What is Venture Capital and How to Break into the Industry

1. Introduction

In prior blogs we have talked about how to raise money from VCs and what it takes for a startup to put themselves in front of the big sharks and ask for money. Now, we will focus about what happens at the other side of the table, and what to do if you are actually trying to break into the industry.

We will start with a basic understanding of what is Venture Capital and how the sector works, followed by how to prepare to break into the industry! So, let's get started 🚀

2. What is Venture Capital?

So, before we dive any deeper, we need to understand what is venture capital. Venture Capital is a type of private financing to early stage companies that have high growth potential. Given VCs enter at a very early stage, they assume a very high risk, reason why they also expect a very high return. Many current large companies actually have raised from VC. For example, according to Crunchbase, Uber has raised over $13Bn across 20+ financing rounds, even though the earlier ones were considerably smaller!

Venture Capital isn't a concept that has always existed. According to Investopedia, Harvard Business School professor Georges Doriot is generally considered the "Father of Venture Capital." He started the American Research and Development Corporation in 1946 and raised a $3.58 million fund to invest in companies that commercialized technologies developed during World War II.

3. How Venture Capital Works 🚀

Venture Capital (VC) firms invest money into promising startups and early-stage companies in exchange for equity, hoping to achieve substantial returns. Here's a friendly breakdown of how VC actually works:

Funding Stages 🎯

VC funding typically occurs in rounds, each marked by distinct goals and amounts:

• Seed Round 🌱: The initial capital provided to help startups validate their idea, build a prototype, or begin market testing.
• Series A 📈: Focuses on scaling the business model, product-market fit, and expanding operations.
• Series B 🚀: Funds growth, expansion to new markets, and building strong operational capabilities.
• Series C and Beyond 🌐: Often larger investments aimed at market domination, international expansion, acquisitions, or preparation for going public (IPO).

Expected Returns (IRR) 📊

VC firms typically expect Internal Rate of Return (IRR) ranging between 20-30% annually. This high expectation is due to the inherent risk involved in early-stage investing. Normally a VC will not expect all companies to yield such return, but rather by investing in many different companies they expect to one of them compensate for the loss made in the other investments.

So getting a positive return from all investments is not the norm! VCs expect that many of their investments will fail, but that one or few will actually skyrocket and yield such a return (10x, or 100x even) that it will generate the average return expected for the entire portfolio.

Number of Investments 💼

Based on the above, most VC funds build portfolios of around 20-40 companies, aiming to diversify risks and increase the probability of securing a few significant "winners."

How Do VCs Get Paid? 💰

"Carry," short for "carried interest," is the primary way venture capital employees share in the fund's profits. It serves as a powerful incentive aligning VC professionals' interests with the performance of their investments.

What is Carry? 📈

Carried interest is typically around 20% of the fund's profits, distributed among the firm's partners and investment professionals once the initial capital and expenses have been returned to the investors (also known as "Limited Partners").

How is Carry Distributed? 🔄

• First, investors receive their initial investment plus a pre-agreed "hurdle rate" (often around 7-8%) to ensure a basic return.
• Any additional profits are then split, usually 80% going back to investors and 20% divided as carry among VC employees.

Vesting and Timing ⏳

Carry is often subject to vesting schedules, typically spanning 5-10 years, ensuring team members stay committed and involved throughout the lifecycle of investments.

4. How to Break into Venture Capital

Joshua from Local Data Exchange shared with us that Venture capital success requires careful analysis of startups because understanding the market dynamics helps in identifying the right investments. Thus, informed choices lead to capturing promising opportunities efficiently.

Based on this, it is already clear that analytical roles are highly demanded and required in the space. Being someone that is attentive to detail, with numerical intelligence and a financial background will always add up to build a great profile. Moreover, VCs also love profiles that have had some experience in startups from the sectors they cover, as that means you already know the ins and outs.

If you then want to break into venture capital, you need to ensure that you focus on your analytical and financial skills and, if you miss any of them, ensure you get the proper training or join additional masters / programs to complete your profile.

"Venture capital is a competitive space, and breaking into it requires a mix of core skills and the right background. From my experience, key skills include strong financial analysis, market research, and the ability to spot promising startups with high growth potential. Understanding emerging technologies or market trends is also crucial." (Charnell from Pearl Lemon Accountants)

4.1. Skills and Qualifications Needed

To succeed in venture capital, a balanced skill set comprising both hard and soft skills is essential. "It's important to maintain a dual focus on both quantitative metrics and the ability to build strong relationships" (Greg from Dundas Life).

Hard Skills 📊

• Financial Modeling: Expertise in building financial models to evaluate investment opportunities and forecast performance.
• Industry Analysis: Ability to analyze market trends, competitive dynamics, and growth potential of different sectors.

Soft Skills 🤝

• Networking: Building strong connections and maintaining relationships with entrepreneurs, investors, and industry experts.
• Interpersonal Skills: Effective communication and the ability to influence stakeholders positively.
• Negotiation: Navigating deals effectively to reach agreements that benefit both the fund and portfolio companies.

📖 Further reading: : Venture Capital Skills: Essential Qualities for Success

4.2. Typical Career Paths in Venture Capital

Breaking into venture capital can follow several pathways, from traditional routes starting at entry-level positions to lateral moves from related industries.

Traditional VC Career Path 🪜

The most common progression within venture capital firms is:

• Analyst → Associate → Principal → Partner

Starting as an analyst or associate is common for early career professionals. Over time, successful investors climb to senior roles, managing investments and leading the firm's strategy.

Lateral Entry 🔀

Many successful VCs enter the industry laterally, typically from:

• Entrepreneurship: Founders who've successfully exited their businesses.
• Banking and Private Equity: Finance professionals with solid transaction experience.
• Consulting: Experts skilled in market analysis and strategy.
• Technology: Tech executives who have scaled companies significantly.

According to Tanjil from Nevada Paycheck Calculator, "For me, it’s about doing, not just studying — results beat resumes!" Profiles such as those of exited founders, finance experts, and tech professionals can often enter VC at higher levels. However, many others start at the bottom and grow through experience.

Typical Educational Backgrounds 🎓

• Business Administration (MBA): An MBA from a top business school is often considered advantageous.
• Finance and Economics Degrees: Strong quantitative skills and financial literacy are highly valued.
• Engineering or Technology Degrees: Particularly relevant for tech-oriented venture funds.
• Science Degrees: Valuable in biotech or health-tech-focused VCs.

4.3. How to Get your First Venture Capital Interview

Getting that first interview may be hard and requires building a good network:

• Leverage your professional network and alumni connections
• Participate actively in startup events, workshops, and industry conferences
• Consider internships or volunteering at startup accelerators and VC firms

4.4. How to Prepare for a Venture Capital Interview

Study, study, study. Beyond ensuring you are up to date with finance, investing, returns, and so on, do not show up without knowing the firm top to bottom!

Step-by-Step Interview Preparation 📋

1. Research the firm’s portfolio companies and recent investments
2. Understand current trends and challenges in the VC industry
3. Practice financial modeling, valuation, and analytical case studies

Common Interview Questions ❓

• Why are you interested in venture capital?
• Can you discuss a startup you believe is a great investment and why?
• How do you assess the viability of a business model?
• Describe a situation where you successfully negotiated a deal.

📖 Further reading: VC Interview Questions and Answers - Mergers & Inquisitions

5. Conclusion

Venture capital is an exciting, impactful industry that combines financial expertise with deep strategic and interpersonal skills. Whether you enter through traditional routes or lateral moves, success comes down to a balance of analytical acumen, strong relationship-building abilities, and practical experience. To learn more or connect with like-minded individuals, join VC-related communities, attend networking events, and always continue learning.