The GoingVC
Research Library
The Venture Capital
Interview Guide
Co-Authored with Femstreet
and JJ MacLean
THE VENTURE CAPITAL
INTERVIEW GUIDE
TABLE OF CONTENTS
Introduction: Storytelling | Page3
Behavioral | Page 12
Investment | Page 14
Firm-Specific | Page 17
Past Experience | Page 18
Technical Resources | Page 19
Finance | Page 19
Turning the Table | Page 25
Post Interview | Page 26
Storytelling - Setting the Stage: Never
Tell Me The Odds
Venture 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 prac
ticing 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 toolbelt - 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, cofounder 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 compe
ঞtors?
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 por olio 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 por olio 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
echnical 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 calcula
ঞng
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 precash 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 valua
ঞon
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 quicky 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 ma tter? 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
‚
matt er?
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 liqui
dation preference has been fulfilled.
‚
What is a pay-to-play provision and when do they matt er?
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
portf olio?
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.
went well? What didn’t go well?
parts?
What
Did you feel confident or nervous in certain
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.