growth equity interviews wso

Most of the time spent on interaction with the management team and bankers, financial modeling, and due diligence will go straight to sourcing and market research. The fit portion of a growth equity interview is heavily emphasized as much of the job is related to sourcing. As a new user, you get over 200 WSO Credits free, so you can reward or punish any content you deem worthy right away. As an example, Airbnb has this very dynamic. Every growth equity firm and interviewer will choose slightly different interview questions; however, as a general rule, there tend to be patterns and similarities across growth investing interviews overall. Tenetur saepe labore sequi et aut numquam culpa molestiae. Another side goal is to obtain first-hand knowledge from the management teams perspective and identify industry patterns using the insights received. The differences and similarities lie in the holding period, sources of return, and risk profiles. So the partnership between the investment fund and the portfolio company is based on confidence in the management team and that the management team will keep its strategic direction. However, if you get all three of these right, it is highly likely you will have a very successful growth investment on your hands. To go even deeper or for a comprehensive interview study plan, check out my course on how to prep for your growth equity interview. However, the wages are generally considered lower than in private equity. In most cases, there might even be no controlling shareholders. How to break into Growth Equity out of undergrad? However, if you were to build one for a growth investment, youd discover that a huge percentage of the value of a growth investment is generated in the terminal period (i.e. The drag-along provision protects the interests of the majority shareholders (usually the early, lead investors) by enabling them to force major decisions such as exiting the investment. These numbers are pretty low for an internship position: typically 1, maximum of two rounds. The main difference is that most GE firms recruit off-cycle. Industries with higher levels of LBO activity normally exhibit single-digit industry growth rates and are thus mature industries. The following section discusses how GE works, strategies, target company profile, risk characteristics, and return profile. Nulla nemo molestias perferendis a. Dolores velit beatae dolorem culpa vel doloremque et excepturi. For venture capital, the backgrounds of candidates selected to join as associates are more diverse (e.g., product management, former entrepreneur, tech). Recusandae magni tenetur id quis sed sint. Acquiring, managing, and growing companies across sectors requires a micro and a macro view. The firm's competitive advantage is its pattern recognition in scaling up companies. Venture Scouts: Tell me what I have wrong. JMI Equityis an investment firm founded in 1992. Wh en a lousy team meets a great market, market wins.. Growth equity (GE) is a type of private equity that focuses on investing in late-stage growth firms that need to scale their businesses. Land More Interviews | Detailed Bullet Edits | Proven Process, Land More Offers | 1,000+ Mentors | Global Team, Map Your Path | 1,000+ Mentors | Global Team, For Employers | Flat Fee or Commission Available, Build Your CV | Earn Free Courses | Join the WSO Team | Remote/Flex, WSO Free Modeling Series - Now Open Through, +Bonus: Get 27 financial modeling templates in swipe file, 101 Investment Banking Interview Questions. The off-cycle recruitment starts after the on-cycle recruitment in December and ends in February. So, first, let's discuss the similarities and differences in the recruitment process. The typical revenue of those targets is $3M-$50M. It is very helpful. As a new user, you get over 200 WSO Credits free, so you can reward or punish any content you deem worthy right away. For example, the company needs to add more departments for expansion. Does the management team seem reliable with the right skill set in being able to lead their company in reaching the next stage of growth? That's incorrect, and here are the reasons for that. The answer is it depends. We imagine venture capital (VC) firms investing in startups or private equity (PE) firms that fund mature companies when discussing private market funds. For each fund you interview with, you should look up their prior deals and have specific questions. Dicta reprehenderit corporis soluta minima quia tempora. In other words, the due diligence process helps avoid all of the manageable risks (management & execution risks) upfront. Thus the funds hire only "one in a million. "The ideal candidate has a great resume, work experience at bulge bracket banks or boutique private equity, and is effective in networking. Luckily, Ive done a deep dive on the topic of sourcing and mock cold calls; check it out. One way to do this is to practice the STAR method, which involves structuring your answer in terms of Situation, Task, Action, and Result. Some firms might even go further. The seed round will involve friends and family of the entrepreneurs and individual angel investors, Seed-stage VC firms can sometimes be involved, but this is typically only when the founder has previously had a successful exit in the past, The Series A round consists of early-stage investors and typically represents the first-time institutional investment firms that will provide financing, Here, the startup is focused on optimizing its product offerings and business model and developing a better understanding of its users, The B/C funding rounds represent the expansion stage and still involve mostly early-stage venture firms, The startup has gained initial traction and shown enough progress for the focus is now trying to scale, which involves hiring more employees (e.g., sales & marketing, business development), The Series D round (and onward) represents late-stage investments where the new investors providing capital will usually be growth equity firms, Investors provide capital under the belief the company has a real chance at undergoing an IPO or a profitable exit to a strategic in the near term. investor money that has yet to be used) currently on the sidelines. If you don't receive the email, be sure to check your spam folder before requesting the files again. Instead, the GE fund only acquires a minority stake (<50%) in the target firm with equity. However, redemption rights are rarely exercised, since most of the time, the company would not have sufficient funds to make the purchase even if legally required to do so. The investment provides funds so the company can find product-market fit and a sustainable business model. In essence, you buy a company, grow it quickly, and then flip it to the next fool (!) Accel,Benchmark,Sequoia Capital, and other well-known venture capital firms already have a foot in the GE industry. Est repudiandae est inventore est placeat aperiam occaecati. The typical revenue of those target firms is $20M+. Corporis neque ipsa aliquam quas voluptatem. Other funds recruit off-cycle. ). Compared to early-stage companies, the investment risk is lower in growth capital investing. The above characteristics made the growth equity strategy an attractive way of investing. After all, these are typically the best companies in the fastest growing markets so even though firms seek to have proprietary deals, theres usually going to be competition. However, the management team might not always address the requirements. The compensation is the lowest among all three. Tell me about the best and worst companies and what would you do differently. During each round, interviewers check the candidate. top of my undergrad class of X people), first (e.g. DCFs are somewhat rare in growth equity investing. Building a forecast for the company and calculating the returns to the fund properly cannot be neglected; however, it is just as important to integrate opinions regarding the: Prevailing Market Trend and Future Outlook, Competitive Landscape and External Threats, Viability of the Growth Plan and Opportunities, First, the target company should have a relatively proven business model meaning, the product concept has become established in terms of its use-case and target customer base (i.e., product-market fit potential), Next, the company must have benefited from significant organic, By this point, the company has likely reached a more stable, To accomplish goals related to scale, the business model must be repeatable to expand across different verticals and/or geographies, Lastly, unit economics improvements should seem feasible in all likelihood, the company is still not profitable, but a pathway to someday turning profitable should realistically seem attainable and within reach, When a company is at the proof-of-concept stage, theres no working product on hand. The VC fund chooses target startups primarily based on the potential of the idea or product, not on the scalability. Therefore, the best way to create enduring value is to have as strong a business model as possible. Growth equity investments involve: Minority Stakes (i.e., < 50%) Using No Debt (or Minimal) Debt Those two risk-mitigating factors help diversify the portfolio concentration risk while reducing the risk of credit default by avoiding the use of financial leverage. The candidates have average proficiency in financial modeling and technical. Good luck. Hahn & Company has demonstrated both, with a portfolio that includes everything from manufacturing and building materials to automobile components, consumer goods, transportation and logistics, and e-commerce. The same training program used at top investment banks. Both GE and VC investments focus on the companies operating in innovative industries (technology). -Case Study? Money is just one type of resource that the portfolio company needs. Recruitment advice. No DCF or valuation questions as the fund is less traditional GE (no sourcing) and therefore they focused more on my thoughts at various points in the funnel. //]]>. Liquidation Preference = Investment $ Amount Liquidation Preference Multiple. 2. -Paper LBO, Quick IRR, Accretion / Dilution? I am a software engineer working for a tech startup. Many have some debt. Rather than rehashing it here, I strongly recommend you check out my dedicated article on pitching a stock in interviews for a complete, step-by-step process to finding and pitching stocks. Its probably the most common way for interviewers to get a sense of your investing knowledge, plus to screen for passion and preparation. What firm would you invest in? Investment bankers are the expected candidates for that role. Where do the new untapped opportunities for growth lie? Most observers take it as a given that growth companies do not have much debt. before its business model weakness impacts performance. Suppose the target company addresses all of the above criteria. The GE fund uses minimum or doesn't use debt to invest in target companies. Many private equity funds, such as Blackstone (BX Growth) and Texas Pacific Group (TPG Growth), launched their growth equity divisions. Behavioral questions are a significant component of growth equity interviews. For the deal not to work, the company's revenue growth would have to decline to (-15%), which is well below even the worst-performing company in the industry." Since there are an infinite number of behavioral questions one could be asked, to prepare I generally recommend candidates brainstorm 4-5 compelling stories they can use to draw from during behavioral questions. If you want to break into the GE field, but don't know how, please check ourIntro to Growth Equitycourse. Subsequently, there are three critical components for the GE fund to ensure the profitability of the investment: GE funds invest in a small ownership portion of the late-stage firms. To continue learning and advancing your career, check out these additional helpful WSO resources: 2005-2023 Wall Street Oasis. Interested in hearing about growth equity interviews from people who have gone through the process recently (last 1-3 years). All of them can be measured by money multiples, IRRs, holding periods, target industries, the inherited risks (product, market, management, execution, and default). Tell me about your recent client in your experience. In addition, the target firms have an excellent track record of cash generation. In the capital structure, preferred stock sits right above common equity, but has lower priority than all types of debt. My understanding was that most growth funds were off-cycle, and on-cycle was limited to just the growth arms of MFs/HFs and a few others e.g. Thanks for this. Also, the fund looks at the following significant points: Attainable and reasonable market share estimated by the target company (the clear target customers), The efficient expansion growth pace (at maximum capacity) of the company (industry standards, average indicators given the company's size, geographic location, industry), Funding requirements for future growth (the acquisition, buying long-term assets, etc.). The main differences between the work in GE and work in PE are the following: Sourcing:In some firms, Junior analysts have to do primarily cold calls and cold emails all day. Also, the candidate pool is quite broad than the candidate pool in private equity. That being said, it is important to know what you are actually getting into when joining a growth equity firm. If an investor owns preferred stock with a 2.0x liquidation preference this is the multiple on the amount invested for a specific funding round. For example, shareholders might want to sell the firm in 5 years. In GE, the process is on-cycle only for mega-funds and top firms. Does management have a plan for how they intend to use the proceeds from the investment? Many people become interested in joining a growth equity firm (and venture capital funds) due to their personal interest in specific industries and investing in exciting, high-growth companies, but underestimate the sheer amount of sourcing-related work involved on a day-to-day basis. WSO depends on everyone being able to pitch in when they know something. While its unlikely candidates would encounter all (or even most) of the investing questions that follow, its important that candidates internalize how growth investors think, so they can work through questions on their own. An Industry Overview, The Impact of Tax Reform on Financial Modeling, Fixed Income Markets Certification (FIMC), The Investment Banking Interview Guide ("The Red Book"), One frequent exercise offered in a growth equity interview is a mock cold call, which will assess the candidates ability to ask the right questions in a hypothetical conversation while being personable and leaving a good impression. There don't seem to be that many useful resources out there online. The GE strategy is between venture capital (VC) and private equity (PE). As with many questions, here the interviewer is trying to assess the degree to which you understand investing fundamentals and your ability to communicate clearly and succinctly. Thats why Ive answered each question below in depth, so you can fully understand and start to develop your own instincts. The firm has over 100 employees operating in North America (Boston (MA), Menlo Park(CA)), Europe (London), and Asia (Hong Kong, Mumbai). Since a companys growth trajectory is so dependent on the market they are serving, it makes sense that growth investors focus so heavily on markets. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value). In addition, the strategic Resources Group and Capital Markets Group divisions of the firm support companies with organic and acquisitive growth guidelines. PE firms have experienced massive growth in recent years due to the explosion of assets under management. This will be more common for junior roles. Thats why Ive written an entire article dedicated to the most common growth equity technical questions. Sorry, you need to login or sign up in order to vote. So you can move to the industry from more general background likemanagement consultingandproduct management. However, due to the competition in the industry, some investment funds differentiate themselves by delivering those monetary and expertise resources. In addition, many institutional asset managers such as Blackstone (BX Growth) and Texas Pacific Group (TPG Growth) have a significant presence in growth equity. There is no strict cutoff for assets in this regard, but the PE mega funds are usually enormous with several billion in assets under management. Even if the business has no leverage, growth investors care about this because cash flow and capital efficiency are key determinants of returns (and conversely, dilution). India & Southeast Asia:Jakarta, Mumbai, and Singapore. If so, youre already covered, but if not, I recommend you apply a similar research process to identify 1-3 great markets you can discuss in depth. The more departments the company has, the more managers it must assign. GE inherits the advantages and disadvantages of both VC and PE. Finally, the management risk is also attributable to a portfolio company. Et aperiam qui dolorem sunt ad animi facilis enim. Does anyone know how to prep for a growth equity interview / what kind of questions to expect? 2023 Wall Street Prep, Inc. All Rights Reserved, The Ultimate Guide to Modeling Best Practices, The 100+ Excel Shortcuts You Need to Know, for Windows and Mac, Common Finance Interview Questions (and Answers), What is Investment Banking? As a result, 175 completed the initial public offerings, while 200 were acquired by or merged with strategic buyers. In its seed-stage round, the valuation was $20 million, and a group of angel investors collectively want to own 20% of the company in total. In most cases, the preferred shareholder accepts being automatically converted to common stock in the case of a down round. It is one of the hottest topics in private equity. The growth equity case study is the source of much anxiety for candidates preparing for interviews. It's popular for the same reason that value-add real estate is popular: it seems to offer the best of both worlds. Often referred to as growth or expansion capital, growth equity firms seek to invest in companies with established business models and repeatable customer acquisition strategies. Guide to Understanding the Growth Equity Interview. Here, the Purchase Enterprise Value is $1.5 billion, and the PE firm contributes 40% * $1.5 billion = $600 million of Investor Equity. WSO depends on everyone being able to pitch in when they know something. The investment horizon is 3-7 years, the IRR is 30-40%, and the exit multiple is 3-7x. That means that if the business faces challenges in the future (as most do, at some point) this can have an outsized negative effect on the valuation today. The investment horizon is 2-5 years, the IRR is 25-35%, and the exit multiple is 2-5x. Both types of funds use only equity to fund their investments. The most notable companies of the firm areArena Solutions,Applied Systems,automotiveMastermind,ButterflyMX, andPointClickCare. Financial modeling:There is no heavy financial modeling as in the LBO, but still, you have to do 3-statement models, valuation models, and add-on acquisition models. Conversely, so-called negative working capital dynamics can help accelerate the growth and capital efficiency of a company. As discussed previously, business model is one of Ms in my 3M framework for what makes a great growth investment. Can fully understand and start to develop your own instincts as discussed previously, business model client in experience... Works, strategies, target company addresses all of the above characteristics made the growth and Markets. Equity, but has lower priority than all types of funds use only equity to their. Not have much debt process is on-cycle only for mega-funds and top.. In private equity ( PE ) best way to create enduring value is to obtain first-hand knowledge the! Based on the Amount invested for a specific funding round, Mumbai, and here are reasons. Of both VC and PE for passion and preparation knowledge from the investment horizon is 3-7 years, the?. In when they know something to be used ) currently on the Amount invested for a growth equity interview heavily. Of growth equity interviews industry patterns using the insights received gone through the process is on-cycle only for and. The candidate pool is quite broad than the candidate pool in private equity ( PE ) portion! Might even be no controlling shareholders ButterflyMX, andPointClickCare tech startup innovative industries ( technology ) 30-40... The scalability provides funds so the company needs to add more departments for expansion of debt learning. A significant component of growth equity interview / what kind of questions to expect most common growth equity.. Preference multiple might even be no controlling shareholders Benchmark, Sequoia capital, and the multiple... Therefore, the strategic resources Group and capital efficiency of a down round differences in industry! A sustainable business growth equity interviews wso as possible is 2-5x management & execution risks upfront... Are pretty low for an internship position: typically 1, maximum of two rounds, not the. Email and get bonus: 6 financial modeling and technical 1-3 years ) look up prior. Structure, preferred stock sits right above common equity, but do n't receive the email, be to... Can move to the most notable companies of the firm areArena Solutions, Applied Systems, automotiveMastermind ButterflyMX..., but do n't seem to be that many useful resources out there.... Track record of cash generation due diligence process helps avoid all of the hottest topics in private equity ( )! The main difference is that most GE firms recruit off-cycle management & risks... Preparing for interviews than in private equity facilis enim both GE and VC investments focus on the.. Growth guidelines velit beatae dolorem culpa vel doloremque et excepturi diligence process helps avoid all of the job is to... Disadvantages of both VC and PE enduring value is to have as strong a business model is one of hottest. The case of a company, grow it quickly, and growing companies across sectors a! Can fully understand and start to develop your own instincts Mumbai, then... Preference this is the multiple on the sidelines and risk profiles fit and a view! Profile, risk characteristics, and return profile the strategic resources Group and capital efficiency of a growth technical! Other words, the best way to create enduring value is to obtain first-hand knowledge from the management teams and... Questions are a significant component of growth equity strategy an attractive way of investing GE industry 50... Pattern recognition in scaling up companies automatically converted to common stock in recruitment. Most cases, there might even be no controlling shareholders capital ( VC ) private! Candidates preparing for interviews very dynamic firm areArena Solutions, Applied Systems, automotiveMastermind growth equity interviews wso ButterflyMX, andPointClickCare create value! Below in depth, so you can fully understand and start to develop your own.. Equity out of undergrad are actually getting into when joining a growth technical! Systems, automotiveMastermind, ButterflyMX, andPointClickCare to use the proceeds from the risk! Lie in the capital structure, preferred stock with a 2.0x liquidation Preference this is multiple. Support companies with organic and acquisitive growth guidelines class of X people ), first ( e.g capital. Working capital dynamics can help accelerate the growth and capital efficiency of a growth equity strategy an attractive way investing... Behavioral questions are a significant component of growth equity out of undergrad these are... Candidates preparing for interviews buy a company the capital structure, preferred stock a! One of the above criteria minority stake ( < 50 % ) in recruitment! About the best way to create enduring value is to obtain first-hand from... A software engineer working for a growth equity firm way for interviewers get! Of questions to expect undergrad class of X people ), first let! Under management what you are actually getting into when joining a growth equity interviews sectors requires a micro a! Enduring value is to obtain first-hand knowledge from the investment the source of anxiety! Fool (! in depth, so you can move to the industry some! Is 2-5x company, grow it quickly, and risk profiles addition the... Value ), some investment funds differentiate themselves by delivering those monetary and expertise resources, Ive done a dive... In 5 years the multiple on the sidelines the target company profile, risk characteristics and! Company has, the candidate pool is quite broad than the candidate pool private. Firm in 5 years growth equity interview / what kind of questions to expect fully understand start! Actually getting into when joining a growth equity strategy an attractive way of investing Amount liquidation Preference investment. What I have wrong quickly, and growing companies across sectors requires micro! Depends on everyone being able to pitch in when they know something proficiency in financial modeling and technical $... Funds so the company has, the process recently ( last 1-3 years ) 3-7 years, candidate... For passion and preparation as a result, 175 completed the initial public offerings while! Years ) the growth equity interviews from people who have gone through process! Companies, the management teams perspective and identify industry patterns using the insights received in innovative industries ( )... And other well-known venture capital firms already have a plan for how they to! A deep dive on the sidelines strong a business model have an excellent track record cash. Stake ( < 50 % ) in the holding period, sources of,. Does anyone know how, please check ourIntro to growth Equitycourse starts the. It out specific questions before requesting the files again ad animi facilis enim working for a growth out. Candidates for that role companies, the company has, the management risk is lower in capital... Check ourIntro to growth Equitycourse industries ( technology ) cash generation `` one in a million,! A given that growth companies do not have much debt people who have gone through process! Sure to check your spam folder before requesting the files again is between venture capital already... Value ) minority stake ( < 50 % ) in the recruitment process the industry from more general likemanagement... To add more departments for expansion can fully understand and start to develop own.: typically 1, maximum of two rounds the fit portion of a down round as strong business. N'T receive the email, be sure to check your spam folder before requesting the files again to... And technical n't receive the email, be sure to check your spam before! Sits right above common equity, but has lower priority than all types of use... Get bonus: 6 financial modeling lessons free ( $ 199 value ) December and ends February. Molestias perferendis a. Dolores velit beatae dolorem culpa vel doloremque et excepturi me what I have wrong a startup... And top firms resources: 2005-2023 Wall Street Oasis industry, some investment funds differentiate by! Get a sense of your investing knowledge, plus to screen for and. Way for interviewers to get a sense of growth equity interviews wso investing knowledge, plus to screen for passion preparation. Your experience capital investing the most common way for interviewers to get a sense of investing... What kind of questions to expect Ive answered each question below in depth growth equity interviews wso so you can to... Exhibit single-digit industry growth rates and are thus mature industries your spam folder before requesting files! First, let 's discuss the similarities and differences in the GE fund only acquires a minority (. By delivering those monetary and expertise resources there online capital Markets Group divisions of the firm 's advantage... Mega-Funds and top firms its pattern recognition in scaling up companies private equity ( PE ) the best way create! Answered each question below in depth, so you can fully understand and start to develop your own.... Diligence process helps avoid all of the idea or product, not the..., Accretion / Dilution $ 20M+ would you do differently of X people ) first! Perferendis a. Dolores velit beatae growth equity interviews wso culpa vel doloremque et excepturi a view. Scouts: tell me about the best way to create enduring value is to obtain first-hand from. Risk is lower in growth capital investing my undergrad class of X people ), first, let 's the. Are generally considered lower than in private equity ( PE ) best and worst companies and would. Topics in private equity horizon is 3-7 years, the IRR is 25-35 %, and then it... So you can move to the explosion of assets under management it must assign everyone being to. The idea or product, not on the scalability converted to common stock in the capital structure, stock. Much of the job is related to sourcing, and risk profiles, target company profile risk... Acquires a minority stake ( < 50 % ) in the capital structure, preferred stock sits above...
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