VC & GE Preparation

These pages are dedicated towards modeling / case study prep. I want to limit repetitive information you can find elsewhere online. For detail about what is VC/GE, different types of VC/GE strategies, and what the associate role looks like ---scroll to the bottom.

We are working hard to release our VC/GE models / case studies. Will be available by August

Modeling / Case Studies:

VC and GE modeling / case studies are very similar to what you'll see in PE prep. However, there is a much larger focus on how revenue is generated + grown and there is very little, if any, debt consideration. Since we are looking at earlier stage companies here, many of them may not be profitable and likely don't have very robust balance sheets. 

This dynamic directs most of the focus and valuation towards the top line: revenue. VC and GE investors need to understand every detail about how a company generates revenue and its underlying growth potential because they're investing in mostly unproven business models with high hurdle requirements (often 30%+ IRR thresholds). 

Otherwise, you're building a standard 3-statement model and baking in key investment assumptions like the multiple paid on the investment, total dollars invested, and any investment structures (preferred equity, liquidation preferences, etc). 

Process to Top-Line Analysis / Customer Cohort Analysis (B2B SAAS Business): 

  1. Using vintages of customer data, you want to assess the average contract value for each customer across each vintage. Then, you want to segment the customers according to their size and industry they conduct business in
  2. With this data, you can calculate key SAAS metrics like LTV, Churn, Logo Retention, ACL, CAC, and ultimately ARR. The goal is to paint a picture of how the business compounds over time without drastically increasing costs as a means of achieving profitability

The best way to visualize this is by opening up a model and tracing back the formulas to get a picture of what each metric is trying to achieve. Nevertheless, I'll list out the definitions of the key metrics below:

    Key SAAS Metrics: 

    • Average Contract Value: Average price paid by a customer for services within a given vintage
    • Churn: Dollars lost this year relative to the total dollars earned last year exclusive of new customers, upsells, and cross-sells. Less churn = stickier revenues
    • Logo Retention: Inverse of churn. A direct measure of customer stickiness
    • Average Customer Life: The inverse of the logo rate + a discount rate (to account for TVM)
    • Customer Lifetime Revenue: ACL * ACV
    • LTV: CLR * Gross Margin. Helps determine the profitability of customers over a given period
    • Upsell: The amount of new money a business makes from an existing customer by selling more expensive products
    • Customer Acquisition Cost: Costs of acquiring customers divided by the total customers acquired
    • LTV / CAC: Measures the value gained per customer relative to the costs needed to acquire them. A 3.0x ratio is good--need to account for the time value of money here since the costs of acquiring customers are incurred before the revenue is recognized
    • Annual Recurring Revenue: Old revenue + new revenue - churned revenue
    • CAC Payback Period: ((CAC / (ARR * Gross Margin))*12. Measures the amount of years it takes to get repaid for acquiring a customer
    • Rule of 40: If revenue growth + EBITDA margin is greater than or equal to 40%, the business is on a sustainable path of growth and profitability 

    A Little Bit About VC / GE:

    This is going to be brief, I do not want to waste time on areas you can just Google. 

    Venture capital involves investing in early-stage, growth-oriented businesses. Anything from pre-Seed -> Series C may fall within the realm of venture capital. These businesses may have no revenue or true stand-alone business model. Naturally, there is a skew towards investing in tech companies since these companies have the best odds of selling a big dream + need substantial funding to materialize an idea. 

    Growth equity is basically late-stage VC. Investing anywhere from Series B -> pre-IPO may fall within a growth equity mandate. GE investments are typically made in companies with revenue and mostly post-product market fit. These are companies that have largely 'solved' their business model and are now looking to scale their businesses to enhance value. These businesses are still largely un-fundable by lenders because the cash flows are not predictable or substantial enough to repay debt. 

    VC and GE funds rarely look to make control investments in companies. Therefore, there is not a tremendous emphasis on portco work. Instead, VC and GE funds make many smaller bets with the hope that 1-2 investments "returns the fund." 

    VC and GE funds operate similarly to PE or PC funds as they use LP capital to make investments. Their LP base is mostly the same, although VC funds tend to have a greater influence from ultra-high net worth individuals because the fund sizes are often in the millions, not billions. They operate on a similar 2/20 model (2% AUM and 20% outperformance). 

    Since the companies are riskier, IRR hurdles are often north of 30%. 

    Different Types of VC / GE:

    Also, will not spend a ton of time here because you can find this detail on Google.

    Venture capital / growth equity is broadly split across Mega-Fund ($10bn+ AUM), Middle Market ($1 - $5bn AUM), and Small strategies (less than $1bn AUM). 

    Different Strategies:

    1. Pre-Seed (similar to angel investing)
    2. Pre-Money (investing in companies before institutional capital comes in)--most VC jobs
    3. Post-Money (investing after or alongside other institutional capital) --also plenty of VC jobs
    4. Growth Equity (investing in companies after significant institutional capital, but before substantial cash flow generation)
    5. Secondaries (investing in other funds)
    6. Tech (investing only in tech companies)
    7. Founder-focused (investing only in good founders)

    The Associate Role:

    Once again, you're the lowest person on the totem pole putting together material for seniors to use to assist their decision making. However, unlike the other strategies mentioned, there is often more room for an associate to take initiative and source deals. After all, you might be closer in age to many of the founders you'll be investing in. 

    Core responsibilities include: 

     VC and GE is known for having pretty chill hours. However, relative to other buyside roles, you'll always be thinking about ways you can find the next Mark Zuckerberg. Conferences, events, social outing, demo days, etc will all consume your schedule. 

    So, instead of sweating in excel all day, you might find yourself sweating at the Salt Lake City Tech Derby! 

    Seniors are largely focused on sourcing better deals and structuring terms of investments. You'll be slapping together a deck to how 'Freak.AI' has the same run-rate user statistics as 2009 Airbnb.