what's up everyone it's kenji here and in this video i thought i'd go over the venture capital industry so firstly we'll be looking at a definition of venture capital then we'll look at their structure and how they make money thirdly we'll go over their investing strategies and lastly we'll look at the career options in the industry looking at things like hiring process the skills required and so on so let's get into it and thank you to the daily upside a free business and finance newsletter for sponsoring this video so what is venture capital simply put
venture capital is money provided by investors to startups that have high growth potential in exchange that startup is going to give them a stake in their company so equity basically the vc then hopes that the site up will grow and with its stake is going to grow as well eventually they hope to be able to sell it for more in the future taking a more mac review when looking at the different asset classes venture capital falls into the alternative investments category which is the same bucket as private equity hedge funds real estate and a couple
other investments so it isn't really an area that normal people like you and i might invest in instead it's mainly for industry professionals in terms of the risk return trade-off it's definitely up there as some of the highest risk as well as the highest return that's typically the case for most alternative investments as well the majority of the startups that the vcs invest in actually end up failing but that's fine they're really only looking for one home run that's going to offset all of those losses so it's usually around 1 in 10 investments that really
becomes a winner so it's definitely high risk and high potential reward another reason that it's perceived as risky is because it's an illiquid investment so liquidity is a measure of how easily something can be converted into cash so here's the liquidity scale for you among the most liquid assets are stocks in big companies like say apple or amazon mainly because everyone is buying and selling them and so it's very easy to find a counterpart that's going to be happy with your price to buy or to sell on the other hand among the most eliquid assets
are real estate where it might take even multiple years for you to be able to buy or sell a house that's because there's many parties involved there's a lot of contracts regulations and so on so venture capital definitely falls onto the more eliquid side of the scale that's primarily because once you have your money invested in a venture capital fund they've invested in startups and so they can't really take the money out until that startup actually has performed because who would want to buy a startup that nobody really knows or isn't selling anything yet but
before we continue i want to talk about the daily upside their free business and finance newsletter with over 200 000 subscribers myself included when i signed up about half a year ago it was founded by a former investment banker who spent a decade on wall street every weekday they deliver a morning brief followed by more detailed stories that are shaping the business world it's about a five minute read giving a high level unbiased analysis with an occasional dose of width to keep things interesting recently i've been enjoying their weekend edition newsletter which goes deeper into
specific topics for example they previously did a deep dive on the very topic of this video where they had a very interesting piece on venture capital which covered the growth trends of both the startups and the vc backers they also include charts and other visuals to help understand the story as you can see from this chart over here both the investment amounts and the number of investments have continued to grow this past year so if you want to stay on top of the latest business and finance news check out the link down in the description
to sign up to the daily upside it's completely free and if you don't like it you can always unsubscribe all right let's now continue with the structure of vc funds and right in the middle you're going to have the venture capital fund and there's going to be two main types of contributors so two main types of people that are going to be putting money in there on the one hand it's a venture capital firm which is also known as the general partner and on the other hand it's going to be investors which are known as
limited partners these are usually institutional investors so things like insurance companies endowment funds and so on the large majority of the fund's money is going to come from the limited partners which are the institutional investors but a small portion of that is going to come from the general partners just to align their interests and make sure that they have skin in the game as well once the fund has all the money they're going to invest in different startups that's going to consist of their investment portfolio of the money invested investors are going to be expecting
around 25 to 35 percent annual returns by the end of their investment that being said they usually don't come across all of the different startups instead one startup is usually going to have the home run so say they have 400 returns while the other ones have close to zero and so that's going to give them that 25 to 35 balance in the end as for the compensation for the vc it's usually split into two main parts firstly you're going to have the management fee which is a fixed fee of around two to three percent of
the assets under management which are going to be paying for things like the operational expenses so the employee cost the office rent and so on now this part is guaranteed so regardless of whether the fund is up or if it's down one year they're still going to be paid that same amount on the other hand there's what's known as a performance fee which is dependent on the gains of the company so how well it's doing how well it's performing usually that's around 20 to 30 percent that goes to the venture capital firm while the remaining
70 or 80 goes to the investors but these performance returns are only realized when they exit the position so when they sell their investment and there's really three main ways that they can exit a position as a vc fund the first one has to do with an ipo which is probably the most glamorous process it's short for an initial public offering that's when you hear the iconic bell on the new york stock exchange state a recent example of it could be reviews ipo similar to that there is an acquisition by a bigger company in an
example perhaps not so recent now has to do with microsoft's acquisition of linkedin and the third option is a direct sale this means you can either sell it to another vc fund that's maybe at a later stage or similar to that you can actually sell it to the company itself so if you invest in a startup that startup can then later by your stake in the company let's now look at the investment strategies and within the venture capital space most funds specialize in particular timings so particular stages of a company particular industries as well as
geographies so let's look into them when it comes to timing these are the investment rounds so typically it's going to start with the precede or the seed stage and this is really when it's just an idea from there it's going to move on to a series a where they're hopefully starting to build a product after which there is the series b where let's say that they're having a lot of growth and maybe they're trying to make some revenue and from there their series is these e's etc and that's all going to culminate ideally in the
ipo which is when they sell their shares in the public markets and in these later funding rounds where the amounts are usually bigger it's not just vcs that are involved usually private equity funds and more specifically growth equity funds are involved in there as well so that's how it looks when it comes to the stages of a company but that's not the only focus some vcs also specialize in particular industries that said they are primarily tech based that's because they want scalable business models and tech sort of enables that but within tech there's actually many
different branches so it could be educational tech so edtech fintech for financial technology or it could also be biotech for biology and the last major filter is geography which to be honest is fairly self-explanatory but there are some big funds that don't necessarily have a particular focus for example if we look at sequoia's website over here which is one of the biggest funds out there they cover most regions in the world lastly looking at the career options in the industry and here's what the hierarchy looks like it goes from analyst associate principal and finally the
partners and these might be further split into junior and senior roles for example you could have a junior associate or a senior associate and even though the analyst role is the most junior level here it's usually not for people that are fresh out of college instead it's for people that have maybe two to three years of experience either working at a consultancy a bank a big tech company or even a fast growing startup as well it is possible to get him fresh out of college with no experience but that's definitely not the norm the associate
level is for people either pre-mba post mba depending on how much experience they have and for the partners this isn't really a quote-unquote conventional job mainly because they have money invested in the fund themselves and so you can't just quit any day because you feel like it it is quite common for these partners to be former entrepreneurs themselves as is the case of say reid hoffman who is a partner at greylock and was actually the co-founder of linkedin which then sold to microsoft like we saw earlier some vcs also have another role which doesn't really
tie into the hierarchy which is known as the entrepreneur in residence this is basically usually a former entrepreneur that's there consulting some of their companies and maybe even taking on an executive role at one of the startups as well in terms of the hours it obviously depends on the size of the fund as well as the number of deals that they're getting but a general rough guide is around the 60 hours per week mark which is better than the 80 hours that you might have on that investment bank or the 70 at a management consultancy
it's more or less on par with the 60 hours that you might find in big tech as well that said these work hours are sometimes blurred because it requires quite a lot of networking and other social activities that some people might consider work while others might not here's a breakdown by harvard business review on how they spend their time as you can see a large portion of their time is actually helping out startups consulting for them as well as helping them with their recruiting efforts when it comes to the skills required for a junior employee
it typically has to do with research where you're going to be trying to assess the latest industry trends and trying to find some of the more exciting startups similar to that is going to be networking where you'll hopefully be talking to some of the founders as well as other relevant people and then there's going to be business strategy trying to assess whether a particular startup's business model is going to be something that's going to be successful in the future and lastly although perhaps a bit more relaxed in a traditional finance role it is quite common
to be using spreadsheets on your day-to-day to try to analyze things looking at some additional resources for you if you're interested in learning more about the venture capital space here's a list of 10 of the biggest venture capital firms out there you might want to see if they have any job openings or try to understand their business models better also i'll leave a few articles in the description that i think could be useful for you if you want to learn about private equity check out this video over here if you want to learn about asset
management check out this other video over here that's all for this one hit the like hit that subscribe if you liked it and i'll catch you in the next one
