Preparing for growth equity interview questions
Note: This article is part of a broader series on how to prepare for growth equity interviews
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.
In this article, I will discuss the major categories for growth equity interview questions, and I will provide specific examples of questions and answers, where possible. The interview question categories are:
- Standard fit questions
- Resume & deal questions
- Behavioral questions
- Investing questions
- Technical questions
- Sourcing questions
Standard fit questions
Growth equity interviews tend to be heavy on assessment of “fit”. 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 when meeting new investment targets. 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 growth equity? This is such an important interview question that I’ve written an entire guide on ‘why growth equity’
- Why our firm? Firms look for candidates to have done a base level of research about the fund; candidates should understand its strategy, investment parameters, and sector focuses at a high level (to the extent publicly available)
- Why tech/software investing? Tech and software investing are so popular these days; prepare an anecdote or two that authentically connect your passion for these areas with your past (e.g. things you’ve studied, projects you’ve taken on, sectors you’ve previously invested in, etc)
- Why (should we pick) you? Sometimes firms ask this, but even if they don’t, this is one of the most important questions you can think through during your prep; authentically, why should a firm choose you? What are the 1-3 areas of your candidacy that differentiate and that you’d like to make sure you emphasize?
Growth equity resume & deal questions
Related to fit, firms seek to get to know candidates on a deeper level by asking about their resume and past experiences. Besides letting them get to know you, the interviewer is trying to understand how you’ve made decisions in your career and how your experiences have prepared you (or not) for the job at hand.
Key experiences to highlight here are areas you’ve excelled relative to competition (e.g. top of your class of 2,000 students, elected to study government president). All investment firms love to feel like they are getting the “top talent.” In your answers, help them out by highlighting areas you’ve been the “best” (e.g. top of my undergrad class of X people), “first” (e.g. first analyst to be picked for X honor in their first year), or “only” (e.g. only associate at my bank who to be picked to work on X top transaction).
- Walk me through your resume? Practice the 2 minute walkthrough of all your experiences; take care to highlight the top 2-3 ways you standout; to prep for follow up questions, I recommend practicing the following for each line of your resume: what is it, why did you do it, and how did it help prepare you for growth equity
- Tell me about your undergrad/MBA experience? Be ready to highlight why your undergrad or MBA experience was amazing; potential themes are learning how to learn quickly, leadership experience from extracurriculars, finance and accounting courses, doing hard or impressive things
- What’s the most impressive thing you’ve ever done? This is one of my favorite questions; other than being a “smart young person” and getting into a generally good school, what have you done that’s hard or impressive?
- Walk me through your deals? If you are applying from investment banking, consulting, or other forms of investing, be ready to discuss your top 2-4 deals in detail
- What was your role on [deal on your resume]? Be ready to talk about how you were lead analyst/associate on deals and took on a broad role, but don’t oversell since folks know that as a junior person you aren’t doing MD-level stuff
- Is [deal on your resume] a good company? Even if the deal wasn’t an M&A deal or even a banking deal, prepare ahead of time to have a point of view on the business models of each company you list in your deals
- Would you have invested in [deal on your resume]? Same as above, no matter what deal type, be ready to have a point of view on whether you would invest in the company listed
Growth equity 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).
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.
At a minimum, make sure you have stories and answers prepared for the following, which seem to be asked with the most frequency in growth equity:
- Tell me about a time you’ve taken initiative / been a self-starter – critical given the role can be very autonomous and self-directed
- Tell me about a time you’ve shown leadership – similar to the question about taking initiative; funds want people who will take ownership and initiative
- Tell me about a time you’ve done sales or entrepreneurship – especially for roles that will be heavy on sourcing or cold calling, funds look for sales or entrepreneurship experience where you’ve had to put yourself out there and deal with rejection
- Tell me about a time you’ve adversity or failed – similar to the question about sales or entrepreneurship
Growth equity investing questions with answers
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 growth equity interview prep 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.
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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.
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.
- 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).
- 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
Growth equity technical questions
As with private equity interviews, growth equity interviews can also involve highly technical questions. That’s why I’ve written an entire article dedicated to the most common growth equity technical questions.
Growth equity sourcing questions
This is a very important topic, especially if you’re applying to a role that’s heavy on sourcing or cold calling. This will be more common for junior roles. Luckily, I’ve done a deep dive on the topic of sourcing and mock cold calls; check it out.
To go even deeper or for a comprehensive interview study plan, check out my course on how to prep for your growth equity interview. Over and out!