Preparing for Growth Equity interviews

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. 

^see above, meant to post this comment as a reply.

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.

2. 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.

3. 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.

4. 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.

5. 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