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. Most people will immediately assume that you’re ambitious, wealthy, and overall successful 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 actually entails.

Key Takeaways

  • A venture capitalist (VC) is an investor who supports a young company in the process of expanding or provides the capital needed for a startup venture.
  • Venture capitalists invest in companies because the potential return on investment (ROI) can be significant if the company is successful.
  • The two primary career paths to becoming a venture capitalist are being a true entrepreneur or a highly skilled investment banker; though these are not the only options.
  • What separates venture capitalists from other equity investors is that venture capitalists often deploy third-party assets to improve the efficacy of a young company with a high upside.
  • Competition is stiff for access to the world of third-party equity financing. Even with the requisite skills, there is no guarantee of a breakthrough into the industry.
  • Venture capital faces competition from other capital-raising methods, such as crowdfunding.

What a Venture Capitalist Is

A venture capitalist (VC) is an investor who supports a young company in the process of expanding or provides the capital needed for a startup venture. A venture capitalist is willing to invest in such companies because the potential return on investment (ROI) can be significant if the company is successful.

Where Venture Capitalists Come From

Many paths lead to venture capitalism, none of which are set or absolute. There are two primary categories of beginners: true entrepreneurs and highly skilled investment bankers. These are not the only options, however. Some venture capitalists are lifelong financial advisors. Others might be academics or technical business process experts. A substantial number have previous finance-industry experience, typically as equity research analysts.

Contrary to popular belief, venture capitalism does not require a huge bank account. After all, venture capitalists are not necessarily investing their own assets. That said, having a large amount of personal wealth makes it easier to break into any investment scene.

What separates venture capitalists from other equity investors is that venture capitalists often deploy third-party assets to improve the efficacy of a young company with a high upside. Private equity firms are interested in someone's ability to improve aspects of the bottom line, such as cash flow and profit, by using such tools as economies of scale and marketing.

Venture capitalism attracts a huge number of aspiring investors or business process developers. Competition is stiff for access to the world of third-party equity financing. Even with the requisite skills, there is no guarantee of a breakthrough into the industry. As the old expression goes, it is often not what you know but who you know.

An individual working as a venture capitalist may be employed by a larger firm or by a smaller, more independent venture capital firm. Those who are individually wealthy can start their own funds. Young venture firms must usually prove themselves before third-party funds begin to make up a significant percentage of total capital invested. It can also be difficult for a young firm to acquire sufficient expertise in infrastructure, human resources planning, security, technology-centric operations, information sharing, and performance evaluation.

What You Need to Know

Not all venture capital firms are successful. Choosing the right investments is a difficult task and 90% of startups fail. The likelihood that all of the investments that your venture capital firm chooses will be a success is small.

In 2020, the venture capital industry did well, despite the pandemic. The industry raised a new record high; almost $130 billion. The total value of investments is up from 2019 but the total number of deals is down, meaning that investment capital is higher per deal.

That being said, venture capital faces competition from other capital-raising methods, such as crowdfunding. In 2019, VC funding deals were still higher in volume than crowdfunding but the annual number of deals per platform for crowdfunding was higher than the number of VC investments per firm.

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 them, followed by networking at conferences and events and to a lesser extent, research. Sixty-hour work weeks are the norm.

What You Need to Have

If you’re still interested in becoming a venture capitalist, 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.

Can you answer "yes" to these questions?

  • Do you have an MBA? A little over 50% of VCs do. If you do, did it come from Harvard University or Stanford University? A large portion 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, where a large majority 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 person, because you will likely spend more time with your business partner than you would with a significant other. Will you be able to agree on financial decisions with that person?

The Good News

Most venture capital firms charge a 2% annual management 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 (that is, an IPO or acquisition of the enterprise you've funded). The income generation can be quite high, but 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.

A venture capitalist will look for several things before investing in an enterprise. One of the primary factors is the uniqueness of the product or service the company is offering. A venture capitalist must also make sure that the potential market for the product or service is significant. Many venture capitalists will stick with investing in companies that operate in industries with which they are familiar. Their decisions will be based on deep-dive research.

In the first half of 2021, global venture funding increased 61% compared to the industry peak of $179 billion in the second half of 2020.

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. If you find one potential red flag, move on to the next potential opportunity.

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, you can also take some of the best talents with you. 

A Day in the Life of a Venture Capitalist

Starting the Day

Most professionals in the financial industry begin their day reading respected daily publications/websites. Venture capitalists focus on publications that offer information on potential leads for investments, on new companies, and on trends in marketable goods and services. For a venture capitalist who specializes in one industry, subscriptions to trade journals and sites specific to the industry of focus are key. While the material digested in one specific morning is not necessarily used the following day, it will inevitably be useful in the future.

The rest of the venture capitalist's morning is typically filled with meetings and phone calls. In general, a venture capitalist meets with other members and partners of the firm to discuss the day's focus, companies that require further research, and other potential portfolio investments.

In many instances, contacts working in the same fields as potential investment opportunities sit in on such meetings and add to the discussions. This allows venture capitalists to gain more insight and decide whether to pursue investments or let them go. Members of the venture capital firm, teams assigned to conduct due diligence, will generally present their data as well.

The Afternoon

A venture capitalist stays connected with current portfolio companies on a regular basis. This is essential for determining how smoothly a company is running and if the venture capitalist's investment is being maximized and utilized wisely. Sometimes, a venture capitalist may take members of the company out to lunch and conduct this meeting over the meal.

No matter how or where the meeting takes place, the venture capitalist must evaluate the company and the potential use of the firm's investment money and take full notes during and after the meeting, making personal and professional progress reports, how the capital is being used, and make an informed opinion on whether the company should be further supported or whether it should be cut off. These notes and conclusions must then be circulated to the rest of the partners in the firm. This process may take up much of the venture capitalist's after-lunch hours.

The Evening

The venture capitalist does not necessarily have a traditional eight-hour workday. After completing afternoon reports and perhaps several smaller meetings for venture capital partners, the venture capitalist may have an early dinner meeting with hopeful entrepreneurs appealing to the firm for funding to support their ventures.

During this meeting, the venture capitalist can get a sense of the company’s potential for success, how dedicated and business-minded the entrepreneurs are, and whether future meetings with this company are warranted. The venture capitalist takes notes during this meeting as well and often takes these notes home, along with due diligence reports, to review the company again before presenting these notes to the firm during the morning meeting the following day.

How Much Does a Venture Capitalist Make?

The compensation depends on the firm they are with, their position, if they operate alone, the types of investments they make, and their negotiation skills. At a top-tier firm, a VC that performs well can expect to make between $10 million to $20 million a year.

Do You Need a License To Be a Venture Capitalist?

You do not need a license. You need a significant amount of experience in the financial sector, ideally in investment banking or private equity. Having an MBA also helps your chances of becoming a venture capitalist.

How Long Does It Take To Become a Venture Capitalist?

You cannot become a venture capitalist straight out of college; at least most people can't. It will take you at least seven to 10 years working in the financial sector before you can become a venture capitalist. You'll have to understand the ins and outs of analyzing a company, which is best learned in investment banking.

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. Venture capitalism isn’t for everyone: You have to always be on the prowl and have a knack for discovering new profit opportunities. If you’re one of the few to succeed, the rewards will be substantial.