Growth Equity Interview Guide

Growth Equity Interview: Career Overview

The growth investment strategy is oriented around taking minority stakes in high-growth companies with proven market traction and scalable business models. Using the proceeds from the investment, the capital funds the company’s expansion strategy moving forward.

Considered to fall right in between venture capital and buyout private equity, growth equity invests in companies that are rapidly expanding but have reached an inflection point where the business model and viability of the product concept have already been established.

Compared to early-stage companies, the investment risk is lower in growth capital investing. However, most growth investments have yet to become net margin profitable and the cash flows generated are not predictable like those targeted by LBO funds (i.e., not capable of handling a highly levered capital structure).

To review the fundamental concepts to understand for a growth equity interview, see our guide linked below:

Growth Equity Primer

Growth Equity Career Path

The responsibilities delegated to growth equity associates are comparable to private equity associates at control buyout funds.

However, the main distinction is the increased amount of sourcing and less financial modeling responsibilities for professionals in growth equity.

As a generalization, associates perform mostly sourcing work whereas senior firm members are responsible for investment theme origination and monitoring portfolio companies.

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.

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 goal of the initial sourcing calls with prospective portfolio companies is to introduce the fund and assess the current financing situation of the company.

Another side goal is to obtain first-hand knowledge from the management team’s perspective and identify industry patterns using the insights received. Therefore, the associate will need to accumulate data points from each interaction to build upon the fund’s understanding of the market.

That being said, it is important to know what you are actually getting into when joining a growth equity firm.

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.

For senior members at the firm, the amount of interaction with management will be limited relative to control buyouts, since most investments consist only of a minority stake. But it is common to see the senior employees of growth equity firms taking at least one board seat as a condition of investing.

Top Growth Equity Firms in 2023

Some of the leading “pure-play” growth equity funds include:

• TA Associates
• Summit Partners
• Insight Venture Partners
• TCV
• General Atlantic
• JMI Equity

However, there tends to be significant overlap at most firms; many buyout or venture-focused firms will have separate growth equity funds.

In addition, many institutional asset managers such as Blackstone (BX Growth) and Texas Pacific Group (TPG Growth) have a significant presence in growth equity.

Growth Equity Recruiting Candidate Pool

In comparison to recruiting for investment banking or private equity, the process for growth equity recruiting tends to resemble that of venture capital – the process is less structured and the chances of receiving an “off-cycle” offer are higher.

For venture capital, the backgrounds of candidates selected to join as associates are more diverse (e.g., product management, former entrepreneur, tech). The candidate pool coming from non-finance roles in growth equity are fewer than VC but still more than in private equity.

Growth Equity Interview: Behavioral Questions (“Fit”)

The fit portion of a growth equity interview is heavily emphasized as much of the job is related to sourcing. 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 firm’s “first impression”.

Typically, a substantial portion of a growth equity interview is discussion-based and consists of questions related to one’s interest in a particular industry.

Some introductory questions to expect in all growth equity interviews are:

For each, it would be best to personalize your responses to fit the fund’s investment strategy and industry focus. 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.

It can be very beneficial to have interest areas that overlap with the focus of the fund, on top of having the proper soft skills to represent the firm. While modeling and learning about the KPIs to track by industry can be learned, interest cannot be taught.

Furthermore, interest in a certain industry can lead to much better performance on the job (e.g., cold calling outreach, networking at industry conferences, contributing at internal firm meetings).

Growth Equity Interview: Exercises

Growth Equity Interview: Technical Questions

Q. When looking at a potential investment for the first time, what are some general characteristics you might look for?

1. 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)
2. Next, the company must have benefited from significant organic revenue growth in the past (i.e., in excess of 30%) and obtained a sizeable portion of a defined market, which permits the company to gradually begin introducing initiatives related to upselling and customer retention
3. By this point, the company has likely reached a more stable growth rate around 10-20%, which enables the company to shift some of its focus to profitability –  but still, the upside for expansion should present significant opportunities, which is the purpose of growth capital
4. To accomplish goals related to scale, the business model must be repeatable to expand across different verticals and/or geographies
5. 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

Q. How does the “proof-of-concept” and “commercialization” stage differ?

Q. What is growth equity and how does it compare to early-stage venture investing?

Growth equity refers to taking minority equity stakes in high-growth companies that have moved beyond the initial startup stage. 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.

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.

Here, the objective is more related to riding the ongoing, positive momentum and taking part in the eventual exit (e.g., sale to strategic, Initial Public Offering).

Unlike VC firms, the growth equity firm has less execution risk, which is unavoidable for all companies.

Nevertheless, the risk of failure is much lower in GE. This is because the product idea potential has been validated, whereas product development is still ongoing in earlier stages of the business lifecycle.

Unlike VC investing, where it is widely expected that the majority of investments will fail, companies that reach the growth equity stage are less likely to fail (although some still do).

Q. How does the targeted investment vary between control buyout and growth equity funds?

Q. In terms of the industries where potential investments are pursued, how do growth equity and traditional buyout firms differ?

Growth equity is centered on disruption in “winner-takes-all” industries and the pure growth of the equity in their investments, whereas traditional buyouts are focused on the defensibility in profit margins and free cash flows to support the debt financing.

On the other hand, in industries where buyouts take place, there is enough room for there to be multiple “winners” and there is less disruption risk (e.g., minimal technology risk). Industries with higher levels of LBO activity normally exhibit single-digit industry growth rates and are thus mature industries.

Q. For growth equity investors, why is it important to perform diligence on term sheets and capitalization tables?

A term sheet establishes the specific agreements of investment between an early-stage company and a venture firm. The term sheet is a non-binding agreement that serves as the basis of more enduring and legally binding documents later on.

The term sheet facilitates the formation of the capitalization table, which is a numerical representation of the investor ownership specified in the term sheet. 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.

A cap table must be kept up to date to calculate the dilutive impact from each funding round, employee stock options, and issuances of new securities (or convertible debt). 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.

Q. Compare and contrast the advantages and disadvantages of being a “horizontal” versus “vertical” software company?

Q. How do growth equity investors protect against the downside risk?

Growth equity investments involve:

1. Minority Stakes (i.e., < 50%)
2. 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. In effect, these companies can be more flexible and better endure periods of cyclical headwinds.

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.

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.

Q. Imagine that you are meeting with the management team of a potential growth investment. Which questions would you want to be addressed?

• 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?
• What are the long-term financial goals in terms of revenue and market share growth?
• Which factors make the business model and customer acquisition strategy more repeatable to facilitate increased scalability and becoming profitable someday?
• How much value do the company’s products/services provide to their customers?
• Where do the new untapped opportunities for growth lie?
• Does management have a plan for how they intend to use the proceeds from the investment?
• What has been driving recent revenue growth (e.g., pricing increases, volume growth, upselling)?
• Is there a viable exit strategy planned by existing investors and management?

Q. Walk me through each of the funding rounds?

Q. Give me an example of the drag-along provision in use?

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.

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 example, suppose the stakeholders with majority ownership desire to sell the company to a strategic, but a few minority investors refuse to follow along (i.e., drag-along the process). In that case, this provision allows the majority owners to override their refusal and proceed onward with the sale.

Q. What are the typical characteristics of preferred stock?

Most growth equity investments are made in the form of preferred stock, which can best be described as a hybrid between debt and equity.

In the capital structure, preferred stock sits right above common equity, but has lower priority than all types of debt. Preferred stock has a higher claim on assets than common stock and typically receives dividends, which can be paid out as cash or “PIK.”

Unlike common equity, the preferred stock class does not come with voting rights despite holding seniority. Sometimes preferred stock can be convertible into common equity, creating additional dilution.

Q. What is a liquidation preference?

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). The liquidation preference determines the relative distribution between the preferred shareholders and the common shareholders.

Often, the liquidation preference is expressed as a multiple of the initial investment (e.g., 1.0x, 1.5x).

Liquidation Preference = Investment $ Amount × Liquidation Preference Multiple

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. This feature is commonly seen in venture capital investments.

Given the high failure rate in venture capital, certain preferred investors desire assurance to get their invested capital back before any proceeds are distributed to common stockholders.

If an investor owns preferred stock with a 2.0x liquidation preference – this is the multiple on the amount invested for a specific funding round. 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.

Q. What are the two main types of preferred equity investments?

1. Participating Preferred: The investor receives the preferred proceeds (i.e., dividends) amount plus a claim to the common equity afterward (i.e., “double-dip” in the proceeds)
2. Convertible Preferred: Referred to as “non-participating” preferred, the investor receives either the preferred proceeds or the common equity conversion amount – whichever is of greater value

Q. Tell me about the difference between an up round vs. a down round.

Prior to a new financing round, the pre-money valuation will first be determined. The difference captured between the starting valuation and then the ending valuation after the new round of financing determines whether the financing was an “up round” or a “down round.”

• Up Round: An up round is when post-financing, the valuation of the company raising additional capital increases compared to its previous valuation.
• Down Round: A down round, in contrast, refers to when the valuation of a company decreases after the financing round.

Q. Can you give me an example of when dilution would be beneficial for the founder and existing investors?

As long as the startup’s valuation has increased sufficiently (i.e., “up round”), dilution to the founder’s ownership can be beneficial.

For example, let’s say that a founder owns 100% of a startup that’s worth $5 million. 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. The founder’s 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.

Q. What is the pay-to-play provision and what purpose does it serve?

A pay-to-play provision incentivizes investors to participate in future rounds of financing. These types of provisions require existing preferred investors to invest on a pro-rata basis in subsequent financing rounds.

If the investors refuse, they subsequently lose some (or all) of their preferential rights, which most often include liquidation preferences and anti-dilution protection. In most cases, the preferred shareholder accepts being automatically converted to common stock in the case of a down round.

Q. What is a right of first refusal (ROFR) and is it an interchangeable term with a co-sale agreement?

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.

• Right of First Refusal: The ROFR provision gives the company and/or the investor the option to purchase shares being sold by any shareholder before any other 3rd party
• Co-sale Agreement: The co-sale agreement provides a group of shareholders the right to sell their shares when another group does so (and under the same conditions)

Q. What are redemption rights?

A redemption right is a feature of preferred equity that enables the preferred investor to force the company to repurchase its shares after a specified period. It protects them from a situation when the company’s prospects turn bleak. However, redemption rights are rarely exercised, since most of the time, the company would not have sufficient funds to make the purchase even if legally required to do so.

Q. What is a full ratchet provision, and how does it differ from a weighted average provision?

• Full Ratchet Provision: A full ratchet is an anti-dilution provision that protects early investors and their preferred ownership stakes in the case of a down-round. The investor with the full ratchet’s conversion price will be re-priced to the lowest price at which any new preferred stock is issued – in effect, the investor’s ownership stake is maintained at the expense of substantial dilution to the management team, employees, and all other existing investors.
• Weighted Average: Another anti-dilution provision used far more often is called the “weighted average” method, which uses a weighted average calculation that adjusts the conversion ratio to account for past share issuances and the prices they were raised at (and the conversion rate is lower than that of a full-ratchet strategy, making the dilutive impact less severe)

Q. What is the difference between broad-based and narrow-based weighted average anti-dilution provisions?

Both broad-based and narrow-based weighted average anti-dilution protections will include common and preferred shares.

However, broad-based will also include options, warrants, and shares reserved for purposes such as option pools for incentives. Since more dilutive impact from shares is included in the broad-based formula, the magnitude of the anti-dilution adjustment is thereby lower.