enture capital is a notoriously tough industry to break into. Some even say you’ve got a better chance of becoming a professional baseball player. While that might not be exactly true, it does underscore an important truth—Venture, like baseball, is a very competitive industry, and that means if you want to break in, you’ve got to practice, practice, practice.
Compounding these difficulties is the fact that the Venture Capital industry is the combination of people from all sorts of personal and professional backgrounds. There is no standard, college major, or specific prior work experience that anyone can point to as a significant factor in contributing to success in the industry. This, in turn, makes the VC interview process a challenging one for which to prepare.
At GoingVC, we believe that the Venture Capital industry benefits with this type of diversity and transparency. Part of making that a reality comes from ensuring aspiring VCs have access to the necessary resources to begin careers within the industry. To help with that mission, we collaborated with our global network of venture capitalists, mentors, and advisors to develop this VC Interview Guide.
How Should You Prepare?
We’ll start by using common exercises and tools to help you prepare for practicing and developing answers to the most common VC interview questions. The key to creating a framework for preparing for interviews is to ensure you are prepared to answer questions that cover each of the below elements:
Who: Who are you, and are you a good fit for the role and the firm?
What: What makes you qualified for the role? What evidence can you provide to support that?
Where: Where have you succeeded and struggled, and what did you learn from those experiences?
Why: Why this role at this firm, and why in the past did you make the choices you did?
How: How will you contribute to the firm?
Excelling in an interview, however, extends beyond merely answering the questions and includes persuading the interviewer to agree with you. Through out this guide, our goal is to help you do just that, in addition to highlighting insights from our community on what to expect.
There are three main entry points into the venture capital industry: early career, post-MBA, and at the senior/partner level. Our scope within this guide is for those seeking early-career and post-MBA roles. We find that these roles are the most commonly available and where a general framework can be applied.
The STAR-(L/P) Framework
One way of answering behavioral questions like ‘tell me about a time when…’ is the STAR-(L/P) Framework.
Situation - what was the event or challenge?
Task - what were you responsible for?
Action - what steps did you take, or how did you solve the problem? • Result - what was the outcome of the event/problem?
Learning/Planning - what did you learn from the situation, or how planning on exploring it further?
Example
Here’s an example of how you can use this framework to answer the question, “Tell me about a time when you failed?”
“As the founder of ABC Tech three years ago, I was struggling to figure out why our beta users were not receptive to the product. I needed to figure out if this was a product problem, a market problem, or something else, so I just started calling and emailing each person and offering to buy them coffee if they’d meet with me for 15 mins to chat about our product. Eventually, we learned that many of our potential customers who worked for larger companies had similar solutions already in place and weren’t looking for another tool for their tool belt - what they were looking for was a way to connect all the tools. At that point, we had already sunk in so much money into the product, pivoting to something entirely different was an insurmountable challenge, and despite our best efforts, we failed. From this, however, I learned how critical it is up front to incorporate user feedback as early as possible to determine if the product is a “nice to have” or a “need to have” and how that might dictate the development and market - which we clearly got wrong.”
Leading With Your Story
All great VCs are excellent storytellers.
I want to be a VC.
Therefore, ___________.
Did you ever study for a test using the brute force method? You scoured the internet and looked for every question you could find before spending hours writing out the answers to each one?
It may have worked for a college exam with a narrow scope, but when it comes to preparing for a venture interview, it’s not an approach we at GoingVC would recommend. Instead, spend your time perfecting your story and getting ready for the questions you’re most likely to be asked.
Great VCs are not coincidentally excellent storytellers. VCs need to be able to weave together lots of information, distill data, and put together a coherent story for partners to digest quickly. Whether you’re a startup founder, a VC, or interviewing to be one, being able to concisely share your story is critical to your success and an important skill to develop and demonstrate.
The good news is that it only takes a couple of hours to improve your answer dramatically. And the great news is that a compelling story can help navigate the interview in a direction that serves you best.
Tell Me About Yourself
“Tell me a bit about yourself”, “Walk me through your resume”, and “I’d love to hear more about your journey” — you can expect most VC interviews to start with some variation of these.
Your goal is to tell a compelling story with an upward career arc. One that has not only prepared you but makes you the ideal for the role. It should be mostly professional, but adding a few personal flourishes can make you appear genuine and add color.
Below we discuss three ways you can build answers to these questions. The first starts with collecting everything you can think of and then picking out the most relevant parts of your past, present, and future (goals). The other two take the opposite approach, starting with brevity and expanding from there. It’s up to you to determine what you think works best for your background.
Start With Abundance
While in the actual interview, you’ll want to keep your answers reasonably brief, a couple minutes or less, it’s often easier to start with abundance and refine afterwards. If you’re going to give this approach a try, start by writing out anything you think might be relevant in the following three categories:
1. Past - What did you study? Where did you grow up? How did you develop an interest in venture capital? Was there a specific person or event that sparked it? How did your interests grow over time? How did you develop the skills needed for this particular role?
2. Present - What do you do now? How do you spend your time? What skills has it helped you develop? If you have any recent big-wins or achievements, be sure to include them.
3. Future - What are your goals for the future? What do you want to do, and how will this specific role help you get there?
Now, armed with all this information, you’re ready to refine it into a compelling career narrative. Pick-out the salient points and think about how you can link them together in an upward arc. Try as much as you can to personalize it for the specific firm/role.
Starting Small
If you find yourself struggling to pick-out what’s necessary and what’s relevant, it might be helpful to take the opposite approach and start small. In To Sell is Human (2012), Daniel H. Pink introduced a couple of great strategies for developing a concise pitch that we like at GoingVC—the one-word and the subject line pitch.
The One Word Pitch
If you had to distill your story to one word, what would it be? While we don’t recommend actually using a one-word answer, starting with one can help you cut through the noise and stand out in a crowded field of candidates. “Nowadays, only brutally simple ideas get through.” - Maurice Saatchi, co founder of advertising agency Saatchi & Saatchi
Question: How would you describe your work experience?
Answer: Challenging
(From here expand on what your one-word means to you. Perhaps you always sought out challenging roles, experienced failure early on, you had to learn from, etc. Use it as a foundation upon which to build your story.)
The Subject-Line Pitch
An alternative approach to starting small is the subject-line pitch, an answer with the length and feel of an email subject line. Great subject lines both convey to the reader roughly what to expect but also leave them wondering exactly what’s inside.
Question: How would you describe your work experience?
Answer: Here’s a few things I learned from building a company and watching it completely fail.
(Here you lead with an intriguing introduction and follow up with the story and how it relates to your past work experience).
Putting It All Together
This is where the fun begins; it’s time to take everything you’ve collected and start putting it all together. As mentioned previously, don’t forget to address the who, what, why, and how, where necessary. When thinking about an event, ask yourself:
1. What happened?
2. Who was involved?
3. Why did it happen?
4. How did it help prepare you for what you did next?
Below we borrow and adapt from several of the basic business storytelling frameworks introduced by Esther Choy in Let the Story Do the Work (2017) to the VC interviewing process.
Creating an Origin Story (Your Background)
I grew up in [city]. Went to [school name] to study [major] because [reason]. [business/career] started when [interesting challenge, opportunity, or connection between two previously unrelated ideas]. Because [I/we] realized [how you decided this idea was big enough to be a business/that opportunity to fit your vocation]. This idea grabbed [me/us] because [how the idea combined with your own internal drive/came at just the right time]. With the help of [people or resources], [company’s initial launch/stabilizing your career]. At first, [problems]. But then, [solutions]. Today, _____ no longer ______ [what has changed since point of origin]. But the same [vision that guided you initially] now [how that vision continues to shape your company/career today].
I grew up in Seattle. I went to UCLA for undergrad and studied engineering physics because I was always really interested in how the universe worked. My engineering career started when I got the opportunity to intern at RocketCo. I realized that the only way to figure out how the universe worked was to get out and explore it so I joined RocketCo. I learned a lot at RocketCo, and had a great manager there. It was actually through his championing that one of my side-projects, the LightDrive. ended up getting productized. We had a lot of problems at first with the guidance system, but we were able to work grind away and figure it out. Today, I am a product manager, not a rocket engineer. I might not be trying to explore space anymore, but that same to figure out how big systems, like the universe, work is still with me.
The Quest (Why and How You Got Here) I want _____. I want [it/to-do it] because [your backstory. Introduce the main characters and set the hook]. To get it, I [action]. However, something got in my way: [your journey of overcoming obstacles and challenges to get what you want]. At the time, I was thinking that [the assumption you had or the worldviews you held at the beginning of your journey]. The turning point came when [a breakthrough moment when you realized you had to change your assumptions]. When that happened, I realized [the main learning point for you in this story]. After that, I [what you did as a result of that realization]. What I also realize now is that [reasons your story is relevant to your audience].
I want to work in the Venture Capital industry. I want to because throughout my career I’ve been interested in emerging technologies and solving problems, especially in the consumer technology industry. To make that happen, I’ve spent the past three years developing a small angel portfolio by investing in startups through non-accredited investor platforms. However, something got in my way: I didn’t have the resources necessary to make this a full-time job. At the time, I was thinking that investing in startups could be done without the network available to firms such as yours. The turning point came when I met Andrea through a networking event hosted by a company I’ve been researching. After that, I spent time reading everything I could about your company and getting coffee with some Associates to better understand what exactly you’re looking for in this role. What I also realize now is that the skills I’ve developed in my past roles have direct application to the Venture Industry. Pro Tip: Why are stories crucial for interviews? As Carmine Gallo, in ‘Talk Like TED’ (2014), notes, “Bryan Stevenson, the speaker who earned the longest standing ovation in TED history, spent 65 percent of his presentation telling stories. Brain scans reveal that stories stimulate and engage the human brain, help the speaker connect with the audience and make it much more likely that the audience will agree with the speaker’s point of view.
Introducing Data
Want to take your story to the next-level? Introduce some data.
The Venture Capital business also hinges on the collection and use of lots of different types of information. What about when you need to incorporate data within your story? Data can help make key insights from your story stand out and provide concreteness to the examples you provide, especially when questions specifically ask for outcomes of specific actions. Data storytelling, according to Choy, “Helps you keep your audience and purpose in mind to communicate data in a way that will address the audience’s deepest cognitive needs.”
Key to delivering a data-driven story is structured logic and sticking to the relevant facts. To create an effective, data-driven story, the following steps are needed, per Choy:
1. Practice Empathy: Put yourself in the audience’s shoes
2. Prove and Persuade: Know when to do which
3. Words Over Numbers: Emphasize words to ensure retention of key numbers
4. Create Meaning: Identify and emphasize the “so what”
5. Give Them What They Want, Tell Them What They Need: Focus on what your audience needs to hear
Practice Empathy
It’s critical, even when presenting a data-driven story, to remember and be empathetic towards your audience. Doing so will ensure that non-data-driven people still understand your message and story. Keeping your audience first and foremost, and selecting data points you believe will be most fulfilling to them will help you both effectively make your point and make it more easily recallable by your audience.
Prove and Persuade
Most interviewers will ask you to prove any points or assertions you make, basically presenting the data you have to support them. But some will go farther and need to be persuaded. Be prepared to go beyond reciting facts and figures, by understanding what they mean—the ‘what’ and the ‘why so that you can convince them to believe what you believe.
Words Over Numbers
“Carmine, when primitive man ran into a tiger, he did not ask, ‘How many teeth does the tiger have?’ He asked, ‘Will it eat me?’” - Carmine Gallo, Talk Like Ted (2014)
Surely this has to be backward, right? We’ve been talking about the importance of numbers, but the key to telling a data-driven story is learning how to emphasize the right words to convey what the data means - and use the data to support that story. Facts, stats, and data are meaningless without context (and boring when simply rattled off), so being able to effectively describe the data and it’s importance helps your audience grasp and remember what you’re saying. It’s also important to start with the big picture before diving into the details. Beginning by connecting with something familiar and high level helps set the scene for a deeper dive.
Create Meaning
Extending the prior point, focus on the ‘why’ aspect of your data. Why does the data matter to the findings, to the audience? Spend more time trying to understand the why rather than the what and how. Why should they care about what you’re telling them? Why is it relevant to your role? Their firm? Now? Pro Tip: Back to Gallo, who says the human brain loves novelty. Teaching people something new creates something unexpected and can jolt people from a status quo bias or preconceived notions.
Give Them What They Want, Tell Them What They Need It’s important to ensure you’re grabbing and delivering the most salient and value-add points to your story when talking about the data. If your data doesn’t exactly support what the questioner is asking, start by giving them what they want - but lead into your case by setting up a counter-argument that is backed up with a compelling data story. This strategic pivot, supported by well-researched data, can prove you have information and knowledge that may be in addition to those required in the role, a real benefit for the company.
Congrats! You’ve successfully put together a framework to answer questions through storytelling. You now have a concise, compelling narrative that connects where you started with where you are today and how it prepares you to work in venture capital.
The Interview
Background & Behavioral Questions
What should you expect during a VC interview? At a minimum, expect questions regarding you and your background, the firm, the role (deal flow sourcing, due diligence and screening, terms and valuations, portfolio management, and LP support), and requesting for supporting examples and case studies.
Given the most likely starting point is an opportunity for the firm to get to know you a bit, that is where we’ll start.
Above we built a framework for answering what will most likely be the first question you are asked in an interview. Background & behavioral questions will also show-up in almost any interview. Just like with your career story, your answers should show fit, an upward career trajectory and explain why you are perfect for the role.
Why do you want to work in venture capital? Why right now?
What excites you about VC? Getting to work with a variety of startups? Playing a role in bringing new companies into the world? Tie your answer back to your career arc and why now is the time.
How you can discuss your ability to integrate information and make decisions when it comes to identifying promising opportunities gets at the heart of what VCs do. What in that process most excites you?
It’s also important to understand the Venture industry. If the firm has a blog, be sure to read it to understand their perspective and generate questions for the firm (or have answers to questions they’ve posed within their content).
Where do you want to be in five-years?
Junior VC roles typically come with finite lengths. What do you plan to do next? Stay in venture? Work at a startup? Get your MBA? You’re not committing to anything here, but you should give some thought to it.
In the event the role is a pre-MBA associate, the exit opportunity is rather obvious. In the event it’s still unclear, try to instead focus on what you intend to do for the firm in your time there and offer suggestions on where that may lead you (into entrepreneurship, into an MBA, up the ladder).
What are some of your biggest strengths and most significant challenges?
Strengths—it’s time to wave the flag here, where do you think you excel? VC roles are multidisciplinary, so there’s a lot that’s potentially relevant, but try and relate it to the job.
Challenges—no one is perfect, including VCs. Be genuine, don’t pretend your career has been easy up to this point. Get specific about why the challenges you faced were challenging. Wrap it up from a positive angle by talking about what you’ve learned or how you’ve grown. If you’ve had experience at a startup that’s failed, leverage what lessons you learned. What about investments you’ve made (if even on paper) that didn’t turn out as you had expected?
Ever grinded out an 80-hour workweek? If nothing else, talking about small failures and how you overcame them. Demonstrate resilience and an ability to adapt and learn - critical skills for VCs, an industry shaped all too often by failure.
Why VC and not a startup or launch your own company? Think about what makes Venture different than working within a portfolio company. The broader exposures, ability to work with multiple teams and across different industries, to name a few. What excites you about how VCs interact with companies?
Tell us something we don’t know from your resume? VC firms are often composed of small teams. Therefore, being able to relate to, work with, and grow as a team are important. Stepping aside from your professional experience to better inform your potential teammates of who they will be working with can be fun and rewarding - so be honest and be yourself (and have a story prepared!).
Investment Questions
Investment & market-related questions are another group of questions commonly found in venture capital interviews. It’s critical that you can think through and develop your own investment or market opinions. Be ready to explain and defend your reasoning.
What’s your favorite startup(s) right now?
Come prepared with two or three different answers, dig deep and try and find something beyond the big names. Bonus points if you can articulate why you believe others are undervaluing the company or its growth trajectory.
Be sure to cover each of these areas: A company description including the problem and company solution, team overview, traction, competitors and why the company fits into the firms’ strategy (stage, geography, industry, etc.) and your personal interest (personal experience with industry or problem, use of the product, etc.)
What sectors are attractive to you?
Similar to the above. Be able to articulate what excites you about the industry and why you think it’ll continue to grow in the future rapidly. Be ready to talk about a few promising companies as examples.
While it may be tempting to spend time researching a dozen exciting-sounding companies, better yet is to spend that time researching one or two companies extensively (i.e. depth over breadth). Even better is to develop a full investment thesis and actually get the founders on the phone to ask them questions as if you are a potential investor. Can’t do that? At a minimum ensure you’ve used the product, signed up as a beta tester or dialed into any calls or product demos. As always, ensure the company is relevant to the firms’ comfort area - no sense pitching an idea they would immediately pass on for screening reasons.
What’s a company or market you think is overvalued? Break out your inner contrarian and develop an argument that goes against the widespread consensus. Find potential red-flags in their approach and explain why you think the market might be smaller or grow slower than most believe.
Be sure to back this up with data - use valuations, industry data, or the like to persuade the interviewer you’re not just reiterating something you read on the web. Be able to make a convincing argument citing industry trends, historical examples of peers, or first-hand experience.
What do you expect your day to day to look like in this role?
The best option here is to have done your homework. If you can offer to get coffee with any Associates (past or current) at the firm (or a similar one) to ask about the daily operations, that would be best. Other than that, reading the blog and subscribing to their newsletter or following on social should provide clues. Do they talk about their process? Insights into recent fundings? Have they visited conferences? Surmising what a day in the life might look like from what those across the firm appear to be doing are good guesses.
How would you perform due diligence on a company you like?
While developing a sound due diligence process and being able to speak to it is critical here, it’s also important to tailor that to the firm. Know what sectors, industries, technologies, geographies, and stages they invest in. Is there a commonality in traction within their portfolio companies? How about team traits? What seems to be the most important factor(s)?
How would you source companies?
VCs are known for having extensive networks and relying on them to find credible deals. How would your network work as a source of deal flow? Beyond your network, consider the blogs and articles you follow. What unique ways would you source deals on your own? Would you consider building a tool or starting your own newsletter? Would you lend a hand if you have relevant skills to promising entrepreneurs to build relationships?
The most interesting exit of the year?
Here is where signing up for VC newsletters and following blogs helps. Tuning into sites like Techcrunch, Hacker News, Crunchbase, and CBInsights reveal lots of information on deals and exits.
Consider choosing a company you know and have followed for some time and talk about how you have seen their company progress.
What’re your top questions in the first meeting with a founder?
Consider thinking of one company in which you would invest your life savings. What questions would you ask the founders of that company? Be sure to run through the typical screening questions like the problem and the solution, market size, and fit but also be sure to ask about the team - how did they meet, what are their backgrounds? What are the competitive advantages they intend to capture as they build their company moat? You will typically have some background information on the firm before the meeting, whether that be through seeing a pitch deck or general research. Thus, you want to dig deep, ask hard questions, and quickly pinpoint the key opportunities and risks in the deal. Essentially, what is most important for you before handing over your money?
What VC resources do you read?
There are plenty of incredible thought leaders in the industry, many of whom are covered in lists like this (especially Andrew Chen, Benedict Evans, StrictlyVC, and Stratechery, to name a few). Outside of that, The Secrets of Sand Hill Road by Scott Kupor and Breaking into VC by Bradley Miles are great VC books.
Try to read up on a bunch of different genres and topics. Recommended favorites are Crossing the Chasm (Moore), Invisible Influence (Berger), Atomic Habits (Clear), Platform Revolution (Choudary), The Culture Code (Coyle), Machine, Platform, Crowd (McAfee), and How To Create A Mind (Kurzweil).
Those should give anyone Amazon recommendations for years on all relevant topics from better work habits to the future of AI.
Another absolute classic is Venture Deals by Brad Feld and Jason Mendelson and if you’re looking for something with more of an academic spin, check out The Business of Venture Capital by Mahendra Ramsinghani. If you like history, Creative Capital by Spencer Ante is also a great read and gives a compelling
background on the development of the industry. I’m also a really big fan of Shane Parrish at Farnam Street, especially his book series on Mental Models and Tom Seides podcast Capital Allocators if you want some insight into the LP perspective.
Firm-Specific Questions
Researching the firm you’re interviewing is an essential part of the interview prep process. Read up on their culture, values, and investment strategy. Be sure to come prepared with some specific questions for the interviewer as well.
Why our firm? How are we different from our competitors? What attracts you to this particular firm? The types of companies or sectors they invest in? Their culture or structure? Something about their reputation? There’s no right or wrong answer here.
Which of our portolio companies are you most excited about?
Pick a couple of their portfolio companies (ideally in a sector you’re excited and knowledgeable about) and prepare and develop an opinion on the company. What differentiates it? Who are its competitors? How fast is its market growing? How quickly are people adopting its technology? What are some potential roadblocks? Have you used the product or service? What do you think? How do you know the company (if beyond their website!).
Which of our portolio companies would you have passed on?
Similar to the above, but again develop a contrarian opinion. Are there potential scenarios where you think the company or market will grow slower than expected? One way to answer this question is to use a product or service that left you unimpressed but to also include suggestions on what to change (are they targeting the wrong market? Poor marketing or brand? Technology not intuitive?). Alternatively, developing a thesis on an industry that is negative and finding companies within that industry work (but of course, explain why).
Here are a couple examples of how you may go about answering these questions:
“I probably would have passed on BigCityTech because their target market was real estate brokers. My thoughts would have been that the increasing number of homebuyers looking online, combined with giant property aggregators pushing commissions down, would have been a huge barrier to strong rapid growth.
What I would have failed to see though was how the company was creating an entirely new business model around home selling with significant benefits to both buyers & sellers. I’d love to learn more about their go-to-market strategy and how they approached creating and scaling the business now that I can see the huge problem they’re working on.”
The other way to answer this question is to point out a successful investment to date that you would have passed on due to different criteria:
“One portfolio company I likely would have passed on is ABC Tech. While this has clearly been a success, at the time you made the investment, I did not see the market as being large enough to support institutional investment. However, with their ability to incorporate ancillary businesses as customers, it’s increased their market potential exponentially and given me a new way to think about estimating total addressable market size.”
Past Experience Questions
The interviewer may want to dive-in to some of your past roles and experience. If you have venture or investment experience, they might ask you to walk them through a deal and explain why you would/wouldn’t have gone through with it.
During your time in your previous role, what were you responsible for?
Broad questions like this often lead interviewees to providing long, out-of context answers. In answering these types of questions, stick to what is most relevant to the new role and if possible, pick just one or two examples if they ask and explain them in more detail (as opposed to listing a bunch with little context). Here’s an example for someone with an operations background:
“Most of my day to day was focused on operational processes and reporting, but what I think is most relevant is my time spent developing and documenting best use practices for our CRM. I learned quite a bit about managing the sales process, creating and organizing tasks and roles, and all things that I believe any VC managing dealflow could benefit from. We measured success by common metrics such as subscriber rates and churn but also created some firm-specific stats around our target audience and quarterly goals.”
What did you like / not like about it?
Be honest - but not too honest! For dislikes, stay away from topics regarding people (like your manager) and focus on the challenges your company faced or how your previous role(s) didn’t necessarily leverage your skills and interest.
Always keep your answers relevant to your next role (so things that won’t be important to your job as a VC associate won’t matter in an interview either). These things can be the size of your current company, the culture, roadblocks to growth and development, or area of focus. On the positive side, what made you passionate about your work? Keep in mind that a good interviewer who hears you say lots of positive things about your current role is likely to ask why you’re leaving - so be sure you have answers to both of those questions.
Technical Questions & Case Studies
Technical questions and case studies are less common in venture capital interviews. Make sure you’re rock solid on the first parts of the article before moving on to preparing for technical questions. Especially if you’re short on time. Below are links to some of the best examples of case study type research within the VC community:
1. Equity vs. convertible notes? What are the trade-offs?
2. What are some key metrics and ratios?
3. How would you value a pre-revenue startup?
4. What is a cap table? Can you build one?
5. What would you look for when evaluating a company?
Finance Questions
VCs need to have a clear grasp on the Finance, Accounting, and Economic terms when it comes to valuation and deal terms. Venture Capital interviews will often include tests of knowledge in this area
How many shares outstanding of a company exist if the equity value is $10,000 and the share price is $50?
200 Shares Outstanding ($10,000 / $50)
How do you calculate Enterprise Value if given Equity Value, Debt, and Cash?
Enterprise Value = Equity - Cash + Debt
Why do we subtract cash when calculating Enterprise Value?
If we do not deduct the cash on hand, we would be double-counting it when using a cash purchase, so it is considered a discount to the purchase price.
What is a DCF model and when would it be appropriate for valuation?
A DCF model uses the estimated future cash flows (not earnings) of a company, including a terminal value to capture the long term estimated growth, and “discounts” those cash flows to today’s present value, summing to the value of the entity. DCF models are best used for more mature companies that have relatively predictable cash flows in the intermediate future and/or operating in new markets (with few comparables).
What are comparables, and when would it be appropriate to use for valuation?
Comparables are public or private market companies that are similar to the subject company (and have a valuation). VCs can use comparables to estimate a value based on the perceived differences and make adjustments for those differences to derive a value. This methodology is best used for pre cash flow companies or those that are operating in existing markets.
What are multiples and how are they used in valuation? Multiples are calculated as the value divided by a financial metrics such as sales, EBITDA, or other. Multiples can be used to find the value of a company given an industry average and the company financial metrics and should be used for companies at similar stages or within the same industry.
What’s the difference between pre-money and post-money valuation?
Pre-money excludes the dollar amount of capital to be invested in the company. Post-money valuation simply includes the new invested capital.
What other methods exist for valuation besides comparables, multiples, and DCF?
There exist many well known, including implied valuation, the VC method, the Berkus method, and various Step Up methods.
If a company had a $500K post-money valuation and you invested $250k, how much of the company do you own?
50% given the valuation uses post-money.
What about if the $500k were pre-money?
About 33%, as the new valuation would be 500 + 250 / 750, and I would own 250/750 = 33%
What are the most common startup business models and how do they monetize their product?
The most common business models for startups are subscription-based (SaaS), commissions/fees, Freemium or Tiered, and advertising.
Subscriptions are used for companies offering software or service platforms that benefit from the recurring nature of revenues, making them projectable and potentially more scalable. On the flip side, however, there is a substantial amount of pre-revenue work and preliminary costs incurred before these platforms can be sold, creating lots of initial risk.
Companies that earn more traditional commissions or fees such as marketplaces or broker-based businesses (real estate buying and selling, eBay, Fintech) rely on generating transaction volume to generate revenues and therefore must be scalable and rely on network effects, which are challenging to develop.
Freemium options work well for subscription type businesses as well as service businesses in that they allow companies to acquire initial users more easily to test ideas and develop products, but conversely face challenges in converting those users to paying customers, which often happens after initial investments and time in product development are completed - but if done well (with, for example, a compelling ‘hook’ or ability to create stickiness), results in efficient scalability because the net cost of acquiring customers declines as they convert to higher pricing tiers.
Lastly, companies that rely on advertising revenues have straightforward business models that, similar to commission-based models, rely on generating traffic and volume. However, they can be slow to get started and rely on the strength of the brand, which takes time and money to develop.
Why do VCs measure performance using IRR instead of return percentage?
IRR adequately demonstrates an investor’s experience incorporating the time aspect, given VC investments are illiquid, are called at different times, and are earned over the life of the fund (typically 8-10 years). IRR makes the returns comparable to other asset classes. IRR also accounts for the fact that returns can be realized over different time periods (i.e. small returns quickly or large returns over longer periods) to compare between.
How are VC returns measured outside of IRR? In addition to IRR, which measures the return given a time period and investment amount, Total Value Paid-In (TVPI) and Distributions to Paid-In (DPI) paint a more complete picture of returns.
TVPI measures the value of the fund’s unrealized investments (i.e. those not yet captured) plus the value of all the funds’ distributions thus far divided by the capital paid in by investors (i.e. the current value of what’s invested and paid out as a multiple of capital invested).
DPI is the value of all distributions paid to investors divided by the capital paid in by investors (i.e. the actual earned and returned capital relative to what has been invested). Both these ratios give a sense of the returns actually earned thus far and the value of the remaining invested (and therefore yet to be realized) capital.
VC Economics
What is the relationship between option pools and valuation?
Option pools reduce the pre-money valuation, as the amount of outstanding options (usually 10-20% of valuation) is deducted from the pre-money valuation. To offset this, VCs and founders can negotiate the pre-money valuation so that it accounts for the option pool or add it to the post-money valuation.
What is the difference between an option and a warrant?
Warrants and stock options are similar, but warrants tend to be used for earlier stage companies but can create complexities down the road during institutional rounds, so maybe better off avoided if possible. Like options, they entitle the owner to purchase a number of shares at a predefined price for a certain number of years.
What is vesting and why does it matter? What’s a typical vesting schedule?
Vesting simply defers the ability for stock and options to be converted and are used to keep employees and founders incentivized to make good long term decisions. If options were able to be converted (and therefore gains realized) immediately, there is little incentive to stick around a company, for example. Options typically vest over a four year period, and ‘vest’ on a pro-rated basis (i.e. 1/48th of the value is vested each month).
Vesting cliffs are typically one year and mean that no options vest before one year, but the 25% (first of four years) then vests immediately at that point, and the remainder begin vesting monthly.
The other component of vesting is the trigger types. Single-trigger clauses mean options fully vest upon a merger while Double-trigger requires two events such as an acquisition and the non-retention of the employee in the new company.
What are anti-dilution clauses?
Anti-dilution clauses are used to protect investors when companies issue equity at lower valuations than in prior rounds (i.e. a down round) are handled in with ‘ratchet-clauses.’
Full-ratchets entitle the investor to reset their earlier round price at the new, lower price and are generally calculated using what is called a ‘weighted average’ approach. This concept uses the outstanding amount of prior shares and the amount of new issuances and their respective prices to calculated the weighted average price:
New Conversion Price = (Current Common Outstanding + Common at Price with No Down-Round) / (Current Common Outstanding + Common at Price with Down-Round) x Old Conversion Price
What are liquidation preferences and why do they matter?
Liquidation preferences state how the proceeds are distributed during a liquidity event. They are important because they can impact the final dollars received for VCs (especially when ventures are sold for less than the amount invested). The two key elements of liquidation preferences are the actual preference and the participation.
The actual preference states what the investors are entitled to claim, which is generally a multiple of their investment and/or a pro-rata share of excess capital. The participation clauses include full, capped, or no participation:
Full Participation: Investors receive their full liquidation preference (multiple) and additional proceeds on an as-converted basis (i.e. pro rata). Capped Participation: Similar to full but the as-converted basis are capped as some predetermined multiple. If the return is greater than the cap, the participation, however, will not apply.
No Participation: The investor does not accrue proceeds after the liquidation preference has been fulfilled.
What is a pay-to-play provision and when do they matter? Pay-to-play provisions matter in down rounds because it forces investors to keep participating in a pro-rata manner in future financings (in order to not have their preferred stock converted into common stock). These provisions matter most when companies, and more broadly, markets sour as it keeps investors incentivized to support their portfolio companies.
What are Protective Provisions and to whom do they protect?
Protective provisions are a control term within the term sheet that give the investors the right to veto actions made by the company - and therefore protect the VCs.
What is a Drag-Along Agreement?
Drag-along agreements curb the ability for a shareholder to vote however they want, given shareholders who are not on the board or directly involved in the company may vote in a way that benefits them solely (and not the company per se). These agreements make voting done by certain investors or class of investors.
Walk me through a hypothetical cap table and the key features.
The cap table keeps track and summarizes the equity ownership in a company before and after the financing rounds are completed and records the owners, the class of stock owned, number of shares, the price, valuation, and ownership percentage.
At the inception of a company, the company will be wholly-owned by the founders with a specific number of shares allocated among the team. The cap table, therefore, is used to track how this ownership changes through financing rounds.
For example, if a company has issued 1M shares at a $5M pre-money valuation and accepts a $5M investment from a VC, the post-money valuation becomes $10M ($5M pre + $5M post). The VC, therefore, now owns 50% of the company. The cap table will track similar dilution in future rounds and the inclusion of items such as option pools (which will deduct from the founder ownership).
To generate the updated total shares outstanding, take the existing number of shares pre-investment (2M, continued to be owned by the founders) and divide by the founder ownership percentage (50%) to generate 4M shares outstanding post-investment.
Given the VC purchased $5M for 50% of the shares, the shares are worth $5M / (50% x $4M) = $2.50 each (purchase price divided by number of shares purchased).
Turning the Table
Do not take lightly the opportunity to engage in a thorough conversation throughout your interview. This should include an opportunity to ask questions yourself. Making sure the role and the firm are a good fit for you is half the equation after all! Here are some questions and ideas to think about:
What else should I know about the role and/or firm that we have not discussed?
Again, make sure no stone is left unturned and try to get all the information you need to feel comfortable making a decision if made an offer. Of course, you won’t be able to be 100% confident but it never hurts to ask - just avoid asking questions that you should have researched beforehand.
What companies are you most excited about within the portfolio?
Make this personal to the interviewer. Which ones are they most interested in and why? Try to find a commonality (have you used the product, too?) over which to discuss and raise questions you might have as well to the company’s founder(s).
What are some of the key challenges you face to continued success?
Every company has challenges. What does the team feel is their biggest weakness and what are they doing to turn these into a strength? This, of course, is a balancing act when asking these types of questions, so avoid making assumptions and suggestions if you’re not well versed in the issues at hand.
Have you considered expanding beyond the verticals, stages, or other specifics to expand deal-flow? While VC firms will often say they leverage expertise in specific industries, geographies, etc. it is fair to ask if they are considering new areas to open up new opportunities. What would that entail?
What is a non-obvious competitive advantage you feel the team has at its disposal?
Be sure, before asking this question, you have researched the company well so this question doesn’t sound like you don’t know what is likely on their company website. The truth, however, is that few VCs make the type of returns to satisfy investors, so what does that competitive advantage look like and how do they intend to keep it?
Reflecting & Learning Post Interview
Take a few moments to reflect after each interview or call? Getting feedback (from yourself & otherwise) is one of the best ways you can improve. What went well? What didn’t go well? Did you feel confident or nervous in certain parts? If you can ask your interviewer for feedback, but approach it critically as they may not have time to provide specifics. Ask yourself if it appears genuine?
Collect it all together and think about how you can do better next time.
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