Have you watched Silicon Valley on HBO? It’s a hilarious comedy series that parodies the exciting world of startups, tech bros and venture capital in Silicon Valley. While we’re not recommending you binge the show this weekend (it’s pretty good), it’s essential you know exactly what venture capitalists do, considering how important they are today.

A venture capitalist (or VC) is a private equity investor who provides funding and support to early-stage businesses in exchange for an ownership stake. They typically target companies with high growth potential (like those in the tech industry) and help turn their innovative ideas into successes.

VCs are usually companies themselves and are an integral part of the startup ecosystem since they provide advice, capital and support to small but promising businesses. In this article, we’ll explore the world of venture capitalists, their work and how they make money.

How does venture capital work?

Venture capital is a form of private equity financing (a fancy term for investing in privately held companies to acquire, manage and eventually sell them for profit) provided by investors (venture capitalists) to startup companies with high growth potential.

The investments in VC are typically made in exchange for equity in the company. VCs often invest significant amounts in industries like artificial intelligence (AI), technology, biotechnology, and clean energy — places with a high promise of rapid growth and substantial returns.

We’ve mentioned equity a few times already, so let’s break it down. Equity is simply ownership interest in a company, often represented by shares that confer ownership rights.

Imagine you and your friends decide to bake a big batch of jollof rice together — the sapa-driven kind. Equity is basically each person’s share of the pot of jollof rice. If you put more ingredients in or help cook it, you get a bigger portion to eat. So, having more equity means you have a bigger share of the tasty (or at least filling) jollof rice.

Unlike traditional forms of financing like bank loans or public offerings (where a company sells shares of its ownership to the general public), venture capital funding is considered high-risk, high-reward. This is because startups (even those in non-tech industries) are inherently risky and have a high failure rate.

However, if a startup succeeds, the returns can be astronomical — for both the entrepreneurs and the VC.

What does a venture capitalist do exactly?

A venture capitalist plays a multifaceted role in the startup ecosystem. Their primary role is identifying promising investment opportunities and providing the necessary funding to help these companies grow and scale.

This responsibility involves conducting due diligence on potential investments, analysing market trends and assessing the business model’s viability.

Along with providing capital, VCs also offer guidance and mentorship to entrepreneurs. They leverage their business experience, industry knowledge and network to support the startups they back in overcoming challenges, making strategic decisions and accessing valuable resources.

What is a venture capitalist fund?

A venture capitalist fund (or VC fund) is a pool of money raised from individual and institutional investors (like banks and insurance companies)  that a venture capital firm manages. VC firms then use this pooled capital to invest in promising startup companies with high growth potential.

As an individual investor, you can contribute to a venture capitalist fund and access a diversified portfolio of startups. Investing in a VC fund also allows you to enjoy opportunities that may not be available to individual investors and benefit from the expertise of experienced venture capitalists.

How do venture capitalists make money?

VCs make money through capital appreciation (profit from value increase) and capital gains (returns from selling assets). When they invest in a startup, they typically acquire an ownership stake in the company. As the company grows and achieves milestones, the value of the VC’s investment increases — leading to capital appreciation.

Once the startup reaches a certain level of maturity, the venture capitalist may look to “exit” their investment and realise their gains.

VCs exit through various avenues, including an initial public offering (IPO) — where the company goes public — or through a merger or acquisition by another company (like when PiggyVest, the first online “Savings & Investment” app in West Africa, acquired Savi.ng in 2021).

You should note that venture capital investments are typically long-term, spanning several years (even decades). Therefore, VCs must be patient and willing to wait for the right time to exit their investments to maximise returns.

What qualifies you to be a venture capitalist?

The qualifications to become a venture capitalist can vary depending on the firm in question and your background. While no specific degree or certification is required, most VCs have a solid educational foundation in finance, business, or a related field.

Many venture capitalists also have prior experience in entrepreneurship, investment banking or consulting — which provides them with valuable insights into the startup landscape and the ability to assess potential investments effectively.

An excellent example is Maya Horgan Famodu, founder of Ingressive Capital (a $50 million VC fund). She has over ten years of entrepreneurship experience and worked in private equity research at J.P. Morgan before becoming a VC.

Ultimately, what qualifies someone to be a venture capitalist (or work for one) is a combination of experience, education and a successful track record of identifying and nurturing early-stage companies.

What is the minimum investment spend to be considered a VC?

There’s no fixed minimum investment requirement to be a venture capitalist — even in Nigeria. However, VCs typically invest substantial amounts — ranging from hundreds of thousands to millions of dollars (yes, dollars) — to gain significant startup ownership.

These investment sizes allow them to support startups’ growth effectively and are strategic to maximise returns.

What are the roles in a venture capital firm?

A VC firm typically comprises various roles and job functions that work together to identify investment opportunities and manage the company’s portfolio.

Some of the key roles in a venture capital firm include:

• Managing partner: The managing partner oversees the firm’s overall operations and sets the investment strategy.
• Investment partner: They’re responsible for sourcing and evaluating potential investments.
• Analysts: They support the investment partners by conducting market research and financial analysis.
• Legal and compliance: This role handles legal matters and ensures the VC firm complies with regulations.
• Portfolio managers: They oversee the firm’s investments and work closely with the startups in their portfolio.

These are just a few examples, and the structure may be different depending on the size and focus of the venture capital firm.

Can anyone become a venture capitalist?

While venture capitalism can be an exciting and lucrative career path, it’s certainly not for everyone. The industry is highly competitive, and becoming a successful VC requires a combination of skills, experience and resources.

However, anyone with a passion for startups, a deep understanding of the Nigerian market and a willingness to learn and adapt can enter the field. Still, to increase your chances of success as a VC, you must build a strong network, gain practical experience and stay informed about industry trends.

How to become a venture capitalist in Nigeria

Nigeria is experiencing a surge in entrepreneurial activity, making the country an attractive market for all kinds of investors — especially venture capitalists.

Here’s how to become a venture capitalist in Nigeria:

1. Gain relevant experience: To develop a strong foundation in finance, business, and startups, start by gaining experience in areas like investment banking, consulting, or entrepreneurship. You can achieve this experience by working in these fields, studying related disciplines, or taking online courses (including the ones we shared in our article on business administration courses to take online).
2. Network: Build connections within the Nigerian startup ecosystem by attending events, joining industry associations and reaching out to successful entrepreneurs and investors. You can also participate in founders’ mixers, attend hackathons and join online tech communities like the Open Source Community in Africa (OSCA).
3. Stay informed: Keep up-to-date with market trends, investment opportunities and government policies that impact the startup ecosystem in Nigeria. You can do this by being active on social media, subscribing to newsletters like Money Matters by PiggyVest and reading publications from trusted sources like Stears.
4. Partner with local experts: Collaborate with local experts who deeply understand the Nigerian market and can provide valuable insights and guidance.
5. Invest wisely: Conduct thorough due diligence on potential investments, assess the scalability of the business model, and align your investment strategy with the growth potential of the Nigerian market.

By following these steps, you can position yourself as a VC to make a meaningful impact in the Nigerian startup ecosystem.

Is venture capital the same as angel investing?

Venture capital and angel investing are similar in that they both involve providing funding to startups. However, they differ in terms of scale and structure.

Angel investors are typically high-net-worth individuals (HNWI) who invest their own money in early-stage companies. On the other hand, venture capitalists invest on behalf of a VC fund — which consists of money contributed by multiple investors.

VCs also tend to invest more significant amounts of money and have a more structured approach to due diligence and portfolio management.

Key takeaways

VCs (venture capitalists) are important actors in today’s startup scene. They help fuel innovation and drive business growth by providing funding, mentorship and guidance to the companies they support.