Alexa Binns here, nice to meet you. I started working in venture capital (VC) about five years ago. But I didn’t start there! I began my investor journey making personal investments as an angel and limited partner. What’s a limited partner you say? I’m so glad you asked!
I’m often asked to chat with impressive women interested in getting into venture capital. I’d encourage any gals to become startup investors. There are the full time roles in venture: partner, VP, principal, associate, analyst, etc. There are also a handful of part-time roles worth considering if you’re looking to break into this field or do some investing while keeping your day job.
This blog post is intended to give a quick overview of 5 ways you can build your VC muscle, whether or not you have the time or cash to invest, and determine if this is a career path for you!
You’re likely familiar with angel investing. Angels invest their personal capital directly into early stage startups. Similar to buying stock in a public company on Wall Street, you can buy equity in a private startup in Silicon Valley.
As of 2012, anyone with any level of income and/or net worth can be an angel investor. As an angel, you should be prepared to invest in 40+ companies to bag one unicorn however. AngelList data shows on average angels with 50 startup investments see an IRR of 10%, where 10 investments delivers just 6% IRR, and 1-5 delivers 0% IRR. Don’t say I didn’t warn you!
The most successful angels invest in industries in which they have deep expertise. Or they invest in founders who are well networked with top VCs. Because angels are the first checks into startups, it’s key that the companies they back are able to raise more capital down the road.
Making angel investments, you’ll practice quite a few VC skills: sourcing companies worth backing, building the confidence to put money to work, supporting founders on their business, and tracking the progress of your investments.
Limited Partners (LPs) are the folks that invest in venture capital funds. At smaller VC firms, LPs are often individuals like us. Big VC firms like Sequoia have family offices, university endowments and pension funds as their LPs.
To be an investor in any size VC fund, you have to be an accredited investor. To qualify you need to make over $200k per year ($300k per year for married couples) or have a net worth of over $1M, excluding the value of a primary residence.
As an LP, the VC fund is your defacto stable of startups — like a private ETF or Index Fund. The VC will take ~3 years to identify 30+ companies to back. The portfolio companies will start out looking more or less the same as one another, and over the years, some burn out, some trot along, and a few grow Unicorn wings.
Getting allocation in the most promising startups is competitive. If you do not have access to founders who are raising hot rounds, you can invest in a VC fund who has these relationships.
Investing as a Limited Partner you’ll get valuable perspective for working in VC: learning how to select one manager over another, receiving quarterly portfolio reports, and gaining first-hand understanding of the economics of a fund.
Venture Partners are part-time affiliates of venture capital firms. Your value-add as a Venture Partner really depends on your skillset: fundraising partners help raise capital for the fund, sourcing partners identify great deals in their network, industry experts do diligence on potential deals in their vertical, and operating partners provide portfolio support on HR, growth, sales, etc.
Venture Partners are often not on payroll. They work for carry – which means that until/unless the fund is successful, they work for free. In many cases, Venture Partners have actually put money into the fund and are providing expertise in addition to their capital.
These roles are pretty informal. All relationship based. If you’re friendly with a VC fund that has a gap in the team’s skillset you can help fill, suggest they bring you on as a Venture Partner. Be prepared to scope what the role and time commitment looks like.
Working as a Venture Partner is a great way to prove your value to a fund, get some real-world experience in venture, and determine if you actually like doing the work.
Scouts source deals for VC funds. They are the startup hunters and gatherers.
Some funds have formal Scout programs. Scouts may be given a lump sum to invest at their discretion. Or some funds are more informal, offering carry to scouts on the deals that the scout brought to the fund. Worth noting, scouts also primarily work for carry, so there’s no salary.
VC funds look for scouts who are plugged into industries or networks where they otherwise wouldn’t have inside access – for example, web3 communities or alumni networks. Your value add as a scout is your unique deal flow.
As a Scout, you’ll practice a few VC skills besides just finding deals, like selling founders on why they should take capital from your fund and building a case for why the fund should be interested in your startup.
Special Purpose Vehicle
Last thing worth mentioning is a Special Purpose Vehicle (SPV).
An SPV is a special entity created to hold equity in a specific company, almost like a VC fund of 1 company. LP capital is pooled together in an SPV so the founder of the startup doesn’t have to manage lots of small checks. SPVs are a way for smaller investors to get a piece of companies they otherwise might not be able to get access to.
You can invest in an SPV. Similar to an angel investment, for an SPV investment, you’re picking the specific company you want to back. But similar to a fund investment, you are investing in a separate entity, not the company itself. Most SPVs will require you to be an accredited investor.
Or, if you’re really looking to flex your venture capital muscles, you can raise an SPV! This would entail finding a startup you’re very bullish on, getting the founder to give you allocation in their funding round, setting up the special purpose vehicle, and then raising the capital from your network to fill the allotment.
Running an SPV is great training ground for running a fund; it requires all the major elements of working in venture from sourcing to fundraising.
People looking to launch their own VC fund will often start by first building a track record. You can do this as an angel investor with your own capital, as a scout or venture partner with a fund behind you, or by raising 20+ SPVs from other LPs.
And the time horizons in venture are long. Investing in early stage private companies your capital can be locked up for 7-10 years while you hope for an acquisition or IPO. It can easily take a decade before you see any returns on your investment.
All the more reasons to consider how you can start dipping your toe into venture.
Hope this helps get the wheels turning for your VC career. I’m excited to work with more women investors, whatever path you choose.