Whether you’re fresh from college graduation or looking for a career change in mid-life, one thing is true: starting out as an investor is daunting, especially for those interested in venture capitalism.
Even for investors who have established themselves, investing as a career never becomes “easy.” It’s a job imbued with risk no matter how many years you’ve been in practice. While you may improve at distinguishing between outright bad deals and potentially good ones, there is no such thing as a “sure thing” in VC investment. As a result, aspiring VCs often struggle to find their footing in the industry.
There is also plenty of bad advice given to new VC investors. These investment myths are perpetuated in online articles meant to earn as many clicks as possible. Three of the most problematic VC investment myths on the internet are explored below.
Myth #1: You need to have your own capital to start a career in VC.
The truth is it’s much easier to become a successful venture capitalist if you have the money to establish your own fund. However, you don’t necessarily need your own capital to traverse this career path.
In the simplest terms, a VC connects young startups in need of financial support with third-party funds. You can generalize novice VCs into two main categories—those from experienced investment banking backgrounds, and those who are savvy entrepreneurs.
A successful investment banker with the financial means to establish his or her own venture fund is great. However, a person from an entrepreneurial background is going to have something to offer as a venture capitalist beyond money. Past experience as an entrepreneur may give someone the ability to provide a more accurate evaluation of factors like the startup’s value proposition and market opportunity. This is a useful talent that may help identify good prospects in their early stages.
Entrepreneurial experience, patience, and a commitment to due diligence can aid novice VCs in introducing established funds to great investment opportunities. Enough successful introductions can put a talented venture capitalist on the radar of existing firms.
These early deals may not earn a new professional any more than a consulting fee (or more likely nothing at all). However, it’s important to note the impact of getting to know people already in venture capital and who work within the startup sector. Without one’s own capital, it is going to take work to earn an invitation to join a VC firm. These opportunities are most often offered to people who have made positive connections by proving themselves to recognize good opportunities.
VC is a small, highly competitive sector, made even more difficult without the funds to start one’s own fund, but the people who ultimately succeed in the industry aren’t intimidated by the odds and do whatever it takes to make it happen for themselves.
Myth #2: You need an MBA to be successful in Venture Capital.
Outdated data from 2011 collected by the National Venture Capital Association suggested then that somewhere around 50 percent of VCs held an MBA. More recent data presented by Investopedia in 2018 (with source uncited) suggests the same percentage of professionals in this field hold an MBA today. Data from Crunchbase shows that around 57 percent of VC investment partners have a master’s degree at minimum. Ultimately, however, these statistics don’t mean much—and an MBA is not critical to a career in VC.
People often look at MBAs as a stepping stone to VC. They believe that the degree will help them develop the technical ability they need to analyze value in startups. Additionally, they feel it will look good on a resume. In reality, an MBA is an expensive and time-consuming investment. Additionally, because the industry is so competitive, an MBA will not guarantee anyone a position at a VC firm after graduation.
So, what improves the odds of landing a position with a VC fund, particularly for those without an MBA? Community involvement improves the odds. This entails involving oneself deeply in the entrepreneurial community in creative ways.
Involvement can come from working for an online tech publication or from joining a fledgling startup as a member of the sales team, and then showing up to every possible meeting. Becoming deeply involved in the startup community and working hard to establish a respectable social profile is much more likely to get a person noticed than an MBA ever could.
Myth #3: VC is a great field for professionals looking to strike it rich.
This myth is at least half false. Many people whose ambition is to become a VC dream of outsized returns—finding the next unicorn and making 20 times their original investment. In reality, this kind of major profit doesn’t come around often. In point of fact, a small minority of top-performing funds are able to achieve the returns of twice the amount of invested capital.
This is considered to be a “venture rate of return,” and even then, most of those returns come over a period of years, not months. According to a 2013 article from the Harvard Business Review, VC funds as a group have failed to outperform the country’s public markets to any significant degree for more than 20 years.
The bottom line: if you’re interested in becoming a venture capitalist because you want to make millions of dollars quickly, VC probably isn’t the field for you. This is especially true for new, inexperienced investors with modest sums of capital at their disposal.
VC is a long-term investment that may not show any returns for many years after you first become involved with a deal. In the beginning, you may not see much return at all, and any time you’re in the market to secure a deal, you’ll be looking for signs of the next unicorn.
This isn’t to say that some people in VC don’t amass a fortune. However, that comes down to several key factors: patience, commitment, and luck. More than anything, though, VC investment is for professionals who are energized by the whole process. This means people who are happy to find strong, early-stage companies with great products and see where the hard work needs to be done. You may strike it rich along the way, but VC is actually ideal for those who are inspired by a challenge and who want maintain an active role in taking a product from great to amazing.