Can venture capital be taught?
Venture capital has become somewhat romanticized over the last few years, thanks to its involvement in the tech start-up sector, an influx of private capital, and its association with various well-known and celebrity investors in the media. As such, its increased profile, combined with a certain mystique, has made it an increasingly attractive choice amongst individuals looking for an exciting and varied career. And as more people look to break into the sector, new training programs are emerging, promising to give them a head start.
One such initiative, Newton Venture Programme, launched just a few weeks ago, run by the London Business School and the VC firm, LocalGlobe. Stating its aims as professionalizing and diversifying VC, it has certainly stirred some debate and discussion in industry circles about the need for such a course and whether it can provide a shortcut into a venture career.
The question is, is it possible to ‘teach’ VC in that kind of classroom setting?
Does VC need professionalizing?
A career in VC has traditionally involved following the apprentice route, whereby associates learn their trade in the real world, rather than undergoing any theoretical training. This has generally been considered vital to developing the plethora of skills, networks, and experiences that are needed to be successful. However, Lisa Shu, Executive Director of the Newton Venture Programme, argues that this approach is outdated and can actually hinder learning:
“The apprenticeship route is slow and costly,” she argues. “Many VCs are struggling to navigate their careers and most firms aren’t big enough to formalize their training. There is huge pressure to perform as an investor in a firm, in front of your team, other board members, and entrepreneurs, and this inhibits learning because you might not want to ask questions which would help you to progress.”
Others agree that a formal program can be the ideal place for teaching the basic principles in terms of asset management, the fundamentals of putting together a deal, what a term sheet looks like, and learning from past case studies. Reshma Sohoni, Co-Founder and Managing Partner of Seedcamp, a seed-stage venture fund, believes that this can ensure that VCs reach a certain level of competence around the ‘science of VC’, something which would improve the reputation of the industry as a whole.
“You hear so many bad stories from founders of their experiences with VCs,” she explains. “From their human-to-human experience, to how documents look and what the value-add looks like. So, any training course that brings people onto the same level is a good thing.”
No substitute for experience
Yet, a training course can only go so far in providing the skills and outlook that VCs need to be successful. Despite being a financial asset class, there is relatively little finance actually involved in VC, and many of the skills that are required, such as relationship building, sourcing and qualifying deals, portfolio management, and managing exits, aren’t well suited to a classroom setting.
Prof Dr. Peter Lorange, the former President of the IMD Business School Lausanne and Chairman of the Lorange Network, agrees, arguing that it’s a VCs’ hard-won intuition which gives them the edge: “The issue of conducting proper due diligence can definitely be covered in a classroom setting. And, also, structural issues and cash flow modeling. Beyond this, I am not sure that VC can be taught. After all, experience and “feel” are key factors.”
It’s also important to bear in mind that VC is a long-term asset class, with five to seven-year cycles. Patience is imperative and professionals need exposure to the full cycle, from sourcing businesses to exit, to fully understand what is involved. As Lorange goes on to explain, VCs need to learn “to take advantage of specific business cycles to execute proper timing”.
Learning an activist approach
Furthermore, while VCs have always had a varied role, this has been magnified by the rise of an active – or ‘activist’ – approach to managing portfolios, whereby they offer a range of hands-on support to entrepreneurs throughout their company’s development. Real-life experience is vital to do this effectively, as is building your network over time. As a VC, you are always learning from everyone and everything around you, while everyone you meet can become a partner, co-investor, employee, or due diligence contact.
And with so many competing demands and a high level of uncertainty, VCs also need to develop their decision-making and prioritization skills, something which Paul Rutherford, Founder and Managing Director at Nire Capital, says is equally hard to do through a training program.
“It is difficult to imagine what it is like until you’ve got a CEO who isn’t performing, or a business running out of money,” he explains. “Covid is a good example. You always think about what you would do if a business went to zero… but with Covid, we actually got to put into practice these things that we usually theorize about. It comes with a lot of responsibility, and you don’t know how you’re going to deal with it until you’re in that position.”
Sohoni agrees that the responsibility of the role is a big element, particularly when it comes to fund management, i.e. managing the concerns of LPs and understanding how to balance the portfolio to deliver the greatest returns.
“You are actually managing people’s money and that’s a big deal,” she says. “We have a duty of care and fiduciary duty and there is a reason we’re able to raise that money, which is that we deliver outsized returns. If you want to achieve 3x or 5x returns, there is so much science to managing the portfolio, understanding how to maximize value, what you’re going to IPO out and when, and so on.”
Finding your own style
Not all VCs follow the same path into the profession, for example, you might join a new fund, an established fund, or a corporate set up, and this will impact the kind of environment you find yourself working in, as well as the skills and attributes required. Rutherford makes the point that part of being successful is also learning your own style and personal way of doing things, something that can only come from experience.
“In VC, everyone has a different approach; they can be entrepreneurs, consultants, engineers,” he explains. “Everyone finds their own way of applying their trade, measuring risks, and deploying capital… which makes it difficult to teach. It is about how you navigate the principles and adapt, and your approach doesn’t stop changing.”
Similarly, Sohoni advises aspiring VCs to remember not to take as gospel anything they do learn in a VC course, and always consider how they can shake things up:
“I think what you don’t learn is how to break and disrupt VC for the better,” she explains. “My only advice to students going through a program is if you disagree with certain things and want to be a disruptive voice, you need to understand certain things and then reapply in your own world. Which is what we did with Seedcamp.”
Expanding the bubble
A training program might not be able to build ready-made VCs, however, if it helps to raise awareness of what the sector does and how it operates, then that can only be a good thing. VC has historically suffered from a misbalance between capital and skills, so attracting a more diverse range of people will be an advantage, particularly in adopting a more ‘activist venture’ style.
“Courses are great because they show that more people are taking an interest in joining the sector,” says Rutherford. “From the outside perspective, it is still more opaque, so the more people who come in from outside and understand it, the better.”
A long-term commitment
VC training courses can of course play a valuable role in the sector, however, there is no substitute for real-life experience, and those who aspire to enter the profession must be realistic about what is involved. Venture shouldn’t be seen as a secondary career or something you choose to do for romantic reasons, but as a long-term commitment, which requires tireless energy and focus, and which always puts the entrepreneur front and center.
Ignacio Giménez, Managing Director Europe & Middle East, bp ventures, bp’s corporate venture arm, sums it up nicely when he says: “Learning venture capital is similar to learning to write; a venture capitalist needs to know the VC lingo, the investment terms, the deal process and understand the general norms and conventions. All this can be taught in a course in the same way that we learn the alphabet and how to form words starting with letters. But being able to write doesn’t mean you can write like Charles Dickens. In the same way that a great writer has the skill to absorb the reader in a story, a great venture capitalist requires additional skills – a strong sense of intuition, self-control in the face of adversity, and a strategic perspective. While necessary, these skills are not unique to VC and like many other soft skills, they can be honed through experience, self-awareness, and mentoring.”