Sometimes secondary research just doesn’t cut it. As fundraising professionals, we all know it’s important for us to understand the context of our prospects’ lives. But as much as you can read about private equity, venture capital, and all the other finance-related professions, nothing beats actually talking with people in that industry to find out how they would like to be cultivated and stewarded. I’m particularly delighted this week to shine a light on a project that University of Chicago researchers, Amelia Aldred and Namrata Padhi, undertook to interview professionals in the finance industry. In this week’s article, Amelia and Namrata share the questions and answers about these professionals that we all want to hear. ~Helen
The problem and our solution
In 2015, our prospect research team hit a wall when it came to understanding venture capital and private equity professionals. Like many of our research colleagues, our team read hundreds of articles about venture capital and private equity industries but we couldn’t find information specifically about venture capital and private equity professionals’ attitudes and behaviors regarding philanthropy, nor could we find information about compensation and wealth beyond a general industry overview.
Our solution? Change our research methods. Instead of reading, we directly interviewed venture capital and private equity professionals about their career path, compensation and wealth accumulation, networks, and how all of these factors affected their approach to giving.
What we learned
First, a quick recap: the venture capital and private equity industries are each part of the investment lifecycle of a business. Venture capital involves earlier stage investment and growth, while private equity invests in businesses at a later stage. Both venture capital and private equity firms are paid a combination of fees and a portion of the profits when their portfolio companies are sold or have a public offering on the stock market.
Here are some of the questions we asked venture capital and private equity professionals and summary of their answers:
What personal characteristics are common among your colleagues?
Venture Capital: Venture capitalists come from a lot of different professional backgrounds, unlike private equity, which mostly draws from investment banking. Since they are helping start-ups grow, they need both finance experts to secure funding, platform experts to help with the actual product or service, and business management experts to mentor the founders and employees. Venture capital professionals often perceive themselves as entrepreneurs, since their firms are involved in the early stages of a business and many venture capital pros came out of an entrepreneurial background and see venture capital as an extension of their entrepreneurial career. So like other entrepreneurs, venture capitalists tend to be very driven and spotlight lovers and are excited by big ideas and competition.
Private Equity: While there is no typical private equity firm, the majority of firms are relatively small, often with less than a dozen professionals. This makes competition for positions in private equity firms very strong. Junior professionals tend to have much more interaction with senior professionals as they get an opportunity to work directly with senior professionals. Private Equity firms typically have a fairly rigid seniority structure with big differences in experience level and responsibilities from top to bottom. Individuals are often board members of art & cultural institutions for networking purposes. They are usually candid about sharing their network and connections.
Is compensation uniform in your industry?
Venture Capital: Compensation really depends on how the firm is structured. There are two types of firm structures, that one of our interviewees nicknamed “aristocratic” firms and “meritocratic” firms. In aristocratic style firms, the founders and a few senior partners take home the lion’s share of profits, regardless of how much they were involved in the actual investment and exit of a company. In meritocratic style firms, profits are divided based on who was involved in a particular investment and exit deal. Meritocratic structures are more common for new firms, since it is difficult to recruit employees if they don’t think they’ll earn much in profits.
Private Equity: As investments may take years to mature, private equity investors can experience significant fluctuations in income and profits from year to year; this is particularly true at smaller firms with only a few funds. Compensation structures may vary from fund to fund, but the standard pay formula is called “2 and 20.” Fund managers take 2% of the fund’s assets each year as a management fee, and 20% of the total profits as a kind of performance bonus.
What do you wish fundraisers knew when talking to you?
Venture Capital: For most people in this field, capital is illiquid for a long time; it usually takes seven to ten years to build a company and exit it. One of our interviewees suggested that gift officers ask venture capitalist prospects to pledge a portion of their profits for a particular company. That would start off gift conversation earlier and would show willingness to work with the realities of the prospects’ profession. It’s also important to be very efficient and to the point when talking to someone in venture capital; venture capitalists listen to people make business pitches to their firm all the time and often view a gift conversation as another sales pitch, the only difference being that it is a pitch to invest in a nonprofits’ mission rather than a start-up.
Private Equity: Private equity firms are among the least transparent financial actors in the economy. Although it is difficult to find a lot of information about the fund size and investments of a private equity firm, it would be a good idea for fundraisers to understand an individual’s role in the private equity firm, and where they are in their career trajectory. With that knowledge, they can dig deeper to qualify a firm by asking questions such as:
- How many funds does your firm manage?
- Does the firm invest in one location or does it invest globally?
- Does the firm specialize by sector?
- Does the firm focus on investing in early stage companies or does it invest in mature companies?
- How is the firm’s project pipeline managed?
With that information, fundraisers can then move on to discuss about how many funds the individual is involved with, and how they plan to repeat the success of their previous fund.
Asking about peers in other private equity firms would also help fundraisers know more about the industry and individuals in the industry.
What we are doing with this information
After compiling all of this information, our prospect research team presented the information in a workshop for gift officers, marketing the workshop as a toolkit for better qualifying, cultivating, and soliciting prospects in venture capital and private equity. The workshop received overwhelmingly positive reviews and senior gift officers adapted the information into training materials for new fundraisers, including a list of recommended questions for prospect qualification.
As a team, we’ve used this information to help us target our research and build more accurate capacity ratings, as well as analyze industry news as it relates to our private equity and venture capital prospects. Overall, the benefits of doing this kind of field research have been significant enough that we plan on continuing to interview industry insiders.
If you are interested in conducting similar interviews, here are some tips:
- Be transparent about what you do, and frame the interview as a chance for your nonprofit to approach the interviewee better and to fundraise more efficiently.
- Be flexible in meeting locations and time; busy professionals are more likely to give you an interview if you can meet them at their office at a convenient time for them.
- Offer and plan for a 30 minute interview (though if they want to keep talking, let them!)
- Do as much research as you can ahead of time, so you can ask about current trends and hot topics in the industry.
- Be sure to ask what industry news sources they recommend.
- Send a thank you or email promptly after the meeting.
Amelia Aldred is a Senior Research Analyst at the University of Chicago. She specializes in international research, arts fundraising, and internal communications and has a an academic background in ethnographic field research and survey design. Follow her nonprofit adventures on Twitter @ameliaaldred or via her blog at www.ameliaaldred.com.
Namrata Padhi is a Senior Research Analyst at the University of Chicago. She leads the industry research initiative and specializes in the startup, private equity, and media and entertainment industries and is also responsible for technology implementation and automation projects. She has an academic background in software engineering and public administration. (https://www.linkedin.com/in/namratapadhi )
- Industry Corner II: Venture Capital and Private Equity
- Available to APRA members through aprahome.org
- National Venture Capital Association
- MoneyTree™ Report: Q4 2015
- Ernst and Young Global Venture Trends 2015
- 2015 Preqin Global Private Equity & Venture Capital report
- Bain private equity report:
- Private Equity CEO pay: