Author: Kelvin Tai
OXVC hosted Toyosi Ogedengbe, a seasoned venture capitalist to find out his tips on how best to break into a career in venture capital. Toyosi is a Said Business School MBA alumni and is an advisor to Creator Fund.
Intro to VC
Before interviewing for VCs, it’s important to know the landscape and what the focus of VCs is about and Toyosi started his sharing with an introduction.
VCs are focused on startups that must have the ability to be an outlier, simply because most startups are destined to fail and there must be startups that can compensate for both these losses and give the Limited Partners a high enough return on capital. Startups need to be scalable, of which software is the most prominent field due to its low capital intensity.
In the first half of the fund cycle:
1. Sourcing for funds
2. Finding and evaluating companies
3. Portfolio support (like consulting for startups).
Last half of the cycle:
1. Exiting deal through acquisition, secondary sale or IPO
2. Portfolio support
3. Raise new fund
VC positions are rare, simply because of the small number of employees in each firm.
VC positions are usually not advertised so you need to be on the minds of potential VCs before they start to think about hiring.
Toyosi recommends networking to find out about firms, trends and startups. Always remember that you should approach the networking as a way to simply build a relationship and not to gain anything out of it.
Try being helpful to VCs, possibly even recommending potential startups to them. Toyosi suggests engaging with societies like OXVC, the foundry and even professors at university. Once built, keep in touch with your network to maintain it.
Knowledge to be armed with before the interview
Pre-Interview Research on the VC Firm
VCs are divided by investment stages and focus categories: based on the investment stage and whether they are sector specific. These will require different skill sets so applicants should be very clear which type of VC they are keen on.
The earlier the stage, the higher the focus on soft-skills. In applying for seed stage VCs, the skillset will focus on due diligence around the founding team and market conditions. VCs in the later stage tend to have more focus on financial modelling skills. They will want to look at the product, model and existing competition of startups. Competition at this stage is especially important since it can be quite clear at this stage if the startup can be the market leader.
Some VCs also invest based on a thesis, so be aware of what underlying assumptions the VC maintains. Theses can include industry changes, societal changes or trends driven by technological advancement.
It might not be that helpful to a generalist to apply to a VC firm that is specific. If you are interested in a particular niche, you have to be prepared for the interviewer to drill in deep to test your knowledge. As such, only express interest in fields that you are genuinely confident in your knowledge of.
VC Case Studies
Toyosi ran the audience through a case study, where the audience could reason why a few example VCs are backable, especially based on trends and degree of scalability. While canned wines might not be that great, a fintech solution that has a full-suite of services would have a low churn rate and is hence more likely to be an outlier. Toyosi warns that as a venture capitalist, one needs to be careful in choosing a company and avoid unjustified optimism about startups that present themselves. Startups may seem promising but we need to choose startups that “knock it out of the park”.
The second case focused on a fictitious startup: Artissimo. This app allows users to invest in art works in small slivers, so ownership is divided between investors once a crowdfunding campaign reaches the required amount. The app is monetised through a commission on transactions.
In order to solve the case, the audience listed the pros and cons of taking the deal. Some factors considered were the founders’ profiles, as well as whether the supply of art would be sufficient to sustain the business. The most important step, however, is to figure out if the valuation the startup is asking for (1 million for 20%, giving it a value of $5 million postmoney) is appropriate.
1. Hypothesise how much they can sell by year 10 which could potentially be $100 million.
2. Translate this into revenue for the business, based on commission.
3. Using industry comparables, figure out a revenue multiple with which to derive the enterprise value
4. Based on the enterprise value, the 10 year return can be calculated and hence the annual return.
5. Whether the return is sufficient to warrant investment is contingent on factors such as the fund size, how realistic the assumptions are and the number of partners that will share in the profits
During the QnA, Toyosi noted that B2B businesses are usually favoured by VCs due to their resilience and fintech companies that service the B2B market are usually successful, raising examples such as Lili. In addition, Toyosi highlighted the opportunities to provide basic necessities, assess credit scores and facilitating the supply chain as middlemen within emerging markets such as Nigeria.
It was an incredibly fruitful session and highlights the importance of being aware about the philosophies of different firms as well as how one can position oneself for a career in venture capital.