Staying a third year as a PE associate vs. doing something nontraditional

I attended an Ivy, worked as an analyst at a BB/EB, and just began my second year as a pre-MBA associate at an upper middle market PE firm. My firm does not internally promote to senior associate and associates either go to business school or lateral to another firm. I'm planning on going the MBA route and am planning on matriculation in the fall of 2020. A few weeks ago I received an offer to stay at the firm for a third year (that is, summer 2019-summer 2020), and my superiors want my answer in the next couple of weeks so they can determine how many associates they need to recruit for next summer.

My long-term goal post-MBA is to be a private market technology investor, but I'm uncertain if I want to continue in the world of mature companies and LBOs or transition to investing in venture/growth-stage companies. In that context, I'm weighing accepting the third year offer vs. doing something entirely different in that year prior to entering b-school. In particular, I'm contemplating working at an early stage technology company and/or incubator.

Reasons for potentially declining the third year offer:
1. I feel that I would benefit as an investor from a deeper understanding of how technology products are created and what makes them succeed
2. The opportunity to see firsthand if I would enjoy earlier stage technology investing or even entrepreneurship
3. I'm unsure of how much I would truly learn during a third year as an associate in PE (law of diminishing returns)
4. Career flexibility tightens after b-school, and I may not have such an opportunity to explore in the future without incurring significant cost to my resume
5. My b-school application would be slightly more differentiated from the hundreds of other undergrad->banking->PE->b-school applicants
6. Option value, including opportunities to expand my network beyond pure finance, potentially meet some interesting and intelligent contacts, find inspiration/resources to start a company down the road, etc.

Reasons for potentially accepting the third year offer:
1. Early stage tech companies and incubators do not recruit a year out so I'd be declining a third year offer without a clearly defined next step. Maybe it's foolish to give up a solid bird in the hand
2. I'm pretty well-regarded at my firm, and they could feel slighted if I turn down their offer. This could impact my bonus/b-school recommendations
3. I would miss out on third year associate comp, which could help fund b-school
4. If I do decide to return to LBO investing as a post-MBA, firms might see a year spent outside of a traditional finance role as a liability ("Maybe he doesn't really enjoy finance"). This could dampen my post-MBA recruitment prospects.
5. Inertia

For those who spent a third year as an associate, was it worth it? Is it possible to leave finance for a year pre-MBA and still land a solid post-MBA role in finance? Curious to hear your thoughts, particularly if you or someone you know of has taken a step similar to the one I'm contemplating. Thanks in advance.

 

So I went down a similar path a while back (but for very different reasons - I was sick of PE and finance... so it was a lot easier of a decision for me).

It sounds like you're leaning toward peacing out and just want some support for your decision. I'll gladly encourage you to turn it down and try out something new if that's the case. Obviously I'm biased though, and you should take everything I say with a grain of salt. i'll address your points though

"1. Early stage tech companies and incubators do not recruit a year out so I'd be declining a third year offer without a clearly defined next step. Maybe it's foolish to give up a solid bird in the hand"

So what you don't have a defined next step. Life doesn't have to be so carefully planned as 4 years college, 2 IB, 2 PE, 2 B school, etc. Like what's the worst case scenario? it's a year later, you don't have a job... but presumably have a padded bank account and can chill and/or travel for a bit before buckling down and looking for a job.

"2. I'm pretty well-regarded at my firm, and they could feel slighted if I turn down their offer. This could impact my bonus/b-school recommendations"

If they feel slighted then theyre dick bags. Seriously. If it meaningfully affects your bonus, well did you really want to work another year with petty people like that? Also you'll presumably have a new job come app time so this won't even be your most recent work experience re: recs.

"3. I would miss out on third year associate comp, which could help fund b-school"

Yes but maybe you find you really like doing something else. Maybe that something else doesn't require b school to advance and you find yourself not needing/wanting to go get your MBA. Or maybe you find that you loved investing way more than operating. As you allude to, better you found out now rather than later.

"4. If I do decide to return to LBO investing as a post-MBA, firms might see a year spent outside of a traditional finance role as a liability ("Maybe he doesn't really enjoy finance"). This could dampen my post-MBA recruitment prospects."

lol dude, c'mon

"5. Inertia"

Ok this is real. But it's also laziness and risk aversion in disguise. I guess the key question is this: is this a risk you would regret not taking when you're older? Alternatively, if it turns out that you hate working in tech/startups/whatever, is that still an acceptable outcome for you? To me it sounds like yes to both, but hey, it's your life and your call. Don't let some random internetter tell you what to do :)

 

Thanks for your thoughtful reply.

  • "So I went down a similar path a while back (but for very different reasons - I was sick of PE and finance... so it was a lot easier of a decision for me)."

Curious to hear more about your experience. A quick glance at your profile suggests you're in PE right now. Did you leave the industry and later return? If so, what did you do in between? Happy to DM you about this if you'd prefer.

    1. If I do decide to return to LBO investing as a post-MBA, firms might see a year spent outside of a traditional finance role as a liability ("Maybe he doesn't really enjoy finance"). This could dampen my post-MBA recruitment prospects."

Maybe this sounds a bit silly, but this is actually my biggest concern. Looking at senior associate / VP profiles on LinkedIn, it seems like everyone who re-entered PE post-MBA had followed the path well-traveled (2+2+2 or 2+3+2). For most people in most industries, an MBA is a metaphorical reset button and prospective employers pay little attention to what candidates did prior to b-school. However, I fear this may not be the case for PE.

 

My profile is wrong and IDK how to change it – I’m not in PE anymore. I did ~5 years in IB/PE before saying f it and quitting without a plan in place. For the first month or two I actually didn’t think about my career at all, just chilled, traveled, played video games/did hobby stuff, and went to the beach. I wasn’t too worried as I had a few friends that had taken time off in between jobs and they said they didn’t really have problems getting back on track after a few months off (some on the buyside, others in different areas in finance/business generally). At first I wasn’t necessarily planning on leaving finance altogether (inertia…) but the more I thought about it, the whole PE process of raising a fund to do deals that hopefully perform well enough to raise another fund and then repeat the process wasn’t appealing to me long term, and I didn’t really want to get pigeonholed as just a “deal guy” long term so it seemed like a good opportunity to explore what else was out there. Talked to a bunch of contacts about what they were up to, wound up in a strategy role at a growth-stage company and quite honestly pretty happy with where I’m at. Feel free to ask any follow up questions.   I’m not actually intending on going the MBA route, so others can speak better here, but I really have a hard time imagining that you can’t spin working at a startup into a positive, especially if you’re interested in tech focused funds down the road. Something like (1) you wanted to transition your sector focus into tech (which it sounds like is not your primary focus rn) and (2) operational experience within that industry is also obviously helpful too.   One thing also worth considering – maybe you can do the third year and then go to a start up after? Might be a bit of a compromise solution. Obviously the downside is you’re delayed a year, but that’s not like the worst thing in the world either.

 

Since CHItizen did a great job outlining the pros of moving to something new, I'll play devil's advocate here...

Reasons to decline

1) Deeper Understanding: Maybe. You would also benefit as an investor from an extra year investing, meeting management teams, learning about new industries and business models... out in the real world I don't know how much respect one year at a random technology firm in an otherwise typical finance path garners. Typically I think the respect kicks in at 3 years in the operating role.

2) Will I Enjoy It?: Agreed, but remember you have both the pre-MBA summer and the internship to figure it out as well. I know a few friends who did a pre-MBA internship and a summer MBA internship in different industries just to test things out. Not to mention the dozens of students who start their own business during school. I think people figure out within 4-8 weeks if they like a job enough to pursue it full-time.

3) Learning in 3rd Year: Depends a lot on your deal experience to date, and is also something you can negotiate, to a certain extent, with your firm. Will they let you quarterback a deal? Do more sourcing? Manage junior associates? Whatever else might be different? Honestly if they like you enough to give you a third-year offer, they probably like you enough to allow you to do some of these more VP-like things.

4) Career flexibility: The pre-MBA and summer internships help here, though I agree there is not a lot of cost either way... investment firms will look past a one-year stint. You also have another year to get more deal experience and solidify your resume for post-MBA recruiting.

5) B-School Application: I'd say how hard your PE firm goes to bat for you has a huge influence on your B-School chances as well, so being one of a handful of 3rd year associates also increases your chance of getting into business school.

6) Option Value: This is true, can't meet a tech bro without being a tech bro :). I'd say business school will accomplish that in spades for you too if you go into it intentionally.

Reasons to accept

I agree with you. #2 is definitely a worthwhile concern, you'd have to manage it well and no doubt they will likely go to bat less hard for you with b-schools, especially if you'll be applying with other current third-year associates. #4 is not as much an issue, more a marketing thing... similar to how people do "something different" for their summers all the time, it's an easy explanation away.

 

Thanks a lot for your reply. Good to get perspective from the other side. I had a few follow-up questions:

butcherer:
4) Career flexibility: The pre-MBA and summer internships help here, though I agree there is not a lot of cost either way... investment firms will look past a one-year stint. You also have another year to get more deal experience and solidify your resume for post-MBA recruiting.
In your experience, how much does announced deal experience matter for post-MBA recruiting? As I'm sure you know, it really sucks to get to the final hour of an auction process and end up losing an asset to another party, which has happened to me a couple of times in my first year. It seems a bit irrational that firms would reward announced deal experience when all the steps leading up to the announcement (modeling, formulating a thesis, performing diligence, etc.) are constant regardless of whether or not your firm wins the auction. If it's really true that you need announced deals to do well in post-MBA recruiting, this could be a huge reason to stay the third year, especially if I don't luck out with an announced deal in my second year.
butcherer:
I agree with you. #2 is definitely a worthwhile concern, you'd have to manage it well and no doubt they will likely go to bat less hard for you with b-schools, especially if you'll be applying with other current third-year associates.
I'm sure they'd bat harder for me if I stayed three years than if I stayed two; the question I have is how much of an impact that'll have. Do b-schools have soft quotas for PE firms? When firms recommend candidates, do they rank them (whether officially or unofficially)?
 
Most Helpful

Let's get a couple things out of the way.

School recommendations:

If you haven't proven yourself by now to your firm, a third year isn't going to help. As long as you're able to respectfully articulate to the partners why you feel your best move is going to be pursing a not-their-job opportunity in 11 months, they aren't going to hold it against you.

By that I mean you need to be humble but frank. Try something like:

"This has been an immense learning experience and I've valued your mentorship and investment in my professional development. I believe that over the coming year I will grow further on all the dimensions I possibly could in this pre-MBA role, so my focus is on preparing for business school as a launching pad for the next step of my career."

They'll be impressed with your maturity and won't take it unkindly at all. This is assuming you choose to decline the third year, obviously.

How to explore your stated interest:

Your writing shows a commendable clarity of thought. Let me build on that with some insight you may not yet have.

If you want to work in venture, operating experience at the early or mid-stage is valued, you are correct here.

You seem to overestimate how hard it is to get that type of job, however. There is not a single startup that isn't going to take a meeting with a guy who did two years of banking and two years of private equity investing.

They may think you want way too much money for their budget, but if you are serious about using your final year before business school to learn and grow and explore your long-term interest, you ought to be taking the job at just about whatever they offer you for it.

I recently read something interesting on Reddit. A guy said that a mentor and one-time boss of his told him something he's never forgotten. I can't find the actual thread so this isn't verbatim.

"Every job pays you in two ways. It pays you today, and that's in money and title. It pays you tomorrow, and that's in experience and skills you can draw on later."

The guy ended up sticking at that company one more year under an abysmal new manager (his mentor had been transferred out, hence the conversation he had with her), but he spent that year getting every certification possible in some discipline of marketing as well as teaching himself a bunch of coding and programming skills.

He was subsequently able to screw over the asshole new manager by failing to sign and return the contract to move over to the new team when the business was acquired, and in his absence the entire team ground to a halt. He ended up getting a job that paid over twice as much and let him work 100% remotely.

The point I'm trying to make is that if:

  • (a) you are serious about going to b-school
  • (b) you are serious about getting into a private-market technology investing role for the long run
  • (c) you recognize the value of operating experience as a benefit to your ability to recruit for venture or growth roles

... then you ought to be optimizing to get 'paid' as highly as possible on non-financial dimensions in that operating role.

Oscar had a team of four guys that reported directly to Josh for strategic development. They ran all the non-CFO financial analysis, so basically an internal SWAT team doing the work behind the fundraising, acquisitions, and core business planning.

It was Oscar so they paid fairly well for startup-land, but for the guys in that seat it was obviously a step down from the private equity or banking roles they could've had. The guy I knew there left after a little less than two years for a fairly strong private equity shop in a major but non-New York market. He used that role for the exact sort of progression you're looking for.

You can cold email or use your network to get warm intros to the CEOs of any Series B company in town. Sit with them and ask what they need help with, what they would do if they could double their time somehow, what the biggest factors for exponential growth in their business are.

Then work nights and weekends to deliver some value around that. Model the market for a new product feature. Build a BD pipeline of potential channel partners, and map how you can get warm intros through your network. Conduct a pricing analysis to see where you stack against any competition.

This is called "working for free" and it's a major part of how people move around in venture or tech. You sit with someone, figure out what they care about, and prove yourself valuable on those things. They hire you to do exactly what you've shown you're capable of.

The liability of a non-finance role:

This isn't really a factor except perhaps in the megafund range, and I truly don't think it is.

Run the logic yourself: how does someone at KKR who has the thought flit through their mind that the guy who did four total years on 'the track' and is now at HBS after a fifth year in an operating role may not be truly invested in a long-term career in buyout go about diligencing that? He asks the guy a whole bunch of questions ... that's called an interview.

As long as you are coherent about why you took the route you did, nothing is going to hurt you here. Look at it this way. Relative to all the cookie-cutter candidates, they get a guy with some additional perspective who has opted back into the 'track' ... for free, at no premium to the vanilla candidates.

If you're looking for anecdotes, I have seen friends take jobs at Blackstone, Carlyle, NEA, General Atlantic and some hedge funds (that are too small to identify by name and keep people's identities safe) after roles at places like LendingHome, Uber, Square, Cadre, Instacart, etc.

///

To sum this up, you will have no trouble at all securing a post-MBA role in venture, growth, or buyout simply from having taken a year to explore an operating role.

I glanced through some of your comments talking about deals that didn't close and your concerns over how that impacts your future options. You may fare worse in post-MBA recruiting than the all-star who closed three deals in his stint before school, but trust me, those guys are in limited supply and there are plenty of people who get buyout jobs after school without having closed one before.

Also, prioritize what you learn in that fifth year, not how much you get paid. You're at the point where you're already jogging. Now you need to figure out how to start running at the pace you'll maintain over the coming marathon.

That means you need to identify what you like (field), how you like to do it (specifics of role), and where you're happiest doing it (geography and culture).

Lastly, I'd recommend that you besides using your fifth year in a mid-stage (Series B to D) company, you should do a summer internship before starting school and a winter internship in the gap between the first two semesters.

This is pretty easily done given your pedigree. Once you've gotten into school (and there's no reason a guy like you doesn't nail H/S), leverage your undergrad network or the b-school alumni database you have access to once your email gets switched on to get in touch with people.

Make two buckets: venture shops, and growth shops. Try to get a summer internship at a venture place, you want 8-12 weeks there. Save the growth shop for the winter internship because it's more similar to what your prior experience has been.

(In growth, you're evaluating mature companies who simply need to expand; their exponential phase is behind them. That's more analogous to buyout investing than early or mid-stage shops that are backing true startups are.)

Reach out to people with a nice, short note. Explain that you're starting school, you're trying to get a headstart on identifying your post-school plans, and that you'd like to build on your private equity experience by going earlier in the lifecycle - are they willing to take on a free pair of extra hands for a couple months?

///

Following this script, you're able to:

  • extract strong recommendations from a shop that (presumably) thinks well of you
  • spend your fifth year gaining perspective on your longer-term interests from a new angle
  • round out your profile for b-school applications (not only do you look different from the herd, but you also get 30 hours a week back to invest on leadership and extracurriculars that could boost your profile meaningfully)
  • shoot your final bullet on experimentation if you do end up deciding to stay on the 'track' (people never regret the stuff they did, they always regret the things they didn't do; if, with firsthand knowledge, you do decide that buyout is the best for you, you won't ever again be able to take a year off to simply try something brand new as costlessly as you can today)

Good luck either way. I think there's a strong and substantiated argument to be made for trying it.

Now I have to get out on the water before it gets too hot.

I am permanently behind on PMs, it's not personal.
 

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