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What Do VCs Do?

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  1. INTRODUCTION

    How This Module Works
  2. How Much Do You Know About The VC Job?
  3. The Six Tasks of VCs
  4. The VC Cycle
  5. Quiz 1
    1 Quiz
  6. GENERATING DEAL FLOW
    What Is The Best Way To Generate Deal Flow?
  7. Generating VC Deal Flow
  8. Building A VC Referral Network
  9. Networking 101
  10. The Importance of Branding
  11. The Startup Ecosystem
  12. Service Professionals
  13. Warm Introductions
  14. Co-Investing
  15. Cold-Calling Startup Founders
  16. Making Angel Investments
  17. The Deal Flow Funnel
  18. Analyzing Pitch Decks
  19. Time Management Tips For VCs
  20. The Anti-Portfolio
  21. Quiz 2
    1 Quiz
  22. EVALUATING COMPANIES
    What Are The Critical Characteristics VCs Look For In Startups?
  23. Analyzing Startups For Venture Capital
  24. VC Firms' Investment Strategies
  25. What Is (Really) Scalability?
  26. The Product/Market Fit
  27. The Hard Truth About Network Effects
  28. The Idea Maze
  29. More On Due Diligence
  30. Breaking The Mental Model
  31. Being Primed For The Problem And The Idea
  32. Making The Investment Decision
  33. Quiz 3
    1 Quiz
  34. Case Study: Write The Investment Memo
  35. How Much Do You Know About Term Sheets?
  36. NEGOTIATING TERM SHEETS
    Negotiating Term Sheets
  37. Our Term Sheet Courses
  38. Quiz 4
    1 Quiz
  39. Portfolio Monitoring Survey
  40. PORTFOLIO MONITORING
    Adding Value
  41. What Kind of Value Do VCs Add?
  42. What Is The Background Of Top VCs WorldWide?
  43. Jack Welch's HR Practices
  44. The Reporting Pack
  45. How Much Time Should You Spend With Portfolio Companies?
  46. Quiz 5
    1 Quiz
  47. How Much Do You Know About Exits?
  48. LIQUIDATING INVESTMENTS
    Selling Startups
  49. Testing Founders' Exit Strategy
  50. The Most Common Exit For Startups
  51. Taking Money Off The Table
  52. About Startup IPOs
  53. How Long Does It Take to Exit?
  54. When Raising Too Much Money Makes Exits Difficult
  55. Helping Founders Exit: The M&A Cheat Sheet
  56. Quiz 6
  57. How Much Do You Know About VC Funds?
  58. RAISING VC FUNDS
    Raising VC Funds
  59. Investment Strategy: Which Round To Target?
  60. When VCs Pitch Investors
  61. How Do VCs Make Money?
  62. Case Study: Acrobator Ventures

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What Do VCs Do? The Six Tasks of VCs
Unit 3 of 62
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The Six Tasks of VCs

👉 Watch the video first.

We address, in this short introduction, the six steps of the VC Cycle we will detail in this module:

  • Generating deal flow
  • Evaluating startups
  • Negotiating term sheets
  • Monitoring portfolio companies
  • Liquidating positions (aka exits)
  • Raising new funds

Which of these steps did you know about? Which ones remain obscure (for now)?

💬 Let us know in the Comments section below.

👀 Sources & Additional Material

A bogus job description for a VC partner was recently published on Twitter. Below the mockery, you can find some actual examples of what VCs do. We reproduced the image posted in the tweet below.

  • Aram –
    Thank you kindly for the 6 steps of a VC job. I myself view VC in terms of 7 steps:

    Sourcing
    Due Diligence
    Valuation
    Partners Meeting (where a decision is made whether to invest or not)
    Deal Close
    Monitoring
    Exit

    What do you think of these 7 steps?

    All the best,
    Wayne

    • Thanks Zeyang for the question, it helps me precise things for everyone. They are not the same thing. In this context, “closing the deal” is the moment you invest in a startup. Liquidating the position is the moment you exit, i.e. sell your shares. (Note that the term “closing” can also be applied to the exit. Technically, it’s the moment money changes hands.)

  • Thanks a lot for the sharing.
    I have a question regarding to the reason of raising new fund: will the money liquidated from the step 5 will all be distributed to the current investors, thus it need to collect new fund to keep investing into new startups?
    Thanks!

    • Correct. VC funds (and most so-called closed-end funds in private equity) are typically structured that way. That being said, other firms have what are called “evergreen” structures, which keep reinvesting their exit proceeds in new deals. The LPs are generally family offices, corporates, or semi-public entities who are either looking for long-term returns, dividends, or strategic value (think of a regional state-owned fund that keeps reinvesting in local startups.)

  • I do believe that these 6 steps do sum it up. Perhaps something quite important that is underlying several of these stages is continuous networking, not only to assist in the deal-flow but also on monitoring the portfolio, to which a considerable amount of time is spent, and arrange for exits. Most VCs deals are exited before going public, typically to other investors.

    • Yes Andre, you’re right, the difficulty is that you’re doing all of these steps at the same time. Especially as a senior member of the team. As Benchmark’s Bill Gurley says: VC is a hustle game. You always have more to do.”

  • This was a really well-made video! I’m interested in learning more about liquidating positions and how term sheet negotiation works! I’m excited to deep dive into that in future lessons!

    • Thanks Andy. We cover this point in the Liquidating Investment section below. You will also learn from our live sessions & the VC Term Sheets online module about the misalignment of interest between Founders & VCs on that point.

  • For me it is less obvious that they have to keep a relationship with their portfolio companies, I realise that there is much more to VC then just finding great opportunities and making a return on them.

  • It seems that evaluating investments is becoming harder as VCs are flooded with investment suggestions since the overall number of new companies in need of capital is steeply increasing. Are there specific techniques that larger funds / successful funds have to “filter” the amount of incoming information?

    • It is definitely becoming a critical skill. There is an argument that the “best” (i.e., most successful in terms of performance) VC firms attract the “best” (i.e., most promising in terms of exit returns) startups. But even elite VC firms see a lot of deal flow. Some firms have tried to implement A.I.-based algorithms to sift through data. Two of my former HEC MIF students did a research on it, I’ll soon post a blog post about it.

  • I already have a general idea of this cycle but I’m curious about the evaluation step in practice. Evaluation for an early-stage startup can vary a lot given different assumptions. In real life, is the final offer from VC more likely to be based on evalution or negotiation?

  • VC funds invest at the early stages of the firms’ development. Hence, investors have to constantly forecast the future success of various ventures, based on very limited evidence/content. Steps 4 and 5 must then be quite disappointing for the managers, especially considering the investments globally low success rate.

  • VC term sheet is not a legal promise to invest. In some cases, TS may prevent potential targets from soliciting any other investors for a period of time. And there’s one thing I am curious about – are friends or business networks the most effective sources to generate deal flow in practice?

    • I’d like to hear others’ points of view on that question, but in my opinion, business networks are better on the whole. Friends usually don’t know what you’re really doing 🙂 That said, friends can bring valuable information on a Founder’s character.

  • During my internship in a VC firm, I was mainly involved in generating deal flow and evaluating startups, but the following process is quite far from my daily work, and I hope to hear these tasks more in our session.

  • The network effects and personal skills involved in finding good deals and good teams to invest in is something that I did not consider before but that is as important (if not more) as the financial analysis, especially given the huge amount of potential deal flow that has arisen lately in the market!

  • I’ve learned about valuation Startups and generating deal flows during my previous internship. But monitoring portfolio companies and liquidating positions are quite new to me, I would like to learn more by doing case studies in class.

  • Apparently, VCs invest in many firms, but only a few would turn out to be successful. So I’m pretty curious about the “monitoring the portfolio companies” stage. What would VC firms do in real practice if they feel things are not going in the direction they want after investing? Should they try to intervene in companies’ operations or simply liquidate and then walk away (since we often hear about saying goes like “intervention is not a good thing for startups”)?

  • I would also be interested how these tasks change with the position one has in a VC. For example, as VC Partner you would be concerned with raising funds, however, as an Analyst you will be more focused on evaluating companies and working on portfolio companies. It would be interesting to know what the “day-to-day” tasks for the different positions are.

  • Thanks a lot for introduction. Although I would love to get deeper understanding on all the tasks, I believe that in order to raise new funds, performance (directly dependent on the 1-5 tasks) of the existing fund is pivotal. I would like to understand those metrics as well.

  • Thank you for the overview. I was pretty much aware of all of the different tasks, but am particularly curious about Fundraising as this is rarely discussed in Business School literature.

  • As a follow-investor (), I am particularly curious about:
    Negotiating a term sheet that satisfies all stakeholders and doesn’t hinder growth at later stages
    Liquidating a position (red, black or green): why, when and how
    Raising funds and more broadly appealing to target LPs

  • All the steps are familiar to me, but what I found interesting was to discover that these steps may happen at the same time – a single firm may have more than one fund and each fund may be in a different stage.

  • Generating deal flow seems accessible to me. However, it seems much more obscure to me to negotiate the term sheets. Indeed, I do not know what it is possible to negotiate at the risk of losing the deal.

  • I think the most interesting part is learning how to correctly evaluate startups and their exits. Raising funds is something that can now be done through many channels and it is also quite attractive.

  • I am only partially familiar with each of these steps, and am most interested in learning more about monitoring the current portfolio companies in order to have them become successful.

  • While I did not know about these six steps in detail, I am particularly interested in the evaluating start ups step. Due diligence helps to observe any red flags, but I also believe that intuition plays a huge role in deciding whether a start-up will succeed. Would be interesting to know how much of the success of VCs is attributed to successful due diligence and to intuition.

  • I have a broad understanding of each of the six steps, but am ager to dive into each step in more detail – particularly negotiating term sheets as I am most unfamiliar with this step

  • Where is the grey line between generating deal flow and evaluating investment opportunities? I would always assume that why generating the deal flow, one is (subconsciently & parallely) already evaluating the potential investments

    • Good point. However, as explained in the module, you can generate deal flow by having a large following in social media, writing a post that invites Founders to send pitches, building a referral network, etc. The act of generating deal flow means you get a pitch deck in your mailbox (or DMs)

  • Which step of the VC cycle is the most important and requires the most time and effort from the fund and the entrepreneur? I can imagine that especially generating deal flow at some point is entirely automated (with having a great brand name), but evaluating startups gets more difficult the more famous the VC fund is. Happy to have some input on this one.

    • Good point. Time and effort are not the same things. Raising a VC fund definitely takes time (18-24 months for most firms) but it’s not constant. Same for exit processes, there are bursts of effort for a limited amount of time. I’d say the grind is in the evaluation of startups: reading pitch decks, meeting Founders, presenting the opportunities to the IC (preparing an IC deck is also a peak of work in the VC schedule). Happy to address it in class if you want.

  • I was familiar with most of these steps at a high level, but quite keen to understand more about the evaluation process for startups. Is it standardized? Is it ad hoc for every sector? For every company?

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