How do you become a venture capitalist?
There is no straight line to follow to become a VC. Going to college and studying finance or trading will not guarantee you the opportunity to become a new investor.
A common feature among the country’s venture capitalists, both newly appointed partners and those with decades of experience, is that most have operating experience as founders or working within a start-up.
Paul Bassat of Square Peg Capital is known for co-founding Seek, Rick Baker of Blackbird founded two software companies before going into investing (Right Party Connect and IDC Global) and AirTree partner Craig Blair, he founded Travelselect before selling it to Lastminute.com in the early 2000s.
Folklore Alister Coleman He is an outlier among the country’s oldest venture capital fund partners, having started his career investing as a senior analyst for a family office before moving to Fairfax Media and overseeing its M&A strategy. But he also gained operator experience before moving to VC, co-founding ShippingEasy in 2011.
A newer member of the local venture capital scene, Jackie Vullinghs, was promoted to partner at AirTree in mid-2021. She has never been a founder, but worked for a start-up before joining the fund.
“I studied history at university, then sold equity derivatives on the trading floor of Merrill Lynch and Citi in London for six years,” he says.
“Throughout my time in banking, I wanted to start my own business, but didn’t have the confidence to go it alone right away, so I joined Lystable, an early-stage B2B SaaS startup in London, as chief of staff.When I decided to move to Sydney in 2017, I thought I would experiment by combining my interest in investing and my love of start-ups by trying venture capital.”
Vullinghs and Coleman agreed that for anyone wanting to break into the industry, your ability to land a VC job has more to do with your mindset than your experience.
“You want people who are independent thinkers, who are incredibly curious, who are good at deductive reasoning and take in information, but don’t cling to all of it, and people who accept that there’s a lot of uncertainty in the world and don’t care. bother. Coleman said.
How do venture capitalists make money?
Venture capital fund partners are paid a salary and also receive transfers into the funds. Carry is a form of profit sharing, and they only earn this part if they generate strong returns for investors in the fund. Transportation hurdles mean that if a certain agreed rate of return is not achieved, the partners cannot share in any of the profits.
For most VC funds, the total carry distributed to partners tends to be between 15% and 30%, with 20% being the average.
Carry is how VCs make a lot of money, but since many funds have a 10-year lifespan and returns often don’t start flowing until six or seven years into the fund’s life, it pays to be patient.
What does a venture capitalist look for in a start-up?
How you evaluate a startup depends on its maturity. An investor buying into a company after it has already raised a few rounds of capital will be able to examine metrics such as revenue growth, average revenue per user, customer acquisition costs, its rate of cash burn, and its path to profitability. : something that is being scrutinized more and more amid this year’s tech market correction.
But, when a company is still in its infancy, there is almost no financial data to examine and this is where curiosity and intuition have a role to play.
Factors VCs consider include the experience of the founders and their team (some funds prefer founders who have personal experience with the problem they’re trying to solve), their ambition, the size of the potential market, and their personalities.
It’s also common for startups to know their potential investors for months or a year before raising capital. This gives venture capitalists the opportunity to learn about the business and witness the founders’ ability to execute their vision.
“The most critical part of the decision occurs in your heart: do you love this company? Do you want to embark on a 10-year journey with this founder? That’s more art than science,” he says. Nick Crocker, partner at Blackbird Ventures.
Vullinghs says AirTree does two to four weeks of legal due diligence on its investments, but the fund looks at much more than just the terms of a deal.
“We seek to understand in detail the background and motivations of the founding team, the unique vision that led them to start the company, the market opportunity, how the product works and whether it engages users, the sales and marketing strategy, the unity economics and finance, and competitive advantage over time.
Coleman’s Folklore fund specializes in early-stage investing, and he believes he can “get an idea” from a founder in less than 30 minutes.
“The fastest we have made a new investment is five days. The fastest we’ve ever done a follow-up investment is 17 hours,” she says.
“When that happens, the bonding chemicals have gone off in everyone’s mind. [We like founders] who are tremendously ambitious, have very clear thinking, are honest and… understand the catalytic power of the team.
“We have also gone from six to seven months [assessing an opportunity]. Swoop Aero took seven months because we didn’t understand drones and wanted to understand the environment they operate in, plus Swoop wasn’t ready to grow at the time.”
What red flags does a venture capitalist look for?
Lying. Both Coleman and Vullinghs say there were times the founders lied to them during the launch process, saying it was an immediate red flag.
“We also do legal due diligence and background checks to make sure there are no skeletons we need to know about,” says Vullinghs.
Coleman says that if a founder is evasive or dismissive, that too is a red flag.
“You’re trying to help these people, but they see the questions as something to be blocked and avoided,” he says.
How does a venture capitalist handle market hype?
Every once in a while, a sector goes from hot to scorching. If you’re an investor who picks the top of the market, this can mean staggering gains, but if you miss out, the losses will be plentiful and quick.
There’s no better example than the Buy Now, Pay Later industry, where companies like Sezzle and Zip are down more than 86 percent in the past year.
Coleman says that Folklore always tries to invest in trends before they’re discovered.
“You want to invest early on, before it has crystallized as a thing,” he says.
“You do not want [the trend] never to be discovered, but you need to understand if something is real and lasting.
Crocker, however, says that Blackbird doesn’t pay attention to the hype.
“We could fund a startup at the peak of the hype cycle, like bottom-up SaaS (software as a service) in 2021, and we could fund a startup when everyone thinks the sector is dead, like crypto in 2013.
“A great company will take more than a decade to build. Wherever that company is in the advertising cycle when you meet it, it won’t be where it is a year from now or 10 years from now.”
How are start-ups doing this year?
Since interest rates began rising this year, funding has slowed considerably and venture capitalists are experiencing the most challenging investment environment in over a decadesays AirTree’s Vullinghs.
The higher interest rates, the lower investors value future earnings, and as a result, both valuations and the number of new deals took a hit this year.
In 2021, Australian startups raised more than $10 billion, while this year, as of October 31, around $6 billion has been invested, according to Cut Through Venture.
(Despite this drop in investment, the amount invested in October of this year, $490 million, still exceeded the total amount invested in 2016, which was $465 million.)
The founders are now dealing with the very real consequences of mega rounds that rose to high valuations in 2021 when cash was flowing freely and competition to close deals was fierce.
The tech sector has experienced a downturn with stocks (S&P/ASX All Tech Index) is down 31.7 percent year-to-date.
Investors are now advising portfolio companies to make their capital last longer, leading to industry-wide layoffs, reduced hiring rates and lower spending on things like marketing.
“We are encouraging companies to continue to build products and lean into growth, but focus on efficient growth, continually assessing spending efficiency, and keeping a close eye on forward-looking demand metrics to understand if customer demand is slowing. and then speed up. decisions to extend the runway if necessary,” says Vullinghs.
However, optimism among investors remains high, with venture capitalists pointing to the long-term nature of investing in startups.
To manage the current uncertainty, Crocker said Blackbird’s approach was to focus on the progress of its portfolio companies, not “the emotions of economists.”
“We’ll never be good at predicting the future, but we can be good at predicting which founders will progress on their vision, regardless of what comes their way.”