The Types of Growth & VC Case Studies

‍Preface

While over 500 people applied to our latest growth equity associate position, with many having strong pedigree, their ability to think creatively has been highly disappointing. For example, we asked candidates to send over the names of two to three companies they think we should invest in, and (1) most applicants sent over startups that didn’t align with our mandate (think of startups raising their Series D versus Series A/B) and (2) every applicant only sent over two or three companies, when the real test was to see who would think differently and go beyond our simple task

My friend at an up-and-coming venture capital firm ranted to me the above, saying that finding quality candidates had proven to be a struggle. Consequently, his firm usually just extended offers to the candidates with the most prestigious background.

Upon hearing his grievances, I wanted to shed light on how candidates can better position themselves for positions within growth equity and venture capital.

1. Initial Screening Cases

What is a common theme you see across our portfolio?

Send 2-3 companies we should invest in. Why should we invest in these companies?

What industry / category do you find the most compelling to invest in?

2. Short-Form Cases

Growth Equity Modeling

3. Long-Form Cases

Size & Forecasting Total Addressable Market

Estimating Unit Economics

4. Additional Resources

Useful Content

Blogs

Books

Podcasts

Initial Screening Cases

What is a common theme you see across our portfolio?

This question is often used as part of the initial screen to ensure that the candidate has done their research about the firm’s portfolio.

While this question may appear easy at first glance, what will likely make it difficult is the lack of information available on the firm’s portfolio, given all the companies will be small and private.

While you can focus on whether the firm’s companies all reside within the same industry, geography or investment size, a way to display further depth of knowledge is to elaborate on the underlying business models of the portfolio companies.

Example business models (Source):

• Freemium – Google Drive, iCloud and Slack

• Subscription – Netflix, Spotify and Tinder

• Marketplace – Amazon, Fiverr and Etsy

• Aggregator – Uber, Airbnb and Google

• Fee-for-Service – Stripe, PayPal and Ayden

• API Licensing – Twilio, SendGrid and Google Maps API

• Advertising – Facebook, Twitter and TikTok

• And many others

Being able to display knowledge of the firm’s portfolio companies down to the business model will be highly impressive, as most candidates are likely to give high level generic answers.

Send 2-3 companies we should invest in. Why should we invest in these companies?

Introduce investors to new companies – start sourcing. The beauty of venture capital is that you can become an investor in your dorm room. If you can introduce me to one company that I end up investing in, odds are I’m going to hire you. If you introduce me to three companies that are worth second meetings, even if I didn’t invest in any of them, you have a real shot at getting hired. Because this is hard to do, and if you can demonstrate that you’re willing to do the work and source companies that are worth my time – I’ll take it very seriously

‍– Ashu Garg, Foundation Capital

As a junior employee at a venture or growth equity firm, you’ll spend a significant amount of time sourcing. As such, firms want to gauge your ability to find high-quality companies that seriously merit investment.

While it might be tempting to just send over the name of the first two or three companies you find online that seem promising, to truly stand out you’ll need to go a step further. For example, if you’re serious about recruiting for a position in growth or vc, you should be attending demo days from accelerator, beta testing products or anything else that helps you gain exposure to high caliber entrepreneurs and their companies. If you start doing this for a year or two, you should begin to gain a feel for a certain market segment and the companies that seem to be doing well in those markets. After going through this process, you should be able to come up with a list of two or three companies that you believe are a compelling investment.

Additionally, you should try to align the companies you send over with the firm’s investment mandate (i.e., don’t send over a Series D stage company to a firm that focuses on Series A)

Resources:

• On Deck

• Techstars

• Gener8tor

What industry / category do you find the most compelling to invest in?

This is very similar to the previous question; except you’ll be focused on an entire market instead of individual startups.

You should still go through the motions described above (networking to meet founders, beta testing products, etc.), however, you’ll need to position your answer to this question to create a compelling case for the market.

As mentioned above, you should calibrate your answer to this question based on the firm’s mandate. For example, if you were interviewing with a firm that specializes in financial technology, you should select an emerging market segment within the realm of fintech.

Short-Form Cases

Growth Equity Modeling

Relative to every other portion of this article, the growth equity modeling cases will be the most standardized aspect of an interview. Note that this is specifically called “growth equity” modeling because it is unlikely that a venture capital firm will give out a modeling test.

If you do receive a growth equity modeling exam, it will be very similar to what you’d receive during a typical corporate private equity interview, meaning you’ll like build either a two or three statement model with equity return sensitivities. However, the following are a few specific features that might appear in a growth equity modeling exam:

Liquidation Preference

A liquidation preference is an instrument typical in early-stage growth investments, whereby a new investor is guaranteed a minimum return on their investment at exit. The liquidation preference is junior to all debt-like instruments in the capital structure, but effectively ranks senior to ordinary equity.

Primary vs. Secondary Equity Investment

Primary equity involves the issuance of new equity by the company, thereby increasing the company’s equity value. A secondary equity transaction involves the purchase of existing shares from current investors in the business, and therefore does not increase the equity value of the company.

An example of this type of case study is UK Unicorn, which was given out by Vitruvian Partners.

Long-Form Cases

Sizing & Forecasting Total Addressable Market

This case type is self-explanatory, the candidate is tasked with quantifying the total addressable market ("TAM") for a startup.

The actual case prompt for this type of question is usually fairly sparse, as the candidate will likely only receive details on what market they should try to size and forecast. For example, see below for an excerpt from a case study given by DST Global:

Please size and forecast the addressable market for this startup in terms of a) gross annual consumer spend in segments that are addressable today and 5 years from now e.g. of the $xbn spent by consumers on restaurants annually what segments/portions are addressable b) what portion is and will be sold through online channels c) What could the size of the cloud kitchen market be on standalone basis…

An example of why this matter is because the TAM will serve as a key constraint to the potential value of a startup. A good example of this is Aswath Damodaran’s article why Uber’s fundamental value wasn’t $17 billion back in 2014 (link). Upon reflection, we can conclude that Damodaran’s valuation of $5.9 billion for Uber ended up being wrong, evidenced by Uber’s current equity value of ~$60 billion (April 2023). This is not a critique of Damodaran’s work, which is reasonable, but is instead an example of underestimating the TAM for a given company. In his article, Damodaran assesses Uber’s potential value based on its potential to capture market share from the existing taxi market. However, he does not include potential value Uber could derive from other segments, such as food delivery or freight. To be fair, those segments hadn’t been entered by Uber yet and were still nascent markets, so it makes sense why Damodaran hadn’t considered them in his analysis. However, this does show the importance of considering additional categories when calculating the TAM for a given startup.

Estimating Unit Economics

Unit economics are another key metric that growth equity investors and VCs focus on. Essentially, they want to ensure that ever unit sold is contributing gross profit into the business. Similar to Sizing & Forecasting TAM prompts, questions requesting the candidate to calculate unit economics will usually be very high-level in nature. The below excerpt is pulled from the aforementioned Cloud Kitchens case from DST:

Please outline what the hypothetical unit economics / P&L structure for an individual cloud kitchen will be for…

What makes this a difficult prompt is its open ended nature, as there isn't a straightforward way to address the question in some circumstances. Usually, the best way to approach this type of question is to conduct a benchmarking exercise against publicly traded comps, however, nascent business models (such as Cloud Kitchens) usually won't have a solid public peer group to pull data from. If this is the case, then you'll need to conduct primary research by reaching out to professionals that work in the industry to gain their perspective on the business. However, this approach might not always be applicable due to time constraints, so an alternative method to answering the prompt would be to create illustrative unit economics and P&L structure based on any information you can find online.

After constructing an initial unit economics and P&L structure profile, you should then elaborate on the scalability of the business. For example, a company that currently has low or negative EBITDA margins but has the potential to scale EBITDA margins to 20-40% could present an opportunity to generate significant returns.