Preparing for Growth Equity interviews

This question is more around Growth Equity but could be applicable to VC.

When interviewing for these roles, how does one form thoughtful discussions and opinions on companies to pitch? I know that’s one of the key elements of the interviews, but coming out of IB you don’t really work with smaller brands of this size so I’m curious to know how others have educated themselves around smaller companies to pitch.

The industry I’m most interested in is Consumer. 

If you have any market trend reports you can point me to or podcasts you enjoy that would be helpful as well!

Thank you!

 
 

Having a genuine and demonstrable interest in the sector and a company's product/service offering is paramount. When pitching a company in an interview it follows the same structure as one you might get in an IB interview, however, financials are much more opaque so unlikely to spend much time with them. Be able to speak to a history of growth by the company, or if not, how they might benefit from a particular growth strategy e.g. acquisitions, new geographies, increased recruitment/training.

When trying to find companies to pitch or speak about I prefer to work backwards from a particular trend. Let's say you're interested in or the fund has a focus on clean technologies. I would then pick a trend that I can speak to and see future market growth in such as grid stability or submersion cooling and search from there. 

 
Most Helpful

See the thread I linked below on how to build relationships with founders and other VC interview prep advice. Essentially, you'll need to do a lot of groundwork to gain a good understanding of early-stage companies and eventually send firms sourcing ideas. 

VC Interview Prep & Building Relationships with Founders

See this thread for the advice I laid out there: https://www.wallstreetoasis.com/forum/venture-capital/vc-interview-ques…

Growth Equity Modeling Considerations

The modeling component of a growth equity interview will be fairly similar to that of a stand LBO model. However, its normal to include the following two "twists" in growth equity interview modeling tests:

Primary vs. Secondary Equity Considerations

Primary equity involves the issuance of new equity by the company, thereby increasing the company’s equity value. A secondary equity transaction involves the purchase of existing shares from current investors in the business and therefore does not increase the equity value of the company.

Liquidation Preferences

A liquidation preference is an instrument typical in early-stage growth investments, whereby a new investor is guaranteed a minimum return on their investment at the exit. The liquidation preference is junior to all debt-like instruments in the capital structure but effectively ranks senior to ordinary equity.

Growth Equity Case Study Example (remove spaces in link to get it to work)

https://drive .google. com/file/d/1J7_zx1ihQmSteqQl2m46mhPeqzjeOGef/view?usp=share_link

Array
 
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See the thread I linked below on how to build relationships with founders and other VC interview prep advice. Essentially, you'll need to do a lot of groundwork to gain a good understanding of early-stage companies and eventually send firms sourcing ideas. 

VC Interview Prep & Building Relationships with Founders

See this thread for the advice I laid out there: https://www.wallstreetoasis.com/forum/venture-capital/vc-interview-ques…

Growth Equity Modeling Considerations

The modeling component of a growth equity interview will be fairly similar to that of a stand LBO model. However, its normal to include the following two "twists" in growth equity interview modeling tests:

Primary vs. Secondary Equity Considerations

Primary equity involves the issuance of new equity by the company, thereby increasing the company's equity value. A secondary equity transaction involves the purchase of existing shares from current investors in the business and therefore does not increase the equity value of the company.

Liquidation Preferences

A liquidation preference is an instrument typical in early-stage growth investments, whereby a new investor is guaranteed a minimum return on their investment at the exit. The liquidation preference is junior to all debt-like instruments in the capital structure but effectively ranks senior to ordinary equity.

Growth Equity Case Study Example (remove spaces in link to get it to work)

https://drive .google. com/file/d/1J7_zx1ihQmSteqQl2m46mhPeqzjeOGef/view?usp=share_link

This is really helpful, especially for those of us who got into growth equity the "unconventional way" (Equity Research --> Early-Stage Venture --> Growth for the last 4 yrs)

Serious question: I know that TCV includes an LBO test in some of their interviews, and I have seen some shops do the same. Why are the Growth Equity guys using LBO analysis? Are they levering up to make these investments, hence the need for a "sponsor return" analysis? 

Or is this a "Growth Equity PE" vs "Growth-Stage Venture" definition issue, and some shops take a PE mindset while some shops take a Venture mindset (no leverage)?

"Be the Disruptor, not the Disrupted" - Clayton Christensen
 

Larger firm's like TCV with funds that are over $1 billion likely give out LBO models as they want to gauge the candidate's technical ability, even if the actual investments they make utilize little to no debt. Basically, it's just a standardized way of assessing a candidate. For example, if a candidate struggles to build a straightforward three-statement LBO model from scratch in 2 hours, that means they likely (1) didn't get significant modeling experience during their last job and/or (2) haven't taken the time to practice basic modeling; both of which are unattractive from the hiring firm's perspective.

Additionally, larger firms are more likely to structure their investment. A lot of times when a growth equity firm is writing a $100 million plus equity check, they'll be "Preferred Equity Series x" in the capital structure, and they'll usually structure the equity to come in at a certain entity that's more senior to others. Also, a lot of firms will structure investments as convertible notes or secured notes (both debt instruments) that will convert into equity upon either the achievement of performance targets or after the company has passed some sort of diligence thresholds. Both of these instruments (convertible/secured notes) will impact make the return profile and is less straightforward than just a regular common equity investment. This is all a long way of saying that a candidate with technical abilities beyond just being able to calculate equity returns (which is extremely easy to do) will be more attractive than one who is only able to source (i.e. cold call, cold email and manage a CRM) even if that is what they'll be spending the majority of their time doing. Remember that this is the context of firms with fund sizes that are over $1 billion, as those are the ones that are most likely to use a complex structure (even for their smaller equity checks).

Note that there are exceptions to the above and there are probably smaller firms that also structure their equity checks, especially in the current venture environment, as they have a lot more leverage against the entrepreneur than they had previously. 

Update

A comment below correctly mentions that structured investments weren't that common in the past decade, as companies had high bargaining power with investors. Companies have less bargaining power in the current environment, so maybe structured investments become more common, but that will only become apparent with time. Additionally, I believe that if an investor is known for taking a highly structured approach to their investments that is negatively viewed (non-founder friendly).

I should have made that more clear above, so wanted to update this post to call that out.

Array
 

Addressing some of the comments above:

  1. Modeling tests are common because deals have a wide range of capital structure and (modest) leverage is absolutely part of the playbook. This is really more of a check the box part of the interview.
  1. When I was heavily involved in on cycle recruiting (a few years back so maybe things have changed), probably the biggest issue we had was losing top candidates to MF buyout. Consequently, candidates that had genuine answers to “why GE” and “why xyz firm” quickly rose to the top of the pool.
  1. Contrary to the comment above, I think top GE firms typically have less not more structure in their security. This is a function of the highest quality companies having better bargaining power on terms like liquidation preference. Some top GE firms have a lot of structure in their track record, but most of the firms I know getting strong structure are smaller. Maybe this changes in the current environment, but I don’t think heavy structure has been the norm over the past decade for large deals.
  1. Trends are actually pretty obvious. The harder part is networking to the best in class companies. Start by looking through presentations at key industry trade shows and conferences and talking to industry-specific brokers/consultants. As an example, OP mentioned an interest in consumer. Start with a broad trend like organic / natural products and then distill that down one more level to cosmetics or pet food.
  1. If you really want to differentiate yourself, try to understand margin profiles and scalability of companies. A huge part of the GE playbook is knowing which companies can rapidly scale margins. Finding the 70% GM / 10% EBITDA margin business that can scale EBITDA margins to 30-40% is one way to make outsized returns.
 

Thanks for the thoughtful discussion and the insights, guys.

I'm a "growth-stage/late-stage venture capitalist" and as someone who has deployed $100MM+ checks, one shot into late-stage VC investments, I'm almost embarrassed to say that I actually don't know how to do an LBO model, given that I'm a former (buy-side) equity research analyst turned VC.

I do, however, know my way around a pref waterfall / liq pref analysis / pref stack / whatever else people call it (I have heard many terms) very well, having done a few of these late-stage deals a year, for the last few years, and doing both primary rounds and secondary opportunities. I guess that's why I was surprised at the LBO test specifically, given that I've never done anything remotely close to an LBO analysis, mostly just pref waterfall analysis.

I guess it's also tough to give a liquidation preference analysis test given that it's so specific to venture and many analysts coming from IB or Equity Research may not know how to do it... so maybe LBO Modeling is used as a proxy for whether someone can understand that?

And/or, maybe it's once again an issue of the blurring lines between types and stages of investors. The team at Blackstone Growth Equity is probably very different from the team at TCV/Insight/IVP/etc. despite a lot of overlap in the portfolios (Snowflake, Chainalysis, Wiz, for example) and what the senior management is looking for may differ, even within the firms -- ex. my previous point about TCV using LBO modeling in their interview.

As a general matter, a lot of crossover VC's I know probably couldn't do an LBO analysis, gun to their head.

That being said, I should probably do a bunch of LBO modeling practice! I always hate it when an analyst asks me a technical question that I can't answer cold, off of the top of my head, because I'm not the type of person to make someone do something that I can't (or wouldn't) do myself -- so if the kids are all learning this stuff, I probably should too

BTW, to the anon managing director in PE -- if we're both talking about "growth-stage venture capital"/"Late stage venture capital" rather than "Growth Equity" as in PE, I think you're spot on with the structure embedded into growth/late-stage company-issued securities diminishing with each successive round. I remember when we did a Series I investment in 2018 (you can probably guess by the stage and year), it was basically a Common Share with a 1x liquidation preference -- no more veto on the IPO/next round, no revision to the "Qualified IPO" language, no special shareholder rights beyond Information Rights, etc. The view as well at that stage is that the company will most likely IPO, which will make a lot of the structuring moot, given the general practice of all the shareholders just being converted into Common Shares right before the IPO, thereby defeating the different liquidation preferences and similar terms that were embedded in different Series/Classes of shares issued previously. In fact, over the last few years, all six of my exits were via IPO

I do agree with you, anon MD in PE, that there could be a change in the amount of structure in later rounds. I'm traveling right now and meeting with other GP's in different geographies, the sense I get is really that a lot of the old school stuff -- and GP's actually writing term sheets, rather than just having Cooley pretend to write one -- is going to come back. I, for one, am really jazzed to see this come back. One of our managing partners was telling me that in the past, the reason why the late-stage/crossover guys were willing to pay high valuations, was because of the downside protection, and sometimes built-in minimum return provision like a 2.5x liquidation preference or some kind of additional warrants/sweeteners for the invetsor in case milestones are not reached, structured into the Preferred Share that would be issued in the later stage -- and this was completely separate from a Pay-to-Play round, this would have been a normal late-stage round. It was the old Carl Icahn "Your Price, My Terms" thing, where the theory is that if it works out, that liquidation preference and additional warrants won't matter, but the investor is protected on the downside. For example, the Palantir Series E had a bunch of these features back in 2011 -- mostly done through warrants.

This IPO exit or bust trend is also probably going to change over time, given that valuations in the private markets will have to come down -- this will probably make the M&A route available again in the future, as the companies get back down to a size that is digestible for potential acquirers, both on an acceptable absolute dollar figure needed to buy the targets, and reduction potential regulatory scrutiny around mega-deals.

Once again, I'm just a VC, and I'm really interested to get the reaction of the IB/PE/HF guys, who are way more sophisticated than the majority of VC's

"Be the Disruptor, not the Disrupted" - Clayton Christensen
 

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