If you are considering VC and have the opportunity to work at a fund, here is my TL;DR advice about how to design your first few months: 1) identify what parts of the role you want to test / explore and be very transparent / intentional about these areas 2) keep a journal of your learnings including what you enjoy doing and don’t.
I’ve had the opportunity to get a glimpse inside the world of venture capital at Owl Ventures. Owl Ventures is an edtech and talent fund that has raised over $600 million assets under management. Based in San Francisco, they recently raised their third fund and have invested in segments of talent / education ranging across HR tech, higher education, corporate learning, K-12, early childhood, and more.
Before starting, I had several learning goals. At a high level, I wanted to learn:
- Industry – How VC firms work and are structured, how VC firms work with founders and one another, and how funds of different sizes operate
- Skills – Practice using financial modeling skills to perform due diligence, learn how to ask questions to quickly hone in on the crucial diligence area for a given startup, approaches to modeling market size, creating cap tables, etc.
- Role – Test out whether I enjoyed investing or if I should go back to operating and learn how investors gain conviction in an investment opportunity
Before I joined, Owl’s team asked me what I wanted to get out of the role. I told them my learning goals and that there were a few specific tasks I hoped to do including performing deep due diligence on a range of investment stages, reviewing termsheets, seeing a “transaction” go through – whether investing or selling, and sitting in on a board meeting of a portfolio company.
Of course I told Owl I was happy to do anything I was asked, but emphasized wanting to focus on due diligence rather than other areas of the VC role such as sourcing and portfolio operations work. I felt those were two areas where my prior experience as a startup executive and operator had served me better, while I lacked experience about evaluating an investment. For me, identifying elements of investing I enjoyed was important since I already knew I enjoyed operating.
Within a few months, I had worked on 3 large project areas:
- Diligence – I did deep diligence on 4 companies – ranging Series A through C
- Portfolio Operations – I worked closely with two of Owl’s portfolio company CEOs
- Internal Work – Owl produces an Impact Report for their Limited Partners each year which I worked on
My first day on the job I was told to prepare a preliminary diligence presentation as we’d be flying to LA in two days to meet a company. I also went to 3 meetings with an Owl partner on my first day. Several of the meetings were for potential investment opportunities and others were meetings with CEOs of their portfolio companies. That frenetic pace was kept up for the next few months.
It ended up being a terrific experience given how the entire team at Owl Ventures involved me so deeply in their work. I’m incredibly grateful to them for this collaborative environment and being attentive to my learning goals (which were all achieved!).
I’ll leave you with my key learnings which I journaled early on. As expected, most of them were skill-, role-, and industry-based, some of which might sound quite obvious in hindsight. I hope you gain something from this and best of luck breaking into VC!
My Key Learnings Starting in VC
Investment Process & Evaluation
- The purpose of the diligence process is to gan conviction about an investment. Key in the diligence process is unearthing the critical assumptions the investor will have to check
- Importance of sales efficiency metrics in evaluating Series A and later stage companies
- Love of product and love of investment opportunity are not always the same
- Churn and renewal rates are metrics commonly misunderstood by founders at Series A & earlier
- TAMs (Total Addressable Market calculations) are part science, part art, and just as often believable as not
- There are two rounds of negotiating with the founders once an investor decide to do a deal – one round of negotiations are around the termsheet and another round occurs once it’s time to sign financing documents
- Importance of a large personal network for diligence, board roles, and winning deals
- People are more likely to divulge information on the phone – effective diligence on a niche market can require a lot of phone and in-person time
- Deep due diligence takes a lot of time in part because drumming up outreach to large number of people, scheduling calls, taking notes, and synthesizing learnings from data takes time
- At board meetings, some portions are limited to board members only and board observers may be asked to step out – frequently portions approving exec / employee comp. Board members are sent materials to review by management ahead of the meeting / call
- Common board load (maximum number of board seats) is typically ~10-12 board seats per investor. This ranges fund to fund
- How to deliver valuation remarks to founders; how and what to negotiate in term sheets vs. future financing docs
Building a VC Firm
- Considerations in raising a large funds v. keeping each fund smaller – Smaller funds have less management fee dollars which some say keeps the team more focused. Larger funds argue they have more capital to invest and bigger funds force them to look for bigger returns
- Reporting fund performance and how to craft a narrative around the fund in its early days
- Merits and considerations of establishing a collaborative vs. agency partnership model – Agency models require less internal management time and consensus building. Investors have more autonomy and conflicting perspectives can exist within the same firm. Partnership models where everyone has to agree on investing in a deal are time consuming and potentially more difficult to get across the line but also ensure everyone is committed and aligned to the investment
- Initially funds tend to have more LPs in the early years of their fund. They may have scores and scores LPs. Over time, if the fund is successful, this will likely consolidate down into a smaller number of LPs which is easier to manage.
- Relationships with bankers and third party observers – what to share and when
- Etiquette of setting expectations with entrepreneurs and when to halt conversations