You walk into a room full of people and someone asks you, “What do you do for a living?” If you can reply with, “I’m a venture capitalist,” then it sounds impressive to others. Most people will immediately assume that you’re ambitious, wealthy, and an overall success in life. Unfortunately, the allure of being a venture capitalist is much better than the reality. And to some extent, what being a venture capitalist is all about is somewhat of a myth. Here's what it takes.

What You Need to Know

The first thing you need to know is that most venture capital (VC) firms fail. Actually, according to Harvard Business Review, most venture capital firms have barely broken even since 1999. Additionally, venture capital firms are losing market share to angel investors and crowdfunding, which means you will be fighting against strong trends. For example, today, less than 1% of U.S. companies have raised capital from venture capital firms. (For more, see: Equity Crowdfunding Sites Disrupt Banking and VC.)

Another potential negative, which depends on your personality, is that you will have to say no more than 99% of the time. Are you okay with crushing people’s dreams and aspirations? If so, then perhaps you stand a chance. But you also better like meetings, because the vast majority of your time will be spent in meetings, followed by networking at conferences and events and to a lesser extent, research. Sixty-hour work weeks are the norm.

What You Need

If you’re still interested in becoming a venture capitalist, then you’re one brave soul. But the list of what you need to know doesn’t end there. You also need to know that experience is imperative. Without experience and a strong reputation, you won’t be able to compete against other firms. (For more, see: A Look into the Secrets of Venture Capitalism.)

Can you answer yes to these questions?

  • Do you have an MBA? Fifty-percent of VCs do. If you do, did it come from Harvard University or Stanford University? Sixty-percent of VCs with MBAs graduated from one of those schools.
  • Do you have experience working for a reputable firm in technology, consulting, investment banking, media or a startup?
  • Do you have a strong social media presence? This is especially important with LinkedIn Corp., where 85% of venture capitalists have a presence.
  • Do you have expertise in a certain technology? Do you understand this technology better than anyone? Will people go to you for answers when they have questions about this technology?
  • Do you keep up with the top VC blogs and technology news sites?
  • Do you have a successful investment history?
  • Do you plan on working with a partner? If so, you better like that partner, because you will spend more time with him or her than you would with a significant other. Will you be able to agree on financial decisions with that partner?

Are you aware that venture capitals firms have underperformed equity markets for more than a decade, that high returns are rare, and that investments are illiquid? If you’re still interested in becoming a venture capitalist, continue reading. (For more, see: Seek an Adventure in Venture Capital.)

The Good News

Most venture capital firms charge a 2% annual fee on committed capital over the life of the firm, which is usually about a decade. This is in addition to any profits generated at exit (IPO or acquisition). The income generation can be quite high. In order to get to this point, you must have a game plan. For most people, that game plan begins with being an angel investor – a good one.

In order to activate this process and really make an impact, you will need between $1 million and $5 million. This will allow you to diversify your investments in hopes that the profits from the winners will far exceed all the failures. A lot of this will be based on deep-dive research. If you find one potential red flag, move on to the next potential opportunity. (For more, see: Where does Venture Capital Come From?)

If you’re successful, you will build a reputation. This, in turn, will lead to better and higher-profile deals. From there, you can get a job at a venture capital firm, where you might earn a salary of $1 million per year. This will help offset any losses as an angel investor. After seeing how the operation works from the inside, you can then apply all of that information and strategy to your own venture capital firm. If you’re on the ruthless side, then you can also take some of the best talent with you. 

The Bottom Line

Becoming a venture capitalist isn’t as easy as most people think. In order to succeed you need to implement a long-term strategy that will require a great deal of time, networking and capital. If you’re one of the few to succeed, the rewards will be substantial. Venture capitalism isn’t for everyone. (For more, see: The Rise of Corporate Venture Capital.)

Dan Moskowitz does not have any positions in LNKD. He is currently long LABD. 

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