management, and industry thought leaders. Honestly, as a young professional, this beats any other aspect of our careers thus far. That said, the relationships you build with these folks come in vastly different shapes and sizes.
At the early stages, nearly every day of work is focused on building relationships with startup founders. Venture can often be a job much like sales or journalism: your success is not typically defined by your ability to perform diligence, but rather, your ability to develop relationships. These relationships are often built-in casual ways and defined by peers, friendships, and shared experiences, plus a lot of hustle.
Ultimately, the social nature of these relationships helps define brands and reputations for younger VCs. This brand-building becomes critical to success, especially in this world where the numbers of angel funds, scout funds, venture funds, and multi-stage funds are growing. This relationship orientation doesn’t change much once your fund makes an investment. As portfolio companies look to hire, scale, and innovate, they often look to their investors for help, so continued working relationships are fairly common. While early investors might have the opportunity to join a board or become a board observer, most actually spend their time on company construction (executive hiring, fundraising introductions, strategic advice) instead of diving headfirst into company operations and performance.
Later-stage private equity certainly caters to a different dynamic between investors and leaders. Your job as a junior or mid-level investor is absolutely about performing great diligence. At this stage, investing in the team is still important, but other attributes of the company and diligence become more critical, placing less relative emphasis on strong management relationships. CEOs and COOs operate more like subordinates than peers, and the development of professional relations becomes more commonplace. These feel less hands-on but more direct in determining business decisions.
Unlike venture, there is minimal relationship building prior to an investment being made, at least for the junior and mid-level positions. Most deals are created by firm relationships and are typically managed among partners or business development professionals. Once businesses are acquired, investors have the opportunity to interact heavily with portfolio company executives. This relationship may develop in a number of different ways, but these often form into professional lines of communication for management to keep its owners apprised (i.e., for budgeting, forecasting, strategic outlays, etc.). Unique to these scenarios, investors can often guide and direct senior management at their will, as they typically represent majority shareholders. In these contexts, you also often find junior or mid-level investors being instrumental in pivotal workstreams for portfolio companies — anything from M&A diligence to development of a corporate strategy to further equity or debt financing.
TLDR: In venture, relationship building with founders and CEOs is critical, meaning significant time spent in various casual, social environments. This is often why you hear VCs mention the “hustler” mentality. These relationships manifest themselves through support and guidance as founders look to scale their startups. In later-stage private equity, investors usually don’t have the chance to build these types of close relationships, as these are rather professional and mostly hierarchical. Instead, relationships often manifest through company reporting and collaboration post-investment on strategic workstreams.