Sunday, August 15, 2010

Venture Capital Firms (Part I)

A venture capital firm is organized with the intent to invest capital into a portfolio of companies to eventually profit from the investment. Venture firms are all different sizes, and so are the funds that they raise. Part I will address what the fund is, and the employee structure of a venture capital firm.


The Fund

Venture capital will raise a fund to invest in select companies. The fund will be raised from institutional investors and sometimes private individuals. For example, let’s take a fictional firm called Venture Captain Partners. For our purposes, the firm will be involved in a multitude of industries. The firm will set a goal of $100 million in capital to raise for their fund. Usually, the fund will be given a title; in our case, we’ll call it Venture Fund I. Once the capital requirements are met, the fund will close and will be ready to invest in companies.

The fund is invested anywhere from 3-8 years into the companies before a return is actualized and profits are distributed back to the investors. Since the investors are limited partners in the fund, they do not have as many rights as the general partners of the firm. They usually will not be able to withdraw their money earlier than the time frame of the fund, and will not be able to make management decisions.


Employee Structure of the Firm

Firm structure can vary based on the scope and size of the firm. Large firms like Kleiner Perkins Caufield & Byers may have a tiered structure with multiple positions. Small firms may only have one or two analysts and be heavier on the partner side. The basic structure of the firm employees is shown below:

 
 
General Partner
General Partners are the owners of the firm, and many times the name of the firm will include their names. There are responsible for the direction of the firm, including what companies the firm will invest in. They will invest some of their own personal income into the fund. GPs also will sit on the boards of their portfolio companies and provide expertise to entrepreneurs running the companies. The GPs make the decision when to actualize their investment, either by selling the company privately or through an IPO. They charge a management fee that is around 20% which is carried over from the fund.

Salary: up to $600,000 plus bonuses and management fees which could be in the millions


Junior Partner
Junior Partners are very similar to general partners, except for the fact that they are paid less and do not have nearly as much decision making power regarding the portfolio companies.

Salary: $210,000-$270,000 plus a part of the carry or percentage of profits


Associate
Associates do more of the grunt work for the venture capital firm. Many of them will have an MBA degree, and some will have experience on the investment banking side of business. Associates will look over business plans before they go to the general partners of the firm. They will also contact businesses over the phone searching for investment opportunities, and may visit companies in the firm’s portfolio.

Salary: $180,000-$260,000 plus bonus


Analyst
This position is usually part of a larger or more established firm, and may not exist at the smaller firms. They are the entry level position in venture capital firms, and general consist of undergraduates. The positions are heavily research oriented, and will revolve around performing due diligence of companies and industries. Analysts in venture capital differ from their counterparts in traditional finance because they need good interpersonal skills to match their analytical skills. Analysts will stay 2-3 years at the firm before going on to business school or joining a portfolio company.

Salary: $100,000-$120,000 plus bonus


Salary information: http://www.glassdoor.com/

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