Career guide: Going from operator to investor
Best practices from investors at Menlo Ventures, Index Ventures and more
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The next play career guide is our attempt to find you the best possible answers to your questions. We did that by asking some of the most talented people we know — people like Deedy Das, Lauryn Isford, Rex Woodbury, Tyler Hogge and 30+ others — for their help in providing thoughtful responses.
Quick disclaimer before diving in: you should read the below as ideas and perhaps some suggestions but NOT prescriptive advice. There’s more than one way to live your life, and so our only advice is that you should think for yourself (if you want 🙂).
“I want to start investing in startups but I do not have the money to do so personally (clearly a bit of a problem!). What should I do? Should I try to join a big fund or do you have any other recommendations?”
“I have been working in tech for the past seven years and I have always wanted to be an investor. What do you wish you knew before transitioning from operator to investor? How would you recommend someone make the switch? What has been surprising (good and bad)?”
Investing in startups frankly sounds like a pretty fun proposition. You get to support founders and companies as they pursue ambitious ideas - meanwhile you get an inside look into how startups work. What’s the catch? Well it’s not a catch but there is one thing you need in order to invest in startups: money. Probably lots of money; you cannot (or rather should not) invest a large percentage of your net worth into risky startups.
And so you, like many others, decide that the best way to invest in startups is to invest other people’s money. So you go get a job at a venture capital fund. Or at least you try to. Because when you get to the door, they start by asking you: “what qualifications do you have for the role? what relevant experience do you have?” And thus you are caught in a tricky situation - what should you do if you have no investing experience (and not enough capital needed to go out and be an investor)?
How do you start investing? What should your first step be if you want to become “someone” who invests in startups?
While it’s tempting, the first step has probably nothing to do with the actual mechanics of investing. The first step is about you and your own motivations. How honest are you being with yourself about the driving factors behind your WHY…Why do you want to invest in companies?
First, be clear why you want to invest in startups - is it for clout, is it for a future career, education or do you think you'll get rich? Let's be clear - you are VERY rarely going to get rich by being an angel investor. History and fund returns will show you the same. I started angel investing mostly as an alternative to an MBA so I can learn from multiple companies at the same time vs. just focusing on one. You can start investing with as little as $1k. My first few checks were very small and that's ok. You should only join a fund WHEN you know you want to invest full-time. Like product management, investing is a glorified role.
Getting really honest with yourself can be a humbling experience. But your future self will thank you.
When I first got interested in exploring the idea of being an investor, I spoke to legendary Sequoia investor Alfred Lin. He kept asking me "why do you want to be an investor?" and to be honest, I didn't have a very good idea why at the time. Towards the end he said, "this job is far more glamorous on the outside than it is on the inside."
Now, a year in, I know what he meant. Prior to being in venture, I thought the job was basically a mini version of Shark Tank. Founders will pitch me, and I'll figure out when to say yes. In reality, that's not exactly how it works. It's not a "job" in the true sense of the world. You are a supplier of a commodity asset, capital (and there are many) and you have to match that capital to the few companies that will give you outsized returns (100x+).
This is a 24/7 job if you want to be elite. If a founder is raising on Sunday, you are working on Sunday. And guess what? There's always a founder raising on Sunday. Your phone, email, Linkedin, and every single other channel will be bombarded.
At it's core, early on in your career, you do not have access to "deal flow" — awareness of who is raising when. It's a very inefficient market. Finding deal flow often means "sourcing" — spending a lot of time writing outbound emails. The best Founders do not respond. You have to find a way in. It's sales.
There are too many VCs and way too few good opportunities. The job is not to "do deals". It's do return capital to LPs who have invested in this asset class over the S&P500 and paid a management fee premium. Every other Partner with a couple of semi-hits leaves their firm to start their own $200-500M fund. Most people (including me) who are VCs today will not be in the future if you do not have hits.
In a competitive market, you have to ask — why would an elite founder take money from me over any of the esteemed investors already out there? Going to Stanford / Harvard or working at BigTech or even a hot startup doesn't cut it. It means nothing to them. You're competing with people who founded those startups.
In this industry, you have maybe 4-6 "shots on goal" or investments you can make (of course this varies on firm / stage). If none of those land, in 2-3 years, you are now a VC with a poor track record and not qualified really to do anything else.
And that's not even the whole job! I talked about finding and winning a deal, but you also have to convince your partnership this deal is the next big thing and support the company to ensure it can be. A VC does five things: Sourcing, Picking, Selling, Winning, Supporting, and optionally Raising, Managing if you're more senior.
Recommendation
All of that is to say — for most people, you think you want this job but you don't. The reason it's so hard to break in is because most people have no value to add. I never wanted to be in venture but I was very fortunate to be on the founding team of Glean, which has so far been a huge success, and had several other skills that aligned well with the role. Most people shouldn't want this job. I'd recommend most people to start and exit a company for $100M+ or be a part of a founding team of a startup worth $1B+ before they consider this. For traditional finance backgrounds, venture is getting harder and harder.
Many people also try to build their angel investing portfolios to show they can do this job. It's a worthwhile tactic if you can be a scout for a venture firm, but I don't recommend it because you probably do not have the economics to do this in a way that makes financial sense. Others try to break in by sourcing live deals for VC firms on the side. I did some light casual venture investing, but my own value to firms was (a) a lot of the learnings and work I did at Glean (b) large online / offline network and passion for tech (c) some small angel investments (d) founders who vouched for me in my ability to help them (e) broad technical knowledge.
I don't think breaking in to this job is worth it for most people (but do your research). If you think you're a fit, only work for a tier 1 multi-stage fund if possible.
What's good and bad
The good: it's a privileged job where you still essentially give people money and get to talk to smart founders building in a wide range of industries. It's a glorified networking and sales job, not really "work". It allows you to be extremely curious and everything you read is ostensibly "for work". You also get to go a lot of events and feel fancy going to free coffees and dinners, but this does get old fast.
The bad: You have to always be on 24/7. Most hot deals are priced senselessly. Losing a deal is heartbreaking. Saying no to good founders sucks. Most people will not last in this career for very long and have no real skills after. — Deedy Das, investor at Menlo Ventures
At the end of your analysis, it’s probably likely that you decide it actually does not make sense to pursue a career in startup investing. Or perhaps at least not right now (this is the case for most people).
For those who want to make the switch, I would say that it's a very hard time to get into venture because the industry is going to contract significantly, and already is, and maybe worth waiting that contraction out 🙂. — Tyler Hogge, investor at Pelion Venture Partners
But maybe…maybe after lots of thinking you decide you want to really go for it. You have clarity around your motivations and you feel like startup investing is the right opportunity for you.
What then?
Well you probably will not just come out of the gates slinging money around and seeing lottery-like returns.
In fact, startup investing has a very different cadence that traditional operating.
Being an operator and being an investor are very different things; being good at the first does not guarantee success at the latter. When you shift into investing, recognize that it will take a long time to master the craft. Many new VCs rush to make an investment. This is a job that's about substance and quality over quantity. It's easy to mistake activity for action; few things matter in a VC career. It's about a few right decisions a year or even in a career. Be patient and find your niche. Take as many founder meetings as you can in your first year or two to train your "algorithm" for what makes a great entrepreneur. - Rex Woodbury, investor at Daybreak
It takes you some time to find your rhythm as an investor - it’s not the sort of thing that comes immediately.