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Nitin is a sharp investor and fundraiser who’s worked as an investment banker for a decade. Eager to seek a fresh challenge midway through his forties, he ponders which route to take next in his career.
Nitin has some creative ideas about digital platforms but lacks a corporate vision. So the idea for a startup doesn’t seem feasible. Moreover, when faced with the question of how to get funding for his startup, Nitin draws a blank.
Government jobs have never appealed to Nitin, so that’s not an option either. As he tries to figure out his next step, Nitin runs into his friend Seema, who’s been a venture capitalist for seven years.
“Why don’t you try your luck in venture capital? I think you’ve got the skills to do really well as you have a sound understanding of the importance of financial management. You can spot good investment opportunities, you’ve got ample patience, and most importantly, you’ll know when to pull out of an investment. So give it a shot,” advises Seema.
After much consideration, Nitin decides to listen to Seema. He applies to be a part of one of the best venture capital organizations in the country and comes on board as a venture capitalist. His years of experience as an investment banker have provided Nitin with sufficient clarity on dealing with joint ventures: their meaning, advantages and disadvantages. With an instinct to take calculated risks that he’s nurtured from his teenage years, Nitin is able to make a tangible difference to the investment portfolio of his new organization. His mid-career switch is a resounding success.
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What Is A Venture Capitalist?
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A Brief History Of Venture Capital
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Advantages Of Being A Venture Capitalist
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How To Become A Venture Capitalist
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Positions Within A VC Organization
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Become An Expert Venture Capitalist
What Is A Venture Capitalist?
What does a venture capitalist mean? What does a venture capitalist do?
A venture capitalist (VC) is an investor who invests in private equity by providing capital to organizations with high growth potential in exchange for a stake in equity. These organizations could be startups or small organizations that are looking to expand but can’t obtain funding due to absence of collateral or a lack of access to equities markets.
Who is a venture capitalist? Is it an individual or a venture capital organization? The answer is both. The sole criterion for being a venture capitalist is to make large investments that allow organizations to scale and commercialize their products. Individuals who function as venture capitalists can technically work on their own, but they generally tend to be associated with a venture capital organization that pools money from members.
Venture capitalists don’t usually look for stable or safe companies to invest in. They seek a high potential for growth, which almost always comes with extra risks. According to one estimate, VC firms usually aim to multiply their investment 10 times within seven years.
As a result of the uncertainties of investing in new or unproven organizations, venture capitalists often experience high rates of failure. However, for those investments that pay off, the rewards are substantial.
Some of the best-known venture capitalists include Jim Breyer, an early investor in Facebook, and Peter Fenton, an investor in Twitter.
A Brief History Of Venture Capital
Before proceeding further on the question of “what does venture capitalist mean?” or delving into how to become a venture capitalist to make smarter decisions on investments, it’s worthwhile to dig into the history of venture capital.
The very first venture capital firms are believed to have started in the United States in the middle of the twentieth century. A Frenchman called Georges Doriot, who had moved to the US to get a business degree, became an instructor at Harvard Business School besides being an investment banker. Doriot went on to found American Research and Development Corporation (ARDC) in 1946, which would go on to become the first-ever publicly traded venture capital organization.
What set ARDC apart was that for the first time a startup could raise money from private sources other than from wealthy families. Prominent venture capital organizations such as Morgan Holland Ventures and Greylock Partners were founded by ARDC alumni.
The modern-day venture capital infrastructure was laid out by the Investment Act of 1958 in the US. This made it easier for small organizations to receive investments and licenses.
In present times, venture capital has grown into an extremely lucrative industry, with total investments, according to Investopedia, exceeding $200 billion in the third quarter of 2021.
Advantages Of Being A Venture Capitalist
Being a venture capitalist comes with its risks, but there are considerable advantages as well, which are outlined below:
- Early investment in an organization helps secure some extent of control for venture capitalists alongside giving them a say in the organization’s growth
- As equities are uncapped, there’s no upper limit to how much an investor can earn through venture capital
- Venture capital organizations are well-placed to analyze early-stage startups since they perform a rigorous background check through a process known as due diligence. This includes going beyond financial statements to analyze product and market-size estimates and researching adequately about the startup or organization’s founding team
How To Become A Venture Capitalist
What is a venture capitalist? What does a venture capitalist do? What does venture capitalist mean?
Let’s dwell on these critical questions.
In short, a venture capitalist invests to make money in the long run. As a norm, venture capitalists make money from the carried interest of their investments besides charging management fees. Most VC organizations collect around 20% of the profits from the private equity fund, while the rest is shared among their limited partners. General partners may also collect an additional 2% fee.
If you want to know how to become a venture capitalist, either as an individual investor or as part of an organization, you can’t be content with traditional investments such as blue-chip stocks and index funds. The answer to “who is a venture capitalist?” is simple- it’s someone who can take risks on new businesses, technologies and industries in the hope of receiving exponential returns. For venture capitalists today, these exponential returns often come about in sectors like IT, bio-pharmaceuticals and clean technology.
Venture capitalist organizations are usually formed as limited partnerships (LPs) where the partners involved invest in the VC fund. The fund is supposed to have a committee that’s tasked with making investment decisions. After potential investment opportunities have been identified, the pooled investor capital is used to fund promising organizations in exchange for a sizable chunk of equity.
Contrary to popular belief, venture capitalists don’t normally fund startups from the onset. Instead, they target organizations that are at the stage where they are looking to commercialize their idea. Once targeted, a venture capitalist will buy a stake in these organizations, nurture their growth, and leave after a substantial return on investment (ROI).
To execute their investment strategy smoothly, venture capitalists typically look for organizations with a robust management team, an emerging or large market and a product or a service that has a competitive edge. Most venture capitalists are also eager to invest in industries they’re familiar with rather than stepping into unchartered territory.
Positions Within A VC Organization
The specific structure of the roles within a venture organization vary from firm to firm, but they can be broken down into roughly three positions:
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Associates
They enter VC organizations with experience in either business consulting or finance and generally have a degree in business. They perform analytical work for the most part, which includes analyzing business models, industry trends and sectors, while also working with all the startups that form a part of their organization’s investment portfolio. Even though associates don’t make key decisions over investments, they can introduce promising startups to the organization’s upper management.
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Principals
A principal is a mid-level professional, usually serving on the board of portfolio organizations and in charge of making sure they’re operating smoothly without any major obstacles. Their more important function is to identify investment opportunities for their organization to invest in and to negotiate terms for both acquisitions and exits.
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Partners
Partners are mainly focused on identifying areas or specific sectors to invest in and approving deals, whether investments or exits. Sometimes partners may also sit on the board of portfolio organizations and engage in other activities that involve representing their organization. Principals are often said to be on a “partner track” depending on the returns they can generate from the deals they make.
Become An Expert Venture Capitalist
Understanding when and where to invest as a venture capitalist takes insight, expertise and resources. Harappa’s Commercial Acumen pathway combines all three to provide the perfect foundation for you to succeed as a venture capitalist. Designed to help you make astute financial decisions, manage your resources optimally and drive value in all your investment endeavors, this pathway gives you the opportunity to think and work like the best in the business. With guidance from a world-class faculty and frameworks such as The Good-Cheap-Fast Rule and the Negotiation Pie, you’ll learn the art of balancing costs while retaining quality and speed, driving win-win outcomes and accomplishing your goals within a budget.
Sign up for the Commercial Acumen pathway right away and unlock your potential as an expert venture capitalist.
