A version of this article previously appeared in Forbes.
One the most frequent questions asked of me by entrepreneurs is, “How can I become a Venture Capitalist?” The inquiry is common because being a VC is (to an entrepreneur, at least) a sexy job. You control substantial amounts of capital, have tremendous autonomy, a flexible work schedule and you get to play Santa by bestowing financial gifts upon worthy entrepreneurs.
You also can vicariously share in the success of those around you and, if you are so inclined, you can give yourself more credit than you deserve for other people’s success.
There are many paths into the VC world, but they can generally be lumped into two categories: (i) serial entrepreneurship, and (ii) tech-oriented investment banking. I define a “VC” as, “a professional investor who deploys third-party funds into relatively early-stage companies.” In contrast, an Angel Investor is someone who invests their own capital. All you need do to become an Angel is identify a promising venture and write a check.
If you haven’t already subscribed yet,
subscribe now for free weekly Infochachkie articles!
Of the two broad paths to a VC career, the banker route is becoming less common among VCs who focus on early-stage investing, because banking skills are best applied to later-stage companies in which financial engineering, creation of financial syndicates and IPO and M&A experiences are more germane.
In contrast, the operational experiences required to take a company from its founding through a successful exit are additive to early-stage startups. Thus, during the past decade, the more common route to seed and Series A investing has been an entrepreneurial career, personified by such investors as: Dave McClure, Chris Dixon, Brad Feld and Mark Suster.
By drawing upon their practical experiences, such former entrepreneurs can reliably assess the venture team’s capabilities, the company’s value proposition and the size and accessibility of the startup’s market opportunity.
The total number of VC professionals is nearly identical to that of professional baseball players. There are approximately 600 Major Leagueplayers and another 5,300 in the minor leagues (i.e., 267 professional and semi-professional teams with approximately 20-players per team). Thus, an aspiring venture investor has about the same numerical chance of becoming a professional baseball player as they do becoming a VC professional.
One story the NVCA numbers do not tell is that a number of the 842 firms cited as “in existence” are essentially inactive. Many of the Partners at such firms are passively managing their existing portfolios and are not making investments in new portfolio companies. Thus, the total number of active VC professionals is actually smaller than the aggregate number of professional baseball athletes.
Manipulate Your Odds
In addition to pursuing an entrepreneurial or investment banking career, there are a number of other steps you can take to increase the likelihood of becoming a VC:
Be An Ecosystem Epopt – Become an active member of your local startup ecosystem. Spend as much time as possible in the company of aspiring and accomplished entrepreneurs. An effective way to associate yourself with high-caliber members of your startup community is to lend your gratis support to a venture accelerator or incubator. In addition, establish relationships with the accountants, bankers, lawyers and investors who comprise your local startup world. This probably won’t lead directly to a job as a VC, but it will help you execute the next task.
Get Venture Backing – Exposure to VC as a star performer at a successful startup will significantly increase the chances that you will be invited to join a venture firm. However, do not be surprised if the VC offers to back you as an operator so they can make more money from your hard work, rather than invite you into the VC fold.
Hang Out With VCs – VCs love free help. If you have skills that will augment their deal flow, due diligence capabilities or simply expand their network, you can make yourself an asset within the small world of venture capital.
Become An Angel – Before I became a VC, I invested my own money in such companies as RightScale, Eucalyptus and AppFolio. This process helped me determine to what extent I enjoyed the transition from operator to investor. It also demonstrated my ability to identify and evaluate viable opportunities and add value to startups beyond giving them cash.
Start Your Own Fund – Although it is extremely difficult for a novice VC to raise adequate capital to establish a first-timefund, each year a handful entrepreneurially oriented investors defy the long odds. According to the NVCA, only 45 first-time funds were launched in 2011. The majority of these funds were launched by venture investors who had extensive track records at prior firms.
Just as unproven startups struggle to raise capital, so do newly minted venture firms. As such, most inaugural funds are comprised of a significant percentage of the General Partners’ cash, rather than a single digit percentage of the total capital invested, as is common at established firms.
Major League Players Don’t Count The Odds
Aspiring baseball players are not intimidated by the competitiveness of their sport. On the contrary, the limited number of positions in the Major Leagues motivates them to outwork their competitors.
Similarly, it is doubtful that an entrepreneur who wants to eventually become a venture capitalist will be daunted by the industry’s small size. After all, of the 6,125 potential openings, you only need one position to fulfill your dream. Besides, if no one asks you to join an established firm, you can always start your own.
Irrespective of which path leads you to a life as a VC, you will be well served to work closely with someone who has complimentary experiences. For instance, at Rincon Venture Partners, my Partner Jim Andelman compliments my operational history with 15-years as a professional investor. I would be a well-meaning, but far less effective investor without the benefit of Jim’s experiences.
Follow my startup-oriented Twitter feed here: @johngreathouse. I won’t tweet you a “No” response if we decide to not fund your company, nor will I Tweet a photo of a killer burrito I am about to devour – my Tweets are about startup stuff.