An old friend from my Stanford days asked me about the venture capital industry in silicon valley and I wanted to post a heavily modified version of my response to her online for more general consumption.
The advice is very general, but I find that the vast majority of people who want to become VCs are missing the big picture things and are far too focused on the details. They’re missing the forrest for the trees. I’m not a venture capitalist so I obviously don’t have as much specific advice as industry veterans would. That being said, I have worked with over 150 start-ups, birthed several ventures myself, have interviewed some of the best venture capitalists in the world, and have devoted thousands of hours to decoding and playing within the venture space ever since I began studying entrepreneurship for my masters degree in 2009.
I find that most people who are investigating VC as a career have fallen in love with the idea, which has blinded them from many of the sector’s realities. The rest of this post is my stance on what many people forget about venture:
1) You’re in the financial sector. Venture capital is a teeny sliver of an enormous private equity sector. As an investor in a company, you’re not involved in the day to day operations. At all. You might help out with a thing here and there, but that’s clearly outside of your job description as a financier/capitalist of high-reward, but unproven businesses. If you’re not comfortable making a long-term commitment to being an investor – if you’re not comfortable sitting on the bench versus playing on the field – then you’re ultimately going to be unhappy in venture. If you think you’re glamorizing venture too much, then just pretend that you’d be more like a banker than king-maker.
2) There is an opportunity cost. Every decision we make in life has an opportunity cost. A decision is an irrevocable allocation of resources. Your time, energy, and money are some of your greatest resources. For bright people, the opportunity cost of being a venture capitalist could be enormous. If you’re talented and can stomach the uncertainty of start-ups, why not work for or start one of your own? You might be more fulfilled in an operations role where you have some control over your destiny and you can have a much bigger personal equity stake in the right venture – which means that you’ll make a lot more money if it’s successful.
3) You’re in a hits-based business, twice-over. Venture is an industry where the profits are distributed in an extremely disproportionate manner. Most funds lose money (aka: they’re a bad investment) because most start-ups lose money. It’s effectively impossible to separate which companies are going to succeed and which are going to fail. If you can see the future and think that the easiest way to make money is by becoming a VC, please call me – I can help. So because 10% of funds make over 90% of the venture returns, it’s essential for your career that you pick the right fund to work with. But the best you can really do is pick a fund that has a track record of success (and cool people, and a masseuse, and a spa). It’s not that continued success is guaranteed, it’s that you’ll be surrounded by and learn from people who have both failed and succeeded instead of people who have only failed. But if you’re not one of the lucky few who can work for a top-tier fund, then what do you do? (This paragraph was a nice way of saying: 1) Don’t work for a shitty fund. 2) Most funds are shitty.)
There are so many others things that I could add to this conversation and, as I explained earlier, I’m no expert. I’d rattle off a list of other things to consider, but that would undermine my thesis that most people are missing the forrest for the trees when it comes to the venture capital industry.
Finally, I’m not suggesting that you shouldn’t become an investor. There are many great reasons to be in venture and many great people in the industry. If you know that your life’s calling is to be in venture, then more power to you on your mission. But if that were the case, then you probably wouldn’t have read this far.