Jon: Welcome to the Venture Capital podcast. This is Peter Harris from the University Growth Fund. He's a venture capitalist. I'm Jon Bradshaw. I give the founders side. Let's begin. Today's episode is how to Get into Venture Capital. You ready?
Jon: Let's first talk about what are the basic qualifications and skills. MBA No MBA. I have it. When I was looking to get into the space deeper, I was told if I didn't have operational experience, whether it was a successful or failed company, I wasn't relevant.
Peter: I think what you need to do is have wealthy parents that are LPs in the fund, okay?
Jon: And that's how you get in.
Peter: That's how you get in or not.
Jon: You know, a lot of wealthy people that can get in.
Peter: Yeah, but even then, like, you got to know them really well.
Peter: To be fair, that is how a lot of people get into DC.
Jon: Or they just buy their way in, right?
Peter: What do you mean they buy their way?
Jon: And so I think vs bringing one of the heart and or I assume as a partner, my understanding is he wrote $1,000,000 check Now this was ten years ago to become a partner of the fund.
Peter: Yeah. Okay. Yeah. I mean to a certain extent if you got enough money you just hang your own shingle up and start investing.
Jon: I think a million bucks was that much money to start your own fund?
Peter: I mean, I don't know. I think that you can just I think a million bucks is enough to get started as an angel. Build your portfolio and then leverage that that track record and portfolio to raise a fund. I think that's how most most early stage venture investors like get their start.
Peter: I think like for the most part it's like if you want to be a partner at a fund, you either are a successful angel investor that leverages your track record to raise a fund you or you were a like analyst associate whatever principle at a venture fund there was a ceiling and so you left that fund, took your track record with you effectively and use that to raise a fund.
Peter: or you were an incredible operator, an entrepreneur that's super well connected and has unique access to deal flow and insights on the market and expertise and all those things. And a partnership like a venture partnership has a good relationship with you and invite you to join the fund. I think those are like the primary ways in which you become like a check rider at a venture capital fund.
Peter: If you want to be like a more junior person out of venture fund, then well, actually backing up, like if you think about, like those different pathways, two of them kind of come from being an operator, right? Because if to be an angel investor, you had to have some money. And the only way most people get money is they start a company and it's successful and then they have money to play with.
Peter: Yeah, right. or they, like I said, they were an operator and they were successful and somebody brought them in. So I think those are like why a lot of people say like, you have to have operational experience to do that. But and then, and then you have like junior people and so analysts and associates and so forth.
Peter: And that that pathway is actually a little more defined, because you can do investment banking management consulting, you work with recruiters and, you know, leverage that to get a job. But most of those jobs are like tuned out. Okay, so you're only there for a couple of years and then they put you out, right? Unless you are in credit pool and you source a really good deal or a string of really good deals and the venture fund is like, crap, we can't afford to lose this person because they're driving so much value to our firm from a deal sourcing or from a fundraising perspective.
Peter: And so they promote, you know.
Jon: How much of having a strong network as a predecessor for being a VC.
Peter: I think it's really important. You know, I think about to be a good VC, you have to do three things. You have to fundraise, you have to source deals and you have to pick winners. you need all three to be a VC. If you don't have one, you have none. and you have to be world class at two of those three.
Peter: You don't have to be world class at all three, but you got to be world class at two. Because if you're world class at two, you can pick up the third fairly easily. and so you talk about network. Well, having a strong network is two of those three things, right? It's fundraising and it's deal sourcing. And so if in like I said you have to be world class are two of the three.
Peter: So if you're, if you by default have to have a strong network somewhere, Right. In order to play the game. Okay. I mean think about it this way. So if I am if I am phenomenal at fundraising, we have a friend that's phenomenal at fundraising. Really good on the golf course.
Jon: Okay. And I know who you're talking about.
Peter: And you know, very good and you're very good at sourcing deals, right? So you are just like a consummate networker, but like you can't pick a winner to save your life. It's okay because it's because you can hire for that, basically, and you'll always be able to raise money. And so get into like great deals and you can kind of leverage like the expertise of other funds, you know, to get into great deals and have a good track record so you can be a V.C..
Peter: Or alternatively, let's say that you suck at fundraising, right? You're just not good at sales, but you are good at like building out a deal sourcing engine and underwriting deals and picking winners. You're going to have a phenomenal track record and the track record will speak for itself. And and people with money will throw their money at you.
Peter: Right? So and then, you know, lastly, we might as well hit all three while we're at it. If you're really good at raising money and you're really good at picking deals. Right, you can leverage the network that you have on the LP side and you can leverage your ability to underwrite and pick deals to go and go hunting for, you know, the diamonds in the rough and still have a good track record.
Peter: So that's why I say you need two of the three and two of the three are network related. So that's why you need a good network.
Jon: Anchor What are the advantages of being in the VC space to be in a VC as a career?
Peter: Well, I mean, there's a lot of there is a potential that you can get very, very wealthy.
Peter: So that's an advantage, right? I mean, I think the guy that invested in Snowflake, I did some back of the napkin math, like the guy is like probably a billionaire off of one deal, like he did or close there, too. Right. like, that's kind of crazy. Jason Calacanis says that it's the. It's the get rich slow profession.
Peter: And what I think he means by that is it's great because a VC, you can place a ton of bets and they may take a long time to pay off, but like the odds are generally speaking, should be in your favor if you have a clue what you're doing to have some success over the life of your career and your collecting management fee and getting paid very well, assuming you're able to raise a large enough fund over time.
Peter: So I think that's an advantage, I think, or not an advantage, but I don't know a plus of being a VC. Okay. keep in mind though, not all VCs are rich. In fact, most are not, because, you know, they don't they're not able to raise big funds. They don't actually make very good investments. I don't know. but the potential's there.
Peter: other things, like, here's the things that I care about.
Peter: venture is one of those careers where if you are intellectually curious, it's just super fun.
Jon: I was going to say that. Intellectually stimulating.
Peter: Yeah, you're just constantly learning.
Jon: That was my favorite thing about the Utah Angels. You're you're meeting new people, you're experiencing new ideas. You get to do a lot of research on projects. You get to call the smartest people you're aware of in the space. And generally they would always take your call. Yeah, you could tax people too. I am that respond like that.
Peter: Yeah, that's not really intellectually stimulating. That's more like power play, but power play.
Jon: But like the whole the aspects like if it the advantages of it but.
Peter: For what it's worth, like people do respect you and they do they do give you more credibility than in many cases maybe you deserve because you are an allocator of resources. Right? So, I think that goes to a lot of VCs heads, right? This like power dynamic. But, the flip side is there's a lot of pieces.
Peter: It doesn't go to their heads and they try to stay humble and, and empathetic. but yeah, for better or worse, like, people do kind of look up to you, Right?
Jon: Okay. what are the potential challenges for being a VC?
Peter: like, if it doesn't work out, what do you do? I think we both know a bunch of VCs that are kind of washed up, and they just kind of float around and.
Jon: They want to become consultants.
Peter: I don't know what they do.
Jon: They help people fundraise.
Peter: They're not really.
Jon: Yeah, I know, I know. I just. I don't know as many as you've known.
Peter: I know, but, like, they just I don't know. It's just hard because, like, if you if like, what can you do as a VC if, if you fail at VC, right. It's like, well, you can't really build a company because.
Jon: You usually spent ten years in the.
Peter: Space. Like really done it. Yeah. And it's taken you ten years before you realize that you suck as a, b, c.
Jon: And corporate strategy.
Peter: Yeah, but like, even corporate strategy is like, Well, can I really trust your judgment?
Peter: Because you couldn't you didn't have good judgment as a VC, would you?
Jon: Where do you former VCs go? They get an MBA.
Peter: I think they just kind of retire. Yeah. Or they try to, like, raise money for something else. But I. I don't know what they do. So it's it can actually be risky because, like, you pour like ten years of this, ten years of your career, let's say you like, become like a partner at a fund or whatever and you're like mid thirties and you pour your heart and soul into it or whatever and you just you're not very good.
Peter: You're 45 runs or rolls around and you're kind of washed up like, what do you do?
Peter: That's a tricky situation to be in, right? What's harder and you don't know, it takes you freaking ten years to find out that you suck.
Jon: Yeah. What's the hardest in level? Difficulty raising fund one Raising fund to raising fund three.
Peter: you know, people say the hardest fundraise is your third fund. I'll explain why in a minute, but I actually think raising the first fund is the hardest.
Peter: and the reason for that is because, like, I don't want anyone to feel sorry for me as a VC. but the pitch for raising venture capital, like, into a fund is, in my opinion, way harder than for a startup. Because for a startup, like, I can paint this like beautiful picture of a vision that will someday, I hope, occur, right?
Peter: And I can sell that vision and people can get excited about the vision, right, of where we're taking the company and they can invest in that vision and venture. It's like, Hey, so here's the deal. You're going to give me $1,000,000 or whatever the amount is because I can invest it better than you can. It's going to be locked up for ten years.
Peter: I have no clue what I'm going to invest in, but I promise it's going to be amazing. Just trust me. And like at the end of ten years, hopefully I'll give you a great return. Right? Like that is a really hard sales pitch to make, and especially if you don't have a great track record or you don't have a track record.
Peter: Right? And even if you do have a track or maybe you're like an angel investor, like sophisticated LPs or investors in your fund are going to be like, Well, how do you translate a 50 K angel check that you made or a 25 K Angel check? You made an Uber and to being able to write $1,000,000 check in the next day.
Peter: You were right. Those are two very, very different things and different abilities and so on and so forth. And so, it's just hard. It's just, it's just hard to sell. Now, people do say that, like, the easiest fundraise is your second fund. Yeah. And the reason for that is because and your first fund, if, if you're doing a good job, you've invested in a bunch of companies that are seeing write ups and valuation and everything is kind of going up into the right, but it's all paper gains.
Peter: But you go to market and you're like, Look at me, I'm a genius. I invest in all these companies are absolutely slaying. and we're generating like these crazy great returns for you, right? And so you raise the next fund fund three rolls around. This is where our people joke that fund three is the hardest fundraise, because all of a sudden those are those investments that you made in fund one are starting to realize, right?
Peter: They're starting to move from paper gains to real gains or in most cases real losses. So you have these companies that they they raise and then they raise at a higher valuation. And then like some start failing and you're like at that phase, you're more like you're losers die early, right? So you have like this like nice run up a valuation and then you start having your losers start dying.
Peter: And it takes a while for your winners to really, like, fully realize. And you're right, like at that point, you're usually like bright in the middle of raising fund three, right? And investors are like, they're like, well, I'm looking at fund to performance and it looks really good, but then I'm looking at fund one performance and it doesn't look so hot.
Peter: How do I know that Fund two is going to end up looking like fund one, right? And that's what you're trying to raise on for fund three. And it can be challenging. Right?
Peter: So but I like persistence and venture like you are still considered an emerging manager until you get to like fund four, fund five with large with a number of different, large LPs like endowments and pension funds and so forth, which is kind of crazy like to be on Fund five. Even if you have a three year investment period means that you're like, and unlike year 15 of being a venture investor, which is, yeah, it's a lot of time if you, if you were like a partner at age 35, like you're a person 50 before you're considered not emerging anymore, in some cases not enough.
Jon: But how about if you were trying to go into VC and focus on like a niche? Like maybe you say, Hey, I'm create a blog or a podcast?
Jon: What industry would you focus on? Healthtech FinTech, blockchain? I.
Peter: I mean, I think you focus on wherever you have real expertise.
Peter: So I'm, I don't know. There are successful VC investors that do I that do enterprise as they do biotech, do pharma, do you know fintech, all kinds of stuff. So figure out like where you have good fit as an investor. Yeah. And that's going to be driven by like your network for deal sourcing your network for supporting those companies, your understanding of the space, your understanding of like where the problems are to be solved so that when opportunities pop up, you're able to identify like, yes, this is solving a real problem or not.
Peter: and then you're able to help them through your own network.
Jon: Okay, I dig it. So now we know all how to be a VC and what it takes how to get in to venture capital.
Peter: Here's my last tip with that is that whenever when venture funds are out recruiting, they will literally get thousands of applications.
Jon:
Peter: they don't typically hire from that pool. They hire from the pool of people that they already know. And those resumes float to the very top of the pile. So if you want to work in venture, you need to spend some time getting to know the partners at the firm, adding value to them and demonstrating that you grow pays more than you take from them.
Peter: And ultimately, like that is how you get in, because these are small partnerships and they have to decide, like, if I take John on, is he cool? Am I going to enjoy working with John? Right?
Jon: Will I enjoy going to the Hamptons with John?
Peter: Will I enjoy going? He exactly. Well, I enjoy going to Cuba. Cuba and I have fun. Retreat with John. Right. can we hang right is going to be cool because there's only five of us in the firm, right? And if he's a if he's a tool, like, I don't want you know, we don't want that, right? So they will optimize for somebody that they like typically that they can work with.
Peter: That's, you know, more so than what you look like on paper. So that's probably 50% of it, I would bet. And then the other 50% is going to be more along the lines of can this person grow the pie more than they are going to take from it? And the more you can demonstrate that through things that you have done for them already versus what you claim on on a piece of paper is going to be way more powerful.
Peter: So I know that's that's my little tips there is that remember that these are small partnerships and that personal relationships are going to win the day. And so if you really want to work in venture, you need to figure out how do you develop those personal relationships, add value to them, and answer those two questions of like, yeah, you're cool to work with and be part of the team.
Peter: And too you're going to you're going to add a lot, a lot of value to the organization.
Jon: I dig it. All right, guys, thanks for watching. Now we know how to break into venture capital. Make sure if you like this episode, give us a five star review. Go to venture capital Dot and you can find all the ways to subscribe and to stay connected.
