Is there a viable exit strategy planned by existing investors and management? Unlike VC firms, the growth equity firm has less execution risk, which is unavoidable for all companies. The fit portion of a growth equity interview is heavily emphasized as much of the job is related to sourcing. Lets discuss why. Instead, theres just a proposed idea for a certain product, technology, or service, The commercialization stage typically refers to the Series C to D (and beyond) funding rounds, and there are usually several large, institutional venture firms and growth equity firms involved, Thus, its difficult to raise much capital; however, the amount of funding required is usually very minimal since its only meant to build a prototype and see if this idea is feasible in terms of product-market fit, Here, the role of the capital and the firm is to guide the company experiencing high growth to get past the inflection point by helping refine the product/service offering and the business model, At this stage, the investors providing this type of seed investment are usually friends, family, or angel investors, The commercialization stage is when the value proposition of a startup and the possibility of a product-market fit have been validated, meaning institutional investors have been sold on this idea and contributed more capital, The focus at the proof-of-concept stage is validating the idea with the goal of showing this potential to outside investors to raise capital, Especially in highly competitive industries (e.g., software), the focus shifts almost entirely to revenue growth and capturing more market share, as profitability is not the priority, Growth equity investors take minority stakes in high-growth companies attempting to disrupt a particular industry, Buyout funds care most about the defensibility of the cash flows of the LBO target, which means they like stable industries with minimal disruption risk, For growth-oriented investors, differentiation is a major factor and often the leading rationale for investing (i.e., the value of a product increases from being proprietary and difficult to replicate, or protection from the patent), The use of high levels of debt is one of the key drivers of returns in a leveraged buyout, which forces the PE fund to be more risk-averse and constrains the type of industries they invest in, Debt is not used by growth equity firms or used very sparingly (and most often in the form of convertible notes), Horizontal software companies provide complete, all-encompassing solutions for their customers, which can be used across a broad range of industries (e.g., Office 365, Salesforce CRM, QuickBooks), Vertical software companies target specific niche segments and many can redefine their target industries to meet the needs of underserved markets, In effect, horizontal software providers have more potential revenue based on the total addressable market (TAM), If a vertical software company comes in with a product that adds meaningful value, it can quickly establish itself as the industry leader, Most horizontal companies have time to adjust their strategy as larger markets take more time to saturate; thus, these companies can pivot and narrow their target customer over time based on which end markets are most profitable, Once market leadership is established, the company can then create a tailored suite of solutions based on their understanding of their end markets specific challenges and needs thereby, such companies experience lower rates of customer churn and can incur fewer sales and marketing expenses, SaaS tends to consist of winner takes all markets and only a few companies will end up dominating a market as they become the standard products used across most industries, By specializing in a particular market, the company is making a high risk-high return bet that it can gain sufficient traction in this focused segment, Higher rates of churn are seen here as horizontal software companies are better funded and many can afford to offer more features and strategies (e.g., freemium), Many of the targeted markets are neglected for valid reasons such as technical hurdles, lack of market demand, specialization requirements, and research & development costs, Due to the increased competition in horizontal software markets, which tends to be more cut-throat, sales and marketing spend is generally higher given the extensive number of potential customers and the competitive race for customer acquisitions, The potential revenue might not justify the expenses and level of risk that is undertaken, Even if the company becomes a market leader, growth opportunities can eventually diminish and force the company to pursue expansion into adjacent markets, making the gap between sales and marketing spending narrow at scale. The work consists of. Suppose the target company addresses all of the above criteria. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value). Some business models require massive investments in working capital in order to grow (e.g. Suppose the target company doesn't stick to or suddenly changes its strategic decisions. However, the management team might not always address the requirements. Before Bain Capital he spent one year at Fidelity Equity Partners, a middle market growth-LBO fund. Meanwhile, early venture investments fund companies at their earliest stage. What Do I Look For During Interviews? As venture capital legend Marc Andreessen once said, the #1 company-killer is lack of market. He has also said, When a great team meets a lousy market, market wins. This button displays the currently selected search type. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Firm Knowledge:What's our firm's current portfolio? There are two types of recruiting in GE: The on-cycle recruiting starts in July and ends in October for analyst positions. Typically, the investment involves primary proceeds for the company to use to expand to new products, services, or geographies. This question can come in many forms from what makes an attractive market to what markets do you like right now but its almost a certainty that youll be asked about markets during your interviews. Liquidation Preference = Investment $ Amount Liquidation Preference Multiple. Did not come close to any other PE, IB, PERE or VC interview I've done but pulled small elements from all of these industries. The typical revenue of those target firms is $20M+. 2. I remember in my own interviews I was once asked, tell me about a time when you demonstrate attention to detail. The anecdote I used was from a job I had in college putting out tables and chairs for an event space (i.e. From a GE internship to an analyst positionThis way is quite competitive and usually targets the Analyst position at mega-funds. However, some firms might have even 4-5 interview rounds for candidates. Furthermore, target companies usually operate in the technology, financial, healthcare, and other innovative sectors. The off-cycle recruitment starts after the on-cycle recruitment in December and ends in February. The questions from his checklist are below. So you can move to the industry from more general background likemanagement consultingandproduct management. Yes, Airbnb must eventually payout the host, but the negative working capital dynamic gives Airbnb more cash flow flexibility and efficiency, such that each time the company invests in growth (e.g. 1. proven business model with demonstrated product-market fit 2. organic revenue growth, solid unit economics with great scalability 3. strong management team 4. competitive advantage and ability to address threats 5. viability of growth plan and future opportunities Top SaaS questions 1. Will be a combination of behavioral/culture/fit questions and technical questions. Understand the flavor of GE that you're applying for (late-stage venture deals vs. growthy PE deals, industry/sectors of interest, size and investment instruments etc). Some of today's top growth equity firms also got their start during this period including TA Associates, . sounds like a very long process, are you based in the US? 5-49%). One type of fund is a mix of VC & PE funds. I'm joining a GE firm in April and below is what my interview process consisted of: Where did the technical questions arise here? 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? For example, in the first round, the interviewer will check whether the candidate fits the organization and ask the respective questions. In essence, you buy a company, grow it quickly, and then flip it to the next fool (!) Recusandae magni tenetur id quis sed sint. The other distinction of Insight Partners is itsInsight Onsite. Insight Partnersis a venture capital & private equity investment firm founded in 1995. Recently went through on-cycle for growth equity Associate positions so I can chime in here. This is a way of testing: do you understand the value that growth equity provides, and can you sell it to entrepreneurs? As a generalization, associates perform mostly sourcing work whereas senior firm members are responsible for investment theme origination and monitoring portfolio companies. Deals are simpler than PE deals; thus, finding a great company first is a winning strategy. window.__mirage2 = {petok:"2CJth2ePHEVKVslLqIgjI2iXL30.BV.QehnVyPT_sMM-1800-0"}; They invest in firms with proven market demand and scalability. The firm also has credit and public equity investing products. There's some overlap, but they're about as thorough as you can get. In addition, the strategic Resources Group and Capital Markets Group divisions of the firm support companies with organic and acquisitive growth guidelines. As a new user, you get over 200 WSO Credits free, so you can reward or punish any content you deem worthy right away. 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. Oftentimes, the initial investment theme will come from higher-ups, and then the junior employees will be responsible for compiling a list of companies that are connected to the given theme. 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. However, if the analysts apply for an urgent role, they can start instantly. Over and out! Often, the investments made by growth equity funds are referred to as growth capital because they are intended to help the company advance once its product / service has been proven to be viable. What kinds of questions are asked? As of today, the firm has $30B+ in committed capital. For each fund you interview with, you should look up their prior deals and have specific questions. Startup founder, now what? In most cases, the preferred shareholder accepts being automatically converted to common stock in the case of a down round. Interaction with bankers:The target companies of the GE fund will less likely be marketed by bankers and otherpublic marketplayers. In PE, the recruiting process is highly structured with clear deadlines (typically on cycle). Unlike venture capital and buyout, growth equity is an appealing form of investing to many prospective applicants because it offers the chance to invest in businesses that are fast-growing AND are established enough to allow quantitative analysis and financial modeling during diligence. Why growth equity/this firm/position? That is the distinctive feature of GE's investing strategy. Stakeholders' long-term exit strategy. Additionally, growth investments are almost always made in the form of preferred equity and structured with protective provisions for preferential treatment, as well as redemption rights. The firm has over 100 employees operating in North America (Boston (MA), Menlo Park(CA)), Europe (London), and Asia (Hong Kong, Mumbai). Nulla nemo molestias perferendis a. Dolores velit beatae dolorem culpa vel doloremque et excepturi. WSO depends on everyone being able to pitch in when they know something. Omnis molestias sed earum iusto. The term sheet is a non-binding agreement that serves as the basis of more enduring and legally binding documents later on. Technicals throughout and it was based on PnL modeling. One way a company can have positive unit economics, but still be overall unprofitable, is when it is investing in new growth projects with upfront overhead or hiring required. This is a critical question to prepare for. In the capital structure, preferred stock sits right above common equity, but has lower priority than all types of debt. The firm's competitive advantage is its pattern recognition in scaling up companies. For this question, you might acknowledge that you know you wont win every deal, but your job will be to put the firms best foot forward with every entrepreneur. With growth, the technical modeling is important but not as big of a deal as big LBO players, so don't expect a 5 hour LBO--when I interviewed at a growth place, it was a 90 minute LBO and now that I work here it's more of a valuation exercise with a downside, base, and upside case. top of your class of 2,000 students, elected to study government president). All Rights Reserved. A lot of the time there's a modeling test and a mock sourcing call as well, but it depends on the firm. Since the associate is usually the first person to reach out to the management team of a prospective investment, he or she often serves as the firms first impression. Unlike LBO buyouts, growth investments are typically minority ownership stakes (e.g. 6. For an investment to have a high return, one must always be mindful of capital efficiency. They invest in firms operating inTMT, financial, and healthcare industries. The fund uses liquidation preferences andconvertible securitiesto mitigate those risks of investing in the target company. Therefore, for growth equity firms to win a deal, its important to screen for fit so the firm can put its best foot forward and get management to like them. Sure there are some exceptions. Many tech startups raise growth rounds and make the strategic decision to not be profitable, so they can spend money on growth and expansion. Therefore, if the investor had put in $1 million with a 2.0x liquidation preference, the investor is guaranteed $2 million back before common shareholders receive any proceeds. On the other hand, there are other companies that receive growth investments that are very profitable and have great margins. View 529980509-WSO-Private-Equity-Prep-Package-pdf.pdf from SMG FE 450 at Boston University. The interview question categories are: Growth equity interviews tend to be heavy on assessment of fit. Nevertheless, the founders of those businesses want to retain their voting power and share of ownership while scaling their businesses. Summit Partners | 46,414 followers on LinkedIn. Which factors make the business model and customer acquisition strategy more repeatable to facilitate increased scalability and becoming profitable someday? In recent years, growth equity has become one of the fastest-growing segments within the private equity industry, as reflected by the amount of fundraising activity and dry powder (i.e. They acquire a majority or 100% of the target company. Preferred stock has a higher claim on assets than common stock and typically receives dividends, which can be paid out as cash or PIK.. Generally, growth rounds occur after early stage venture investments, but before IPO. This means they seek to rule out any concerns about the companys future ability to be profitable (once they reach scale), so they can focus their efforts on assessing growth and expansion opportunities. Case Studies:Firms often ask a candidate to do a 3-statement model by focusing on the drivers of revenues and expenses. The growth equity case study is the source of much anxiety for candidates preparing for interviews. The businesses targeted tend to be steady performers with strong and consistent cash flow in order to support the debt. Management interaction:Since the growth equity will not have controlling ownership, the interaction with the management team in GE is less than that in PE. The fund might not always offer the solution directly. These are more weighted questions than in the interview process in PE, so prepare well. All Rights Reserved. Ditto, very heavy on behaviorals and little emphasis on modeling or traditional PE analysis. But it is common to see the senior employees of growth equity firms taking at least one board seat as a condition of investing. Instead, the fund might be just one of the several minority shareholders. The founders stake will be reduced from 100% to 80%, while the value owned by the founder has increased from $5 million to $16 million post-financing despite the dilution. That is the distinctive feature of GE's investing strategy. 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, How do you measure yourself against other golfers candy), my overall enterprise will be unprofitable. Both GE and VC investments focus on the companies operating in innovative industries (technology). 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. The funds expect to get a return from only 1 or 2 successful startups that can cover all other expenses. Industries with higher levels of LBO activity normally exhibit single-digit industry growth rates and are thus mature industries. //]]>. The Return comes in revenue growth, profitability, and strategic value. Interviews were very heavy behavioral. The "average" amount of proceeds is $225 * 10 = $2,250, and the "average" Exit Year is Year 4 (no need to do the full math - think about the numbers - and all the Debt is gone). Nowadays, most private equity and venture capital firms focus their effort on growth equity investing due to its favorable characteristics. 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. Usually, it includes variable costs (e.g. Itaque nihil qui aut harum. Even if a company could grow quickly, if they require lots of funding to fuel each new leg of growth, you will want to be cautious as an investor since the company may require more new capital to scale, which will decrease your return by dilution. The division consists of over 100 operators and works with portfolio companies in product & tech, sales & marketing, strategy, talent, and business development areas. The LBO funds invest in portfolio companies using high leverage. The fit questions Id spend most of your time on are as follows: Related to fit, firms seek to get to know candidates on a deeper level by asking about their resume and past experiences. //