Do you have what it takes to be in the VC/Private Equity business?
I have been in the money and private equity business for around 30 years now; both as an investment banker, company operator/ CEO and venture capitalist and private equity investor.
I have seen and met the whole spectrum of people… From the super smart type to the dumb as a rock persona and all in between.
People constantly ask me what is it like to have experienced all sides of the fence and be at the heart of the private equity business, shaping its very core from the family office side… So I thought sharing with you those personal thoughts.
1. First off… You have an unending amount of email, phone calls, and requests for your time which is very hard to manage without coming off like a total asshole. It’s very difficult to find rational entrepreneurs who can execute, and the number of crazy and dumb ideas that you get pitched about is surreal. You also have all the normal challenges as a senior partner of running a business, hiring people, and dealing with problems that arise in an industry with very few rules and established best practices (there are plenty of established worst practices however)
2. You have to be able to convince a lot of professional investors to give you tens of millions; hundreds of millions or even billions of dollars. By definition, to do this, you must have prior success either as a private equity investor with a track record of performance or in operations in the industries in which you want to invest. I’ve read that for early-stage funds, successful entrepreneurs tend to be the better bet (irrespective of academic pedigree). For later stage funds, investment analysts, folks with Harvard/Stanford/Wharton MBAs tend to do better.
3. You have to identify deals for due diligence. Literally thousands of deals get thrown at you a year. You invest in maybe 5-10 . You have to separate the pointless from the potentially valuable very quickly because you cannot possibly devote much time to investigating fully thousands of deals. Of course the entrepreneurial community complains you don’t get their deals, you haven’t devoted enough time to understand their deals. You aren’t responsive enough, etc…, etc.
4. You perform due diligence on potentially investable deals. Let’s say to get 10 deals, you spend a significant amount of time on 25. You have to verify the product claims, technology claims, market claims, team claims, etc… and just generally get to know the deal.
5. You have to convince your partners that the deal is sound with big potential. You need to show them your due diligence and convince the partners why the Firm should invest in your deal, remembering that there are limited funds and those same partners want funds available to invest in their deals.
6. You have to determine the terms of the deal . . . prepare the term sheet. In doing this, you need to be cognizant of the fact that the entrepreneur will likely see the opportunity as worth more than you. The best deals get multiple offers so that you may be competing against a private equity group who can offer more substantive help to the company than you and may be able to put a lower valuation on the deal because that group has a higher value-add or a VC/private equity investor with less experience who may be overvaluing the deal.
7. You have to negotiate and manage the deal taking all of the foregoing into account. In fact, you need to serve on the Board of Directors of the Investee Company. To do this successfully, you’ll need to be an active participant, not just a casual outside observer who shows up at meetings. This involves mentoring a young entrepreneur and facilitating success of the company by, for example, assisting it in finding employees, strategic partners, customers and the like.
8. You have to also manage the inevitable conflicts between investor and entrepreneur. Keep in mind that entrepreneurs routinely and loudly criticize VCs and private equity investors alike for their alleged failures here.
· What happens when they fail to make plan, as most, I would say almost all do at some point in their development?
· Is it time for a shift direction or do you continue on the same path?
· What will be the impact on the company of terminating the founder?
10. You have to determine if a company is worth further investment. Most companies fail to adequately predict how much capital they will need to get to a certain point. The question is, does this failure mean that you are throwing good money after bad or does it mean that you need to cut your losses, stop supporting the company, and declare the investment a loss?
11. On the flip side, if the company is succeeding, you have to determine when is the right time for exit. Anecdotally, I think VCs tend to want to throw more money at their companies that are succeeding to build the valuation in the hopes of a home run rather than take a single or a double.
With that said, a few things I’ve noticed about the VC/private equity lifestyle that I’ve heard is mostly true for others as well, regardless of status or firm:
· Solitary: Unlike a startup, where you’re interacting with a team on a daily basis, you’re more on your own as a VC. You meet with companies, you run numbers, and you typically see your fellow partners at the weekly meeting or at social events. You don’t work with them dawn to dusk like you would your teammates at for example Google.
· Travel: There is a ton of travel in the private equity world. Higher-level VCs and firms with more autonomy have more control over their schedules, but you have board meetings and conferences to attend.
· Politics: You either have to deal with the internal politics of your firm, the outside politics of other investors, or most likely both. You can’t avoid it sometimes- even if you are the founding partner of a big firm or private family office.
· Egos: Some VCs/private equity masters of the universe types have egos that can’t seem to deflate. The best ones realize that the entrepreneurs are the stars, and that they are merely coaches on the sidelines…
· Coaching: A lot of a VCs /private equity investors time is spent coaching his or her companies. Bad ones get over-involved in the affairs of their portfolio companies. Great ones provide mentorship and advice when asked and help guide their entrepreneurs with insight and wisdom.
There’s a lot more to be said about being a founding partner at a VC/private equity firm, but to summarize: every partner is different, every firm is different -especially when it comes to family offices – and VC isn’t for everybody.
Share your thoughts.