Why would someone want to get into venture capital?

Because it’s the job at the epicenter of what drives our economy and innovation

That job has two sides:

  1. Help people with wealth invest it in entrepreneurs more capably than they likely can themselves.
  2. Help entrepreneurs with the advice they need and capital they might.

For some reason, VC is getting a bad rap in some circles lately. Largely I think, that’s because of people who shouldn’t be in the business. Because at the end of the day, VC might be worthy of being considered the most philanthropic work possible by way of capitalism.

People need capital.

Investing in startups and innovation is HIGHLY risky.

People with wealth tend to want to help with that wealth but they’re generally inexperienced or unfamiliar with how innovation and startups work.

Ergo… VC is the “philanthropic” work that enables all that.

Granted, it’s not actually philanthropy, we get that, I’m not saying that. What I’m encouraging everyone appreciate rather evidenced in economics: non-profits actually tend to suck at efficient and fiscally responsible social impact. They’re only slightly better than government in this regard. Capitalism has been shown to have the greatest impact on overall quality of life, ever.

And the VC is in the job of taking on the HIGH risk of helping wealth fuel innovation and entrepreneurship.

Now, be clear, they get paid for it, yes. But, not being good at it means a lot of capital is lost. Wealthy folks lose their money, and bad startups piss away the money.

So it’s a job highly dependent on being able to move this capital reasonably effectively. Or they lose the job.

So in a way, it’s economic philanthropy with accountability.

With the ‘philanthropy’ notion aside now, make no mistake, it is a for-profit job so let’s go there to wrap up the answer as to why someone would want that job.

The typical business model in venture capital is what’s referred to as 2/20. There are lots of different ways venture capital firms do and can work, I’m just elucidating the typical.

2/20 means that 2% of the funds they raise goes to pay their salaries (and other costs and team). 20% gets paid as bonus (sort of, it’s not really a bonus in the job sense of the word, I’m vastly oversimplifying things for the sake of a simple answer); that money comes out of successful investments’ exits.

So, say you raise and have a fund of only $100MM. You’d get $2MM per year, from that money, for salaries and such. And that fund would typically last 5–10 years. Not a bad gig, eh? Granted, you have to be pretty good at raising that money, dealing with investors, and then figuring out where to invest it.

Overwhelmingly most startups fail so most of what you determine will probably mean lost capital. You have to find the couple/few that make up for the losses AND deliver more capital back to investors!

Do that, and the 20% is part of what you earn out too. Stink at it, and you’ll be looking for other work.

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