Growth Equity / VC ... What's the appeal to juniors?

At a tech IBD group now and would like to start thinking seriously about exits. The obvious buyside opportunities from my group lie majorly in the GE and VC space, very few tech buyout shops. Unfortunately, I'm interested in the financial engineering aspect of buyout but have heard GE / VC is very light on that function and is closer to a sourcing role at the junior level. Obviously depends on the shop, but can someone shed light on what the attraction is to GE / VC other than conceptualizing growth stories? What technical work is typically done?

Comments (28)

Jan 17, 2022 - 4:07pm
daddylaurier, what's your opinion? Comment below:

bump

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  • Incoming Analyst in PE - Growth
Jan 18, 2022 - 2:40am

In short (for analyst roles):

  1. Better W/L balance than IB/LBO PE
  1. Comp is amazing
  1. You get paid to network
  1. Targetcos are doing cool, innovative shit
  1. Exit ops from top places include pretty much anything you want-sets you up for tech PE, other GE, VC, startup, MBA

There are a bunch of minor reasons/perks as well but that's as simply as I can put it

I think based on your description you are not a good fit (and btw that's totally fine). I'm starting in GE next year and while I think financial engineering is cool, I don't think it takes much brainpower to find a company already generating cash flow and lever it up. the more interesting part of PE is finding the right company, negotiating an investment, and then helping that company scale. Everyone uses the same LevFin bankers, at the end of the day a PE firm won't have a massive "edge" by using financial engineering.

  • Analyst 1 in IB - Cov
Jan 18, 2022 - 3:39am

Are exits to tech PE realistic from GE? I feel like I've heard mixed things about that

Also, how do GE firms usually place in MBA programs? Any info on what the range look like for both the more well-known shops as well as the less well known, MM GE firms?

  • Research Analyst in HF - Other
Jan 18, 2022 - 8:54am

On point #2 regarding comp: could you contextualize this a bit more? What range are we looking at here?

  • Incoming Analyst in PE - Growth
Jan 27, 2022 - 11:36am

I think this started a productive conversation, but I would like to clarify: buyout PE is intellectually challenging. I was replying to OP's interest in financial engineering.

What I was trying to say is that financial engineering is not the most interesting part of PE to me, and I do not believe it is a differentiator of returns.

The firms that are top quartile fund after fund buy businesses and make them much much better by the time they exit.

  • Principal in PE - LBOs
Jan 18, 2022 - 8:49am

Financial engineering absolutely does exist in growth, just not in the form of squeezing out every dollar of leverage to juice returns. Cap tables, waterfalls, incentive plans, preferences, etc. can get very convoluted and IMO can be a lot more interesting than traditional LBO modeling. 
 

note that this is becoming less the case for super competitive minority deals where you're pressured to be fast and easy, but certain funds (Sagemount comes to mind) do this very well. 

  • Analyst 1 in IB - Gen
Jan 18, 2022 - 1:24pm

Growth is becoming increasingly more broad because you have late stage VCs, crossovers (Tiger and the like) that will throw big $ at any B, , C, D round, and then traditional growth forms that love boring software companies with solid ARR and fundamentals (this seems more like buyout). All are very, very different. 

  • Associate 2 in PE - LBOs
Jan 18, 2022 - 8:22pm

Here's 2c: Venture is cool if you like thinking about teams/founders, new markets, and new technology. If you geek out over those things, you'd like venture. Also if you like networking more than deal structuring / diligence / etc. Venture growth is similar, if you want a hybrid between venture and buyout: some more of the quant / deal stuff, but still seeing relatively new technology at an inflection point and the crystallization of interesting new markets backed by founders who are learning to go from guy-who-made-new-tech to guy-running-reasonably-sized-business. If you ask me, both are super cool. But I work in buyouts now and most of my peers would say that is weird fluffy work, no thanks give me a CIM for a $XXXmm EBITDA distributor or some other old world business.

Most Helpful
  • Associate 2 in PE - Growth
Jan 19, 2022 - 10:51am

I did 2yrs in MF buyout and moved to growth. Here is how I think about the comparison after my second year in growth. 

The poster above is completely right when they say that the typical buyout is more mentally engaging than the typical VC/growth deal. In general:

  1. Just by nature of being larger capital commitments, getting control, and being able to implement business plans (and approve budgets), buyouts typically demand a much higher level of mental engagement. Buyout principals care more because they enter in size and own the morning after. You (the junior) learn more as a result. In contrast being in growth in the last 2 years has been high in activity/excitement but low on intellectual stimulation. There are definitely some intellectual investors in growth but even they have all basically gone full retard in the last 2 years due to SoftBank + Tiger + macro environment, and everyone is underwriting far more on unstructured pontification, beta and hype than ever before.
  2. There is way more attention to numbers and business plans in buyouts because maturity of business model means higher predictive power. Even for growth-driven LBOs (far and away the fashion now) the level of DD being done is just more granular in terms of cost structures, customer contracts, etc. Nothing new being said here. In growth/vc, due to deal velocity a common underwriting heuristic is to just take the management case and say something like "lets push it out 1-2 years" - and since mgmt knows this, it just becomes a complete dance. I have closed several deals where the models/memos are utterly worthless, just for paper trail. Our IC's decision was made the moment we heard what space it was in and who else wants to lead. 
  3. Junior level career development is pretty clear cut - if you are under 4 YOE then you will likely learn more about business in buyouts, especially if you get board involvement. I am now one of those insufferable growth guys with half a dozen board observer seats on my linkedin, you can't even tell what I do for a living (tis the fashion). I have done more work as an observer in my buyout portco in 1 month than I have done for all my Portcos collectively since I joined growth.  

However: the thing about buyouts is that like growth and like pretty much everything business-related, it becomes a people game once you go beyond your associate years. Connecting with them, managing them, influencing them. People who realize this early get ahead, people who cling to their numbers and try to stay "intellectual" suffer in career development (except in HFs). Numbers at most become a tool you can use on people to sound smart. In growth/VC you will meet more people AND those people are more likely to lift you up in terms of career development given the growth trajectory nature of these industries. 1 buyout deal is usually enough to build the mental framework. Especially in the economy of the last few years, spending time in growth increasing my network 3-4x in super sexy fast growing fields just seemed like a much higher NPV move and this has been completely true. Sometimes it feels more meaningful because of the tech involved and WLB is marginally better too. 

Upshot: recommend doing 1 year in buyouts just so you get the skillset (which is marketable in growth for sure) but in the long-term? Growth/vc will start to make more and more sense as you progress in your career.  

  • Prospect in IB - Gen
Jan 19, 2022 - 11:05am

Thank you, I was framing my exits in a similar way and tend to agree with your stance on buyout -> growth.

Jan 19, 2022 - 9:09pm
VCMonkey01, what's your opinion? Comment below:

I'm admittedly biased working at a VC firm, but the Tiger/SoftBanks of the world are far more sophisticated than you're giving them credit for.  

SoftBank has obviously made a number of crappy bets over the years but that's because Masa's an egotistical clown who overrules his team all the time. Softbank's core investment team under Masa is mostly very sharp. If you look at their resumes/profiles, you'll see a ton of ex-PE types. I know for a fact that they were aggressively recruiting folks from top PE firms and offering pretty aggressive comp packages. The diligence they do on companies is very deep and thoughtful. You can't get to the same level of precision on a company growing 100%+ YoY as you can on a buyout candidate growing 6% in a GDP-growth market, but that doesn't mean it's all "finger-in-the-air" YOLO. The investments they've made that Masa wasn't jamming down the team's throats have actually performed quite well. Their enterprise portfolio in particular is very strong. 

Tiger is also quite sophisticated in their thinking as well. I think some of their early-stage bets are pretty aggressive, and not ones that I would make, but it's not because they're not thinking these things through, it's because they've decided that false negatives are more costly than false positives.

I've also worked on both buyout deals and growth equity deals. I find both to be quite intellectually engaging. There's just a lot more precision involved with buyouts. Buyouts involve deal structuring/mechanics/leverage that are more complex than growth deals, but I don't think of that as very intellectually interesting. It's just a lot of tedious arithmetic. 

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  • Associate 3 in HF - EquityHedge
Jan 28, 2022 - 1:01am

Thanks for the insightful comment.

I have an idealized notion of you GE/VC guys being exposed to so many situations, your pattern recognition gets to the point where you can peer into the future, perhaps play out in your head where a business or vertical is headed.

Is that completely off base? I imagine the long lead times (many years before you know if an investment succeeds and fails) would be an impediment to refining your judgment. Maybe because early stage has wildly variable outcomes, any predictive work is almost worthless. And all the comments about NPV of expanding your network, being included on deals because false negatives are costly etc. imply that judgment takes a back seat. (Perhaps it comes into play when assessing founder's character?)

TLDR: do you think pattern recognition in GE/VC can be honed to the point where it starts to matter more than the size of your network? Or will the latter always dominate?

  • Analyst 2 in IB - Gen
Jan 23, 2022 - 8:41pm

I think there are specific firms that have evolved from / outgrown the traditional idea of growth investing that usually gets tagged GE / VC and are now comfortably "growth buyout" or GE / PE. OP might be a good fit for firms like these.

They typically have a very large flagship fund to invest everywhere or multiple funds focused on a specific level of the business lifecycle. The junior experience imo can be the best of all worlds (minority, control, full buyout, sourcing, hours, comp) and give you a great experience + opportunities to move into whatever exit you'd like, including traditional buyout. Firms that exist at this intersection of GE / PE (some more to one end than the other) that come to mind are Insight, TA, GA, Vista…

  • Prospect in IB - Gen
Jan 24, 2022 - 2:13pm

OP here, appreciate the post. I agree that these blended-strategy funds would be my best fit. 

  • Investment Analyst in RE - Comm
Jan 25, 2022 - 12:12pm

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Jan 25, 2022 - 1:20pm
kuf135, what's your opinion? Comment below:

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