Running head: VENTURE CAPITAL AND PRIVATE EQUITY CAREERS 1

Venture Capital and Private Equity Careers

Aldranon A. English II

Keller Business School of Management / DeVry University

Author Note

We are required to write a detailed paper on a topic in venture capital. This paper will include at

least 10 peer-reviewed sources and be APA formatted.

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Venture capital has played an important role in funding the development of several US

high-technology industries. Economists and business scholars utilizing models based in

traditional economics have studied venture capital from the perspective of investment decision-

making. Innovative technologies historically took form inside of large corporations or looked to

wealthy families. The stock market crash of 1929, the ensuing Great Depression, and World War

II resulted in an environment that was decidedly not entrepreneur-friendly; however, and, though

it was a sweeping generalization, start-ups were few and far between during these periods

After the end of World War II, with former soldiers graduating college under the GI Bill, a

newly educated generation of potential entrepreneurs began to emerge just as the U.S. economy

was beginning a prolonged post-war boom. This, in part, laid the foundation for a renaissance for

entrepreneurs.1

The present-day VC industry traces back to the creation of the VC/PE firm American

Research and Development Corporation (1946) by Georges Doriot. ARD raised $3.5 million, of

which $1.8 million came from nine institutional investors, including MIT, Penn, and the Rice

Institute. The industry galvanized steam in 1958, when “Venture Capital was in its infancy,”

according to Mark Heesen, president of the National Venture Capital Association. Largely part

due to the significant boost which was given to the industry with the passage of the Small

Business Investment Act.1 The passage of the Small Business Investment Act gave tax breaks to

private investment companies, leading to the creation of professionally-managed VC firms by

licensing private, small business investment companies (SBICs) to help entrepreneurs finance

and manage their startups. From 1960 to 1962, according to Hessen, 585 SBIC licenses were

approved, representing $205 million committed in private money. “The experience with SBICs
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demonstrated a key point – government policy has an extremely important effect on the venture

capital ecosystem.”2

Some examples of companies funded through early venture capital include Xerox, Intel,

and American Microsystems. In fact, throughout the 1960′s and 70′s, computers, electronics and

data processing were exploding with growth and development, and venture capital firms were

there to provide financing for these highly risky endeavors. So much so, that the investment

vehicle soon became thought of as the primary method by which to finance tech startups. In the

1990′s, the “dot com” era was a boom to venture capital, providing numerous opportunities for

new firms to emerge and go public and for existing firms to put financing into the seemingly

endless array of internet startups. Startups funded during this time include Compaq, Intel,

McAfee, Hotmail, Skype and American Online which ushered in a massive time of growth of the

internet age.2 Fast forward to the modern era, entrepreneurial ventures are enacted across the

world. More specifically domestically, these ventures can be seen throughout the nation. Venture

capital investment and startup activity in the United States are extremely concentrated, or spiky.

The top ten metros alone account for more than three-quarters (77.6 percent) of all venture

capital investment across the United States, while the top 20 account for more than 88 percent.

Venture capital investment is found in just half of America’s 366 metro areas.2 However, the

entrepreneurial hotbeds can be found in the northeast (NY; Wall Street, NJ, Vermont,) but more

so in Silicon Valley.
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Venture-capital investment activity is more concentrated in Silicon Valley today than it

was in the late 1980s, when personal computers were all the rage. Data from the National

Venture Capital Association – the industry’s trade group – show that 23 percent of venture-

capital deals and 28 percent of venture-capital dollars went to Silicon Valley companies in the

second half of the 1980s.3 Over the last five years, from 2010 to 2014, 38 percent of deals and 43

percent of dollars went to businesses in The Valley. This increase in industry concentration has

occurred despite a tremendous expansion of venture-capital activity. Between 1985 and 2014, the

number of active venture capital funds in the United States rose from 432 to 1,206, and the count

of active venture capital firms grew from 294 to 803. The list of companies receiving financing

from venture capitalists increased from 1,160 in 1985 to 3,665 in 2014, and the number of VC

investments rose from 1,352 to 4,361 over the same period.3

Venture capital fills the void between sources of funds for innovation (chiefly

corporations, government bodies, and the entrepreneur’s friends and family) and traditional,

lower-cost sources of capital available to ongoing concerns. Filling that void successfully

requires the venture capital industry to provide a sufficient return on capital to attract

private equity funds, attractive returns for its own participants, and sufficient upside potential

to entrepreneurs to attract high-quality ideas that will generate high returns. Put simply, the

challenge is to earn a consistently superior return on investments in inherently risky business

ventures.

Let’s consider the people behind this profession. Professional venture capital

companies generally have a team of experienced managers who are trained to fast track these

important factors. The management team is also backed by several bright, astute, highly qualified

individuals that vet investments and provide a different angle to all investments. Before
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investing, or recommending a company to your boss for investment, an entrepreneur got to be

able to read business plans and understand how to gauge the market and the various industries

you may fund. While a VC doesn’t need more than instinct and capital to start investing, most

venture capitalists at least have a four-year business degree. In the VC community, many

professionals also earn an MBA, according to the Princeton Review.4

Founders of VC firms are predominately white male (92 percent), where women account

for eight percent. Previous studies have consistently shown that venture capitalists are

predominantly white men who, in turn, mostly fund companies started and run by other men. As

a result, women and minorities have been largely left out of one of the world's greatest wealth

creation machines. Venture capital firms control the spigot of wealth in high tech, providing early

cash infusions to companies they bet will go on to become tomorrow's Apples and Googles.5

The general structure of the roles within venture capital firm vary from firm to firm, but

they can be broken down to roughly a handful of positions. Associates usually come into VC

firms with experience in either business consulting or finance, and sometimes a degree in

business. They tend to more analytical work, analyzing business models, industry trends and

subsections, while also working with companies in a firm’s portfolio. Those who work as junior

associate and can move to senior associate after a consistent couple of years. Associates are

slightly more junior members of the investment team who are usually in their role for 2-3 years.

After this period, they are occasionally promoted to principal, but they more regularly leave.

Associates do not lead investments, but they are typically visible at events and workshops. Their

job is usually externally facing and involves meeting with a large volume of companies,

providing a first filter and bringing the more relevant cases to the attention of the principals and

partners.6
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Given this role, associates are crucial gatekeepers. If an entrepreneur can meet and

resonate with an associate, they will open the door to the senior members of the investment team.

Analysts are the hidden gems of VC firms. They are the most junior members of the investment

team. They usually have two or three years of previous experience, most typically in banking,

consulting or at a startup.7

Principal is a mid-level professional, usually serving on the board of portfolio companies

and in charge of making sure they’re operating without any big hiccups. They’re also in charge

of identifying investment opportunities for the firm to invest in, and negotiating terms for both

acquisition and exit. Principals are also seen as the senior members of the investment team. In

addition to helping the firm discover and meet the industry’s most promising entrepreneurs, they

also work very closely with companies after investment. The principals do not usually lead deals,

however, they are trusted long-term members of the team. As an entrepreneur, time spent

building a relationship here is not time wasted. They have the ability and influence behind closed

doors to hook you up with critically useful meetings and introductions. Beyond investment itself,

principals are often highly networked, thoughtful players in the technology startup ecosystem

that can usually help in a multitude of other ways. Principals are on a ‘partner track’, and

depending on the returns they can generate from the deals they make.8

Partners are primarily focused on identifying areas or specific businesses to invest in,

approving deals whether they be investments or exits, occasionally sitting on the board of

portfolio companies, and generally representing the firm. The idea profile of a VC is preferably

someone with an entrepreneurial background--even if those ventures failed. Successes are great

(even if small) especially if the entrepreneur has built and sold a company in a domain that is the
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focus of a VC firm. The entrepreneurial route typically leads to becoming an EIR (Entrepreneur-

in-Residence) that often takes on various roles from triage of deals, to board seats to becoming a

GP in a firm.

Experience is the best kind of education for venture capitalists. Serial entrepreneurs who

have started and sold a variety of businesses know the pitfalls associated with startups and can

advise new business owners how to avoid some of the challenges and how to take advantage of

certain markets. Experience at a large bank makes for a plausible VC background. Headhunters

hired by large venture capitalist companies look for VCs who have worked in product

development for a large firm, or who have served as a consultant to small businesses at banks or

credit unions. Venture capital funds are structured as limited partnerships with a set of general

partners (GPs) who are the investment managers and limited partners (LPs) who put up the

billions of dollars that the venture capital industry invests annually. A typical venture capital

firm will continue to raise more funds and some of the largest institutions that have over 5 funds

a piece each with a variety of portfolio companies.10

As mentioned, startup experience is highly preferred when dealing with negotiations and

the overall startup process. Corporate or startup or accelerator experience could be relevant but it

depends on the VC firm. Different firms have a different "lens" through which they would judge

their interest in such work experience and some of it all depends on what "gaps" the partner team

at a VC fund believe they need to fill. A non-investor role with angel group or family office is

least relevant unless it's for an administrative position. Corporate roles are relevant only to later

stage investors. Venture capital has gained tremendous importance due to the explosion of

startups. Venture capital can be compared with established directors giving break to young and

talented actors and if the movie turns out to be successful then it will result in windfall for the
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producer and director of the movie as fees of new actors is very low as compared to seasoned

actors, in the same way if new idea or business clicks then it will result in windfall for the

venture capital investors. It is important to note that with every profession, there are advantages

as well as disadvantages. The first and foremost advantage of venture capital is that company

which is new has difficulty in raising funds both from equity and debt market and an idea

without funds is similar to a bank account without money. For example, as far businessman who

is talented and has the business idea but no money venture capital is a blessing as it makes sure

that idea does not remain in the mind only but turns into business.

As far as venture capitalist is concerned, venture capital investment can be very fruitful

because if company turns out to be successful then the stake of venture capitalist generates

returns ranging from 50 to 500 percent per annum which is far greater than any other investment

and that is the reason why venture capitalist take that leap of faith in new and promising

business. Another advantage of venture capital is that business gets the expert opinion of venture

capitalist as they are into the market for a long period of time and their experience comes in

handy during crunch situations. Therefore, venture capitalist does not provide only capital but

they also give their experience to new business which is a crucial aspect as far as new business is

concerned.

The biggest disadvantage as far as new firms is that it leads to dilution of control as

venture capitalist takes stake in the business and due to their stake they tend to interfere more

than desired in the day to day activities of the business and the owner who started the business

feel suffocated as he or she cannot take decisions independently. Venture capitalist tend to hurry

for listing as they want to offload their stake as soon as possible which in turn results in the

company getting lower valuation because if the listing is not done at the right time then it will
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lead to an undervaluation of the company leading to a loss for the owner of the company. As far

as the venture capitalist is concerned majority of startups fail and only a small percentage of

companies go on to become a successful enterprise, hence one should not make this mistake of

thinking that every deal is profitable and venture capitalist always makes money.

In conclusion, I predict the future of venture capitalism and the early stage investing

landscape will look quite a bit different in the next five years. The top tier VC firms will still be

around; however, alongside them, competing for large institutional investor dollars, will also be

more diverse models that leverage software, data, and the web. As for operations, investors will

focus on helping with operations including business development/partnerships, sales, marketing,

development, and recruiting rather than just financing, advice and introductions. VCs will start

taking a hands-on approach with their portfolio companies, not just providing advice, but

executing. That means there will be change in the types of employees at a VC firm. Rather than

financiers and MBAs, they’ll be operators that will make sales calls, code, and market. This will

both attract the best companies and help the investments achieve superior returns. VC firms will

also be even more active in recruiting. They will have teams on college campuses recruiting top

students before premier companies like Google or Goldman Sachs have their picks.
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