What is Venture Capital? Industry Overview & Career Options - YouTube

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