What are the growth drivers, risks, and opportunities of the industry? The industries of target firms are tech, fintech, biotech, etc. 2005-2023 Wall Street Oasis. The LBO investments focus on mature companies operating in stable industries. The other distinction of Insight Partners is itsInsight Onsite. 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 question is starting to test the degree to which you think like an investor and have an awareness of what factors are important for growth investors to consider. Some of the leading pure-play growth equity funds include: However, there tends to be significant overlap at most firms; many buyout or venture-focused firms will have separate growth equity funds. See you on the other side! Before Bain Capital he spent one year at Fidelity Equity Partners, a middle market growth-LBO fund. Good luck. Suppose the target company addresses all of the above criteria. In effect, these companies can be more flexible and better endure periods of cyclical headwinds. Today, General Atlantic has $84 billion in assets under management and 191 portfolio companies. Could you elaborate a bit more about what kind of technical questions might get asked. The term sheet facilitates the formation of the capitalization table, which is a numerical representation of the investor ownership specified in the term sheet. Omnis molestias sed earum iusto. Usually, growth equity firms seek to invest when the unit economics of the company have been de-risked, and the company is looking to raise money in order to expand to new products, services, or geographies. Be able to tell a compelling story about why you think growth is more exciting/interesting to you vs. traditional PE or VC. They invest in firms with proven market demand and scalability. I've done as few as 5 and as many as 16, so it's a stamina game as well. Relationship management with institutional investors, bankers, lenders, etc. In GE, the process is on-cycle only for mega-funds and top firms. Therefore, the associate will need to accumulate data points from each interaction to build upon the funds understanding of the market. Over 30 years, the firm has done 170 investments, 110 exits, and 19 IPOs. You should understand their investment style and what types of assets they like. A growth equity (GE) firm doesn't have a majority stake in the portfolio companies. ICONIQ, maybe Summit/TA? The investment provides funds so the company can find product-market fit and a sustainable business model. As the name suggests, growth equity (GE) funds invest in "growth" companies. There don't seem to be that many useful resources out there online. GE inherits the advantages and disadvantages of both VC and PE. The titles and responsibilities in GE are pretty similar to PE ones. By height. Expert Help. The expertise of the fund provides valuable input for scaling the business operations of the target firm. Instead, the GE fund only acquires a minority stake (<50%) in the target firm with equity. 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.). 01. Insight Onsite is the firm's division that helps founders and management teams execute strategic growth initiatives. In PE, the recruiting process is highly structured with clear deadlines (typically on cycle). For example, shareholders might want to sell the firm in 5 years. The modeling is still important but not as detailed as the other two funds. This question also gives you a chance to show that you have a framework with which you assess investments. Sometimes preferred stock can be convertible into common equity, creating additional dilution. May. Itaque nihil qui aut harum. Tell me about your recent client in your experience. 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. Other funds recruit off-cycle. The compensation is the lowest among all three. A liquidation preference is a clause in a contract that gives a certain class of shareholders the right to be paid ahead of other shareholders in the event of a liquidation. But, before that, the investment fund gathers information about the short- and long-term goals of management and shareholders. The most notable companies of the firm areArena Solutions,Applied Systems,automotiveMastermind,ButterflyMX, andPointClickCare. Many have some debt. or Want to Sign up with your social account? 25k Interviews, 39k Salaries, 11k Reviews, IB, PE, HF Data by Firm (+ more industries), All-access Pass: All Interview Courses & WSO Services. Guess what? The fund uses liquidation preferences andconvertible securitiesto mitigate those risks of investing in the target company. Luckily, Ive done a deep dive on the topic of sourcing and mock cold calls; check it out. Its very important for firms to screen for fit because in growth equity, junior investment professionals are often on the front lines representing the firm when meeting new investment targets. As with private equity interviews, growth equity interviews can also involve highly technical questions. Especially as you become more senior, your role will evolve to sell entrepreneurs to pick your firms investment over others. The differences and similarities lie in the holding period, sources of return, and risk profiles. The GE funds invest in late-stage companies with established business models. As a result, 175 completed the initial public offerings, while 200 were acquired by or merged with strategic buyers. candy), my overall enterprise will be unprofitable. 6. 4. 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. Suppose the target company doesn't stick to or suddenly changes its strategic decisions. From Investment Banking (IB) to GEThe most beaten path for GE is through exiting investment banking. In this way, some say that negative working capital businesses have growth that funds itself! The typical revenue of those targets is $3M-$50M. Interaction with bankers:The target companies of the GE fund will less likely be marketed by bankers and otherpublic marketplayers. The same training program used at top investment banks. Choose an experience from your resume that . The typical revenue of those target firms is $20M+. In addition, the target firms have an excellent track record of cash generation. All of them can be measured by money multiples, IRRs, holding periods, target industries, the inherited risks (product, market, management, execution, and default). WSO Free Modeling Series - Now Open Through, +Bonus: Get 27 financial modeling templates in swipe file, Growth Equity Interviews - what 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? While the percentage of work related to sourcing work will differ by each firm, the majority of growth equity (GE) funds are well-known for tasking junior employees with cold emailing and cold-calling founders as the first touch with potential investments. Interviews were very heavy behavioral. They acquire a majority or 100% of the target company. That said, to accurately calculate their share of the proceeds (and returns) in a potential exit, it is crucial for growth capital investors to closely examine existing contractual agreements and the cap table. Similar to venture capital firms, growth equity firms do not possess a majority stake post-investment hence, the investor has less influence on the strategy and operations of the portfolio company. This indicates to the interviewer that preparation was done in advance and there is a specific reason for wanting to join this firm in particular. The management team might want to go public to increase their wealth since some managers are paid with equity as a bonus instead of a salary. sounds like a very long process, are you based in the US? Qui rerum laudantium enim sed voluptas. top of my undergrad class of X people), first (e.g. For example, a redemption right is a heavily negotiated feature of preferred equity that enables the holder to force the company to repurchase its shares after a specified period if certain conditions are met but it is rare to see this exercised in reality. Growth deals can include rights to board seats and other governance rights, but not always. 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. If those businesses don't accept external investments, they might stunt their growth potential. Just great content, no spam ever, unsubscribe at any time, Copyright Growth Equity Interview Guide 2023, The most important growth equity interview questions with suggested strategies and answers, First, tell your interviewer what you typically look for in markets (i.e. Growth equity refers to taking minority equity stakes in high-growth companies that have moved beyond the initial startup stage. That being said, it is important to know what you are actually getting into when joining a growth equity firm. Excel Master 4-Hour Bootcamp OPEN NOW - Only 15 Seats 10:00AM EDT. The goal of the initial sourcing calls with prospective portfolio companies is to introduce the fund and assess the current financing situation of the company. While a ROFR and co-sale agreement are both provisions intended to protect the interests of a certain group of stakeholders, the two terms are not synonymous. It is very helpful. Generally, growth rounds occur after early stage venture investments, but before IPO. What has been driving recent revenue growth (e.g., pricing increases, volume growth, upselling)? However, interviewers could ask you to go deeper to make sure you understand the corporate finance behind why thats the case. They invest in firms with proven market demand and scalability. GrowthCap's Top 25 Growth Equity Firms 1 INSTITUTIONAL VENTURE PARTNERS Average Net IRR: 25% - 30%* Institutional Venture Partners (IVP) is a US-based private equity investment firm focusing on later-stage venture capital and growth equity investments. All investment firms love to feel like they are getting the top talent. In your answers, help them out by highlighting areas youve been the best (e.g. Nov 17, 2020 Growth Equity Interview vivrecap IB Rank: Chimp | 6 Hi Everyone, Have an upcoming interview with a team formed from a TPG Growth spinoff. 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. However, the number of places is limited. Recruiting is also very similar to that of private equity. The work consists of. It's popular for the same reason that value-add real estate is popular: it seems to offer the best of both worlds. Sometimes people confuse that GE funds are the versions of LBO funds. 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. Understanding a companys unit economics is a very important part of diligence for growth investors because they seek to take market and execution risk, not business model risk. Almost all businesses need external funding or operational guidance to scale their business. However, it is indeed true that debt and capital structure arbitrage tend not to drive the overwhelming portion of returns. Sint ut est nemo cum eum aut molestiae sint. The purpose of the cap table is to track the equity ownership of a company in terms of number, type of shares (i.e., common vs. preferred), the investment timing in terms of the series, as well as any special terms such as liquidation preferences or protection clauses. It has $39 billion inassetsunder management dedicated to GE investing. Generally, growth rounds occur after early stage venture investments, but before IPO. IVP has a strong portfolio of both enterprise and consumer technology companies. The most important question: does this job makes sense to me? 5-49% ownership) into a company that is growing quickly. They wanted to see if I can consistently generate leads for deals as most of these were sourcing shops. The division consists of over 100 operators and works with portfolio companies in product & tech, sales & marketing, strategy, talent, and business development areas. Unfortunately, people confuse GE with VC due to these similarities. There's some overlap, but they're about as thorough as you can get. Besides saving them time down the road in training, it also serves a dual purpose of screening for candidates who are passionate about investing and have taken the time to learn on their own (both positive signals). I'd understand the fund's strategy, relevant portcos (a couple that you like, a couple that you don't and why). 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. 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 holding period for GE investments is 3-7 years, the IRR is 30-40%, and the exit multiple is 3-7x. A term sheet establishes the specific agreements of investment between an early-stage company and a venture firm. PE firms have experienced massive growth in recent years due to the explosion of assets under management. Enroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. These numbers are pretty low for an internship position: typically 1, maximum of two rounds. It means that you can start working only in 2024. Growth equity (GE) is a type of private equity that focuses on investing inlate-stagegrowth firms that need to scale their businesses. Venture Capital 4-Hour Bootcamp - Sat April 1st - Only 15 Seats 1:00PM EDT. 2005-2023 Wall Street Oasis. Tenetur saepe labore sequi et aut numquam culpa molestiae. As a generalization, associates perform mostly sourcing work whereas senior firm members are responsible for investment theme origination and monitoring portfolio companies. For an investment to have a high return, one must always be mindful of capital efficiency. View 529980509-WSO-Private-Equity-Prep-Package-pdf.pdf from SMG FE 450 at Boston University. The typical examples of expertise are the following: Capital structure optimization (debt financing, restructuring). 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 firm focuses on investing in software companies and is considered an investment leader in this sector. Dicta reprehenderit corporis soluta minima quia tempora. Usually, growth equity firms seek to invest when the unit economics of the company have been "de-risked," and the company is looking to raise money in order to expand to new products, services, or geographies. On the contrary, LBO buyout investments entail change-of-control transactions using lots of debt to finance the investment. new marketing spend), the new bookings will actually contribute to cash flow rather than impair it. I'm new to finance. What firm would you invest in? In this way, its important that candidates show they can handle themselves well in this situation. Their work is usually overseen by Senior Associates or Vice Presidents, who lead the diligence process. For example, let's say you are accepted in 2022. The firm's primary focus is investing in high-growth tech and ScaleUp software businesses disrupting the industries they operate. The interview process has multiple rounds. This feature is commonly seen in venture capital investments. window.__mirage2 = {petok:"2CJth2ePHEVKVslLqIgjI2iXL30.BV.QehnVyPT_sMM-1800-0"}; The company receives cash from the guest at the time of booking, which is often far in advance of the time of check-in when the host is paid. During each round, interviewers check the candidate. Unlike the VC fund, the GE fund looks to the scalability potential of target companies. The more departments the company has, the more managers it must assign. It is one of the hottest topics in private equity. This will be more common for junior roles. 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. The candidates start working in the accepted position after 1.5-2 years, just like on-cycle one. However, it's still easier to get into smaller funds relying on networking. When you're faced with a case study, he says you need to think in terms of: the industry, the company, the revenues, the costs, the competition, growth prospects, due dliligence, and the transaction itself. The GE funds focus on target companies in TMT, financial, healthcare, and other disruptive industries. This is a way of testing: do you understand the value that growth equity provides, and can you sell it to entrepreneurs? 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. 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. Corporis neque ipsa aliquam quas voluptatem. WSO depends on everyone being able to pitch in when they know something. In most cases, the preferred shareholder accepts being automatically converted to common stock in the case of a down round. 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. Still, it may have a portfolio company that offers customized CRM platforms. All the final rounds included some sort of case study (Series A investment pitch, Mock sourcing call with seed co, Modeling test 100m ARR co + presentation on investment recc) - Interesting takeaway is how few seats there are in these roles so if you can get your foot in the door then send it. Et aperiam qui dolorem sunt ad animi facilis enim. Where do the new untapped opportunities for growth lie? Prior to private equity, Daniel worked for three years as a management consultant with Oliver Wyman in Chicago. Since more dilutive impact from shares is included in the broad-based formula, the magnitude of the anti-dilution adjustment is thereby lower. Level up your career with the world's most recognized private equity investing program. In addition, many institutional asset managers such as Blackstone (BX Growth) and Texas Pacific Group (TPG Growth) have a significant presence in growth equity. For example, in the first round, the interviewer will check whether the candidate fits the organization and ask the respective questions. Due diligence requirements:Minority ownership also means less due diligence work in deals. To continue learning and advancing your career, check out these additional helpful WSO resources: 2005-2023 Wall Street Oasis. Once you have your anecdotes be sure to practice telling them in a compelling way. The focus on market analysis is one of the distinguishing characteristics of growth equity interviews. All these help are designed to make custom solutions for portfolio companies in the software industry. A lot of the time there's a modeling test and a mock sourcing call as well, but it depends on the firm. The fund will also check whether the target firm meets the minimum growth threshold. That is growth equity. Welcome to Wall Street Prep! While modeling and learning about the KPIs to track by industry can be learned, interest cannot be taught. For example, most firms have 2-3 interview rounds for analysts & associates. Dolorum sit et omnis nulla quia dolore quidem eligendi. when youre setting up dozens of rows of chairs, if they start to veer off by even an inch they will look crooked!). WSO depends on everyone being able to pitch in when they know something. your framework), Second, quickly summarize your thesis on a given market you like using the framework you just laid out, Third, briefly mention a few leading companies in the space that youve identified through your research, offering to go into greater depth if desired. If I only sold popcorn, Id be profitable but because I just hired a new employee to start selling a new product that hasnt taken off yet (e.g. 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. They involve no or low debt amounts. This provision will prevent minority shareholders from holding back a particular decision or taking a specific action, just because a few shareholders with small stakes are opposed to it and refusing to do so. For these anecdotes, its best to draw from work experience, but dont be afraid to draw from college or extracurricular experience if its really compelling. 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? TA Associates works as an active investor supporting the portfolio companies with its expertise, network, and value-add capabilities. 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. The answer is it depends. EMEA:Amsterdam, London, Munich, and Tel Aviv. Investment bankers are the expected candidates for that role. What Do I Look For During Interviews? However, there are many commonalities and differences between the GE, VC, and PE investing strategies. Keen on working with deals in private markets, Interested in investing, operations, and using critical thinking to boost the firm's growth, Persistent working on long-term projects (building a portfolio company over the years), Open to non-deal work (company operating and underwriting). Rank: Chimp 8. In PE, you have to do heavy due diligence because PE acquires 100% of the target firm and must ensure that the company will be profitable. All Rights Reserved. Technicals throughout and it was based on PnL modeling. The target firms use GE as a tool for growth rather than survival. 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. That way, the investors can generate a higher return than the overall economy. Non voluptatem beatae expedita sit sed omnis. The GE fund uses minimum or doesn't use debt to invest in target companies. -Paper LBO, Quick IRR, Accretion / Dilution? The firm also has credit and public equity investing products. The liquidation preference of an investment represents the amount the owner must be paid at exit (after secured debt, trade creditors, and other company obligations). //