Venture capital interviews aren’t tricky. Generally, there are no brainteasers or case questions. A VC interview is a chance for venture capitalists to get a sense of you, the same way they do when meeting with entrepreneurs. That’s how venture capitalists make investment decisions—by gut instinct. Hiring is no different. As a result, the interviews are often very personal in nature. The venture capitalist wants to know if he/she can bear to work closely with you and depend on you for million dollar decisions. Remember that VC offices are typically small, and “fit” is extremely important. Pay attention to your meetings with analysts and associates when interviewing. They are often just as important, if not more so, than the partners.
Corporate VC interviews vary a great deal, depending on the company. While a few corporations may have completely separate funds for doing deals, most are structured as groups, divisions, or subsidiaries of the parent company. The interviews for these groups are therefore likely to be similar to most corporate interviews. Be prepared to answer questions about company strategy, investments that should be considered, or new directions and paths to be taken. You should therefore do enough research to understand the corporation’s lines of business, current strategic direction, and challenges that it faces (now or in the near future). A question that has been asked might sound something like, “If our company decided to sell off one or more of our business lines, which line would you choose?”
Questions in VC interviews typically fall into three categories: questions about your personality/fit, questions about your expertise, and questions about the VC process. Below are four questions about the VC process.
1. How would you value an investment?
The idea is to get the best deal possible and still have the entrepreneur take your money and give you a seat on the board. Saying that you would use several methods and then triangulate on a number wouldn’t be unreasonable. That number would serve as an anchor around which you would begin discussions with the entrepreneurs. Begin by putting an upper boundary on the valuation by estimating the maximum potential exit valuation for a company and then backing into a number by calculating the maximum price the firm could pay and still get its desired return (after subsequent round dilution). That desired return is typically 40 percent per year, or 10 times the invested capital over a reasonable period, such as five years.
The Discounted Cash Flow (DCF) method can only be used on later stage companies with significant profit history and relatively predictable growth plans. Price earnings multiples from comparable public companies do not work well either, since most early-stage startups have no earnings (and may have little to no revenue). A third and more common way venture capitalists hone in on valuation is to look at comparable private equity investments made by other venture capitalists at similar firms. This leads toward the following if/then decision: If the startup in X field/industry has Y dollars of current revenue with a product in Z stage of development, then it will be valued within a specific, predetermined (by the market), dollar range.
2. When you evaluate a business plan, what’s the most critical element you look for?
The answer is management—the brains behind the operation. A good company is a three-legged stool. One leg is management, a second is market opportunity, and the third is the product or technology. Top management is a must, since a solid team can always deal with and change the business model if necessary. A business or market opportunity must also exist, since at the end of the day, somebody has to sell something to make this all worthwhile. With a seasoned team and viable market, any faulty product or technology can be fixed. That said, too many plans are written around technologies that are more feature than stand-alone product.
3. Would you want to invest in companies geographically near or far from our offices?
You want to invest near the VC offices to make monitoring and supporting the company easier. You would try to increase returns by giving each invested company more attention and thus an increased chance of succeeding. Early stage investments especially need assistance, and some venture firms turn away any entrepreneur with an office that is more than five miles away from the general partnership’s headquarters. On the other hand, it’s worthwhile to search for lower valuations on good companies in faraway regions underserved by competing venture capital firms.
4. What investment areas do you find interesting?
Do some research on a niche within the investment landscape of the firm. It will take hours of reading in the library or on the Internet, but should give you a differentiated interview and show you are truly interested in venture capital. The venture capitalist may disagree with you, but as long as you have good reasons for your opinion, and can show them you can disagree confidently and constructively, you score big.
The above was adapted from the new Vault Career Guide to Venture Capital.
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Brainteasers are like standardized tests: of little relevance to the actual subject but designed to compare all people equally. As for what these tricky interview questions entail, they typically encompass probability and/or statistics.
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