Growth equity interviews

Growth Equity roles are among the most attractive in the investing world right now. Growth investing is attractive because it allows investors to place exciting bets on the future (similar to venture capital), while also bringing rigor and potential for attractive returns (similar to private equity).

However, given the unique nature of growth equity, preparing for growth equity interviews can present many unique challenges and questions for candidates.

Given my experience in the industry – I previously worked as an investor at General Atlantic, and I’ve worked for several years at portfolio company Airbnb – below I put together a comprehensive growth equity interview prep guide to help candidates ace their interviews.

In it, I will discuss the most common (and important) interview questions you’ll be asked in growth equity interviews, in addition to the sourcing, modeling, and case studies you can expect.

What is growth equity

Growth equity refers to investing minority ownership positions in high growth companies that have demonstrated traction and have proven, to a large degree, the viability of their business model.

The businesses that receive growth equity Investment tend to have strong growth and positive momentum. Usually, the proceeds of a growth equity investment goes toward expansion into new products, services, or geographies.

Growth investments typically occur in privately held firms (pre-IPO) that have little or no debt. Because they take minority ownership positions (sub-50%), growth equity firms tend to influence strategy and operations through soft influence and board seats, rather than through outright control of the company (as buyout firms do).

Many find it helpful to think of growth equity investments as the stage after venture capital, but before private equity and hedge funds (LBO buyouts and IPOs, respectively).

Top growth equity firms

Traditionally, the top growth equity firms (the “Big 3”) have been: General Atlantic (where I began my investing career), Summit Partners, and TA Associates. These firms helped popularize the term “growth equity,” and they each have decades of history and stellar investment track records.

In recent years, there’s been an influx of new firms that compete to invest in growth companies. Many top venture firms have raised funds to invest larger amounts of capital in growth rounds of companies. Many top venture firms now have growth funds, including Sequoia, Andreessen Horowitz (a16z), Google Ventures (Capital G), and Founders Fund.

At the same time, traditional later stage investment firms have also raised growth funds, so they can participate in growth investments. Top firms from across the asset management business have gotten in on the action. Examples include:

• Traditional asset manager: Fidelity
• Private equity: KKR Growth, Carlyle Growth, Blackstone Growth
• Sovereign wealth fund: Temasek
• Hedge fund: Tiger Global, Coatue

Finally, another new entrant has joined the growth investing landscape – SPACs. A SPAC is a “special purpose acquisition company” and is often referred to as a “blank check” entity. SPACs are publicly-traded investment vehicles that have commonly been as an alternative for IPOs and a means to take growth stage companies public.

By definition, an investment from a SPAC means the company becomes publicly traded. The growth equity asset class had traditionally focused on investing in private companies; however, SPACs have become popular in part due to the large number of attractive growth stage companies that have sought to go public but wanted to do so through alternative means other than IPO. Top SPAC firms investing in growth-stage companies via SPAC include Social Capital and Altimeter.

How to get growth equity interviews

Just as many firms have sought to gain exposure to the growth asset class, so too have job applicants. Many candidates view growth equity as a sweet spot between venture capital (which invests in exciting companies that are growing) and private equity (which invests with rigor and discipline).

Typical qualifications

The ideal qualifications for growth equity roles vary, based on the role/firm you’re interviewing with and the stage of career you’re in.

Most growth equity firms seek to hire candidates with “traditional” finance background – this includes stints in banking, consulting, etc. However, some growth shops are open to hiring candidates with diverse or non-traditional backgrounds as pre-MBA associates (e.g., former entrepreneur, product manager, other industry role). That said, while venture capital firms are generally more accepting of this than growth equity, but it still does occur with some growth firms.

Below is a summary of the “traditional” qualifications that most growth equity firms look for:

• Undergrad interns and full-time analyst roles – Competitive undergraduate schools with a track record of achievement there. To be successful in interviews, you do not generally need to have studied business or economics; however, this can vary based on the firms’ preference. It’s usually much more important that candidates show high achievement in academics, leadership activities (e.g. entrepreneurial, sports, clubs, or other leadership experiences), and show a passion for investing.
• Pre-MBA associate roles – Former analysts from investment banking and management consulting programs. As the growth equity industry has grown – and the lines have blurred more with venture capital firms – it’s become more common at some firms to hire candidates with “non-traditional” backgrounds for pre-MBA roles. As an example, it’s possible that candidates with industry or entrepreneurial experience may be considered as well. Given most pre-MBA roles are filled by candidates with just 1-3 years of post-undergrad work experience, one’s undergrad qualifications can also play a role in assessing your candidacy as well.
• Post-MBA or partner track role – prototypical qualifications are: (1) experience in investment banking or management consulting, (2) significant pre-MBA experience at a strong investment firm (e.g. private equity, growth equity, maybe venture), and (3) attend a top MBA program. While these qualifications are usually required to be competitive at the top elite firms, the good news is they are not hard requirements for the majority of growth equity firms. As with pre-MBA roles, smaller and newer firms (especially those with more of a “venture capital” mindset) can be amenable to much more diverse backgrounds in candidates, assuming the candidates have still demonstrated high achievement in what they’ve done.

Networking

While it’s unlikely to “get” you the job, networking can be pivotal in getting you an interview. This, of course, depends highly on the firm and the situation, but when done well, it can help you get opportunities.

Some candidates assume that networking might be tough or less effective with firms that rely heavily on headhunters and recruiters to do most of their early candidate screening. While you don’t want to be seen as “going around the process,” I would still give networking a shot, especially if you are having trouble getting plugged in with their recruiter. If you have a great networking conversation with someone at the firm, they can make sure your recruiters adds you to the interview list.

The harder part of networking is usually that it can be difficult to get engagement from growth equity investors, given how busy they are and how many candidates reach out. To help candidates navigate these challenges, I’ve created a separate guide that goes into lots of detail about how to network successfully in growth equity; check it out for more details.

Growth equity interview process

Depending on the firm, recruiting for growth equity can either look like private equity recruiting (highly structured process with a defined “on cycle” recruiting schedule) or venture capital recruiting (less structured process with more “off cycle” opportunities).

Multiple rounds

Regardless of on-cycle vs. off-cycle, a typical interview process usually spans several rounds of interviews, no matter the role. Processes often start with an initial phone screen, generally conducted by an associate or VP-level person at the firm. If a candidate makes it past the initial screen, he or she would move to superday interviews (typically, a batch of interviews conducted on a single day).

If the candidate makes it through the superday, they would likely be assigned a case study assignment (check out my guide on growth equity case studies for more detail), and they might be invited back for an additional superday round of interviews.

Whereas the first superday round is likely to be administered by VP and principal-level professional, the final superday is much more likely to involve group heads, managing directors, and partner-level folks for one or more of the interviews.

Getting an offer

After completing your final round of interviews, firms will usually make a decision as to whether to give you an offer relatively quickly (e.g. in a matter of days). Having been part of this before, I can tell you that usually the bottleneck that prevents firms from making decisions faster is the difficulty in coordinating across all interviewers’ busy schedules to find a time to huddle and make a decision.

During on-cycle recruiting, firms generally make decisions very quickly, sometimes on the same day, in order to be competitive with other buyside firms making offers.

Growth equity recruiters & headhunters

Many growth equity firms, especially the larger and more established ones, do work with traditional headhunters and recruiters to find candidates to interview. There are different approaches to this, but most often, a recruiting firm will be hired to provide the firm a list of pre-vetted candidates, from which the growth equity firm will ultimately decide who gets an interview.

To be considered for this list, candidates in investment banking and consulting programs are solicited to meet with the recruiting firm ahead of time. This conversation with the recruiter is in essence your “first interview” with the growth equity fund as it takes place even before the initial screening interview.

Check out my article on networking for more detail on how to engage with recruiters.

Preparing for growth equity interviews

In the sections that follow, I will deep dive into interview questions that are common and important for growth equity interviews. The major categories are:

• Standard fit
• Behavioral
• Growth investing
• Sourcing & cold-calling
• Technical & modeling

Growth equity case studies & activities

Before we jump into the actual questions though, quick reminder. While the focus of this article is interview questions, most firms also include case studies as part of their interview process.

There are several kinds of growth equity case studies, and they can be quite unique relative to private equity case studies. This variety is one of the most challenging aspects of preparing for growth equity interviews:

• Modeling & case study
• Mock cold call
• Market & sourcing pitch
• Stock pitch
• Paper LBO

Compared to private equity and venture capital interviews

Relative to private equity interviews, growth equity interviews tend to place a greater emphasis on assessment of markets, sourcing & cold calling, and growth modeling techniques. While you need to know LBO modeling (including paper LBO), it’s unlikely you’ll receive questions on advanced LBO modeling tactics.

Relative to venture capital interviews, growth equity interviews tend to place more weight on modeling case studies and rigorous financial analysis. Meanwhile, in venture interviews, you will likely encounter more questions about early stage investing and term sheet understanding. In both types of interviews, you will be expected to discuss markets, trends, and businesses that are attractive to invest in.

Additional interview prep

If you’d like more help preparing for growth equity case studies or interview activities, I’ve written several articles that may be helpful. Also, if you want to supercharge your growth equity interview prep, check out my comprehensive course covering all aspects of growth equity interviews.

Alright, let’s jump into some interview questions!

Standard fit questions

Growth equity interviews tend to be heavy on “fit” questions. It’s very important for firms to screen for fit because in growth equity, junior investment professionals are often on the “front lines” representing the firm through sourcing activities. In this way, it’s important that candidates show they can handle themselves well in this situation.

Furthermore, fit questions are important because of the competitive nature of growth equity investing. Usually growth investments target the best companies in the fastest growing markets. These companies have lots of fundraising options. Therefore, for growth equity firms to “win” a deal, it’s important to screen for “fit” so the firm can put its best foot forward and get management to like them.

The fit questions I’d spend most of your time on are as follows:

• Why our firm
• Why growth equity
• Walk me through your resume
• Walk me through your deals

I’ve previously written about strategies for answering these fit questions; check it out for more detail.

Behavioral questions

Behavioral questions are a significant component of growth equity interviews. You will get several “tell me about a time” questions.

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. The stories should be compelling and flexible such that they can be used for several “tell me about a time when …” situations. They should also have a positive resolution (e.g. even in failure, there should be learning).

At a minimum, make sure you have stories for the following, which seem to be asked with the most frequency in growth equity:

• Tell me about a time you’ve failed – Critical for roles that will have lots of sourcing
• Tell me about a time you’ve taken initiative – Critical given the role can be very autonomous and self-directed
• Tell me about a leadership experience – Similar to the question about taking initiative; funds want people who will take ownership and initiative

For these anecdotes, it’s best to draw from work experience, but don’t be afraid to draw from college or extracurricular experience if it’s really compelling. 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. when you’re setting up dozens of rows of chairs, if they start to veer off by even an inch they will look crooked!).

Once you have your anecdotes be sure to practice telling them in a compelling way. One way to do this is to practice the STAR method, which involves structuring your answer in terms of Situation, Task, Action, and Result.

For more detail, I discuss several more examples of growth equity behavioral questions in my full course on growth equity interviews.

Growth investing questions

While investment skills and instincts can be learned or sharpened, usually firms look for candidates with a base level of investing knowledge already. 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).

While it’s unlikely candidates would encounter all (or even most) of the investing questions that follow, it’s important that candidates internalize how growth investors think, so they can work through questions on their own. That’s why I’ve answered each question below in depth, so you can fully understand and start to develop your own instincts.

If you want more practice questions or more in-depth discussion, check out my comprehensive course to go even deeper.

What does a typical growth equity deal look like?

Here the interviewer is testing your general awareness and research into what you’re interviewing for.

Typically, a growth equity transaction involves a significant minority investment (e.g. 5-49% ownership) into a company that is growing quickly. Usually, the investments do not involve any debt or leverage, and they are not change-of-control transactions. Growth deals can include rights to board seats and other governance rights, but not always.

Traditionally, growth equity deals have involved privately-held companies; however, new fundraising options like SPACs and other vehicles have expanded growth-stage investment opportunities in the public markets as well.

What characteristics do you look for in a growth-stage company?

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. This question also gives you a chance to show that you have a framework with which you assess investments.

There’s lots of different ways you can go with this response, but one approach to consider is my favorite growth equity framework of all time: the 3Ms. A managing director at General Atlantic once told me that growth investing was very simple – all you had to do was look out for the 3Ms:

• Market – Ultimately, the size of any company will be capped by the size of the market it is seeking to serve, so it’s critical that your target’s market be large and fast-growing, with lots of attractive customers
• (Business) Model – In order to create enduring value, a company must have a strong and defensible business model; even if you are a market leader in a huge market, if your business is not capital efficient or if it is prone to margin pressure, it will be challenging to build something value
• Management – In order to execute against a market and a business model, a company needs a strong and visionary management team; it’s critical for a growth company’s leadership team to set an ambitious vision for the company to execute against

Clearly, the 3Ms don’t address every factor that can determine the success of an investment. However, if you get all three of these right, it is highly likely you will have a very successful growth investment on your hands. Sometimes you only need to be right about one or two of the M’s.

Finally, no matter what approach you take with this question, I’d recommend a short caveat for your interviewer along the lines of “One of the reasons I’m excited about this role is to develop and refine my growth investing approach, but my current framework is …” A little humility, especially in an interviewer, can go a long way.

For more on what makes a good investment, check out my guide to pitching a stock in interviews.

How do growth investments differ from LBO buyout investments?

Unlike LBO buyouts, growth investments are typically minority ownership stakes (e.g. 5-49%). They involve no or low debt amounts. And they target businesses that are growing quickly. Typically, the investment involves primary proceeds for the company to use 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. The transaction proceeds are secondary, meaning they go to the selling shareholder rather than the business. The businesses targeted tend to be steady performers with strong and consistent cash flow in order to support the debt.

How do growth investments differ from early stage venture investments?

Growth investments occur once the company has established product-market fit and some degree of business model viability. 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. Generally, growth rounds occur after early stage venture investments, but before IPO.

Meanwhile, early venture investments fund companies at their earliest stage. The investment provides funds so the company can find product-market fit and a sustainable business model. These investments entail much greater risk of failure; given this, the expectation is that most venture investments will fail, but the gains from good bets will more than make up for losses from the bad ones.

This is not the case for growth investments, where the expectation is that every deal will contribute positive returns.

What’s a company that you think is attractive? (aka pitch me a stock)

This is a critical question to prepare for. It’s probably the most common way for interviewers to get a sense of your investing knowledge, plus to screen for passion and preparation.

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.

Also, check out the above question where I discuss how to determine whether a company is a candidate for growth investment (3Ms).

What’s a market that you think is attractive? (aka pitch me a market)

The focus on market analysis is one of the distinguishing characteristics of growth equity interviews.

This question can come in many forms – from “what makes an attractive market” to “what markets do you like right now” – but it’s almost a certainty that you’ll be asked about markets during your interviews.

Growth investors attempt to generate returns primarily from growth. Since a company’s growth trajectory is so dependent on the market they are serving, it makes sense that growth investors focus so heavily on markets.

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. Wh en a lousy team meets a great market, market wins.”

So, how do you respond to this important question? I recommend this structure:

• First, tell your interviewer what you typically look for in markets (i.e. 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 you’ve identified through your research, offering to go into greater depth if desired

To that end, what’s one framework to know if a market is attractive? Well, here’s one example with many things growth investors look for:

• Fast growing – A market’s growth rate will be a major factor in the growth rate of all the companies within it
• Attractive business models – Certain industries can be fast growing, but if they have bad business models (e.g. mobile gaming studios during the mobile boom) they will not be interesting to growth investors
• (Potential to be) large – The market doesn’t need to be huge today, but there needs to be a path. Especially in tech, markets can often appear deceptively small, even at the growth stage (e.g. the market for couchsurfing was nearly zero before Airbnb). It’s important that the customer painpoint be so large that it’s plausible the market could become massive someday
• Investable companies – Most people forget about this, but it’s key. It only takes one promising company in a market to really matter, but all else equal, you’d love for a market to have several companies with promising growth prospects who are looking to raise outside capital. Sometimes industry dynamics, regulations, or other factors mean that there aren’t many “investable” companies in an otherwise attractive market

With this backdrop, I recommend candidates prepare 1-3 market pitches before interviews. Ideally, you’ve picked companies operating in great markets for your stock pitches and sourcing exercise. If so, you’re already covered, but if not, I recommend you apply a similar research process to identify 1-3 great markets you can discuss in depth.

What are the three ways investors make money, and how do growth investors make money?

I love this interview question. I remember being asked this myself during my own interview process with TPG Growth!

The reason why it’s such a great question – especially for growth equity interviews – is it gets to the core of what growth equity is and why it’s unique among other styles of investing.

Let me explain. When most people think about investing, usually they believe the way to make money is to “buy low, sell high.” Yes, ultimately, it’s always the goal to pay a lower price than you sell something for. But as investing pros, we know there’s much more nuance.

There are fundamentally only 3 ways you can make money as an investor. They are as follows:

• Valuation – If you buy a company for 10x revenue and sell it for 12x revenue – assuming everything else stays the same about the company – you will make a positive return on your investment
• Leverage – If you buy a company for 10x revenue, even if you sell it for the same multiple (10x revenue) and revenue has not changed from when you acquired it, you can still make a positive return as an investor if the company has reduced its net debt from the time you acquired it
• Growth – If you buy and sell a company for 10x revenue, and there’s no change in net debt from the time you acquired it to the time of sale, you can still earn a positive return on your investment if the company has grown its revenue

Mathematically, these are the ONLY ways one can earn a positive return as an investor.

Once you understand this, you can start to understand growth-stage investing (and its risks) with greater sophistication. As the name implies, growth investors typically generate returns through company growth (rather than valuation and leverage).

However, it’s actually very common that growth stage investing returns will be reduced due to the effect of valuation (multiple compression). Since growth investments typically demand high valuation multiples at entry, usually the multiple compresses as growth slows by the time you sell your stake.

This means that growth investing requires that you generate returns from growth that are far in excess of your return hurdle, since you must account for the negative effect of valuation multiple compression. All this is why it’s so important to really underwrite your growth projections before investing – you’ll likely be exposed to negative valuation pressure, so if you are wrong on growth, your investment will really be in trouble!

Note, above is a lot of detail, most of which you may not need to mention in your actual interview. However, it’s a fundamental concept you should grock and be able to speak to if the situation demands it.

What is the biggest risk in growth stage investing?

This is a continuation or follow up to the previous question.

One of the biggest risks of growth stage investing is if a company misses their growth projections. The reason why this is such a big risk is it can lead to a double drag for the investment returns.

As explained in the answer above, if a company’s growth slows down, the valuation multiple you can get at exit will likely also be lower (people won’t pay as much for a company that’s not growing fast). Therefore, if a growth company misses its growth target, it will also have valuation multiple compression, both of which will really impair returns.

Many people think that growth investing is relatively safe, since there’s a sense that you have lots of “margin for error” when you are investing in a company that’s growing 50% per year. The thinking goes: if the company slows down to 20% per year growth, will you really be that bad for your investment?

Well, often the answer is yes, growth slowdowns are VERY bad, assuming you did not forecast this drop in your investment case upfront. In this way, growth investing is quite risky, since there’s so much importance on maintaining high growth, which is fundamentally hard to project.

Finally, there are also other risky aspects of growth investing that you could talk about for this question, such as:

• Limited ownership and operational control – Without majority control, it could be challenging to affect change at the company
• Fast decision-making to invest – Given a hot deal, you may be forced to decide to invest quickly, which could limit your diligence and impair decision making

If I told you the growth rate of a company, what else do you need to know in order to estimate returns?

Here’s a neat trick: you can easily estimate growth returns, if you know the company’s growth rate, by using some assumptions. Let’s say we knew revenue growth of the company was projected to be 20% per year throughout the period of the investment. If we assume that there’s no change in net debt (debt minus cash) over the period, and there’s no change in entry vs. exit revenue multiple, then IRR will equal the compound annual growth rate of revenue (in this case, 20%).

No model needed here!

Furthermore, investor returns are ultimately driven by 3 factors (growth, leverage, and valuation). So, if you knew the growth rate of revenue, you would then need to know valuation (entry and exit revenue multiples), as well as leverage (change in net debt over the investment period) in order to estimate returns.

For in depth explanation or background, see the question above related to the 3 ways investors make money.

A couple quick caveats:

• The company’s valuation multiple be expressed in terms of the same metric as growth (e.g. Enterprise Value / Revenue, and Revenue Growth)
• Often, growth companies see multiple compression during the course of an investment, so just know that the assumption of entry & exit multiple parity is a simplifying one and won’t necessarily become true; in this way, in our example you can say that returns would likely have a “ceiling” of 20%, if you expect some multiple compression

I discuss this and other cool tricks in my guide to growth equity case studies.

Is it possible for a growth equity deal to involve a company whose organic growth is single digit percentage?

Yes! As noted in previous questions, there are multiple ways to make money as an investor (e.g. growth, valuation, and leverage). While growth often drives the bulk of returns, it does occur that growth investments generate some portion of their overall return through leverage or multiple expansion.

Besides organic growth, many growth investments generate returns through inorganic growth (e.g. M&A rollups). Therefore, even if the underlying market is only growing at single digits, one could generate greater returns through acquisitions.

What situations might you expect multiple expansion in growth deals?

Multiple expansion is generally rare in growth equity deals, and it is not underwritten in investment cases; however, it can occur. A few possible situations could drive this:

• M&A rollup – A legitimate strategy to drive growth returns can be an M&A rollup. In this case, you might acquire the original target company at a certain valuation multiple; however, after several successful acquisitions, investors may value the overall platform you’ve built more highly, especially if there are advantages to scale or market share leadership in that industry
• Cyclical valuation factors – While a company’s growth trajectory tends to predominate valuation, the degree to which investors favor certain sectors can vary with the timing of the business cycle (e.g. financials)

Why is debt not used in most growth investments?

Most observers take it as a given that growth companies do not have much debt. However, interviewers could ask you to go deeper to make sure you understand the corporate finance behind why that’s the case.

First of all, it’s not true that NO growth investments have debt. Many have some debt. However, it is indeed true that debt and capital structure arbitrage tend not to drive the overwhelming portion of returns.

The reason why is twofold.

1. Unpredictable cash flow – When a company first starts out, it isn’t very creditworthy (i.e. few customers, unproven track record, etc.). This is why the company must raise equity (usually from venture capital investors) in order to grow their business. Even when a company has achieved some scale and is growing quickly, it may still be difficult to raise debt at attractive terms, due to the fundamental volatility and unpredictability of business performance (even if it’s unpredictable in the right direction).
2. Cost of capital – Investing in the business generates higher return than paying off debt. Let’s say we owned a business and we had $1 million to invest in it however we wanted, so we wanted to model all the alternatives. (No one really does this in practice, but let’s roll with it.) Generally, using that $1 million to hire more people and build a new product would generate a much higher ROI (e.g. 200%+) than we would generate by paying off debt (e.g. extinguishing an 8% cost).

How important are business models in growth investing?

As discussed previously, business model is one of M’s in my 3M framework for what makes a great growth investment. Let’s discuss why.

While it’s true that many growth investments have succeeded despite weak business models, for this to work, it usually requires great luck or timing (or a combination of both). In essence, you buy a company, grow it quickly, and then flip it to the next fool (!) before its business model weakness impacts performance.

DCFs are somewhat rare in growth equity investing. However, if you were to build one for a growth investment, you’d discover that a huge percentage of the value of a growth investment is generated in the terminal period (i.e. far in the future). 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.

What this means is, for a growth investment to make sense today, one must be reasonably confident that he or she is investing in a company that will create enduring value (e.g. strong margins) in a capital efficient way over the long-term. Therefore, the best way to create enduring value is to have as strong a business model as possible.

What are unit economics, and why are they important?

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.

Unit economics refer to how profitable it is for the company to sell a single unit of its product or service. Usually, it includes variable costs (e.g. cost of goods sold, labor, and marketing), but it excludes fixed costs (e.g. building, equipment). 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.

For instance, imagine my store sells bags of popcorn for a $1 profit per unit. If I only sold popcorn, I’d be profitable but because I just hired a new employee to start selling a new product that hasn’t taken off yet (e.g. candy), my overall enterprise will be unprofitable.

Understanding a company’s 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. This means they seek to rule out any concerns about the company’s future ability to be profitable (once they reach scale), so they can focus their efforts on assessing growth and expansion opportunities.

Should growth investors care if a company is profitable as a whole?

The answer is … it depends. Many tech startups raise growth rounds and make the strategic decision to not be profitable, so they can spend money on growth and expansion. On the other hand, there are other companies that receive growth investments that are very profitable and have great margins.

If the company isn’t profitable today, there are a couple key factors you’ll consider as a growth investor:

• Is there a viable path to profitability in the future? As a growth equity investor you’ll do lots of analysis on this question (e.g. cohort analysis)
• Is the company profitable in terms of unit-economics? Changes in the funding environment can impact this, but it’s pretty rare that growth investors would invest in an unprofitable company with negative unit economics; usually, unit economics have been proven out by the time a company raises a large growth round

Is working capital important in growth investments?

Yes – working capital can be a key component of cash flow and capital efficiency. 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).

Some business models require massive investments in working capital in order to grow (e.g. online retailers need to buy more inventory before they can sell more products). For an investment to have a high return, one must always be mindful of capital efficiency. 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.

Conversely, so-called “negative working capital” dynamics can help accelerate the growth and capital efficiency of a company. As an example, Airbnb has this very dynamic. 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.

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. new marketing spend), the new bookings will actually contribute to cash flow rather than impair it. In this way, some say that “negative working capital” businesses have growth that funds itself!

How would you try to convince an entrepreneur to take your investment?

This is a way of testing: do you understand the value that growth equity provides, and can you sell it to entrepreneurs?

It’s not uncommon for growth equity deals to be highly competitive with many bidders. After all, these are typically the best companies in the fastest growing markets – so even though firms seek to have “proprietary deals,” there’s usually going to be competition. Especially as you become more senior, your role will evolve to sell entrepreneurs to pick your firm’s investment over others.

For this question, you might acknowledge that you know you won’t win every deal, but your job will be to put the firm’s best foot forward with every entrepreneur.

Some ways to do this are:

• Pitch your firm’s unique capabilities – To win deals, the first thing an investor can mention is to talk up the capabilities of their firm to help create value (e.g. internal consulting, connections with customers, etc) or their unique expertise in the space (e.g. invested in similar companies)
• Sell your firm’s unique story and background – It’s possible that the entrepreneur is moved by the mission and background of your firm or its LPs. This was something we often leaned on at General Atlantic, given its unique founding story
• Encourage optimizing value for the long-run – You could suggest to the entrepreneur that, instead of simply picking the highest bid in this round, he or she should pick the investor that will optimize long-term value
• Be likable, and build long-term relationships – It’s not always possible, but it should be said the best way to attract and win deals is by having an existing relationship with the entrepreneur; also, in the short-run, don’t underestimate the power of simply being likable during the pitch process

What are some ways that growth equity investors can protect against downside risk?

Of course, the first tool at any investor’s disposal to reduce risk is to diligence an investment thoroughly. Another way is to pay lower prices for companies, therefore granting yourself more leeway to achieve a given return.

More specific to growth stage investments, firms also commonly reduce risk by adding preferential deal terms, such as anti-dilution provisions, as part of the deal. Finally, low debt levels can also help growth companies survive and even outperform during slowdowns.

What is a liquidation preference? Why is it significant for investors in “down rounds”?

“Liquidation preference” is a deal term that many growth investors request in investments to limit downside risk. This term gives investors financial protection in the event that the company has a disappointing exit valuation.

To be specific, it lowers risk by guaranteeing that, upon an exit, investors will get paid, at minimum, a certain amount (expressed as a multiple of their original investment) before common shareholders (e.g. employees) are paid any exit proceeds.

An example:

• Investor purchases 20% stake for $2 million ($10 million valuation). She also received a 2x liquidation preference.
• A few years later, the company is acquired for $5 million valuation
• Ordinarily, the the investor would receive $1 million at the exit (20% of $5 million), but because of the liquidation preference she receives is $4 million (2x her original investment), she takes $4 million, which leaves only $1 million for the remaining shareholders

As you can see, such a scenario can massively affect the financial outcome for parties involved when an exit occurs at a lower valuation than the previous round (a so-called “down round”).

Liquidation preference effectively gives investors a “guaranteed” return, assuming the company exits for a valuation that sufficiently clears the preference amount.

Cold-calling and sourcing interview questions

Sourcing is the process of identifying new investment opportunities and building relationships with them. It’s a critical part of the growth investor’s job. One of the most unique elements of growth equity interviews is the emphasis many firms place on the skill of sourcing.

Many firms can test sourcing and idea generation abilities in two ways:

1. Mock cold call – This exercise involves role-playing with your interviewer about what you would say to an investment prospect when cold calling them. This is most common in processes for more junior roles, which tend to be more cold call heavy
2. Market (or prospect) case study – This is a take-home case study where candidates articulate an investment thesis for an industry and identify 3-5 potential investment private targets; in some cases, firms will prescribe the industry to research, and in other cases, you will be asked to pick one yourself

In both instances, this aspect of growth equity interviews is distinct versus traditional private equity recruiting. For much more in-depth discussion, I’ve written a complete guide to growth equity cold calling and sourcing interview questions.

Modeling tests, case studies, and technical interview questions

Last but not least, many growth equity interview processes will require candidates to complete a modeling test or case study as part of interviews. This can occur in the office or as a take-home assignment, but in either it will be time limited.

Compared to private equity interviews, the modeling test is much less likely to have tricky or advanced LBO concepts (e.g. PIK debt).

Instead, it will focus on the fundamentals of modeling. It will also place greater weight on the candidate’s ability to analyze an investment idea and to present a thoughtful investment recommendation via written materials (e.g. memo, slides) or spoken presentation.

Even though you likely won’t be asked to model super advanced LBO features, it’s possible the modeling exercise will require advanced growth features (e.g. detailed revenue builds, SAAS revenue recognition). Also, many growth equity firms – especially those with more of a private equity orientation – ask candidates to perform paper LBO exercises to ensure they grasp the fundamentals of modeling.

Finally, growth interviews do include several technical questions, especially for a more senior role (e.g. post-MBA). It’s common that growth investors will ask technical questions about deal terms, preferred securities, or deal dynamics.

For a detailed and comprehensive look at what you can expect and how to prepare for growth equity case studies, modeling tests, and technical questions. It proves frameworks and examples for how to do:

• LBO modeling
• Paper LBO
• Growth technicals/modeling
• Software