Breaking Into Venture Capital: A Comprehensive Guide for Aspiring Investors

According to Professor Lee, before anyone starts to invest, it's important that they go in with their eyes wide open. That starts with knowing the difference between a venture capitalist and an angel investor.

A venture capitalist is an investor who provides funding and expertise for an ownership equity stake in new or fresh ventures. For example, when a general partner of a fund raises money from 100 limited partners (LPs) who each give $1 million dollars to invest, the GP is managing a $100 million fund and is making investment decisions on behalf of their LPs. Contrast that with angel investing, where it is individual angels that make their own investment decisions and invest their own capital.

Typically, that means that venture capital firms are going to be able to write larger checks as most investors don't have billions to invest the way VC firms like Andreessen Horowitz or Sequoia Capital would. It also means that angel investors have a little more latitude in what they invest in because they don't have a fiduciary responsibility to their investors.

Compensation is very different for venture capitalists and angel investors. VCs get paid off of fees and carry. You'll often hear "2 and 20." Two percent is the typical annual fee to manage a fund while 20 percent is the performance fee from the fund. If you're running a $100 million fund, you'll get paid 2% annually in fees plus you get to keep 20% of whatever money you make in carry. So if you turn $100 million into $200 million, meaning you make $100 million in gains, as the GP you get to keep $20 million and distribute $80 million to your LPs. The venture capital industry standard is "2 and 20."

Angel networks typically charge member dues. In New York City, these dues could be between $3,000 and $5,000 per year, but these figures would change depending on where the angel network is geographically located.

In the venture capital industry, there are standalone venture capital firms and corporate venture capital firms. The standalone venture capital firms are the ones most people have heard of, Bessemer Venture Partners, Kleiner Perkins, and Andreessen Horowitz. In 2022 corporate venture participated in about 20% of the venture deals. On the angel side, there are solo angels who are working independently and angel networks where a group of people comes together to share deal flow, due diligence, and think about what to invest in.

If you are thinking about putting money into this asset class, it's really important to think about how much control you want to have as there is a bit of a spectrum. An LP fund provides the least amount of control over your investments. You are trusting the GP to make your investment decisions. An angel fund provides a little more control. When a group of angels pool their resources together, typically there are some voting mechanisms for investors to have their voices heard. For example, ARC Angel Fund has around 70 investors putting in $50,000 each into a fund. They are making decisions as a collective on this $3.5 million fund. The investors have more control than they would as an LP in a traditional VC fund but less control than an individual angel investor.

An angel network provides more control than an angel fund. Most angel networks have deal curation from the team and then angels collectively diligence, but they get autonomy over what they invest in. The angel network founded by Professor Lee, 37 Angels, looks at approximately 2,500 companies per year and presents the 50 best to their angels. Their angels independently decide on the 10 or so they want to invest in per year. A solo angel allows for the most control. Professor Lee was a solo angel from 2008 to 2012. While she looked at several hundred deals a year, she only invested in one or two.

When it comes to startup investing, there's no right or wrong place to be on the spectrum. You do need to know how much control you want to have. An LP in a fund has a lot of diversification and a little bit of control. Whereas an angel has a lot of control but little diversification. There's a balancing act when it comes to risk. Many individuals join angel investing or venture capital because they're excited about the rewards, want to make a ton of money, and want to be a part of this really cool network. But, it's also important to discuss the risks when it comes to venture capital funds and investing.

A startup portfolio is a very risky asset class. The goal of early-stage investors is to triple their money in 10 years. That said, half of all VCs do not even return their LPs money. An investor can give a GP $1 million to invest, and 10 years later, they only return $700,000. It's important to know when you get into the venture capital world that half of all VCs are losing their LPs money. It's also not particularly liquid. From seed to exit is currently taking about eight years. As the check sizes are large, there is little diversification. You don't have a lot of legal control over what the company does, and it's emotional in a way that investing in the public markets is not.

Most people tend to think about their expertise first when picking an area to focus on. Professor Lee would also encourage thinking about what you're interested in and where your network is. To be a good investor, you must consume a lot of content, meet a lot of founders, and go to conferences. It will be very difficult in a few years if you're not interested in that topic. When choosing where to put your focus, pick an area that's interesting to you. Then think about where your network is. A lot of an investor's job is to add value post-investment. The more you are able to introduce startup founders to hires, other investors, or partners, the better.

There are many areas to think about when specializing. What stage do you want to invest in? Do you want to be a seed investor, a series B investor, or a series D investor? What sector do you want to invest in? For example, in the tech industry, there are many areas to invest including FinTech, EdTech, PropTech, and more. Is there a type of founder you want to focus on? There are a lot of funds focused on, for example, diversity and inclusion. Then, there's geography. Where is the company located, and where do you want to travel to? If you are thinking about going a little bit deeper into the venture capital space, it's important to start by developing a point of view.

What does it take to be a successful venture capitalist or angel investor? Professor Lee suggests the following:

1. Develop Your Investment Point of View

One of the key pain points for aspiring VCs and angel investors is deciding where to they should put their focus. By using strategic thinking and developing a well-thought-out point of view, investors can differentiate themselves from others and demonstrate their value to startups and co-investors.

This requires a deep understanding of the industry and the ability to identify emerging market trends and opportunities. Start by speaking with experienced professionals in the field, attending industry events, and subscribing to relevant reading resources. Professor Lee recommends several sources including venture capital books, PitchBook and CB Insights for their data insights, Halo Report as it specializes in angel investments, TechCrunch, and Bessemer Atlas to get Bessemer's perspectives on different industries. By immersing themselves in the world of venture capital, investors can start to develop a unique perspective and a more informed investment strategy.

2. Identify and Evaluate Quality Deal Flow

With thousands of startups vying for funding, it can be difficult to know which companies to invest in and how to find them.

To help overcome this challenge, it's important to build a strong network. By connecting with other investors, entrepreneurs, and industry professionals, aspiring investors can increase their access to promising startups and improve their ability to evaluate potential investments.

New investors should hone their due diligence skills by working with experienced mentors or participating in educational programs, such as Columbia Executive Education's Mastering Venture Capital Deals. This hands-on program provides participants with the opportunity to conduct diligence on real companies, negotiate term sheets, and understand valuation, ultimately equipping investors with the tools needed to identify potential investment opportunities and evaluate quality deal flow.

3. Avoid Common Investment Mistakes

As with any industry, there are common mistakes that can derail the success of aspiring venture capitalists and angel investors. Two critical errors include investing too early and relying too heavily on a company's progress when making investment decisions.

To avoid these pitfalls, new investors should take the time to evaluate a large number of pitches before making their first investment. By doing so, they can gain a better understanding of the startup landscape and refine their investment criteria.

Investors should also focus on other factors beyond a company's current progress, such as the founding team's customer empathy, organized hustle, and ability to be data-driven learners. These traits can be indicative of a startup's potential for success, making them valuable considerations when evaluating early-stage investments.

4. Education and Continuous Learning

To succeed in the fast-paced and competitive world of venture capital, continuous learning is essential. Aspiring investors must stay up-to-date on industry trends, best practices, and emerging technologies to make informed decisions and adapt their investment strategies accordingly.

Education is also key, both through formal programs like Mastering Venture Capital Deals and through informal learning opportunities such as networking events, mentorships, and industry publications. By investing in their own education, aspiring venture capitalists and angel investors can not only improve their skills and knowledge but also demonstrate their commitment to the financial capital industry and increase their credibility among startups and co-investors.

5. Build a Strong Personal Brand and Network

In the world of private equity and venture capital, your personal brand and network can make or break your success. Aspiring investors need to establish themselves as knowledgeable, trustworthy, and well-connected professionals to attract deal flow, raise money and secure co-investment opportunities.

New investors should focus on developing their personal brand by being active in industry events, publishing thought leadership content, and engaging with other professionals on social media platforms like LinkedIn. Investors need to be intentional in their networking efforts, seeking out connections with individuals who share similar interests and investment theses.

6. Embrace Diversity and Inclusion in Investment Decisions

Studies have shown that diverse founding teams are more likely to outperform their less diverse counterparts, portfolio companies and investors who prioritize diversity can benefit from this competitive advantage.

Professor Lee, who is also the founder of 37 Angels, an angel investing network focused on women investors, believes that investors should actively seek out and support underrepresented founders to foster innovation and drive better returns. By incorporating diversity and inclusion into their investment strategies, aspiring venture capitalists and angel investors can not only help close the funding gap for underrepresented entrepreneurs but also create a more equitable and prosperous startup ecosystem.

Launching a successful career in venture capital or angel investing requires a deep understanding of the industry, a strong network, and the ability to identify promising startups and investment opportunities. By participating in educational programs like the Mastering Venture Capital Deals program, aspiring investors can overcome common challenges, build a unique investment thesis, and ultimately find success in the world of venture capital corporate finance.