By Michael A. Greeley
June 14, 2005 | A number of Nothing Ventured readers have asked how to get into the venture capital industry. My immediate reaction is, “Why?” After their initial shock, I assure them that I am only kidding, and, in fact, I would do this job for free (another joke).
There is a widespread belief that the role of a venture capitalist (VC) is a simple one; and for a time it was. During those magical five years in the mid-1990s, VCs simply needed to have a pulse to be successful. That changed dramatically a few years ago. This industry may still be on the front end of a very painful restructuring, of which many entrepreneurs need to be mindful.
The U.S. venture industry is estimated to have around 10,000 practicing VCs. Many observers suggest that number should be closer to 4,000. Today, the venture industry has about 750 firms, although many are effectively out of business — they are close to being fully invested, and the prospects of raising a new fund are remote. These are probably not firms you should pitch your idea to or work for.
Money managers have historically considered the venture capital asset class to be one that generates superior returns, consistently 500 to 1,000 basis points above public equities. The hidden truth behind these numbers reveals something a little more disturbing. The firms in the top quartile generate the most attractive returns; the remainder often generates returns far below the public indices. Superior returns are really the domain of only the most successful firms. Moreover, there is not a lot of turnover among the top-tier firms.
While that last statement may no longer be true — many of the “old-guard” VCs have retired after making obscene amounts of money, allowing new firms to break in — it does highlight that entrepreneurs really should focus on working only with leading firms with plenty of “uninvested” capital. That also goes for those who are looking to enter the VC industry.
At IDG Ventures, we consider ourselves to be “the entrepreneur’s invited guest” to assist the entrepreneur. Our role includes being a strategist, a sounding board, a recruiter, a fundraiser, a deal negotiator, and a confidant to the CEO. We do not run the company; the entrepreneur does. Good VCs understand the boundaries. They see a lot of companies so that patterns for success can be identified. They also understand that good companies are created when incentives are properly aligned and that entrepreneurs need to make a lot of money in the process of building important companies.
IDG Ventures manages approximately $1 billion globally and has about a dozen partners. A constant debate centers on the right profile of a successful VC: an operating versus a financial background. We solve that dilemma by ensuring that very different backgrounds are involved in the decision-making process so that contrasting viewpoints are heard. It is this dynamic that creates entry points into this industry.
So how does one become a VC? Many funds have positions that allow someone to join with an investment theme that they want to explore but need the platform a fund provides. These positions are often called Venture Partners, or Entrepreneurs-in-Residence. Often times these positions are neither permanent nor full-time; therefore, it is incumbent on the individual to build the case as to why a particular focus area is compelling.
VC aspirants should consider working in a startup that plays to the particular theme, including bio-IT. We remain excited about this field and value experience in such companies. My advice is to work in a business development or customer/product-facing role. The objective is to deepen your understanding of the forces creating successful companies. Other areas to explore are in business development or corporate investing departments in larger companies or in the licensing offices at major academic institutions.
The objective is to stay relevant to a venture firm while the industry contracts. Develop the case that you can help create great companies (and great returns) because you have built a Rolodex and an ability to identify patterns of success.
Michael A. Greeley is managing general partner of IDG Ventures, a global family of funds operating in North America, Europe, and Asia, with approximately $1 billion under management. E-mail: firstname.lastname@example.org.