Is it better to start my career in a VC firm or in a startup?

A video-based Role Playing Game to help you decide your first career move

The game starts in the video just below:

Table of content

Videos:

Text transcript:

Startup Track: Day #1

Startup Track: Day #2

Two years later

VC Track: Day #1

VC Track: Day #2

Two years later

Startup or VC firm?

For those who cannot, or don’t want, to watch the videos, you’ll find below the text transcript.

Hi there and welcome to this MemoHub micro-program dedicated to students who are wondering whether they should follow the startup path or the venture capital investment path.

An interactive video micro-program

Should I start my career in a startup or in a VC firm? It’s a question that I discuss regularly with students who are interested in the tech world but are not sure which path to choose once they graduate. The aim of this interactive micro-program is to help you make this decision by giving you some information and by making you complete some tasks that can feed your own personal decision.

It’s a series of videos that have been designed as a role-playing game where we’ll pretend that you must make a job commitment for the next two years and we’ll see together what it implies concretely for you in terms of career.

The way it works is simple:

  • You start by reading this part
  • Once you’re finished you complete the tasks which are explained at the end
  • Depending on what you’ll  answer another article will be suggested to you
  • Which you should read and work on tomorrow

To sum it up, for the next five days you’ll read one part of this long article per day, do some tasks related to this part and you’ll repeat each day of the week. Obviously, if you’re in a rush you can also do everything at once, I leave that up to you, I’m not your dad. 

Startup or VC firm: Blue pill or Red pill?

Now coming back to our initial question, in order to decide which career path, startup or VC, you should pick first, you’re going to answer a couple of questions that I have for you, so pick a pen and paper right now to keep track of your answers.

Second, before answering my questions, the context is important, so pretend that you already have received two job offers, one from a VC firm and one from a startup, you like both companies, but now you need to make a decision knowing that you’ll commit the next two years of your life to that job.

Question 1: For the next two years, would you rather focus on one industry/space or explore plenty different?

The first important difference between a job in a startup and a VC firm is the diversity of industries and topics you will explore in a short amount of time.

What do I mean by that? Your role as a junior VC analyst will be to analyze plenty of startups, operating in different industries. One day you might analyze an eCommerce startup selling baby gears to parents, the next day it might be a social network for pet owners, and later in the week an enterprise software company.

Not in every case, but in general, you’ll explore a very diverse set of industries and spaces whereas when you are working or launching a startup, you’ll need to focus and go deep into one industry/topic. If you are working for this baby equipment company we spoke about you’ll need to become an expert at it, if it’s the enterprise software company you’ll need to understand in detail the specific needs of this customer segment etc.

So you might think that a job on the VC side is more interesting from that perspective, but as we’ll see later this week, the drawback is that the tasks you’ll complete as a junior analyst are much more repetitive compared to a job in a startup where you’ll potentially do plenty of different things.

So for the next two years, if you prefer to explore plenty of different industries even if the tasks are repetitive, then add one red pill to your score. If you rather focus on one topic you’re passionate about and that you enjoy doing very different tasks, then add a blue pill to your score.

Question 2: Are you more a builder or a thinker?

Another major difference between the two careers is the feeling of building something. When you are on the startup side one of the magical aspects is to see the product you are working on, evolve before your eyes, and to see people you don’t know using it, and hopefully love it. This is truly a great feeling.

It’s less the case when you are on the VC side, you don’t have this feeling of “building” something concrete. That being said what a lot of investors are addicted to is meeting plenty of great entrepreneurs and interesting people. You’ll likely have many awesome discussions with outstanding entrepreneurs if you choose the VC track.

So if the feeling of building something is super important to you, add a blue pill to your score, and if you are more a thinker and your kink is to learn and analyze things, then add a red pill.

Question 3: For the next two years, would you rather work in a fast-changing environment or a stable one?

VC firms are generally very stable working environments: employee turnover is quite low, your tasks don’t radically change from one month to the other and you don’t have the month-to-month pressure of hitting your numbers since the feedback loops are much longer on the VC side.

Startups, on the other hand, are in general faster-changing environments: your responsibilities might evolve every six months, employee turnover can be higher, you’ll change offices much more regularly if the company grows, and you’ll constantly have to hit a new business target or your company will risk dying.

There’s not one better than the other, it really depends on what you are looking for, so for the next two years if you prefer high stability, take a red pill, and if you prefer chaos, the blue one.

Question 4: Outfit

Look at these two pictures and pick the outfit you’d prefer to wear for the next two years.

Making the jump

Now that you’ve answered all the questions, count how many red and blue pills you have and In the case of a draw, you can count double points for the last questions about the outfit.

If you have more red pills proceed to the VC track for tomorrow, and if you have more blue pills, proceed to the startup track. See you tomorrow.


Blue Pill #1: The Startup Lifecycle

Whether you want to be a founder or to work for a startup as an employee, it’s interesting to keep in mind the 10000 feet overview of the lifecycle of a startup that we’ll see together in this video. Because it can help you decide what kind of startups you want to found or to join. 

The startup lifecycle

I will describe a funnel that I find useful to illustrate what the lifecycle of a startup can look like, and which is decomposed into three stages:

  • The validation stage
  • The PMF stage
  • The scaling stage

The Validation stage

At the very beginning of a startup, there’s usually nothing and you need to build the business from the ground up. You need to validate that there’s a need for the product you want to build, to discover for which types of user/customer and whether you can monetize it or not. It’s what I call the market validation.

In parallel you need to build the actual product and make sure that people like it and use it and that you are not building a leaky bucket or a product in search of a problem. It’s the product validation.

And finally, you need to validate the marketing and sales side, to understand where to find and how to convert the users you target.

Once you’ve validated these three very macro aspects, hence the name of “validation stage”, you have what we call a first product-market fit, which will cover later in the video.

To finance this phase founders have generally three options: 

  • The first is to generate revenue from the customers as fast as possible and pay the expenses and salaries with that. It’s often what we call bootstrapping.
  • The second option is to finance it with the money the founders might have put to the side or that they collected from their close network or loans.
  • The third common option is to raise money with what we call Venture Capitalists or business angels, who give money to the founders in exchange for shares in their company.

Anyway, what’s important to understand at that stage, which is also called the pre-seed / seed stage, is that it’s a period of high uncertainty and chaos. It might sound super easy to validate the three aspects I’ve mentioned but it’s actually super hard. Some teams will find a first product market first in a matter of months while the majority will take years to do so. If they ever manage to achieve that. 

You’ll need to constantly experiment and iterate in order to find a good way to approach a market, to build a product that people like, and how to market it. It’s no easy task and it’s also why, IMO, it’s better to start a company in a field that you are passionate about or at least that you enjoy spending time in.

From an employee perspective, it might be a time of chaos and pressure, but it’s also a time of huge opportunities for people with no experience. At that stage, if you are smart and ready to make your hand dirty even if you are not super experienced, you can have a huge impact on a startup and quickly take responsibility. And this is kind of unique to this stage. So keep that in mind if you decide to work in an early-stage company, you can definitely grow much faster in your role compared to joining a company at a later stage.

The PMF stage

The term PMF is common in the startup and investor world, so it’s something that is useful to know if you ask me. That being said there’s no precise definition of it so you can use my personal definition of a product/market fit which happens when a startup has built a product that users really use, and not only test, that it monetizes it, a’.k.a it generates some revenue and finally, it knows where to find and how to convert users. Basically, once you’ve validated the market, product, and marketing aspects of the previous stage.

It’s also important to understand that reaching that stage is not linked to a certain level of revenue. Some startups will become huge like Uber which generates billions of dollars of revenue but is losing money, while the vast majority will grow slowly and stay relatively small companies generating maybe tens of thousands to hundreds of thousands of dollars of revenue per year and some being profitable.

And the first one is not necessarily better than the second. It all depends on what the founders want and what they value. A company that might not grow fast but is profitable and that the founders love, can be equally fulfilling and enjoyable than a super fast-growing startup burning tens of millions of dollars of investor money. The most important thing is that you choose or create a company that is aligned with your own values and believes, not that you follow the hype only.

From an employee pov, if the previous stage was the “chaos” stage, once a company finds a first product-market fit, they will naturally start to structure their operations much more. It’s at that stage that a real HR hierarchy emerges with different departments and the first real managers whether it’s a head of product, marketing, or other more management jobs. Don’t mistake me, it’s still “startup style”, but it’s definitely at that time that more structure is needed.

The consequence is that you’ll potentially have less room to take responsibility quickly if you are inexperienced, but on the other side, it’s also in this kind of company that you can learn more from others. As an inexperienced person, you’ll be able to witness how a real business works which you don’t necessarily see when you join a very early stage company. 

The Scaling phase

The last phase is the scaling phase and consists of companies like Airbnb or Stripe, which have raised millions and millions of dollars and generate millions of revenue.

At that stage, founders face challenges inherent to large companies and not necessarily to startups anymore.

And it’s the same from an employee perspective, if you join Airbnb or Facebook, you’ll be working for a big company with its benefits like a better salary and lots of perks but also a much more rigid HR structure and potentially more internal politics required to progress in your career.

To do of the day

Now that you’ve seen this framework, again take a pen and paper and if you want to be a startup founder:

  • Write down the type of company you aspire to build. Do you want to go the go big or go home path by taking money from VCs and try to grow as fast as possible, or do you value more control over your company and you want to build a bootstrap company that might be big one day but which take more time and might not be as hyped? Also, think about the field in which you want to build this company. Are you more onto eCommerce? Enterprise software? Mobile app? And for which type of users?

If you want to join a startup as an employee,

  • Write down which stage appeals the most to you. Do you prefer to join directly the “chaos” of a pre-PMF startup, or do you want to join first a company that already has a working product, generates some revenue, and is a bit more advanced in terms of business.
  • Second, find and write down the name of a startup that fulfills these criteria and that you would like to join.

Blue Pill #2: A Day in the life of a Startup

Now that we covered the big picture, let’s dive into what the life of a founder or an employee in a startup can look like. We’ll do that by covering the different stages we spoke about in the previous video.

Validation Stage

First of all when I speak about validation, what is important to keep in mind is that it’s not a binary state. It’s not like “we have validated the market or not at all. Same for product or sales and marketing. No, it’s more like a scale that you need to climb step by step, with plenty of wins and losses in between each step.

And this is why early-stage startups are so hard because you need to make a lot of bets without knowing where you should exactly go. You need to test a lot of things and to change directions quite often. and this is true for the three aspects we spoke about.

Before validating the market by having a product that you monetize, you’ll need to make plenty of small market validations. For example, before you even have a working product to put in the hands of users you will likely do customer interviews to understand their needs better. You’ll also maybe run some user surveys, create landing pages to test your value propositions, to test your pricing etc.

Same for the product. Before you arrive at a first version that users like, you’ll likely make many iterations: starting with a prototype, then a MVP or Minimum Viable Product that you’ll put in the hands of beta testers to collect their feedback until you finally arrive at a first version that people are happy about and are ready to pay for. Which can take many months.

When it comes to marketing and sales it’s probably the least important aspects of the three at the very beginning at least. Most of the time there’s no need to start a proper sales and marketing effort when you haven’t validated some aspects of the market and product first. That being said, once you reach that point, many startups will start their branding effort by trying to have some PR, do some content marketing to spread the word, and think about lead generation.

Anyway, as you can see, startups at that stage are really in exploration mode, which explains:

  • First, why there’s more generalists than specialists employees, as you don’t know yet which aspects you should double down, which is the real value of a “specialist”. If you join a company at that stage chances are that you’ll work on many different aspect without necessarily going deep into one.
  • Second, it explains why I said in the previous video that there are opportunities for unproven/inexperienced employees to grow much faster in their role.

So be aware before either joining or launching a startup of the characteristics of that stage, because there might be great opportunity to grow, but it’s also a ruthless stage during which you either fly or die.

PMF Stage

As a reminder, what I call the Product/Market Fit stage is once a startup has a first stable product that is monetized in a way or another and the founders understand how to attract and convert users. You’ve validated the market, product, and marketing aspects of your business.

It doesn’t necessarily mean that the company is profitable and depending on how deep into their PMF they are, there still might be a lot of uncertainty. That being said it’s for sure less chaotic than before and it’s when more structure is required.

On the market side, you normally have proven that there’s a need for your product and that you can monetize it. The next big step is to discover what kind of company you can really build out of it. Are you going to build a fast-growing and potentially cash-burning VC compatible company, or are you more on the profitable and not growth at all cost type of startup? The answer to this question really depends on your market, the competition and your aspirations as a founder

On the product side, you have a first working version and now the game is about making it much “stronger” to keep attracting and retaining users. It’s why at that stage you’ll put in place much more product structure from experienced product managers and designers to setting up real product analytics tools that will enable you to make much more data-driven product decisions.

Finally, on the marketing and sales side, it’s where the real work starts. To continue growing your revenue you’ll need to build a real lead generation engine and depending on your monetization model you might need to put a sales team in place.

Anyway, as you can see, startups at that stage are really in structuring mode, which explains

  • First why in terms of employees “specialist” profiles start to have more value than generalist profiles.
  • Second, why the first management structure is required

From an employee perspective, if you want to join a company at that stage you’ll have fewer opportunities to grow fast in your role and it’s generally harder to be recruited because experience starts to be crucial criteria. That being said it’s also there that you can really learn from more experienced people and that you can witness how a real business works.

From a founder’s perspective, it’s at that stage that you’ll need to spend much more time structuring your company and managing/recruiting people. It will likely be a different experience compared to the very early days of your company.

Scaling Stage

I will not cover the scaling phase because if you want to launch a startup you have time before you reach this stage and if you want to join as an employee such companies your job will look less like a startup job and more like a normal corporate job.

To do of the day

Now that we’ve seen together in more details the characteristics of each stage, again take a pen and paper and if you plan to launch a startup:

  • Focus on the first stage, the validation stage, and write down the major market, product and marketing validations that you think you need to reach in order to find  a first product-market fit with your company. And if you can, also write down for each, the experiments and actions you want to conduct in order to validate them. 

If you plan to join a startup as an employee:

  • First, Write down which stage you think is the best for you
  • Second,  what do you value more as an employee for the next two years: do you want to learn from experienced people in a more stable environment or do you prefer to jump right in the chaos of a very early stage company and have the chance to take responsibility faster?

Red Pill #1: Venture Capital 101

Now, before starting your first day on the Venture Capital side, let’s make sure that we have the basics in place.

Financing options for startups

When it comes to financing a startup you have three main options:

  • Bootstrapping a.ka the company tries to generate revenue as fast as possible to finance its development
  • Personal money or loans: the founders use the money they already have to the side or take loans that they need to reimburse later. 
  • Finally the business angel and Venture Capital options, who give money to the founders in exchange for shares in their company.

There are other options but these three are the most common ones. One of the major differences between the first two and the third is that bootstrapping or debt are non-dilutive capital, meaning that the founders don’t give away equity against capital. Which is a key aspect to keep in mind.

The VC option 

Since you’ll be working for a VC firm, we’ll focus on this specific financing option. At his core, the job a of Venture Capitalist is to find great startups and to invest in them. VC firms are generally focused on certain stages of startups. For example, early-stage investors invest in very young startups, while later-stage investors invest in more mature startups that have proven more things on the business side. It’s what we call Series A, B, C, etc.. rounds and For the earlier stage, it’s often called pre-seed and seed rounds.

Another notable difference is the specialized investment firms that focus on specific industries or types of startups. For example, a fund that will invest only in health-tech startups, and generalist investment firms which are industry and model agnostic.

How do VC firms make money?

  • Let’s start from the beginning: In order to invest in startups, first, a VC firm needs to raise money from different people and entities that we call LPs for limited partner
  • Once they have collected this money, which can range from a couple of millions of dollars for the smaller funds to literally billions of dollars for the bigger funds, they are ready to invest it in startups.
  • On the other side, startups that need money to finance their activity will contact VC firms to enter their fundraising process.
  • If the investor finds the company promising they will send an investment offer for a certain amount of money and valuation in exchange for shares in that company.
  • So at that stage, the startup has the money from the investors and the investors have shares in this company so how does the VC firm make a return on his investment.
  • Well, investors make money once what we call an “exit” happens. There are two types of exits:
    • The startup gets sold to a bigger company, it’s what we call an acquisition.
    • The startup becomes a public company through an IPO or other mechanisms.

In both cases, the investor will make a positive return on investment only if the company has grown its value before the exit. In theory, an investor pays a certain amount for the shares of that company during the fundraising. If the company does well, its value grows over time, so at the time of the exit the value of the shares that the VC firm has acquired also has grown in value, so when they sell it they make a profit between the initial price they pay for it and the final price at which they sell it to the acquirer.

I said in theory because investing in startups is a risky business:

  • Most of the startups investors invest in actually die. So they lose money.
  • Only a few of them become successful enough to provide a return on investment for the VC firm. It’s why we often say that the VC business model is “hit-driven”: they’ll make the majority of their return on investment only from a handful of startups of their portfolio.

And don’t forget that most VC firms invest the money of their LPs, so they first need to return a certain amount of their benefits to them, and only after they take a cut on what is left.

So when you take into consideration these different elements, you understand quickly that the unit economics of an investment firm is tough and the majority of them actually don’t provide a positive return on investment to their LPs. Say it another way, the majority of investment firms are bad businesses.

Consequences of the VC model

There are a lot of consequences to unpack from what we just saw, but the aim of this video is to be concise, so I’ll focus on the most important ones for you:

  • First, the VC model is not a financing option compatible with every type of startup. In order to make a positive return on investment, most investors need to invest in startups with a high exit potential and that can grow significantly. And far from all startups are what we call “VC compatible”, the majority of startups will fail or stay small.
  • Second, it’s a super long term business model, On average, the time between the initial early-stage round and the exit of a startup is more than 7 years. 
  • Third, given the nature of the transaction, the investors take shares in a company and will stay for more than half a decade on average, choosing the VC financing option for founders has very long term consequences and it’s almost impossible to go back. So if you’re a founder, don’t take this decision lightly, we often say that choosing an investor is like choosing your husband or wife.

To do of the day

Now that we’re all at the same level, your first task as junior VC is to source a startup that you find promising from an investment perspective. You can source a startup at the stage you want, whether it’s a very early stage company with barely a product or a more advanced one, choose what you prefer.


Red Pill #2: A Day in the Life of a Junior Analyst

Now that we have laid the foundations, in this part we’ll see concretely what your job as a junior analyst/VC will look like during your first two years.

The investment funnel

As I explained in the previous video the job of a VC is to find great startups to invest in, and a good way to visualize this process is with a funnel.

Dealflow stage

At the top of our funnel, we have what we call the dealflow and which is simply the flow of startups that enter in contact with an investor in order to raise money. There are various ways an investor creates its deaflow, but at the macro level, you have two types of sources: the incoming dealflow which are the startups that come to the investor directly, and the outgoing dealflow which is when the investor goes hunting for promising startups.

First filter

The first filter is then done, during which investors check the companies’ pitch deck, and decide whether it’s an investment opportunity worth exploring or not. In general, they won’t meet with the founders and won’t do any research, the aim is to quickly dismiss the companies which might not fit for various reasons.

Analysis/Research stage

For the startups which they think are interesting, they then spend time doing research in order to understand the company itself but also the market and the opportunity as a whole. Investors conduct this analysis by doing online research, by discussing with the founders, doing calls with experts, or even with customers of the startup. The aim of this process is to build your own conviction: Is it a startup worth investing in or not?

Second filtering

If it’s the case and the investor thinks it’s an investment opportunity worth pursuing they will enter the deal-making stage during which various deal-making-related processes happen. It ranges from writing an investment memo, to partners meeting, due diligence, discussing the valuation, sending a term sheet, negotiating the final terms of a deal, etc.

Investment closing

And if all goes well and that the different parties involved agree with each other, the deal is closed and the investment made.

Your job as a junior analysts/VC

When you join a VC firm for the first time you’ll generally enter as an intern or junior analyst. And in most cases, you’ll work on the first two stages of the funnel, the dealflow, and research parts.

  • For the dealflow you’ll help with the first filtering phase for example by checking pitch decks to discard out the non-relevant ones.
  • For the research part, you’ll do a lot of market research, market sizing, competition analysis all of that to support the senior investors who are working on specific deals.

Early in your career, you won’t make a lot of decisions, you’ll be more supporting the investors of the firm. This is why in terms of daily tasks, you should expect to do a lot of online research, a lot of reading, a lot of writing reports, potentially some calls, etc… It’s definitely not for everyone and not necessarily the sexiest job if you don’t have the drive for it.

That being said, be aware that your experience as an intern or junior analyst widely depends on the VC firm you join. Some investment firms have very structured tracks for junior roles where they will be exposed to the dealmaking process by teaching them how to read a captable, by including them in partner meetings or in negotiation calls. While some VC firms are more “exploiting” interns and analysts by making them do only the unpleasant tasks.

So my advice before you join an investment firm is to ask them about that and ideally to discuss it with previous interns and junior people.

To do of the day

Now for the task of the day, you’ll make your hands dirty and write your first “mini investment memo” about the startup you have sourced in the previous video.

Check their website, do some research about the company and its market, and in one or two pages maximum sum up your findings by sharing what you find promising and what you find problematic from a:

  • Market
  • Product
  • And Competition perspective.

Finish the doc with a conclusion explaining whether if you were working in a VC firm you would recommend investing in this company and why.


Conclusion: Two Years Later

Now that you have this information and got a taste of what the first two years of a career on the startup or VC side can look like, let’s pretend that we’re at the end of these two years.

Early in a career, I think that it’s always interesting to take a step back from time to time to reassess the situation:

  • If you love what you’re doing, then keep doing it and double down on building skills there
  • But if you find out that this career path is not for you, don’t hesitate to switch track early and don’t risk getting stuck further down the line once you become too experienced. It’s easier to test different jobs early on. 

Anyway, as a micro conclusion to this micro-program, I hope that it can help you make your own decision. Just use what you saw and did as inputs to make your own personal choice.