When you picture a venture capitalist, you probably imagine someone wealthy. How do venture capitalists make money, though, and what exactly do they do?
Becoming a venture capitalist is no easy feat. In fact, you’re more likely to be drafted into Major League Baseball than you are to become a venture capitalist — but Major Leaguers don’t count the odds and we bet you don’t either.
Maybe you’re one to defy odds and wonder how to become a venture capitalist.
If you’re looking to break into the world of venture capital, there are three main paths: becoming a successful entrepreneur, expert investor, or partnering with one.
Want to learn more? Keep reading for some quick lessons in venture capital 101, and see how you can break into this competitive industry.
What is a Venture Capitalist?
A venture capitalist (VC) drives market growth and innovation by investing in early-stage startups using third-party funding. This sets them apart from angel investors, who invest using personal money. Venture capitalists may also face competition from other funding methods, like crowdfunding.
Venture capital deals usually involve firms providing rounds of funding in exchange for equity, a company board position, or other perks. Once startups reach profitability or go public, VC investors can reap high rewards.
Most of the time, VCs work as part of a larger firm, but occasionally savvy individuals can become solo VCs.
What Does a Venture Capitalist Do?
Venture capitalists provide funding to startup companies in different sectors through different stages of growth:
- Early-stage venture: This refers to the very first seed fund and possibly one or two funds after that. The company is likely in the idea phase or barely past it.
- Mid-stage venture: This funding usually focuses on startup companies that have established a market fit and are beginning to generate buzz.
- Late-stage venture: Even though it’s “late stage,” this funding still refers to companies in their early startup years. At this stage, startups are beginning to generate revenue.
Specializing in different stages comes with different pros and cons. Late-stage ventures are usually less risky but often come with less reward. Companies are more likely to offer higher equity in earlier stages.
While funding is the biggest part of venture capitalism, that’s not all VCs do. In addition to providing capital, VCs can also provide their partner companies with:
- Financial coaching or mentorship
- Industry expertise
- Network connections or additional partnerships
These benefits can help VC firms win competitive acquisitions. Keep in mind that if a startup company looks like a great investment, there will likely be other venture capital firms looking to invest. If one firm can offer funding in addition to great network connections, it may be the deciding factor that wins them the deal.
How Do I Become a Venture Capitalist?
Venture capitalists are typically one of two people: successful entrepreneurs or expert investors. In order to become a venture capitalist, you’ll most likely need to become one of those two people — or partner with one. That’s not to say there aren’t other paths into venture capital, but if you’re wondering how to become a VC, these routes are the most common.
Path 1: Become a Successful Entrepreneur
Entrepreneurial VCs are usually those who were highly successful in their own endeavors and now have the cash to contribute to VC funds. Since venture capitalists often offer coaching and mentorship, entrepreneurial VCs also bring a unique value to firms: firsthand experience.
Because of their firsthand experience in growing profitable companies, entrepreneurial VCs are commonly employed at firms that focus on early-stage ventures. Their unique experience can help solve common startup issues and circumvent delays — like pulling in a founder for advice. At the end of the day, keeping companies profitable and growing is the name of the VC game: If the companies a firm invests in fail, so does the firm.
What makes a successful entrepreneur, though? If you’d like to evaluate your company the way a VC would, here’s a helpful rule of thumb: Look at your company’s growth rate.
- 3x annual growth is decent, akin to a B grade.
- 4x annual growth is good, akin to an A grade.
- 5x annual growth is excellent, akin to an A+ grade.
Depending on the company, growth may be measured in revenue, active users, or something different. Year-over-year growth is difficult to sustain. If your company is upholding the above standards, you’re doing well.
Path 2: Become an Expert Investor
Investors who understand the mechanisms of going public, financial engineering, mergers, and acquisitions are more likely to work at mid- or late-stage venture firms where advanced financial skills are necessary for mature startups.
VC positions at firms are incredibly competitive. There are not many jobs available, and when jobs do become available they’re often filled without public listings. One of the best things you can do to enter the expert investing world is to grow your network. With these competitive jobs, what you know is just as important as who you know.
If you’re lucky enough to snag an opening at a VC firm, your path to becoming an expert investor could look like this:
- Managing Director
- Vice President or President
While becoming a high-level VC is certainly a glamorous thought, the path is often grueling. Associates spend their time going to conferences, networking, making spreadsheets of potential companies to invest in, and doing much of the groundwork. Interns are sometimes paid and sometimes unpaid. After being successful in these entry-level positions, you can move up to higher-level decision-making roles, like principals and beyond.
Path 3: Partner With an Entrepreneur or Investor
Becoming a successful entrepreneur or expert investor are both extremely difficult endeavors. About 90% of startups fail, and firms likely only have a few hundred VC job openings annually. To put that into perspective, you are more likely to be drafted into Major League Baseball, which has about 1,000 openings annually given to about 10.5% of NCAA senior male baseball players.
If you’d like to become a VC while avoiding some of the risks associated with the first two paths, you may be able to break into the industry by partnering with an entrepreneur or investor.
To partner with an entrepreneur, consider joining a promising startup. Some of the most sought-after VCs are those who were growth project managers on something that grew from 1 million users to 100 million users. That kind of experience is extremely rare and speaks volumes to firms about your skill. So if you don’t want to found a startup, you could get similar experiences by simply joining one.
To partner with an investor, it’s all about networking. Check out firms you may be interested in working at and see if you can make a connection with any employees there. VCs tend to be active on LinkedIn, so build up a strong presence for yourself and stay current in the VC niche.
What Do You Need To Become a VC?
While you don’t need anything in venture capital other than access to funding and an eye for investing, there are a few things that can help you even more:
- Education: Most VCs have at least a bachelor’s degree in business, but an MBA is even better. About 50% of VCs have an MBA, and many come from Harvard or Stanford.
- Experience: Are you an entrepreneur who was able to grow your business three times or more annually? Do you have a background in investment banking, financial advising, or have you helped a company go public?
- Ambition: The odds of breaking into venture capital are low, but Major League Baseball players don’t count the odds. Do you have the ambition and drive it takes to succeed?
- A Network: Breaking into venture capital is often about having the right connections. Once you become a venture capitalist, your network can help you find promising startups or score deals.
- Mentorship: This industry is all about know-how, so having a mentor to help you learn the ropes can be invaluable. Seek out an assisting or internship position at a firm you’d like to work for.
According to Garry Tan, founder and managing partner of Initialized Capital, “A lot of [what you need] is just purely trust. If people think you’re smart and scrappy and hungry… sometimes they’re going to hire you the next time they [need] an associate.”
How To Become a Venture Capitalist With Little Money
You don’t need millions of dollars to become a venture capitalist. Harlem Capital, a venture capital firm that now manages $174 million in assets, started out with only $25,000. Five founding members pitched in $5,000 each and started investing as angels to grow their portfolio and reputations. Now this venture capital firm receives funding from the likes of Apple and PayPal.
Don’t have any money at all? Just start where you are. If you break it down, the role of a venture capitalist encompasses four main things:
- Sourcing Deals
- Verifying Potential
You can do all these things without a firm backing you — and even without initial money. Lean on your network to find promising startups or visit tech conferences. Once you find some leads, verify their market potential by conducting background checks on the founders and researching markets. Negotiating lets you know how much money the founders will need. If you find prospects that are truly worthwhile, money will follow. Venture capital firms, angel investors, and others are always looking for solid companies to invest in.
Do You Need a License To Become a Venture Capitalist?
You do not need a license to become a venture capitalist. Most of the time, all you need is a solid network, know-how, a background in entrepreneurship or investments, and drive. Having an MBA from Harvard or Stanford doesn’t hurt either.
How To Get Into Venture Capital: 5 Tips
Now that you know the paths to venture capitalism, what you need, and what you don’t need, the question is: Where do you begin? Here are a few actionable tips to get you started on your journey into venture capital.
- Join the Entrepreneurial Community: Whether this means scaling your own business or writing at a tech publication, joining the entrepreneurial community is a great way to help you get connected. Knowing key players from different parts of the industry can give you a huge leg up both with breaking into venture capital and succeeding once you’re already in.
- Create Original Research: If you get an interview at a VC firm, they will almost certainly ask you about markets or new products that interest you. Set yourself apart by not only knowing promising startups but by also knowing market trends discovered through your own research. VCs spend plenty of time researching and presenting their findings, so conducting original research is a great way to show you have what it takes.
- Maintain an Active Social Media Presence: VCs are typically active on LinkedIn, so follow potential mentors or firms you’d be interested in working with. Engage with their content early on so firms already know your name before a position opens.
- Read Venture Capital Blogs: Deepen your understanding of this niche industry by following what other venture capitalists have to say. You might even be able to find job postings on blogs like these. AVC is a frequently updated blog run by Fred Wilson, a successful investor who backed companies like Etsy, Tumblr, and Kickstarter. First Round Review shares content created from members of the entire First Round firm.
- Start Angel Investing: If you can show VC firms that you’ve invested your own money and found success, you will be ahead of the game. Very few people come with this type of firsthand experience. Even if you only invest a few thousand dollars, that’s a few thousand dollars more than much of the competition.
How Long Does It Take To Become a VC?
There is no set amount of time it takes to become a venture capitalist. Sometimes, you may be lucky enough to break into a firm straight out of college. Other times, you may need 30 years of investment banking or industry experience before you can even get a job as an associate. Sam Yaffa leveraged himself into a prestigious position at a venture capital firm directly out of college. At 23 years old, he pitched himself to much older firm partners as someone who could offer the VC firm a unique, younger perspective. His pitch worked, and he’s now among the elite few who turned their venture capital dreams into reality.
How Much Does a Venture Capitalist Make?
The amount a venture capitalist makes varies widely depending on what their role is, what firm they work at, and how successful their investments become. Venture capitalists get paid in three main ways:
Most people understand what salary and bonus mean, but what is carry? Short for “carried interest,” this money comes from a percentage of investment profits (usually around 20%-30%). Generally, carry is split up mostly between partners with small amounts leftover for junior positions.
Total compensation for VCs isn’t tracked in any standardized way and carry is likely to vary from year to year based on investment success. However, a 2021 survey provides insight into average annual salaries for different VCs (these numbers exclude bonuses and carry):
- Partners: $244,000
- Vice Presidents and Presidents: $182,000
- Senior Associates: $140,000
- Associates: $111,000
- Analysts/Senior Analysts: $76,00
Some of the most successful venture capitalists can make tens of millions annually, though — sometimes even more.
5 of the Richest Venture Capitalists
The venture capital industry is worth billions of dollars. In 2020, it reached $197.7 billion in revenue, and it’s projected to grow another 16% from 2021-2026. Not only does this industry create millions of jobs through funding startups, but it also creates millionaires (and even billionaires). Here are five of the wealthiest venture capitalists in the world:
- Richard Liu: Founding partner of 5Y Capital, Richard Liu (who also goes by Liu Qiangdong) is worth about $19.8 billion.
- Neil Shen: A successful entrepreneur turned venture capitalist, Neil Shen founded travel site Ctrip.com before becoming a founding partner of Sequoia China. His net worth is approximately $4.1 billion.
- Mike Speiser: Managing partner at Sutter Hill Ventures, Mike Speiser’s net worth is about $1.5 billion.
- Alfred Lin: A partner at Sequoia Capital, Alfred Lin makes about $18 million to $20 million a year. His net worth is approximately $163 million.
- Hans Tung: Managing partner at GGV Capital, Hans Tung is worth approximately $39.5 million.
Ready to break into venture capital? Now that you know how to become a venture capitalist, one of the best ways to get started is by investing as an angel. EquityNet’s angel platform makes finding the right company to invest in easy. Browse our list of promising startups and see which one could be your next big investment.