Venture Capital (VC) & Private Equity (PE): What they are? How to enter them?

Series A, Unicorn, Funding Winter, Buyout etc.: A few examples of terms that are increasingly becoming part of modern financial vocabulary. Trying to understand them inevitably leads one into the realms of Private equity and Venture capital.  But what exactly is meant by them? And how can you get into them?

Here in this article, I will list out a few details that you might want to know about these firms and talk about how you can get into one.

1. Basic Definition:

The term private equity in general means investing in privately owned companies or in public companies with the intent of taking them private. Venture capital firms form that portion of the private equity market which invests/provides its resources (Financial, People or Information) to entrepreneurs who either have a business idea or operate a young business that has a limited operating history, lacks access to capital markets & bank loans but is believed to have exceptional growth potential. 

2. Financing Process

The entire Venture Capital financing process can be distilled down into the following 3 steps :

1. Deal Origination: Either the investors can receive proposals from or they can employ entry level Associates/Analysts to network with entrepreneurs, understand their business proposals, perform preliminary checks & analysis and bring potential deals to the firms
2. Screening & Evaluation: At this stage, extensive due diligence is performed on the business’s projections, its model is re-evaluated in further detail & since operating history is limited, managements work/education history is evaluated to judge their skills and competencies.
3. Deal Negotiation: Once due diligence has been performed, the investor pledges a capital amount in exchange for an equity in the business. Sometimes, the investor may choose to provide debt financing depending on the risk/return profile desired. The funds may be released all at once or can be provided in stages.

3. Financing Stages: 

Venture Capital financing can be divided into 5 stages which are based on the current stage of the target company:

1. Pre-Seed or Angel Investing: This financing is provided at the idea stage. The funds are primarily used in converting the idea into an actual business plan and assess the market potential. The capital involved is typically small & is usually provided by friends & family or wealthy individuals a.k.a Angels.
2. Seed Stage – At this point, the company seeks to develop a working prototype of its products or services, setup its management team and/or support its initial marketing efforts. This is generally the first stage where VC firms enter into the picture. Sometimes, the Angel investors can skip the pre-seed round and participate at this stage.
3. Early Stage (Series A & Series B) – At this stage, the financing is provided for firms to begin offering their products/services commercially, acquire customers & step up their marketing efforts.
4. Later Stage (Series C & beyond) – At this stage, financing is provided for growth: major expansions like physical plant expansion, an extensive marketing campaign etc.
5. Mezzanine Stage – This is the final stage where capital is provided to prepare the firm for a liquidity event: either an IPO or an acquisition & thus enable the existing Investors to earn a return on their investments. Also called as bridge financing required to fund the company till the liquidity event.

4. Additional features of Venture Capital investing: 

1. High risk-returns involved & lack of liquidity
2. Long term orientation: The investor/investing firm seeks a substantial return usually over a 5–10-year time horizon depending on the stage at which it initially invested
3. Less regulation and transparency 
4. By occupying a board seat, the VC firm actively participates in business & management decisions
5. The financing typically takes a monetary form but sometimes it can be provided in terms of managerial or technical expertise
6. Concentrated portfolios although as fund sizes grow, the larger number of investments do provide some diversification 

5. Typical Organizational structure

A typical VC firm has the following organizational structure (listed in increasing order of hierarchy) :

6. Skills required & routes to get into it?

Before discussing the routes, let’s briefly discuss the skills that these VC firms look for. While I can list out general skills of being determined, having negotiation skills, deal making etc., I would like to focus on 3 skills which by far outweigh the others:

1. People skills – A majority of your work at a VC firm will involve networking, due diligence, deal sourcing & sometimes convincing hot startup founders to pick your firm over a competitor’s. How you deal with people, especially entrepreneurs can thus have an immense impact on your as well as your firm’s performance.
2. Project Management Skills – A job at a VC firm makes you wear multiple hats simultaneously: sourcing a deal while performing due diligence on another, at the same time being on top of all your existing portfolio companies.
3. Financial Modelling skills: As the portfolio/ target companies moves into early-stage financing i.e., Series A onwards, financial modelling become an essential skill in evaluating the deals

7. Routes to get into Venture Capital –  

Venture capital firms usually tend to recruit for Analyst/ Associate positions. Primarily there are 3 routes which can be considered to get into these positions:

1. Pre-MBA:
   1.  After gaining some work experience at an Investment Banking or management consulting firm OR
   2.  Working in a startup in a business development, sales or product management role
2. Post MBA: Getting an MBA degree after gaining a background in a specific industry makes your profile suitable for such a role 
3. Working as an Angel Investor yourself: This is the most creative way that you can use to enter a VC firm. Through crowd platforms, the minimum amount required to invest in startups has come down considerably essentially meaning that you can scout for deals yourself, perform the necessary due diligence and invest your money in promising startups. 

Venture capital firms can also consider you for a Senior Executive / Partner role if you have founded and/or exited a successful startup from a senior management position. The Wall Street School through its flagship Financial Modeling and Valuations program provides opportunities to many candidates who can make a career in the field of Venture Capital, Private Equity, Investment Banking  etc. Many of its alumni are already working in the afore mentioned domain.  You can check out the  Live Placements of its alumni on their Placements Page 

Concluding remarks

I hope that by now you have a fair bit of understanding about what Venture capital is & how you can get into it. Even though the procedure might look daunting & somewhat time consuming, a job at a VC firm can enable you to be at the forefront of technological innovations & can get you an insider’s view of how great businesses are being built.