You may have heard of the term “venture capitalist” without fully understanding its meaning. Venture capital (VC) is a type of private equity that refers to providing funding to startup businesses that show high potential for growth. A VC firm invests in these startups for a stake in ownership. You might even think of a venture capitalist as an adventurer because VC enterprises often fail due to the risky nature of financing fledgling businesses, many of which are based on innovative technologies and face a high degree of uncertainty. VC appeals to enterprises that aren’t large enough to raise capital publicly or through banks. Such firms provide initial funds in hopes of seeing a big return on investment (ROI) when the companies they bankroll go public. Does that sound interesting to you? Here are some things you should know before diving into the sea of venture capital.
The Road to VC
The path to being a venture capitalist is not set in stone. While many start out as investment bankers or entrepreneurs such as Matt Ocko, others may have backgrounds in academia, law, technology and other types of finance. Starting a VC outfit doesn’t require having a lot of money as many groups aren’t necessarily investing their own money; however, independent wealth does open significantly greater opportunities. Still, many VC s usually leverage third-party resources to not only fund startups but to improve their effectiveness, business processes and bottom line.
Here are some characteristics that are typical of most venture capitalists:
- Fifty percent of VCs have a Master’s in Business Administration degree. Of these, over sixty percent have MBAs from elite schools such as Harvard University and Stanford University.
- Several VCs have worked in tech, consulting, media, investment banking and/or startup.
- Approximately 85% have a strong social media presence, especially on platforms such as LinkedIn.
- Many have demonstrated success in investing.
- They are usually go-to experts in a particular technology or business area
- Most keep up with the world of venture capitalism through blogs, podcasts and tech news sources.
Most VCs will spend most of their time working with a business partner than with their own families.
The harsh reality is that most VC companies fail. Many startups have a lot of potential but come with a high degree of uncertainty. There is no such thing as a “sure bet” in investment and private equity is no exception. Consider the fact that most VCs have not broken even in a decade. Moreover, venture capitalism has lost significant ground to angel investing and equity crowdfunding. Less than 1% of businesses in the United States have secured capital through VC funding. As a venture capitalist, you will work long hours in meetings and networking. You will also have to get used to telling people no and possibly crushing their hopes. VC work is not for the faint of heart.
Venture capitalism can be the basis for an exciting career in investing. There’s a special kind of energy in working with startups that can be very alluring if you have what it takes. Building equity in emerging businesses comes with considerable risk. Although the odds of success are quite low, wealth generation potential can be very high.