Canva, Instacart, Airbnb, Uber — what do these companies have in common? They’re all highly successful startups that venture capital has funded. So, what is venture capital, and how does it lead to companies worth billions of dollars? Venture capital is a type of financing where investors give money to startups and small businesses with high-growth potential.
In this guide, we’ll cover:
- Venture Capital Overview
- Venture Capital Stages
- Venture Capital Career Path
- How to Get Into Venture Capital
- Pros and Cons of Venture Capital
Venture Capital Overview
Venture capital (VC) is a sector that provides funds for up-and-coming businesses. This capital comes from investors and investment banks. When companies are just starting — and before they go public — venture capitalists support them along the way, primarily through monetary contributions, but sometimes with management advice, support, and networking.
>>>MORE: Learn what it’s like to work at a startup with Y Combinator’s Working at a Startup virtual work experience program.
“Venture capital is a really important and sometimes critical part of the entrepreneurial journey,” Clair Byrd, partner at Wing Venture Capital, says. “VC dollars help companies get off the ground, scale, hire the best talent, and deliver great experiences for customers quickly.”
Venture Capital Stages
Venture capitalists invest in companies in stages, often offering them smaller sums to get up and running, and investing more once the company starts selling its product or service. There are five venture capital stages when VC firms invest.
This funding is used to build out the foundation of a company and supports market research, product development, and building out the team. At this stage of funding, the startup founder may only have an idea or prototype for their business.
After a startup has done its market research, established a leadership team, and even developed a sample product, investors will give more funding if they believe there’s a market for the product. At this stage, startups use venture capital to continue developing what the startup worked on in the seed stage: hiring more people, developing the product further, and continuing market research.
Also known as first or second-stage capital, early-stage funding comes once the startup is starting to sell its product. At this stage, investors can see the product’s viability and how it fares in the market. In addition, capital from early-stage funding will often go toward developing the company’s sales, product manufacturing, and marketing. As a result, funding for this stage is often significantly higher than in previous stages.
Once a startup sees some growth, viability, and profit, venture capitalists will invest in helping the startup keep up with the growing demand for the product. Startups then use this funding to grow their market share, potentially expanding their product into new areas or markets.
Also known as the mezzanine stage, the bridge stage is the last stage of venture capital financing. This stage aims to get the startup to go from private to public — when outside investors can buy company shares — or to fund a merger or acquisition. Many venture capitalists profit from their investment at this stage by selling their company shares.
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Venture Capital Career Path
Early-career venture capitalists tend to work closer to the numbers, researching and analyzing investment performance. More experienced professionals build relationships with startup founders and make final decisions on where to invest.
Analysts are entry-level employees who analyze and research current investment performance to recommend which companies to invest in further. In addition, they sometimes help associates identify new opportunities for investments.
Analysts then move into associate roles, where they help source new deals and recommend potential new investments. Further, they conduct due diligence on potential investments and support the firm’s current portfolio companies.
Senior associates usually gain their titles and promotions after completing an MBA. They have more influence with partners than associates, and their work involves supporting partners and sourcing new deals.
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Principals and VPs work on executing and negotiating deals. They also work closely with clients and often sit on the boards to help nurture current portfolio companies.
Partners have the final say in what companies the firm invests in. They raise funds (sometimes even contribute their own) and act as firm representatives.
How to Get Into Venture Capital
There’s no one degree or set of hard skills that you need to become a venture capitalist. For example, some venture capitalists gain experience and skills by working as a VC analyst and then getting an MBA. On the other hand, some venture capitalists might get technical subject matter expertise by working on a product team at a startup, then later decide to join a VC firm.
While there’s no one right way to get into venture capital, the following education, skills, and experience can be helpful:
- Degree in finance or business; to move up the ladder, an MBA is often preferred
- Experience working at a startup
- Data and research skills
- Analytical skills
- Communication skills
- A well-connected network
“Firms are looking for folks who can bring in differentiated deal flow, so being involved in networks and communities representing hotbeds of potential deals is important, including communities through your school, your first job, online and social media communities, etc,” Tanay Jaipuria, partner at Wing Venture Capital, says. “Networking and community involvement will set you apart and make you more attractive to a firm.”
>>>MORE: Learn how to become a venture capitalist.
Pros and Cons of Venture Capital
- High reward: If an investment pans out, there’s often a high level of profitability. Early venture capitalists make an average salary of $196,275, while more experienced professionals make an average of $330,816.
- Experience vs. education: You don’t need a specific degree to land a job in venture capital. Experience matters most, and that experience can come from working in venture capital or a startup.
- Impact: “By far, the best part is working with great founders who are building the future,” Jaipuria says. “You get to make a dent in that future.”
- High risk: High reward also comes with increased risk. Nine out of 10 startups fail; not every business you invest in will be profitable.
- Slow-moving: “Venture capital is finance, not a ‘tech’ job,” Byrd says. “The pace is slower, the timelines are much, much longer to see impact and things ‘working,’ so if you are motivated by making and seeing an immediate impact from your work, it would probably be a challenging industry to work in.”
- Not for entrepreneurs: “It can be made out to seem more glamorous than it actually is,” Jaipuria says. “In the startup ecosystem, venture capitalists are in a support role. If you have a founder mentality, it can be challenging as a VC. Working in a supportive role across multiple companies doesn’t scratch the founder’s itch to own and create something from the ground up.”
Looking to learn more about what it’s like to work in venture capital? Try H2 Venture’s Venture Capital virtual experience program.
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