Pick up your iPhone 4S and ask it this question: "Siri, who is Shawn Carolan?" Probably just like you, Siri doesn't know who Carolan is.
Without him, however, the artificial intelligence technology may have never have made its way onto Apple's latest smartphone. Carolan didn't develop Siri's technology, but in 2008 and 2009 he invested millions of his venture capital firm's money into the start-up that was building the "virtual personal assistant" which recognizes spoken requests for everything from sending a text message to finding a nearby Italian restaurant.
When Apple bought Siri in 2010 for a rumored $200 million, Carolan and the venture capital firm where he is a managing director, Menlo Ventures, reaped as much as an eightfold return on its investment. Short of an initial public offering, earning a handsome profit and seeing an early-stage investment become embedded in the world's most beloved smartphone is a pretty nice day's work.
Except it's not just a day's work. It can take years of sixty-hour workweeks to find a company with the financial upside of a Siri, much less that of a Facebook or Zynga. "You end up kissing a thousand frogs for every investment you end up making," Carolan says. When you find a prince among the amphibians, though, the financial and professional payoff is huge.
"Where else can someone say that 90% of our investments will fail, but the 10% that succeed will give you an IRR (internal rate of return) that will be nothing short of dealing in cocaine or loan sharking?," says Steve Blank, a former technology entrepreneur who now teaches at Stanford University's business school. "These aren't bankers, these are gamblers."
Venture capital has always been a popular and therefore exclusive club to join, and there are significantly fewer jobs in the industry now than before the financial crisis. The number of principals at venture capital firms dropped 27% from 8,665 in 2007 to 6,328 in 2010, according to data from the National Venture Capital Association, an industry lobbying group.
"The industry is contracting; it's small and getting smaller" because of a lackluster IPO market that has stalled the cycle of profit, return, and reinvestment, said Emily Mendell, vice president of communications for the group. That hasn't made venture capital lose its allure; getting a job in the industry is just as competitive now as it was when the cycle was rosier.
These aren't bankers, these are gamblers”
Being a risk-taker is a prerequisite to becoming a venture capitalist. You've also got to be an expert in a specific area of technology, whether it is in social networking, online retailing, medical devices or, say, clean technology. Otherwise, discovering the next Twitter, Amazon, Medtronic or LanzaTech isn't possible.
Many venture capitalists are graduates of elite M.B.A. programs or graduate-level engineering schools or, increasingly, both. Others are former executives with operational expertise who have led successful start-ups and growth-stage companies, though it's not unusual for these venture capitalists to also have advanced degrees.
Large established venture capital partnerships like early Google investor Kleiner Perkins, founded in 1972, are still hiring as are newer firms founded by wealthy, early-retirees who got their start in angel investing, the practice of putting relatively small sums into small companies. That's how Peter Thiel, who famously gave Mark Zuckerberg his first $500,000, got started in the business.
After 46-year-old Roger Ehrenberg retired from Wall Street in 2004 from 17 years working in derivatives trading at Citibank and Deutsche Bank, he founded a tech start-up and began investing his own money in other people's start-ups. In 2010, he raised a $50 million fund to focus on data-centric companies like BillGuard and PlaceIQ.
When he blogged about hiring one of his first investment employees in 2009, he received 1,000 applications of which 300 were legitimate candidates. He conducted 100 phone interviews, then 10 face-to-face interviews, and then five written examinations, before hiring a Ph.D. in electrical engineering who had served as a technology adviser to Craig Mundie, Microsoft's chief of research and strategy. "It's crazy competitive," Ehrenberg says of the VC job market.
While there is no "typical" path into venture capital, the most common entry-level opportunity is to join a VC firm out of college or from a consulting firm as a research analyst or associate with a salary ranging from $70,000 to $80,000 with bonuses of up to 50-60% of salary, says Tarang Shah, a former venture capitalist at Softbank Capital and author of "Venture Capitalists at Work: How VCs Indentify and Build Billion-Dollar Successes." Analysts are expected to research and analyze the economics of potential start-up investments for more senior colleagues, while the more prestigious associates concentrate on finding new companies to invest in.
Unless they are exceptional, both research analysts and associates are let go after two years and expected to either attend a top business school, if they haven't already, or go to a start-up. Either they impress their way back into venture capital, or they end up staying in the business world. Though some promising associates are promoted to senior associates and groomed for partner level positions. Most senior associates have MBAs from prestigious colleges
The next level up is vice president or principal. You're called to sit on the boards of directors of portfolio companies and help them hire, monetize their product and advance toward becoming mature companies. You also start to earn a small commission of the profits the company makes off of its investments. If you can adroitly manage a packed schedule of power lunches while traveling up to two-thirds of your time, you get promoted to general partner. That's when the money big enough to retire from comes into play, plus the big pressure.
General partners still seek out promising investments and help guide portfolio companies, but they're also responsible for raising money from institutional investors like pension funds and nonprofit foundations. Partners are also expected to invest significant sums of their own money into their funds.
The only guaranteed salary that partners receive is a percentage of management fees paid by institutional investors. While management fees provide enough cash to live on relatively comfortably, it's only when a portfolio company goes public or gets acquired that partners earn significant sums.
Take the example of Kleiner's $35 million investment in Zynga. When the Facebook games maker went public in December, Kleiner's stake was worth $635 million, according to Bloomberg. After the initial investment is returned to investors, the partners at Kleiner would give 80 of the profit back to their investors, and keep 20%, or $120 million, for themselves. Split among 10 partners, that would be a pretax take home of $10 million.
It's a profession that's not for the faint of heart or for those in a rush. It can take 10 years or more as a venture capitalist to see if you're really cut out for the business, says Erik Benson, a 43-year-old managing partner at Seattle's Voyager Capital. "It's a long apprenticeship to figure out whether you're a good VC or not," he says. "But if you're good, you can keep doing it into your 70s. It's a job that you often never leave."
Write to Joseph Walker at Joseph.Walker@dowjones.com