Let’s start with the elephant in the room: yes, we’ve covered the growth equity case study before, but I’m doing it again because I don’t think the previous examples were great.

They over-complicated the financial model (e.g., minutiae about issues like OID for debt issuances) and did not accurately represent a 1- or 2-hour case study.

So, you can think of this example and tutorial as “Growth Equity Case Study: The Final Form.”

It combines the best examples I’ve received from students over the past 15 years and gives you a realistic idea of what to expect.

It’s an excerpt from our Venture Capital & Growth Equity Modeling course, so it’s not a step-by-step walkthrough – but it should still be quite helpful:

Types of Growth Equity Case Studies

Growth equity firms are “in-between” venture capital and private equity firms.

They invest when companies already have revenue (like PE firms), but they do so by purchasing minority stakes, holding them, and selling in an IPO or M&A exit (like VC firms).

Since growth equity is halfway between VC and PE, interviews and case studies are also a blend.

So, you could receive a financial modeling case study – as in this example – but you could also potentially receive a “qualitative” case study:

• Do some market research on Company X and explain why you would or would not invest, the risk factors, etc.
• Pretend we’re conducting due diligence on Company Y, and you’re calling their top 5 customers. What would you ask them, and how would you structure each conversation?
• How would you screen the market and use your network to find potential investments? Walk us through your thought process.

These topics are interesting but difficult to demonstrate in a video tutorial or article, so we’ll focus on the financial modeling case here.

What to Expect in a Growth Equity Case Study: Procyon SA

You can get the PDF document describing the case study, the blank and complete Excel files, and the video tutorial below:

• Procyon SA – Growth Equity Case Study Prompt (PDF)
• Case Study Walkthrough and Explanation – Slides (PDF)
• Growth Equity Case Study – Blank Excel File (XL)
• Growth Equity Case Study – Complete Excel File (XL)

Video Table of Contents:

• 1:16: Part 1: What to Expect in a Growth Equity Case Study
• 3:51: Part 2: Historical Trends and Revenue
• 6:16: Part 3: Financial Statement Projections
• 7:45: Part 4: Sources & Uses and Ownership
• 10:06: Part 5: Exit Calculations and IRR
• 13:41: Part 6: Investment Recommendation
• 15:24: Recap and Summary

In short, we must project this SaaS company’s revenue and financial statements, model primary and secondary share purchases, make exit assumptions, and recommend for or against the deal.

Specifically, should we invest €60 million at a pre-money valuation of €1.2 billion and €50 million at a €800 million pre-money valuation if we’re targeting a 3.0x multiple and 30% IRR?

Will the company use that money to achieve its growth targets or flush it down the toilet?

I would sum up the differences between VC, GE, and PE case studies as follows:

You are unlikely to get a detailed cap table exercise in a GE case study, but you could get asked about primary vs. secondary purchases, liquidation preferences, and participating preferred (the first 2 of which are covered here).

Like an LBO modeling test, the 3-statement projections and entry/exit assumptions are important.

But the unique feature is that, unlike VC and PE case studies, growth equity case studies often require you to forecast customer-level revenue, factoring in renewal rates, upgrades, and downgrades.

Growth Equity Case Study, Step 1: Historical Trends and Revenue Projections

We’re given the number of new customers each year, so we can use that information and the historical trends to forecast revenue.

But they do not exactly “give us” the historical financials – only the customer-level data:

So, we need to use Excel functions like SUMIFS to determine the number of customers that existed in both periods and the revenue difference they represented for the “Upsells and Price Increases, Net of Downgrades” formula:

You can use similar formulas to get the Average Annual Contract Value (ACV), the Retention Rate (Renewal Rate), and other metrics.

Once we have these numbers, we can plug in the # of new customers the company expects to win each year and make reasonable forecasts for the Churn Rate and Price Increases to forecast revenue over 5 years:

It’s also worth forecasting the sales & marketing spending and customer acquisition costs (CAC) so we can calculate some standard SaaS metrics, such as the Customer Lifetime Value (LTV) and LTV / CAC Ratio:

Growth Equity Case Study, Step 2: Financial Statement Projections

As in most 3-statement models, the Income Statement is simple, especially since we now have the revenue and sales & marketing numbers.

We can look at the COGS and the Operating Expenses as percentages of Revenue and follow historical trends to forecast and link them to the Income Statement:

If our assumptions result in the company reaching “breakeven profitability” too early or too late, we might revisit them, but they seem reasonable here (for more, see our coverage of the breakeven formula).

For reference, the case document said to expect profitability by the end of the 5 years.

The Balance Sheet and Cash Flow Statement forecasts use a similar approach: make most items simple percentages of Revenue, COGS, or OpEx.

We mostly follow trends and extend them here rather than using median figures, but you could use either approach, depending on the numbers:

After linking these items on the statements, we see an immediate problem on the Balance Sheet: Cash turns negative!

Procyon is spending aggressively on sales & marketing, resulting in negative Net Income, a declining Shareholders’ Equity, and a negative Cash position.

That’s problematic, so they need €60 million from our firm.

Growth Equity Case Study, Step 3: Sources & Uses and Ownership Summary

We can set up the Sources & Uses schedule as follows:

Although we invest €110 million total, the ownership calculations are not based on this simple €110 million.

Normally, in a VC deal, the ownership equals the amount invested / post-money valuation – but only for a primary share investment (i.e., new shares get created).

So, for the primary share purchase here, the ownership is:

60 / (60 + 1200) = 4.8%

But the secondary purchase does not create new shares, so we do not add the €50 million of capital to calculate the post-money valuation for use in the ownership calculation:

50 / 800 = 6.3%

We add these together to get the total ownership of ~11%.

And yes, maybe we should increase the €800 million pre-money valuation in the secondary purchase to reflect the €60 million of new primary shares…

…but it makes a small difference, and we don’t know the sequence of events here.

We wouldn’t do this if the secondary purchase occurred first because it still would have been an €800 million pre-money valuation.

But the bottom line is that you should not worry about this detail in a 90-minute case study.

After doing all this, we link in the €60 million of equity proceeds from the primary purchase on the Cash Flow Statement, which flips the Cash balance positive:

Growth Equity Case Study, Step 4: Exit Calculations

Now, for the moment of truth: Do we achieve a 30% IRR and 3.0x multiple of invested capital in this deal?

There are two main issues to resolve:

1. Revenue Multiple – The initial deal was done at an 8.3x trailing revenue multiple and 4.4x forward revenue multiple. What do we use for the exit multiple here?
2. Liquidation Preference – The case document says the €60 million primary purchase has a 2x liquidation preference, but the €50 million secondary purchase does not. In other words, if €120 million exceeds what the primary stake is worth upon exit, we’ll choose to take the €120 million instead.

The revenue multiple is simpler: it decreases substantially over time, falling from the 8 – 12x range to the 5 – 6x range upon exit.

The company’s Year-Over-Year (YoY) growth rate is between 30% and 50% in these years, down from the 100%+ rate at the time of the deal, so its multiple should decrease.

These numbers also align with the revenue multiples for the smaller SaaS comparable companies on the “Comps” tab.

The Investor Proceeds uses a complicated-looking Excel formula to factor in the liquidation preference:

The idea for the first part of the formula is simple: compare the €120 million to the value of this 4.8% stake upon exit and take whichever is greater – as long as it’s less than the Exit Equity Value.

The first part, in words, goes like this:

MIN(Exit Equity Value, MAX(Liquidation Preference, Primary Ownership))

And then we add the secondary proceeds – but only if the exit equity value is above this €120 million liquidation preference!

If not, we get nothing for this 6.3% stake because the exit proceeds cannot even cover the liquidation preference.

Here’s the second part in words:

+IF(Exit Equity Value > Liquidation Preference, Secondary Ownership * Exit Equity Value, 0)

This is not a robust formula that handles all cases correctly, but it’s fine for a 90-minute exercise to get a rough idea of the results.

Specifically, this formula doesn’t correctly handle the case where the Exit Equity Value is very low but still above €120 million (e.g., €150 million).

In this case, we should add a separate condition, take the Exit Equity Value, and subtract the €120 million to calculate the proceeds that get multiplied by this secondary stake percentage.

But we skipped it to save time, and it barely changes the results in normal exit ranges.

Growth Equity Case Study, Step 5: Investment Recommendation

Normally, you consider the outcomes in different cases to make an investment recommendation.

We’re close to the IRR targets but a bit short of the money-on-money multiple targets in this baseline scenario:

We also need to ask if the company’s business plan is believable based on metrics such as the LTV / CAC.

The ~4x LTV / CAC here is not crazy, and while the entry valuation is quite high, it’s not unreasonable if the company grows by 7x over 5 years.

In a downside case, where the company’s new customer numbers are cut in half, and the exit revenue multiples are only 3 – 4x, we still achieve a 1.5x multiple with mid-teens IRRs:

This isn’t a great result, but it’s still above the minimum targets in the case document.

So, overall, we would recommend investing in this company.

If we care more about the downside risk, we might negotiate for a greater primary share purchase or a higher liquidation preference.

But if we care more about the upside, we might shift more capital to the secondary purchase – as the valuation is lower, but it lacks the downside protection from the liquidation preference.

Bonuses and Other Points

There is a bonus section on cohort analysis here, but we don’t have time to cover it in this summary.

However, an upcoming video or Knowledge Base article might walk through the topic.

In addition to this cohort analysis, you could get asked to conduct market or industry research or benchmark this company against its peers.

There isn’t much to say about these mechanically; use resources like the Bessemer Cloud Index and Capital IQ and FactSet if you have them.

The #1 mistake people make with growth equity case studies is over-complicating them and losing sight of what matters – such as the key drivers and the returns in different outcomes.

But if you keep those in mind, growth equity case studies should be some of the easier ones in interviews.

The post The Growth Equity Case Study: Real-Life Example and Tutorial appeared first on Mergers & Inquisitions.

It’s one area where people on both sides tend to talk past each other:

• Bankers say that wealth management roles pay less, offer less interesting work, and lack good exit opportunities.
• Wealth managers say that investment banking requires crazy hours, has mostly dull work, and is ridiculously competitive to get into; also, the “compensation ceiling” may be similar in both fields, so why kill yourself in banking?

The truth is that both claims are correct but incomplete.

To illustrate the problem, I’ve created two “career ladders” for these fields:

Now let’s dig in:

Wealth Management vs. Investment Banking: Job Functions

Wealth managers advise individuals on their investments and may provide other services, such as tax and estate planning.

These individuals are usually “high net worth” (HNW), meaning an average of $5 – $10 in assets, but it could be as low as $1 million. And wealth managers at large banks may advise people with as little as a few hundred thousand to invest.

Some of these client differences relate to the distinction between private wealth management and private banking; for more on that, you should review the the private banking article.

By contrast, investment banking is more about advising companies on transactions such as M&A deals, equity and debt deals, and restructuring.

In wealth management, you advise the same clients over long periods, but in IB, you hop from deal to deal – though some groups do operate on more of a “client service” model.

When a deal becomes “active” in IB, you dive into it and go in-depth into all aspects, from the financials to the buyer/seller outreach to the presentations and more.

You can think of it like this:

• Wealth Management: Broad and long-term/continuous client coverage.
• Investment Banking: Deep and short-term coverage (just until the deal is done!).

There is some overlap because at the large banks, wealth management clients often get early/privileged access to investment banking products, such as upcoming IPOs, equity/debt offerings, or new investment products.

The Nature of the Work: Markets, Analysis, Sales, and Interpersonal Skills

Wealth management (WM) requires broader knowledge of the financial markets since you may have to advise clients on everything from their portfolio allocations to upcoming tax changes.

(Note that the scope is more limited in “pure” WM roles; you’ll do more non-portfolio work in private banking.)

Wealth management also requires more sales and interpersonal skills even at the entry level because it is a sales job from Day 1 – and you need to start bringing in clients early to succeed.

There’s much less technical work because your analysis tends to be very high-level. Think: benchmarking portfolios rather than modeling companies.

You will very rarely get exposed to the type of financial modeling that bankers complete: 3-statement models, DCF models, M&A models, LBO models, and so on.

Investment banking eventually turns into a sales job, but only when you reach the VP level or above (roughly 7-8 years into the IB career path).

At the Analyst level, it’s more about grinding away in Excel and PowerPoint.

As you move up in the early years and become an Associate and early VP, it turns into “project management” and making sure your team delivers.

Knowledge of the financial markets is helpful, but you don’t need it like wealth managers do because you just need to understand the deals you’re currently working on.

One final note is that in wealth management, there’s a split between relationship managers and investment professionals.

This split doesn’t exist in quite the same way in IB, so you can get a very different experience in WM depending on your role.

Recruiting in Wealth Management vs. Investment Banking

You should know all about IB recruiting from reading this site, but it’s insanely competitive and starts very early.

To get an IB internship that leads to a full-time return offer, you need to get “pre-internships” in Years 1 – 2 of university, prepare for recruiting by the middle of Year 2, and do a good amount of technical prep – while earning high grades and doing something to make yourself look interesting.

If you miss undergrad recruiting or change careers, you can also get into IB via lateral hiring or from a top MBA program, but these paths take more time (and money!), and your odds are not spectacular.

By contrast, wealth management is much less competitive to get into.

If you have good sales skills, you could break in with a middling GPA (3.0 – 3.5) and without a target school or great internships.

Like any sales job, they hire lots of candidates because it’s impossible to know in advance who will succeed.

The philosophy is to hire many candidates and let them “sink or swim.”

Interviews are broader than IB interviews and require knowledge of asset allocation, economics, and and financial markets, but far less specific technical knowledge.

For example, they might ask you how to use a DCF, what bond yields are, or the trade-offs of debt vs. equity – but but they won’t ask you to build a DCF model or calculate Unlevered Free Cash Flow.

As with the job itself, the theme is breadth over depth.

Wealth Management vs. Investment Banking: Careers and Promotions

At a high level, the IB and WM career paths seem similar: it might take 10 – 15 years to reach the top (Managing Director), and you start out doing analytical work but shift to sales as you advance.

However, the “sales shift” starts much earlier in wealth management, as it’s pretty much a sales job from Day 1 (with some analytical work mixed in).

The first few years are very tough because you start from nothing – but if you build a decent book, the job gets easier since you’ll have consistent revenue from long-term clients.

By contrast, the first few years in investment banking are tough in a different way: tons of work, crazy hours, and an unpredictable schedule.

You don’t need to be good at sales to make it to the VP level; you can grind your way up if you’re good enough at executing tasks and following instructions.

To advance and move beyond the VP level, you do need sales skills, which not everyone has – this is why the more analytical candidates often leave for private equity and hedge funds in the early years.

Investment banking careers are also less stable than wealth management ones, and mid-level bankers often get laid off because they’re expensive and do not yet directly generate revenue.

I would summarize the careers like this:

• IB: Tough-but-grindable early years; the mid-level roles become less stable and require more real-world skills to advance.
• WM: The early years are painful because you need real results to advance, but it gets easier as you move up and gain “sticky” long-term clients.

Wealth Management vs. Investment Banking: Compensation and Hours

Salaries and bonuses change each year and depend on the firm and group, but in both careers, you’ll start in the low-six-figure range (e.g., $100K to $200K) and advance from there.

Expect something on the lower end of that range for WM roles at large banks and something in the mid-to-upper-end (or above) for IB roles.

At the mid-levels, VPs and Directors in IB also earn significantly more than the equivalent positions in WM (it’s maybe a ~30 – 50% discount in WM).

At the top, MDs in wealth management can theoretically earn $1 million+ year, just as many investment banking MDs do.

However, it might be more realistic to expect “high-six-figure pay” if you make it to that level and have a good base of long-term clients.

There’s less money to go around because the fees are lower, as most groups charge 0.5% – 1.0% on assets under management (AUM).

Investment banks also charge fees in that percentage range, but they’re charged on deals worth hundreds of millions or billions of dollars.

Some wealth managers eventually amass $100+ million in assets under management, but it’s a very slow process, and there’s a limit to how much in AUM any one group can manage.

As a result, the dollar volume of fees ends up being higher for a similar headcount in investment banking.

Compensation is also more individualized in wealth management, especially as you advance – if your clients generate significant fees, you should still do well even if others in your group perform poorly.

This is not the case in IB until you reach a very senior level (for more on all these points, see the article on investment banker salaries).

Finally, the hours are significantly better in wealth management because you don’t do that much work outside of normal business hours.

So, you won’t pull all-nighters to finish pitch books, and you won’t be called in over the weekend to make last-minute changes to a model.

It’s usually a 50-hour-per-week job, which is significantly better than the 60, 70, or 80+ hours required in IB.

The Top Firms in Wealth Management vs. Investment Banking

Most people would say the top investment banks are the bulge brackets and elite boutiques, at least for entry-level roles.

They do larger, more complex deals and offer better experience, compensation, brand-name recognition, and exit opportunities.

Even as you advance, there isn’t necessarily a reason to leave one of these firms and move to a smaller one outside of very specific lifestyle/personal issues.

In wealth management, some people argue that it’s best to start at the bulge bracket banks for the brand name, compensation, and network…

…but they might also say that the better long-term roles in the industry are at the pure-play firms and boutiques, especially on the “private banking” side.

These firms tend to work with higher-end clients, and the work tends to be more varied and interesting, with less cold-calling and cold-emailing to chase leads.

I could not find data to confirm this one, but I would also assume that the compensation ceiling is higher at these firms because they do not necessarily use a standard fee schedule.

Wealth Management vs. Investment Banking: Exit Opportunities

There are some huge differences here, and it’s tough to argue with the quality of investment banking exit opportunities: private equity, hedge funds, corporate development, corporate finance, venture capital, startups, equity research, and more.

It offers the broadest set of possible exits within the finance industry if you leave early (in your Analyst years).

As you advance, your exit opportunities narrow because PE firms and hedge funds don’t want to pay for expensive VPs or Directors with no direct investing experience.

The corporate finance/development options and a few others remain, but you’re unlikely to exit into a PE mega-fund – or any sizable PE firm – as a seasoned VP in investment banking (for example).

The exit opportunities in wealth management are much more limited because it is an exit opportunity.

In other words, people don’t go into WM to leverage it into another job: They go in it to build up a client book and eventually earn a high income with a good lifestyle.

If you decide it’s not for you, you might be able to move into investor relations, fundraising, or sales jobs, but deal-based roles are highly unlikely.

Even hedge fund and asset management roles are unlikely unless you’ve had a lot of experience analyzing individual companies or doing very technical analysis.

You might have a shot at sales & trading if you’ve had experience with relevant products, such as FX hedges for international clients, but even that is a stretch.

Final Thoughts on Wealth Management vs. Investment Banking

The basic issue is that investment banking “wins” for entry and mid-level roles due to the higher optionality, higher pay, and the ability to grind your way up the ladder.

Yes, IB is far more difficult to get into, and the hours and lifestyle are much worse – so these points count against it.

But if you’re an ambitious student or you’re early in your career, you shouldn’t care too much about these issues.

At the top levels, WM and IB roles are arguably similar, and wealth management might even offer advantages in terms of reduced stress and shorter hours.

But it’s tough to get there, and the burnout/quit rate is very high.

In the past, many students used WM roles at large banks to get solid brand names on their resumes and become competitive for IB internships.

But I’m not sure how well this works anymore because of hyper-accelerated recruiting, at least in the U.S.

It would be smarter to get more relevant internships – anything involving deals, modeling, or individual investments – even if they’re at boutiques or other, smaller firms.

That said, I think the sheer hatred directed toward wealth management in some online forums is quite exaggerated.

From my perspective, yes, IB is “better” for most ambitious/analytical people, but not everyone has the same personality, skill set, or goals.

If you’re very sociable but not the most analytical person, wealth management could easily be a better option for you.

Similarly, if you do not want to work more than 50 hours per week, and you’re in it for the cushy lifestyle after 10+ years, wealth management could also be better.

But remember that it is a different career ladder – and you don’t want to change your mind and fall off when you’re midway up it.

For Further Reading

• From Regional Audit to Investment Banking: How to Break in *Without* the Big 4 Pedigree
• From Valuation Advisory to Investment Banking: How to Make the Lateral Leap
• How to Cold Email for an Internship: Investment Banking Cold Email Templates and Guide
• M&A Investment Banking: The Best Group Ever?
• How to Move from Accounting to Investment Banking and Leave the Audits Behind Forever
• From Wealth Management to Investment Banking: How to Make the Leap

The post Wealth Management vs. Investment Banking: Career Deathmatch appeared first on Mergers & Inquisitions.

My portfolio did “OK” (up 10% for the year), but it greatly underperformed the S&P 500, which was up 24%.

On the other hand, I was only down 9% in 2022 vs. a 19% drop for the S&P, so both the index and my portfolio are now back to “early 2022” numbers.

This result is disappointing because it ends my 4-year streak of matching or beating the market, and it’s all because of my bad decisions.

With better decisions, I could have been up 15 – 20% for the year and slightly above my levels from 2 years ago.

I’ll start with my current portfolio and why I did well in 2019 – 2022 but lost ground this past year:

Investment & Market Updates: My Current Portfolio

Here it is as of January 1, with differences vs. January last year in brackets below the chart:

• Equities: 54% [Up 22%]
• Real Estate (Equity Funds + Owned Properties): 12% [Down 3%]
• Gold: 8% [Down 2%]
• Cash & Savings: 5% [Down 6%]
• Angel Investments: 5% [No change – recording these at historical cost]
• Crypto: 5% [Up 5%]
• U.S. Treasuries: 4% [Down 15%]
• Natural Resources & Commodities: 3% [Down 2%]
• Silver: 3% [Unchanged]
• Real Estate Loans: 1% [Unchanged]

Looking at this split, my performance makes intuitive sense:

• With 50%+ allocated to equities, you’d expect roughly 50% of the S&P’s gain (I didn’t quite get this due to allocations to international, value, and dividend stocks).
• But my real estate investment funds were down ~10%, which hurt.
• Gold did well (up around 13%), but I had 10% or less in it the whole time.
• I bought crypto again and was up around 50%, but the percentage allocated was too small to make a big difference.

This current allocation and my changes might look reasonable on the surface.

But to explain why they didn’t work well, I need to outline why performance was much better in previous years:

Past Performance Does Not Indicate Future Results

In previous years, my main portfolio was not particularly aggressive.

I had way too much in cash (sometimes 20% or more!) and far too little in equities.

However, I still outperformed because I made small bets on risky assets that did extremely well and were meaningful percentages of my total assets:

• I bought Bitcoin for under $1,000 in 2013 and under $10,000 in 2020 and sold it for $30,000 to $50,000 in 2021 – 2022.
• I made a few angel investments in the mid-2010s that had successful exits in later years (10x+ multiples).
• When the markets rallied after the initial COVID sell-off in March 2020, I put more cash into equities and real estate. More importantly, I did not “panic sell” when everything crashed.
• And I used some crypto proceeds to buy a condo whose price rose by 50% over 2 years.

Finally, we ran several promotions and price increase sales on BIWS in 2017 – 2021, giving me more cash to invest, which helped when the market was frothy.

Investment & Market Updates: What Happened in 2023

Unfortunately, nothing above was a major factor over the past year.

Nothing generated 10x, 30x, or 50x gains, I didn’t buy any real estate that suddenly shot up by 50%, and while I didn’t “panic sell,” I timed my trades poorly.

If I had to summarize the year in one phrase, it would be:

“The right ideas, but the wrong execution.”

On paper, I made the correct decisions:

• I consolidated my brokerage accounts into 2 main providers because managing many different accounts had become a pain.
• I sold most of my U.S. Treasuries.
• I cut cut my allocations to commodities and real estate.
• And I reallocated these proceeds into crypto and equities and put in some excess cash.
• I traded individual stocks and had good results with few merger arbitrage and special situations ideas.

But I made most of these changes too late or invested too little to make a huge impact.

For example, I bought crypto again in March after swearing it off and selling everything following the FTX debacle a few months before.

I could see the rally and expected it would be a good period for speculative assets.

But I only put in a small percentage of my total assets – so even a 50% gain wasn’t enough to save my entire portfolio.

I should have done this in January and put in ~15% of my total assets rather than ~3%.

Within equities, I started the year with many value-oriented, international, and high-dividend stocks.

I could see this mix wouldn’t work as well in 2023, but I waited until the middle of the year to reallocate into “Total Market” indices that more closely track the S&P.

You can see the problem with this approach:

For much of the year, I found myself saying, “Wait, what did I do? Did I make a huge mistake by reallocating when things have been flat-to-down since then?”

But then November and December came along and saved me and everyone else.

I Find Your Lack of Faith Disturbing

Zooming out, the broader problem is that I lacked conviction in many trades.

Historically, I performed best when I went against the current market consensus – but over the past few years, I fell into the trap of “going with the flow” and not acting consistently.

For example, in January 2022, I sold most of my crypto because I expected the looming rate hikes to hurt virtually every asset: crypto, stocks, bonds, and maybe even gold.

Instead of waiting for that to play out, I immediately reallocated the proceeds into value-oriented equities.

And sure, value stocks held up better in 2022 than speculative growth stocks, but it was still a dumb move because it went against my market view (that all assets would fall).

A related issue has been my poor cash management.

It’s fine to have a high percentage in cash at times, but it works only if you use it effectively by buying dips and market corrections.

But I did the opposite: When the market reached a low in Q3 of 2022, I stupidly sold ~20% of my equities – even though I still had a sizable cash balance and could have bought more.

The solution here is simple: Allocate based on rules rather than sentiment.

For example:

• 10% Correction: Shift 2% of total assets from cash and UST into equities.
• 20% Correction: Move 5% into equities.
• 30% Correction: Shift 8 – 10% and sell gold/silver if necessary.

Investment & Market Updates: What’s Coming in 2024?

I’ll be honest: I do not have strong convictions about the markets for this year.

Two major factors drove the markets last year: on-again/off-again hopes for rate cuts and AI hype around Nvidia, Microsoft, and other tech companies after ChatGPT’s release.

But these expectations for rate cuts have already been priced in, and these companies need to start showing substantial revenue growth from AI soon to keep benefiting.

So, I don’t think we’ll see another 24% gain for the S&P.

I expect far more volatility than in 2023, which was fairly calm except for the Credit Suisse and Silicon Valley Bank failures in March.

The S&P and NASDAQ are way ahead of themselves and seem to be pricing in multiple rate cuts and a “soft landing” – a bit of a contradiction.

If you forced me to make a prediction, I would expect a relatively flat year in the range of +5% to –5% for the entire index.

I am still bullish on gold and commodities because they are cheap next to equities, so I have almost 15% allocated to them.

Structurally, the U.S. and most developed countries spend like drunken sailors and incur huge deficits each year, which means more money printing (despite the higher interest rates and attempts at tightening).

And never-ending money printing benefits gold, equities, and crypto, which explains my current allocation.

I now have over 50% in equities not because I think they’re “cheap” or set for huge gains but because most alternatives seem even worse:

• Bonds have already priced in rate cuts; performance will be terrible if rates rise.
• Cash now earns 4 – 5%, but that’s barely above the dividend yield on many stock indices.
• Real estate is doing poorly due to high office vacancies, inflation, and higher rates.
• Startups have been hit hard the past few years, and exits do not look promising.

Within equities, I have ~40% allocated to international stocks, which is my way of slightly betting against continued U.S. outperformance.

This trade has not worked well over the past 10 – 15 years, but I think international stocks will eventually outperform (BlackRock has a good explanation here).

That said, I’m no longer playing the value vs. growth game; I’m just using various indices and ETFs to cover the entire U.S. and non-U.S. markets.

With my luck, we’ll probably get a 30% correction in 2024.

Hopefully, I won’t “forget” to shift all my cash into stocks when that happens.

The post 2024 Investment & Market Updates: How to Reverse a Painful Year with AI Hype and a Frenzied 2-Month Rally appeared first on Mergers & Inquisitions.

The IB internship recruiting timeline is now so insane that even mainstream news sources like the Wall Street Journal are writing about it (“The Race Is On to Hire Interns for 2025. Really.”).

And yes, you read the news correctly: Banks like RBC, DB, Houlihan Lokey, Rothschild, and Guggenheim opened 2025 summer internship applications in calendar year 2023.

Admittedly, not all banks did this, and many bulge bracket firms will start in the normal time frame of January – March.

In practice, this means you must be on top of IB internship recruiting from Year 1 of university if you’re in the U.S.

I’ll cover the following points in this updated article:

How to Get an Investment Banking Internship: The “Ideal” Timeline in the U.S.

By the time internship applications open in Year 2 of university – whether that’s in the middle or beginning (!) of the year – you should have the following elements in place:

• A good GPA – at least 3.5 and ideally a bit higher.
• One (1) solid finance internship and one (1) student/leadership activity or two solid finance internships.
• A decent amount of networking completed with bankers (e.g., 30 – 40 coffee chats or informational interviews).
• And ~30 hours of interview prep, which you can stretch over 2-3 months or cram into a few weeks (your story, standard behavioral questions, technical questions, etc.).

To accomplish that, I recommend the following timeline:

How to Get an Investment Banking Internship, Step 1: Your First Year in University

You don’t necessarily need to pick your major at this stage, but I would recommend finance/accounting or something that will be useful for a wide range of jobs.

Think: Engineering, math, statistics, or something with elements of all these, such as “management science” or “operations research.”

Avoid options like sociology, art history, gender studies, etc., unless you’re at one of the top ~5 universities in the country (it’s easier to get away with irrelevant majors there).

Next, front-load your schedule with easier classes in your first year, such as language classes or university-wide prerequisites.

Earn a high GPA from these easy classes and save the hard, technical ones for later years.

Join 1-2 student groups that will help you network into finance roles, such as the student investment club or the business frat. You could also consider investing or case competitions.

Most importantly, you NEED to get a finance internship in your first year or in the summer after your first year.

In the past, you could wait until Year 2 for your first internship, but this is riskier today because applications keep opening earlier and earlier.

And yes, some banks will still start later, but you want to keep your options open so you can apply to as many firms as possible.

You probably won’t be able to get a “real” IB internship, but you can find some good alternatives:

• Search fund internships.
• Internships at local venture capital or private equity firms.
• Internships at regional boutique banks.
• Corporate finance roles at nearby companies.
• Wealth management.
• Corporate banking.
• Anything in real estate, such as brokerage, appraisal, or lease management.
• Big 4 or independent valuation firm internships.

There is no set process, so you’ll have to find people on LinkedIn, send them messages or emails, and repeat until you find something.

How to Get an Investment Banking Internship, Step 2: The Summer After Your First Year

Ideally, you’ll complete your first finance internship in this period (see above).

You should also start learning the technical side (accounting, valuation, and basic M&A and LBO concepts) and begin networking with alumni.

It might even be a good idea to start networking before the end of your first year so you have more time to follow up with alumni and set up calls.

This may sound unbelievable, but with recruiting moving up and start dates becoming more random, it is better to start too early than to wait too long.

If your internship has normal hours, you could target ~10 hours per week for networking + technical prep.

A good target might be to complete 20-30 coffee chats or informational interviews by the time your second year starts.

With the technical prep, the most important point is to learn by doing.

Yes, you can read guides, take courses, and watch YouTube videos, but you should also spend a few hours building simple DCF models or 3-statement models to learn the key concepts.

You will retain far more information if you practice with companies you’re interested in than if you passively consume content.

How to Get an Investment Banking Internship, Step 3: Your Second Year in University

This is where it becomes unpredictable because it depends on when banks open their applications, which seems to change each year.

Since you can’t know that beforehand, you should continue networking with alumni and preparing for interviews as your second year begins.

Weekend trips to places like New York or London can certainly help, but you don’t necessarily “need” them if you’ve been able to speak with many alumni already.

You’ll also have to consider your internship plans for the upcoming summer (after your second year) since they will appear on your resume/CV and in interviews.

I would refer to the “pre-internship” list above and focus on the area you’re most interested in.

If you don’t already have a “brand name” on your resume, aim for an internship at a large, brand-name company; if you do have that brand name already, aim for a highly relevant internship, such as one where you work on deals and value companies.

At some point in your second year, applications will open, and the recruiting process will begin – at least if you’re at a target school.

All you can do here is pay close attention to news alerts and job postings and be ready to pounce the moment applications open.

Some people recommend resources like The Pulse, the Adventis newsletter, etc., but I can’t personally speak to how useful or accurate they are for tracking the dates.

If you do well in HireVues and investment banking interviews, you might have something lined up by the middle to end of your second year.

How to Get an Investment Banking Internship, Step 4: The Summer After Your Second Year

You complete your second finance-related internship here.

Also, not all banks finish their summer internship recruiting by this stage, so if you haven’t yet found something, you might still have a shot.

Smaller firms tend to be a bit slower, so you could find some middle-market and boutique openings, even if the bigger banks are done.

Therefore, you can keep applying and networking – but your chances decrease the longer it takes.

How to Get an Investment Banking Internship, Step 5: Your Third Year in University

Some banks will continue recruiting even into your third year, so you might still be able to interview around.

But if you do not win an internship within the first few months, chances are that you won’t be in IB at a large bank for the summer before your final year of university.

What If You Start Late or Miss Application Deadlines?

The best “Plan B” options depend on how far off you are.

If you can plausibly get finance internships in a related area, such as corporate banking or corporate finance, you could potentially aim for a full-time return offer in one of those fields, work for a year, and then go for lateral roles in IB.

Similarly, if you can win an offer at a boutique bank or another smaller firm, you could take a similar approach and work there for a year and then go for lateral roles at larger firms.

But if the best you can do is something like wealth management, it will be much harder to make this move (you want something with more financial or deal analysis – for more, see our article on wealth management vs. investment banking).

You could also think about fields like equity research that are less structured and that might allow you to get in without a previous internship.

On the other hand, if you missed the deadlines because you were on a totally different path – such as engineering, marketing, or pre-med – you will probably need to pivot more aggressively with something like a Master’s in Finance degree.

You could also work for a few years and go the MBA route, but I do not recommend that for your immediate “Plan B” because it’s slower and more expensive.

How to Get an Investment Banking Internship at the MBA Level

At the MBA level, the timing is less frantic because banks cannot recruit until students arrive on campus.

You should still expect a quick start to recruiting and on-campus events once classes begin, but that has always been the case at this level.

We have an article on the MBA investment banking recruiting process, so please refer to that for more details.

In short, you still need to prepare for interviews and do some early networking, but the entire process is very structured at the top programs.

So, your candidacy is more about presentation, consistency, and ensuring you have a good enough background to be competitive.

How the Recruiting Timeline Differs in Other Regions

In places like London and Hong Kong, the process has moved up to earlier start dates, but it’s not as ridiculous as in the U.S.

So, you can afford to take your time a bit more and get internships in Year 2 (assuming it’s a 4-year degree – if it’s a 3-year degree, you need to move more quickly).

Applications usually open ~10-12 months before summer internships begin, so it’s less accelerated than the U.S. timing.

The Big 5 banks in Canada seem to be starting recruiting season earlier as well, but they’re more in-line with the start dates of the U.S. bulge brackets (well, except for RBC).

One difference is that there are more avenues into IB internships in regions like the U.K., such as investment banking spring weeks.

How to Get an Investment Banking Internship: What to AVOID

If you attend a good university, earn good grades, get 1-2 decent internships, and network/prepare in advance, you’ll probably be able to win an IB internship.

But you could also make plenty of mistakes that reduce your chances, so here’s what you should avoid:

First, it’s risky to transfer to a better university – even if you’re moving from an unknown state school to the Ivy League.

This strategy made sense for students at non-target schools a long time ago, but the new recruiting timeline makes it difficult to execute – as you won’t have much time to network with alumni or join student groups.

Second, do NOT take difficult classes in your first year. You cannot afford a lower GPA because banks use grades to weed out candidates.

Third, do not wait too long to start networking. If you wait until the middle of your second year, it might be too late!

Finally, do not focus on activities at the expense of internships. Yes, leadership experience is nice, and clubs can be useful for networking, but you will not make it far without internships.

Additional Reading About Internships

I’ve written a lot about IB internships over the years.

Here are the most relevant articles:

• How to Write a Finance Internship Resume with No Work Experience
• How to Cold Email for an Internship: Investment Banking Cold Email Templates and Guide
• No Investment Banking Summer Internship Offers: What to Do
• The Off-Cycle Investment Banking Internship: The Best Side Door into the Industry?
• How to Prepare for Your Investment Banking Summer Internship in Less Than 8 Hours (Excel, PowerPoint, industry knowledge, and networking)
• Investment Banking Internships: The Ultimate Guide (tips for the job and receiving return offers)
• How to Decide on Investment Banking Summer Internship Offers: Who Has a 97.5% Full-Time Offer Conversion Rate?

Finally, if you want to speed up your preparation process so that you can succeed in this hyper-accelerated recruiting timeline, our friends at Wall Street Mastermind might be able to help you out.

They can coach you through the process I laid out above step-by-step and remove the trial and error you would have to go through on your own otherwise.

Their team of coaches also includes a former Global Head of Recruiting at three different large banks, so you’ll know exactly what banks are looking for in candidates.

They provide personalized, hands-on guidance through the entire networking and interview process, and they have a great track record of results for their clients.

You can book a free consultation with them to learn more.

The post How to Get an Investment Banking Internship appeared first on Mergers & Inquisitions.

That’s a shame because “how to get into commercial real estate” is a much easier question than “how to get into investment banking” for many people.

There are many pathways into the industry, you don’t need an Ivy League degree or high GPA, you can move between different CRE jobs quite easily, and many roles pay quite well.

On the other hand, the industry is highly cyclical, and you could get “pigeonholed” if you stay in real estate for years but then want to move elsewhere.

But before presenting a full pro/con list, I want to start with a sector overview and the main pathways in:

How to Get into Commercial Real Estate: Which Sector Do You Target?

People often divide commercial real estate into “fee for service” and “investing” roles.

The categories look like this:

In the first category, you provide services or execute deals by connecting buyers and sellers, and you earn money based on your service or deal volume.

In the second category, you make investment decisions and profit based on your capital and deal performance.

It’s like the buy-side vs. sell-side distinction in finance, but specifically for real estate.

In general, it’s quite difficult to find investing roles directly out of university, so if you’re a student, you’re better off targeting the “fee for service” roles for initial internships and jobs.

But there are some exceptions to this rule, so the categories above may not be the best way to think about the sector.

I would suggest the following “career map” instead:

You can win the initial roles without much experience and use them to move into other areas afterward.

The intermediate roles typically require more work experience, such as a relevant full-time role or previous internships.

And the endgame roles usually require even more experience, such as several years of RE-related full-time experience.

That said, most real estate jobs are not “up or out,” so plenty of people stay in the initial or intermediate roles for a long time.

However, if you’re interested in finance careers, you will probably view these jobs as steppingstones to investing at larger firms.

How to Get into Commercial Real Estate: Initial Roles

There are a few options here, but if you’re interested in moving to bigger-and-better CRE roles, you should focus on appraisal / valuation and brokerage roles:

Leasing / Property Management

In these roles, you work at a local property management firm and deal with tenant-related issues for different property types (apartments, offices, retail, industrial, etc.).

Tasks include getting tenants to renew their leases, negotiating new terms, and handling unit repairs, maintenance, renovations, and new HVAC installations.

You put out a lot of fires, which makes the job stressful – especially if you deal with residential properties (i.e., individuals, not businesses).

The advantages are that you can win these roles with minimal experience, and you will learn a lot about leases, property budgets, and management.

The disadvantages are that it is quite difficult to move from these jobs into investment/deal-related roles, as some CRE investors “look down on” property management.

The compensation isn’t great (perhaps $50K – $100K for entry-level roles in the U.S.), but it’s fine for your first job.

If you want to go this route, find a management firm that works with commercial properties (or multifamily properties with 200+ units) owned by institutional investors.

This type of firm will give you more networking opportunities and career mobility.

Appraisal / Valuation

Real estate appraisal is the process of valuing a property, which is essential when it is being sold.

But it’s also important when a commercial real estate loan refinancing occurs, as the amount of new debt is based on the property’s value.

The biggest CRE brokerage firms, such as Jones Lang LaSalle (JLL) and CBRE, have appraisal teams, but many smaller firms and independent operators also do this.

This one is probably the best “initial job” in CRE because you can get in without great credentials, you’ll do plenty of real estate financial analysis and valuation, and you’ll meet plenty of brokers and investors.

The exit opportunities are also quite good because many appraisal professionals get into development, investment sales, lending, and even real estate private equity roles.

The starting pay is in the “not great, but fine for a first job” range ($50K – $100K), but it moves into the 6-figure range once you’ve passed the required licensing test and have more experience.

Experienced appraisers with their firms could earn $200K annually (or more) if they have many clients and bring in new ones regularly.

The main disadvantage is that the licensing time frame can be very long, depending on your state and country.

For example, Texas requires 18 months with 3,000 hours of study/training before you can take the exam, so you’ll need at least 1.5 years to gain significant experience and earn higher pay.

Brokerage

We have a detailed commercial real estate brokerage article, so you should review that for all the details.

At a high level, you connect buyers and sellers of properties and earn commissions based on a percentage fee.

The main advantages are that you can win brokerage roles without fancy degrees, Ivy League schools, or high grades – just aggressive networking – and if you get in, you will learn a lot about real estate valuation, sales, due diligence, and deal execution.

The main disadvantage is that while getting into brokerage is relatively easy, it’s difficult to succeed on the job, especially in your first 6-12 months.

At many firms, these positions are commissions only, so you earn nothing until you close a deal.

But closing a deal, even for a “small property” (worth a few million USD or less), is easier said than done and normally requires a decent network and brand.

On the other hand, brokerage could be a fantastic long-term job if you are outgoing and good at networking.

Experienced brokers can earn in the $125K – $250K range at smaller firms, and well-connected brokers can earn above $500K, or even above $1 million, if they sell high-priced properties.

But most brokers do not earn anywhere close to these high-end figures, just like most people in investment banking do not earn Managing Director pay.

If you want to enter the industry via brokerage roles, find a firm that provides formal training and jobs that are not 100% commission-based.

Architecture / Construction / Engineering

We don’t cover these roles on this site, but you could potentially use them to win real estate development roles.

The main advantages are that you can get in without much experience or a great pedigree, and you will learn quite a lot about the “physical” side of real estate.

But if you are just interested in “commercial real estate,” I wouldn’t recommend these jobs because they require significant education and some type of licensing exam, and the pay is still not great (architect salaries are also in the $50K – $100K range).

You can leverage these roles to move into real estate development later, but they’re not especially relevant for finance/investment/deal-related roles that require financial analysis.

How to Get into Commercial Real Estate: Intermediate Roles

These jobs tend to require some amount of work experience.

For example, to get into real estate private equity, you normally need previous internships in investment banking, private equity, or real estate.

However, you do not necessarily need full-time experience (i.e., you can complete internships and join directly out of undergrad).

Asset Management

“Asset management” (AM) refers to what institutional investors, such as PE and life insurance firms, do after buying new properties.

Some consider AM a back-office role, but it’s closer to PE firms’ “operations” or “value creation” teams.

It involves everything from optimizing tenants and leases to coordinating property appraisals, renovations, refinancings, and budgeting.

Managing the property effectively can be the difference between a 10% and 20% IRR.

The real downside to AM roles is that the compensation tends to be lower; expect a 10 – 20% discount to compensation in acquisition roles.

The main advantage of AM roles is that the exit opportunities are good: Some people move into acquisitions or other REPE roles, and others go into lending, debt funds, or even REIT or investment banking jobs.

If you have less work experience, you might want to target life insurance companies with RE operations, such as Prudential; they tend to be less competitive than private equity firms with separate RE asset management groups.

Real Estate Private Equity (Smaller Firms)

We have a detailed article on real estate private equity, so you should refer to that for everything.

In short, REPE is just like normal PE, but firms buy and sell properties rather than companies.

Junior-level roles consist of real estate financial modeling, reports and memos, due diligence, and meetings.

The main advantage of REPE is that you can get into the industry from a wider variety of backgrounds.

For example, in the U.S., it is very difficult to win traditional PE jobs without investment banking or other M&A experience.

But you could win an offer at a REPE firm from a real estate brokerage, real estate lending, or REIT role (in addition to the standard IB route).

However, it’s more plausible to do this at smaller REPE firms rather than the giants (e.g., Blackstone, Starwood, and Brookfield).

If you’re aiming for the private equity mega-funds that also operate in real estate, you’ll almost certainly need real estate investment banking experience at a top bank to have a good shot.

There are some recruiting tips in the REPE article, but you need to network extensively, join industry associations, and complete at least 1-2 RE-related internships to be competitive.

I list REPE in the “Intermediate” category here because if you intern or work at a small firm, you will most likely leverage it to win a different role in the future.

Real Estate Lending

Again, we have an article on commercial real estate lending, so you should refer to that for the details.

In short, CRE lenders review deals from property investors and make quick decisions on whether to fund the loans required to acquire and develop these properties.

In commercial real estate, virtually every deal involves a substantial debt (often over 50% of the property’s value), so lenders play a critical role.

As an Analyst, you’ll review property financials, build pro-forma models, do some due diligence on the property and its investors, and contribute to the funding decisions.

Since your upside as a lender is capped, you focus on the worst-case scenarios and whether your firm might lose money if rents plummet or property values decrease significantly.

The main advantages of CRE lending roles are:

1. Wide Range of Entry Paths – You’ll see everyone from recent grads to former bankers, real estate developers, and even commercial/corporate banking professionals win these roles. But you still need some finance/real estate internships in university if it’s your first job out of school.
2. Exposure to Lots of Deals – You will be exposed to far more deals than in most other CRE roles, which means you’ll learn more about different property/deal types, different sponsors, and more.
3. Exit Opportunities – You can use CRE lending to move into almost anything else in real estate, from real estate debt funds to REITs to REPE to REIB.

The pay isn’t spectacular; expect ~$100K total compensation initially, rising to the low-six-figure range when you move up to the VP level.

But given everything above, you can’t go wrong with CRE lending as your first full-time job or a steppingstone to another one.

Real Estate Investment Banking

We have a detailed real estate investment banking article, so read that if you want the long version.

The short version is that if you work in REIB at a large investment bank (Goldman Sachs, JP Morgan, Morgan Stanley, etc.), you advise entire companies in the real estate sector.

These companies might include REITs, casinos, hotel firms, homebuilders, real estate operating companies, developers, and leasing firms.

By contrast, if you’re in REIB at a big brokerage firm, you usually focus on raising debt and equity for properties rather than companies.

This distinction between properties and companies means that REIB roles are much closer to other investment banking roles and quite different from RE brokerage jobs.

This also means that you must be on top of the very early recruiting timeline, with IB internship recruiting starting in Year 2 of university in the U.S. (and early Year 3 in other regions).

Your undergrad university, GPA, previous internships, networking, and technical preparation will also be important.

In theory, you might be able to use other CRE roles, such as lending or brokerage, to break into real estate investment banking, but it’s not that common in practice.

The skill sets do not transfer well, and it’s almost always easier to go from REIB to something else than the reverse.

REIB roles are some of the most competitive in this entire sector.

So, they shouldn’t be your top choice if you’re a non-traditional candidate, but they do offer benefits such as high pay and some of the best exit opportunities.

How to Get into Commercial Real Estate: Endgame Roles

I label these roles “endgame” because many view them as permanent roles they plan to stay in for the long term.

For example, if you enter REPE at a mega-fund, there isn’t an obviously better exit opportunity.

In most cases, the main “superior exit opportunity” is going independent and becoming a real estate investor, with all the pros and cons of starting any business.

Real Estate Private Equity (Larger Firms)

See the REPE description above. The only difference here is that REPE is more likely to be an “endgame” goal if you work at a large firm with a clear hierarchy and advancement.

Think: Blackstone, Starwood, Brookfield, etc., rather than the 5-person firm in your neighborhood.

Real Estate Debt Funds

Once again, we have an article on real estate debt funds, so you can get the full story there.

The big difference vs. CRE lending is that RE debt funds tend to fund a wider variety of debt issuances, including the riskier mezzanine tranches, and they tend to be independent entities that raise capital from outside investors.

Many CRE lenders, by contrast, tend to be connected to large commercial banks, so it’s a bit like the distinction between DCM / Leveraged Finance vs. direct lending / mezzanine.

Much of the work is similar to CRE lending (more deals, downside case focus, memos, due diligence, and financial review).

However, the pay ceiling is higher, especially at the biggest debt funds (e.g., Affinius, Fortress, MSD, and Sculptor).

Also, your exit opportunities are quite good because you could easily move to REIB, REPE, or almost anything else besides a pure development role.

The main downside is that breaking into RE debt funds is quite challenging, and they typically require several years of full-time experience.

Real Estate Development

Development differs from almost everything else because it is much more of a nuts-and-bolts job.

In other words, you must deal with issues like budget overruns, angry landowners, construction crews, government approvals, zoning problems, etc.

There is still plenty of financial analysis, and many development models are more complex than acquisition and renovation models.

However, you do far more work outside of spreadsheets.

There are two main paths to breaking into development:

1. Finance / Deals – For example, you could potentially move in from something like CRE lending or REPE if you have worked on development deals in these.
2. Construction / Architecture / Engineering – See the “Initial Jobs” section at the top. These jobs all give you a good knowledge of the physical side of real estate, which is essential for development.

Getting in from brokerage or appraisals / valuation is also possible, as networking trumps almost every other skill for real estate careers.

In most cases, you will need full-time experience in another area to have a good shot at the few roles available at the larger, well-established developers.

In terms of the job itself, starting pay is around $100K – $150K at larger shops, and this increases to the mid-six-figure range as you move up.

But there is one big difference: Like private equity firms, developers receive a share of the profits in successful development deals.

The earnings ceiling is still lower than in PE, but it’s higher than in areas like CRE lending because this profit-share structure results in significant upside on successful deals.

The number of deals you get exposed to varies based on the market, geography, and firm, but you should expect to work on fewer deals than in most credit roles.

Each development deal requires more time and attention than an acquisition of a stabilized property, and some developers only do one deal every few years and still earn a good amount.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are similar to real estate private equity firms in some ways, as they both acquire, develop, and sell properties.

However, they differ because they operate as long-term holding companies and do not necessarily “have” to sell properties within a specific time frame.

They raise equity and debt constantly in the public markets, and they have shareholders but no Limited Partners – so there are no issues with fund lifecycles.

REITs are structured as special corporate entities with a corporate tax exemption (or a very low tax rate) if they distribute a high percentage of their Net Income as Dividends.

Some REITs specialize in a single property type, such as hotels or offices, while others specialize in a certain geography or are more diversified.

Many of the skills required for REITs are the same as those in brokerage, CRE lending, or REPE: You value properties, model the potential returns, and assess the downside risk.

The difference is that it’s quite difficult to break in right out of undergrad – like how it’s difficult to win corporate development jobs without full-time work experience.

Instead, REIT teams usually hire people with at least a few years of experience in fields like REIB, REPE, CRE lending, or RE debt funds.

The pay isn’t great, as it’s a discount to REPE pay in most cases (like the gap between corporate development and private equity compensation).

The big advantage is that the hours tend to be much better, with minimal weekend work, though this depends on your team and their deal flow.

Also, if you can advance to the top of the hierarchy and become a C-level executive at a solid REIT, you can get paid very well for reduced hours and stress (vs. other finance roles).

But it’s also quite a slog to get there because few people want to leave, and turnover is much lower than in traditional finance firms.

How to Get into Commercial Real Estate: Final Thoughts

As a career, commercial real estate is best if you:

1. Are Willing to Network Aggressively – You’ll need to do this to win almost any internship or job, and sometimes you’ll need to do it on the job.
2. Do Not Necessarily Have Great “On Paper” Credentials – For example, maybe you attend a non-target school, have a low GPA, or got started very late in the recruiting process.
3. Are Very Good at Execution – You can figure out tasks and get them done regardless of any obstacles, which is essential for CRE deals.

The best way to get into commercial real estate depends heavily on your current position.

If you’re a university student, focus on winning RE / finance internships in any of the “Initial Roles” above (brokerage, appraisals, leasing, etc.).

And if you’re starting very early with the potential to be competitive for IB internships at large banks, real estate investment banking is a great option.

If you’ve already graduated, you may be able to move into CRE via a real estate lending firm, brokerage firm, or asset management group.

It just depends on how close your current experience is; you could do this from commercial/corporate banking or a credit analyst role, but probably not from an IT or engineering job.

So, if you’re in something completely unrelated, you may want to consider a Master’s degree or an MBA, depending on your experience level.

Assuming you get in, your next step depends on how you value factors like work/life balance, compensation, and the daily routine.

If you want to work on many deals but have a good work/life balance, and you’re fine with lower compensation, CRE lending might be perfect.

If you want to be more entrepreneurial, work on fewer deals, and be more involved with the physical side, maybe RE development is the best fit.

The good news is that it’s such a broad field that you can find a job fitting almost any preference – if you understand how to get in.

Read More

You might be interested in this article, titled The Real Estate Pro-Forma: Full Guide, Excel Template, Explanations, and More.

The post How to Get into Commercial Real Estate: Side Doors, Front Doors, Steppingstones, and Career Paths appeared first on Mergers & Inquisitions.

Unfortunately, my initial instincts are often correct: If I have a bad feeling about something, it usually has issues.

And that is exactly what happened when I watched Dumb Money, the movie about the GameStop short squeeze in 2021, the other day.

There are some entertaining moments and good performances, so I wouldn’t call the movie “bad.”

But the story is thin, there’s no real character development, and even if you ignore these issues, the filmmakers do a poor job of explaining the GameStop story.

I understood it because I knew the companies and people involved, but the movie might confuse the uninitiated.

I’ll cover all those points here, but I want to start with some context first:

A Long Time Ago in a Stock Market Far, Far Away

To understand the premise of Dumb Money, you need to return to late 2020 and early 2021, which now seem like a lifetime ago:

• There was a global pandemic. I wrote many articles about it. It sucked.
• Everyone was locked up inside, and many turned to day trading for entertainment and money (in between binge-watching shows on streaming services).
• The Fed and other central banks cut interest rates to 0% and printed massive amounts of money to support the “fiscal stimulus” that was allegedly required to counteract the pandemic; this created a bubble in the financial markets.
• SPACs, cryptocurrency, and other junk went “to the moon” as people piled into risk assets. Remember when Chamath was on CNBC all the time?
• Oh, and lots of M&A, IPO, and SPAC deals were happening, so banks made plenty of “COVID hires,” often ignoring qualifications and recruiting norms.

I wrote about the GameStop short squeeze back when it happened in February 2021, and it turned into the most popular article of the year.

I later removed it because of annoying trolls, but I’ve restored it if you want to go back and read my initial comments.

In short, the media portrayed this event as a populist uprising against Wall Street, as retail investors on Reddit joined forces to bid up GameStop’s stock price while hedge fund Melvin Capital was heavily short the stock.

This led to a “short squeeze,” where Melvin had to cover its shorts by buying shares, further pushing up the price.

This huge increase in GameStop’s stock price led to many normal people becoming wealthy on paper – but popular brokerage firm Robinhood then blocked buys of GME shares, and the stock price fell back down to earth (it’s now down ~80% from the top of the squeeze).

In the original article, I explained the problems with this narrative: Retail investors acted as a catalyst, but if you look at the order data, institutional investors and huge trend-following funds were responsible for most of the price increase.

And yes, Melvin Capital and Robinhood emerged as losers following these events, but other big firms, such as Citadel and Silver Lake, became winners because they made different decisions.

Dumb Money: Characters and Story

As you can probably infer from the summary above, this is a thin premise for a movie because there isn’t much to the story.

In a traditional story structure, the protagonist has strengths and weaknesses and must overcome challenges to achieve their goals; this protagonist makes movies, the antagonist responds, and the protagonist succeeds or fails by the end.

The original Wall Street from 1987 is a good example of this structure, with the relationship of friends-turned-enemies Bud Fox and Gordon Gekko forming the movie’s core.

Dumb Money has none of this.

Things just… happen, and the protagonist – “Roaring Kitty” on the Wall Street Bets sub-Reddit, who started hyping GameStop in 2020 – is poorly defined.

Sure, he wants to make a lot of money and “stick it to the man,” but these goals could describe 99% of the human population.

By the end, he’s the same person, but he’s $34 million richer because of his GameStop stock.

Despite that, we’re supposed to feel sorry for him because he got grilled in front of Congress for his role in the short squeeze.

The antagonists – Steve Cohen (Point72), Ken Griffin (Citadel), Gabe Plotkin (Melvin Capital), and Vlad Tenev (Robinhood) – are even worse because they barely do anything.

Their scenes reminded me of fantasy novels where the evil wizards sit around discussing their schemes in the prologue… but then never enter the story directly.

We never understand why these billionaires cared about GameStop or Redditors so much, given everything else in their lives and portfolios.

Ultimately, Dumb Money falls into the same trap as many other “money movies”: it focuses too much on the money and not enough on the personal motivations.

This can work if the characters are entertaining or crazy things keep happening, but this film didn’t have nearly enough of that to keep me invested in the story.

Dumb Money: The “Finance” Parts of the Story

The filmmakers wanted to convey a “Wall Street bad; populist/rebel retail investors good” message, and that’s fine.

The issue is that they went a mile wide and an inch deep and didn’t properly explain the key relationships, companies, and personalities.

I will give them credit for covering concepts such as “payment for order flow” and the deposit requirements set by the Depository Trust & Clearing Corporation (DTCC), which forced Robinhood to limit GameStop buying activity.

They could have skipped all this, but they added more nuance by including these points.

But if you asked the average non-finance person to explain the relationships between Robinhood, Citadel, GameStop, and Reddit after just watching this movie, I doubt they would be able to do it.

The film needed an “explainer scene” that connected all the dots and explained how Citadel emerged as the big winner due to Robinhood’s order flow and why so many retail investors started day trading due to zero-commission trades, lockdowns, and the market bubble.

The Big Short did an excellent job explaining the 2008 financial crisis with a few key scenes, and Dumb Money could have done something similar – maybe during the Congressional hearings toward the end.

Dumb Money and Dumb Conclusions

Besides the lack of connecting dots, the other big issue is that the film reaches some unfounded conclusions in its final moments.

Via on-screen text, it states or implies the following:

1. Robinhood’s IPO flopped because of the bad press around GameStop and the trading limits the company imposed on customers.
2. The GameStop short squeeze “changed the industry” forever because hedge funds could no longer ignore retail investors. Now, they scour the internet for ideas as well.
3. Robinhood and Citadel colluded to limit GameStop trading activity.
4. Melvin Capital shut down because of its losses on GameStop and other meme stocks.

I agree with point #4, but this was entirely Melvin Capital’s fault; any short squeeze would have melted down the fund, even if retail investors hadn’t catalyzed it.

On point #3, some leaked text messages later emerged that pointed to collusion, but a judge threw out the lawsuit due to the lack of credible evidence.

I completely disagree with points #1 and #2: Robinhood’s IPO flopped because it was a bad company poorly suited to a post-pandemic world, and the GameStop story did not fundamentally change the finance industry.

Hedge funds have always scoured the internet for ideas, and quant funds have always used internet data to train their models. Maybe these funds pay more attention to retail traders now, but I don’t think it’s a night-and-day difference.

In short, many of the film’s conclusions are off the mark and represent a romanticized view of the real story.

Dumb Money: The Final Verdict

Despite all my criticism, I still wouldn’t call Dumb Money “bad.”

To me, it’s in “mid” territory: There are some funny scenes and good performances from a great cast, but they’re marred by underdeveloped characters and a paper-thin story.

If you’re interested in trading or the markets, you might want to check it out when it arrives on the streaming services, but I’m not sure I’d recommend a trip to the theater to see it.

If you want an educational finance movie that explains complex ideas well, watch The Big Short.

If you want an entertaining finance movie with drugs, crazy people, and models, watch The Wolf of Wall Street.

And if you want everything above, plus excellent writing and characters, watch Succession.

There may be other good finance stories waiting to be discovered, but they’ll need a much stronger premise than Dumb Money – one that lends itself to real character development and the twists and turns of a traditional story.

The post “Dumb Money” Review: A Worthy Addition to the Classic Finance Movie Roster? appeared first on Mergers & Inquisitions.

Most articles are copied/pasted/tweaked text, others appear to be written by ChatGPT, and others repeat generic questions you might get in an interview for a janitorial position.

But there is a decent reason for all this: It’s much harder to write an article about VC interview questions since they are far less standardized than IB interview questions or PE interviews.

That said, it is still possible to explain the most important topics and give a few preparation tips, so let’s get started:

The Biggest Differences with Venture Capital Interview Questions

I’d summarize them as follows:

1. Less Technical and More Research – They’re not going to quiz you on merger models or how to calculate the IRR quickly, but they will expect that you’ve read about their firm and their portfolio companies and that you have investment ideas.
2. No Right or Wrong Answers – Some technical questions have correct answers, but many market and investment ones do not. There are better and worse explanations for your answers, but in the absence of time travel, VC interviewers can’t determine if your startup investment pitch was “correct.”

In some ways, prep for VC interviews is easier because you don’t have to learn or memorize many technical topics, but in some ways, it’s harder since you have to do lots of firm-specific research.

Categories of Venture Capital Interview Questions

I would split VC interview questions into 6 main categories. We’ll explain each one and give a few examples along with model answers:

1. “Fit” and Background Questions – Your resume, why venture capital, why this firm, your strengths and weaknesses, etc.
2. Market and Investment Questions – Which startup would you invest in? Which market is attractive? Which markets should we avoid?
3. Firm-Specific and Process Questions – What do you think about our portfolio? Which companies would you have invested in or not invested in? How would you analyze a potential investment and make a decision?
4. Deal, Client, and Fundraising Experience Questions – How did you add value to the deals you’ve worked on? If you worked at a startup, how did you win more customers or partners in a sales or business development role?
5. Technical Questions – You could get standard questions about accounting and valuation or VC-specific questions about cap tables, key metrics in your industry, or how to value startups.
6. Case Studies and Modeling Tests – These are less likely, but you could get a short investment recommendation, a market/company analysis, or a cap table exercise.

Venture Capital Interview Questions: Fit / Background

Q: Walk me through your resume.

A: See our guide and examples for the “Walk me through your resume” question and the article on how to walk through your resume in buy-side interviews.

The main difference for VC is that you want to emphasize your desire to advise and invest in startups in the long term.

For example, you could say that you liked the client and relationship aspects of IB but are less interested in the technical work, and you would make a bigger impact working with early-stage companies.

Q: Why venture capital?

A: Because you are passionate about working with startups, helping them grow, and finding promising new companies – and you prefer that to starting your own company or executing deals.

You can also link this back to tech or healthcare companies you’ve advised or earlier-stage businesses where your work made a difference.

Q: Where do you see yourself in 5 or 10 years?

A: The answer depends on whether you’re interviewing for a Partner-track position, which usually means “post-MBA role.”

If you are, the only correct answer is, “I want to continue in venture capital, advance, and make a long-term career of it.”

If not, you can say that you want to work with startups in the long term, but you understand that candidates normally move into something else after a few years.

So, you could mention a related job, such as strategy, finance, or business development at a portfolio company, and say that you want to return to VC at a higher level eventually.

Q: What are your strengths and weaknesses?

A: See our walk-through, guide, and examples. For VC, your strengths should include points like “communication/presentation skills,” “networking ability,” and “being able to update your views quickly” (i.e., strong opinions, loosely held).

For weaknesses, it might be acceptable to say that you don’t have the best technical skills or sometimes have trouble balancing important, long-term tasks with short-term, urgent ones.

It’s probably not a great idea to say that you second-guess yourself or take too long to make decisions because these are both bad weaknesses for investing roles.

Q: Why not private equity, growth equity, hedge funds, or entrepreneurship?

A: You’re most interested in tech or life science startups, and PE funds and hedge funds do not work with these companies in the same way, as they don’t directly fund their development activities.

Growth equity is a bit closer, but you’re more interested in early-stage companies that need VC support rather than already successful companies that need more capital.

Finally, you’re not interested in starting your own company because you like to advise portfolio companies and get a broad view of the industry rather than working on one idea for years or decades.

Q: Why our firm?

A: This one should relate directly to your research on the firm, including their target markets and portfolio companies. Example answer:

“I’m interested in your firm because you focus heavily on tech-enabled healthcare, which matches my biology and computer science background, and you have some of the best portfolio companies in the market, like [Insert Names]. I have also liked everyone I’ve met here, such as [Insert Names], and think I would fit in with your culture.”

Venture Capital Interview Questions: Markets and Investments

These questions span a wide range, as they could ask you to discuss everything from the current M&A and IPO markets to specific startup sectors you like.

There is no real “answer” to the preparation other than “Read a lot about markets and specific startups each week.”

Q: Tell me about the current IPO, M&A, and VC funding markets.

A: This one will change over time, but if you’re interviewing in 2023, you could say something like:

“Currently, all these markets are doing poorly after many companies went public over the past few years due to loose monetary conditions – and then failed to perform well. So, the IPO market has largely been closed, but there are some signs that it’s now opening up with recent deals like ARM and Instacart.

M&A activity is also down significantly, and higher interest rates, inflation, and more antitrust enforcement are making many companies think twice about acquisitions.

Finally, VC funding is also down significantly, and fewer startups are getting funded – and when they do get funded, it’s typically at much lower valuations than in the boom years, especially for late-stage deals.”

Q: Which current startup would you invest in? Why?

A: As with hedge fund stock pitches, you need to research markets and companies and develop 2-3 solid ideas here. These ideas must match the firm’s strategy and represent significant potential upside.

In other words, if the firm does mostly Series A investments, you should present ideas that could potentially generate a 10x multiple; but if the firm focuses on later-stage investments, the potential multiples can be lower.

Example answer:

“I would invest in Novoic, a healthcare IT startup in the U.K. that is using AI to do early detection of Parkinson’s, Alzheimer’s, and other diseases based on variances in speech patterns. It raised a $2.6 million seed round a few years ago, and if it could capture even a small percentage of the ~$3 billion revenue Alzheimer’s diagnostics market, it could be worth $500 million to $1 billion in 5-10 years. The market could also be much bigger than people think, especially due to aging populations worldwide – expectations are that it will double by 2030, but I think it could triple by then as younger people increasingly use these early detection tools.”

Q: Which markets are the most attractive to you? Why?

A: For this one, you should find highly specific markets – such as P&C insurance technology rather than “fintech” – and argue that others have overlooked them for reasons X, Y, and Z, but they could potentially create billion-dollar startups.

Avoid mentioning markets that are over-hyped or that represent “The Current Thing.”

Example answer:

“I would be interested in anything in the ‘care tech’ space, especially marketplace companies, because the population in most developed countries (and China) is aging rapidly, and there aren’t enough doctors, nurses, and care workers to meet demand, so technology will have to meet at least some of the needs. Marketplace companies also solve the problem of younger people who need to find jobs or income sources outside the traditional channels.

If you consider the hundreds of millions of elderly by 2030 or 2040, this market could potentially be worth tens of billions by then, with many startups positioned to grow as a complement to the traditional healthcare system.”

Q: Which markets should we avoid?

A: You’ll make the opposite argument here and say that a market is worse than the consensus view because it’s smaller than expected, it will grow more slowly than expected, or it has other disadvantages, such as too much competition or no way to build a “moat.”

Example answer:

“I would avoid anything in the ‘general AI’ space right now because most of these companies are building ‘products’ that should be features, and most of the benefits from this technology will go to the biggest tech companies, not startups. Although there have been many high-profile funding rounds lately, I don’t think most of these companies will have good outcomes for investors. There might be room for investment in something with proprietary data or a huge moat, such as a patent or other IP that gives them access to a market and limits competition.”

Venture Capital Interview Questions: Firms and Processes

These questions are important in venture capital recruiting because firms value “fit” so much – if you haven’t researched the firm and its portfolio extensively, they’ll find out quickly.

Q: Of our portfolio companies, name one that you would have invested in and another that you would not have invested in.

A: Most of your answer here should come down to the market being smaller or bigger than expected, but for later-stage companies, you can add something about the competition, the company’s product/services, and even its valuation in recent funding rounds.

Example answer:

“I would have invested in Qventus because the ‘hospital optimization’ space is huge, and many struggling hospitals are looking to cut costs ASAP. It has raised over $90 million so far at relatively low valuations, most recently in the hundreds of millions, and I believe it could eventually grow to a $1 billion market cap company, which might produce a 10x+ multiple for you.”

“I would not have invested in cargo.one because the freight forwarding space is quite crowded and commoditized, and while the market is big and the company’s product is good, it doesn’t do enough to differentiate against the competition. It might still produce a decent return, but I would have avoided this specific market and focused on others with higher potential.”

Q: How would you think through an investment decision?

A: First, you must ensure that the startup matches your firm’s size, stage, and strategy. If your firm only does Seed and Series A investments in tech companies, you won’t invest in a Series D round for a biotech company.

Next, you research the market and estimate how big the company could eventually get and what it might be worth to see if you could earn a reasonable multiple, such as 10x for a Series A or 5x for a Series B deal.

Then, you look at the team, the product, and the competitive advantages and make sure all of these are reasonable. As part of this, you’ll request due diligence data on users, Average Revenue per User, customers, financial performance, clinical trial data for biotech companies, and SaaS metrics for enterprise software companies.

You might also conduct some DD and analyze the data via Excel database functions.

If all of these check out, you might recommend investing.

Assessing the risk is not that important for early-stage VC investments because most startups fail – so you focus on the potential upside rather than everything that could go wrong.

Q: Suppose that you join our firm. How would you screen for new companies to invest in?

A: You would start by reading about the market and its current startups and finding product, team, and financial information.

However, the best VC deals tend to come from your network and personal referrals – so once you have an idea of the companies you’re seeking, you would reach out to everyone who might be connected and see if they can make introductions.

You’ll usually review each startup’s pitch deck or meet with them, and if they’re of interest, you’ll go through additional meetings and request more information before investing (see above).

Q: What are the most important provisions in VC term sheets?

A: The most important terms relate to economics and control. With economics, the investment amount and pre- and post-money valuations are critical, but so are terms like the employee options pool, liquidation preference, and participating preferred and participation cap (if they exist).

The pay-to-play and anti-dilution provisions are also important for determining what happens to a VC’s ownership in future funding rounds.

With control, the key terms are the Board of Directors composition, “protective provisions” that allow investors to veto certain actions, and drag-along rights that effectively allow one investor group to make decisions for the other group(s) (usually, majority shareholders “dragging along” minority shareholders).

—

There are many other potential questions, such as queries about the VC business model, the typical investment stages, sizes, and valuations, and how you might monitor portfolio companies.

Venture Capital Interview Questions: Deal, Client, and Fundraising Experience

Your deal experience could come up in venture capital interviews, but it tends to be less important because VC deals are relatively simple.

If you have an IB background, you should outline your deals by following the examples in the investment banking deal sheet article, and you should pick deals that are relevant to venture capital – a tech or healthcare IPO, a joint venture between two software companies, or something that required significant market analysis.

You should also take a critical view of each deal and be able to explain why you would or would not have done it if you had been the buyer or institutional investor.

These questions are not specific to VC interviews, so please refer to the other coverage on this site, such as in the private equity resume guide.

Venture Capital Interview Questions: Technical Concepts

You are highly unlikely to get traditional IB interview questions in VC interviews, but they could ask about VC-specific topics, such as different types of funding, startup metrics, and so on.

Q: What’s the difference between pre-money and post-money valuations?

A: The “pre-money valuation” is a startup’s Equity Value before it issues new shares to the VC firm, and the “post-money valuation” is the startup’s Equity Value after that happens.

If  the company’s pre-money valuation is $10 million before it raises $5 million from a VC firm, its post-money valuation is $15 million, and the VC firm owns $5 / $15 = 1/3 of it.

Q: Why would a startup raise money in a priced equity round vs. a SAFE note vs. a convertible note?

A: A priced equity round is based on the amount invested and the pre-money valuation, and the investors own Investment Amount / (Pre-Money Valuation + Investment Amount) afterward.

The ownership is clear, but priced rounds take longer to negotiate and may be more expensive.

Some startups prefer options like SAFE and convertible notes that defer the valuation and ownership questions. Investors that use these instruments contribute capital but do not get shares right away – instead, they convert into equity in the next priced round.

These instruments can be faster and cheaper, but they may also create problems in the priced round because the conversion method isn’t always clear, and future investors may dispute it.

Convertible notes are more complex than SAFE notes and might have terms like accrued interest (AKA PIK Interest) in addition to the standard valuation cap and discount. For more, please see our tutorials on cap tables and venture debt as well.

Q: What are some key metrics and ratios for SaaS companies?

A: We have a full video tutorial on this topic (see the notes). Important ones include the Lifetime Value (LTV) and CAC (Customer Acquisition Cost) and the resulting LTV / CAC ratio.

The CAC Payback Period, i.e., the number of months it takes to earn back a customer’s acquisition cost, is also important because it is far less subjective than LTV.

Other important metrics include the Gross Retention, Net Retention, Annualized Recurring Revenue (ARR), and Monthly Recurring Revenue (MRR).

ARR is different from normal “revenue” because it’s based on the recurring revenue in one month or one quarter, annualized for the entire year. So, ARR tends to be higher than simple “revenue” for growth companies since the recurring revenue grows each month.

SaaS accounting and metrics like bookings vs. billings vs. revenue are also important.

Q: How do you value a biotech startup?

A: Assuming it is developing patent-protected products, you usually use a Sum-of-the-Parts DCF where you project revenue and expenses for each drug, discount the cash flows to Present Value, and then add them up.

Unlike in a normal DCF, there is no Terminal Value – instead, you go out many decades and assume the drug hits “peak sales,” and that revenue then declines to a low level as generics enter the market.

In the final step, you also must factor in the PV of Net Operating Losses, the PV of corporate G&A / overhead, and the standard Enterprise Value bridge items to determine the company’s Implied Equity Value.

Venture Capital Interview Questions: Case Studies

Case studies could easily come up in VC interviews, but they tend to be more qualitative. They might give you a company’s pitch deck and financial information and ask you to evaluate the market, team, and financials, and make an investment recommendation (for example).

We have a direct example of a venture capital case study in our PitchBookGPT exercise, so refer to that if you want to practice.

If you get a more quantitative case study, it will probably be a cap table exercise or a variant of “Review the customer data and tell us what you would ask questions about.”

A simple cap table exercise might go like this:

• Seed Investment: $2 million at $8 million pre-money valuation with 1x liquidation preference.
• Series A Investment: $5 million at $15 million pre-money valuation with 1x liquidation preference and 10% employee options pool (created at the same time as the VC investment). Pari passu with the Seed investors.
• Series B Investment: $15 million at $50 million pre-money valuation with 1x liquidation preference. Senior to Seed and Series A.

Calculate the proceeds to each investor group at exit values ranging from $50 million to $300 million (use sensitivity analysis in Excel).

So, How Do You Prepare for Venture Capital Interview Questions?

This point goes back to the differences discussed at the top: VC interview prep requires far more research and outside reading.

Sure, you can complete a few case studies for practice, and it’s good to learn the basics of cap tables and the VC investment process, but they’re unlikely to ask you extremely technical questions about any of these.

Unfortunately, no article you can find online – including this one – gives you the magic-bullet solution because they cannot possibly know the specific firm you are interviewing with.

But if they did, they could probably replace most of the article text with “Google this firm and its portfolio companies extensively,” and you’d be well-prepared for venture capital interview questions.

The post Venture Capital Interview Questions: What to Expect and How to Prepare appeared first on Mergers & Inquisitions.

“It’s like long/short equity or credit, but more interesting!”

“Distressed investing offers equity-like returns with lower risk.”

“Distressed assets offer non-correlated returns, similar to global macro.”

These are nice sales pitches, but the reality is quite different.

Distressed debt investing offers advantages over other hedge fund strategies, but the marketing often oversells the benefits.

Some people can do very well at dedicated distressed funds, but in most cases, you’d be better off pursuing the strategy at a broader credit or event-driven hedge fund:

What Are Distressed Debt Hedge Funds?

Distressed Debt Hedge Funds Definition: Distressed debt hedge funds buy and sell debt that is trading at a steep discount to face value, such as 40%+, and make money by betting on changes in the price of this debt or using it to gain influence in a restructuring or bankruptcy process.

As discussed in the distressed private equity article, there is no universal definition for a “distressed security” or a “distressed company.”

However, various books and textbooks have defined “distressed” as follows:

1. Debt Discounts – If Secured Debt is trading in the low 90% range or below, or Unsecured Debt is trading in the 60-70% range or less, it’s typically distressed. These percentages mean the market is pricing in a high likelihood of creditor losses in a restructuring or bankruptcy.
2. Troubled Company – If the company has a low Cash balance, limited Revolver availability, and a looming debt maturity with no easy way to refinance at similar terms, it is usually distressed.

As an example of the first definition, if a company has issued $1000 of Unsecured Debt, but you can now buy it for only $600, it’s distressed.

The company still pays interest on the full $1000 and must repay it upon maturity, but you can buy the issuance at a steep discount because there’s a significant chance of default (see: book value vs. market value vs. face value).

A sharply declining stock price does not necessarily mean a company is “distressed.”

For example, let’s say a tech startup with no Debt goes public, and its stock price soars from $10 to $200 and then falls to $30.

This company is not distressed; it’s an overhyped tech startup that came crashing down.

Distressed investing relates specifically to Debt and how much a company’s Debt and Equity “should” be worth when various scenarios play out.

The catalysts could be anything from quarterly earnings announcements to covenant breaches to announcements of M&A deals, financings, or strategic reviews.

Distressed debt hedge funds could be classified within either the “credit” or “event-driven” categories, which make up a combined ~22% of all hedge funds:

An Example Distressed Debt Trade

To make this strategy more concrete, we’ll look at a company that initially raised Debt with this financial profile:

The company was levered at 5x Debt / EBITDA, but most of its Debt still traded near its face value or par value, as shown above.

A few years later, the company’s industry declined, and it was slow to cut costs and enter new markets. Its financial profile now looks like this:

Its Debt / EBITDA is now 10x, its EBITDA / Interest has fallen below 1x, the Secured Debt is trading at 90% of its face value, and the Unsecured Debt is down to 60%.

The company has only $100 million of Cash and $150 million of Revolver availability, so it cannot repay the upcoming Secured Debt maturity.

It could refinance, but it will have to accept a significantly higher interest rate on the new issuance – and it can barely afford interest at the current rates.

A distressed debt hedge fund could trade this situation in several ways:

1. Long the Secured Debt and Short the Equity: The fund might do this if it expects the company to announce a full liquidation, but it has determined that the proceeds from its net tangible assets can fully repay the Secured Debt. If they’re right, this will produce a quick 11% gain from the Debt and more from the Equity. This scenario is unlikely since the company’s Equity Value is only $200 million (less than the Secured Debt balance), but you never know…
2. Long Both Debt Issuances and Use CDS to Hedge: If the fund expects the company’s business to turn around in the next earnings announcement, it might buy both the Secured and Unsecured Debt and use credit default swaps to hedge the default risk. If the Secured Debt rises to 98% and the Unsecured Debt rises to 80%, the fund will earn ~9% and ~33%, respectively, minus the hedging costs.
3. Long the Secured Debt and Short the Unsecured Debt (or Use CDS): If the fund expects the Secured lenders to be repaid in full as the Unsecured lenders get wiped out, it might bet on one tranche and against the other. In this scenario, they would earn 11% on the Secured Debt and, if the Unsecured Debt falls to 10% of face value (for example), an 83% return there.

Distressed Debt Hedge Fund Strategies

I’ll refer you to the distressed PE article for more on this one, but there are five basic distressed investment strategies:

1. Distressed Debt Trading – Buy Debt that trades at a big discount to face value, such as 30 – 40%, and sell it once the price rises (or bet against the Debt with credit default swaps).
2. Distressed Debt Non-Control – Buy Debt to gain influence in the restructuring or bankruptcy process and earn a huge gain upon repayment – or get common shares in a debt-for-equity swap and sell the shares at a profit.
3. Distressed Debt Control – Buy the “fulcrum security” that will convert into Equity to gain a controlling stake in the company post-restructuring. This one is more common for distressed PE firms.
4. Turnaround – Acquire Equity before any bankruptcy or restructuring process and turn around the company to make it profitable and cash flow-positive. Again, this is more of a PE strategy.
5. Special Situations – This could include the events above but could also refer to investments in spin-offs, asset sales, recapitalizations, acquisitions, or capital raises.

Most distressed debt hedge funds follow strategies #1 and #2: trading and non-control.

Many hedge funds use strategy #5 (special situations), but they’re usually put in a slightly different category.

Within the “event-driven” category, distressed funds fit in as shown below:

How Are Distressed Debt Hedge Funds Different?

Most dedicated distressed funds offer less liquidity and longer lock-up periods than other hedge funds, and they tend to hold positions for months or years with fairly concentrated portfolios.

They also tend to use less leverage than equity and global macro strategies because it can be difficult to exit their stakes.

If a merger arbitrage fund holds an average of 100 positions, a distressed fund might hold only 10-15 (or even fewer).

You might wonder if these differences result in better performance for distressed funds, and the best answer is “Kind of.”

The distressed strategy outperformed equity and global macro in 2000 – 2019, but not the credit category as a whole:

In terms of risk, distressed funds have fairly standard Betas to stocks and bonds:

Many people correctly point out that 2010 – 2019 was a terrible period for distressed strategies due to zero interest rates and a flood of cheap money.

Outside of events like the oil crash and COVID, there weren’t that many true distressed opportunities because virtually any company could get funding.

So, I would expect distressed performance to improve, especially as companies start to feel the effects of higher rates.

The Top Distressed Debt Hedge Funds

There are single-manager distressed funds in the $500 million – $2 billion AUM range, but these are not necessarily the best funds to target for a few reasons:

1. Cyclicality – Distressed debt investing comes into and goes out of favor quickly, so you could easily go from dozens of opportunities one year to almost nothing the next. It’s a better career bet to aim for diversified funds that do everything from “stressed” credits to event-driven and deep-value strategies.
2. Influence – In many distressed situations, smaller funds are at a disadvantage because they might own 5% of the Debt, while firms like Apollo, Oaktree, or Blackstone own 50%+. They cannot compete for better terms or more influence in this scenario.

With that said, here’s how I would split up the distressed landscape:

Huge Funds That Do Distressed Investing: Apollo, BC Partners, Blackstone, Centerbridge, Fortress, GoldenTree, Oaktree, and Sculptor Capital (FKA: Och-Ziff).

Traditional Distressed Funds That Have Diversified: Anchorage (partially shut down), Brigade, Davidson Kempner, Elliott, Marathon, and Silver Point.

Newer/Smaller Funds with Occasional Distressed Investments: Diameter, Kennedy Lewis, and Nut Tree.

You could add plenty of names to the second and third lists: Angelo Gordon, Appaloosa, Aurelius, Avenue, Baupost, Bayside, Beach Point, Canyon, King Street, Monarch, Mudrick, and Solus Alternative are examples.

A few of these funds specialize in distressed (e.g., Mudrick and Aurelius), while most use broader credit, event, and deep-value strategies and make occasional distressed trades.

How to Recruit for Distressed Debt Hedge Funds

The best background is restructuring investment banking because the skill set is directly relevant.

But you could also move in from Leveraged Finance or an industry group that does frequent debt deals.

DCM would be a tougher sell because you only work with investment-grade bonds.

If you have a non-IB background, such as at a turnaround consulting firm, you might want to aim for operational roles in distressed PE or move to banking first to improve your chances.

You can get into distressed investing at the MBA level, but more so if you’ve already done something relevant pre-MBA, such as credit risk at a large bank, and you move into restructuring IB after the MBA.

If you want to join directly out of an MBA program, you’ll almost certainly need turnaround or distressed experience pre-MBA.

You can also get into distressed investing with a legal background because the job requires you to interpret confusing documents and know the details of the restructuring and bankruptcy processes.

But it’s more common to go from law school to investment banking and then move to a hedge fund.

If you want to get into distressed investing directly out of law school, you’ll probably need:

• A degree from one of the top law schools in the country.
• Two relevant internships in 1L and 2L, such as at a restructuring boutique bank and a PE or credit-related one.

Most distressed funds use an off-cycle recruiting process, so the timing varies, and you’ll have to network proactively to find opportunities.

The large funds that operate in the distressed space use more of a structured, on-cycle approach, which is positive if you’re an IB Analyst at a top bank and negative otherwise.

If you’re recruiting for distressed roles in Europe, language skills (especially Portuguese/Italian/Spanish) help quite a bit because you’ll have to read the original documents and understand the nuances of local bankruptcy law.

Interviews, Case Studies, and Investment Pitches

The differences in credit hedge fund interviews also apply here: Expect many questions about bond math, including the YTM calculation, pricing, recoveries, seniority, and different covenants.

They could also ask you about the bankruptcy and restructuring processes and the options for distressed companies (see the restructuring IB article).

For your investment pitches, you don’t necessarily need to pitch all distressed ideas, but you should aim for “stressed” trades, such as a high-yield bond currently trading at 90% of face value.

The main difference vs. standard credit trades is that the range of outcomes is wider.

For example, you can’t limit yourself to catalysts such as positive or negative earnings or upcoming refinancings.

You must also consider what might happen in a debt-for-equity swap, liquidation, or Chapter 7 vs. 11 bankruptcies.

Your overall approach might look like this:

1. Screen for Stressed or Distressed Issuances – You’ll need Bloomberg or another data source in most cases, but you might be able to use online research to get ideas.
2. Plot Out the Possible Scenarios – And estimate the market value of each Debt tranche and the company’s Equity in the most likely outcomes
3. Create Your Trade – The simplest approach is to long one part of the capital structure and short another, but you could also long or short just one component and use options or CDS to hedge the risk.
4. Find Support – After you have estimated the returns in different scenarios, you should read the company’s credit documents and do some industry/competitive research so you can defend your views in interviews.

This process is time-consuming, so you don’t need to develop many ideas.

You might be fine with just two (2) separate pitches, and they could be based on similar distressed situations.

Careers at Distressed Debt Hedge Funds

The biggest issue with long-term careers is that there aren’t that many viable, dedicated distressed debt hedge funds.

Economy-wide distressed cycles only come along once every 10-15 years, so if your fund does nothing but distressed investing, you’ll be waiting a long time to invest.

Some people argue that higher interest rates and the rise of non-bank lenders will create more distressed opportunities in the future – and they might be right.

But it’s still a highly cyclical investment style with too much capital chasing too few opportunities in most markets.

So, if you want to work in distressed investing, you should aim for a larger, diversified fund that uses a range of credit and event-driven strategies and has relationships with many companies.

The other differences noted in the credit hedge fund article also apply here: You’ll work longer hours because distressed investing is closer to working on deals, and you’ll work in more of a team setting since you need input from so many different parties.

Compensation, as always, has less to do with the strategy and more to do with the AUM, fund performance, your seniority, and the single vs. multi-manager distinction.

Exit Opportunities

The best part of working in distressed debt investing is that you gain a lot of mobility within the credit space.

For example, it’s much easier to go from distressed debt to investment-grade debt than the reverse, and it’s far easier to move from distressed to LevFin than the reverse.

You could also join a generalist credit hedge fund, event-driven fund, special situations fund, or a restructuring investment banking group.

Distressed private equity and turnaround consulting are more of a stretch since they’re operational, but they are plausible if you have the right experience.

You will not be a good candidate for venture capital, growth equity, or corporate finance roles because the skill sets are too different.

Normal industry groups in investment banking and corporate development jobs might also be difficult because you could be perceived as overly specialized.

For Further Learning

To learn more about this field, we recommend the following books and websites:

• Distressed Debt Analysis – The classic Moyer guide. It’s still good, but some concepts have become less relevant since it was written 20+ years ago.
• Creating Value Through Corporate Restructuring (CVCR) – This is a more recent reference that covers real-world case studies.
• Distress Investing – This is good if you’re more advanced and want something written by a top distressed hedge fund investor.
• The Art of Distressed M&A – Another good reference, but more geared toward investment banking.
• Distressed Debt Investing – This site is no longer active, but the archives have many useful case studies.
• Pari Passu and Petition – These are good newsletters related to distressed and restructuring.

Or, you might want to read this article: Distressed Debt Hedge Funds: How to Become a Vulture Capitalist.

Final Thoughts About Distressed Debt Hedge Funds

The biggest benefits of working at a distressed debt hedge fund are:

1. You gain in-depth technical skills.
2. You work on interesting, complex trades.
3. You get a lot of mobility within the credit/distressed/turnaround space.

If you get bored of distressed deals, you could easily move to a credit or event-driven strategy or even switch gears and return to banking or consulting.

The biggest drawbacks are that there aren’t that many dedicated distressed funds, and even if you find one, it’s risky to work on only distressed investments.

It’s arguably the most cyclical of all hedge fund strategies, and if you join at the wrong time, you could end up with limited experience.

But if you find the right fund and work in a more diversified role, distressed investing could be a career highlight – even if the reality doesn’t quite match “the pitch.”

The post Distressed Debt Hedge Funds: How to Become a Vulture Capitalist appeared first on Mergers & Inquisitions.

After putting in all that time and effort, you feel like you’re back at square one.

Unfortunately, it’s also quite common: in some years, over 50% of interns fail to get a return offer.

And in periods where deal activity is terrible (e.g., 2008 – 2009 or 2022 – 2023), the percentage may be even higher.

While it may feel like the end of the world, you are not actually back at square one.

But if you want a good outcome, you need a solid plan and honesty about why you didn’t get a return offer. I recommend the following steps, detailed below:

1. Step 1: Figure Out Why You Didn’t Get a Return Offer
2. Step 2: Pick Your Best Next Move
3. Step 3: Network and Prepare for Interviews
4. Step 4: Reevaluate Your Options If Nothing Worked

What is a “Return Offer”?

All the large investment banks – bulge brackets, elite boutiques, and middle-market firms – use internships as a recruiting tool for Analysts and Associates.

Effectively, the internship is an 8-10-week interview where you must prove yourself on the job by helping full-time employees with their tasks.

If you perform well and the bank has enough spots, you’ll get a “return offer,” which means you can start working full-time at the bank the following year after graduation.

These internships matter because the large banks make most of their full-time job offers to interns who perform well.

To succeed in your internship, please see our guide to investment banking internships.

This guide will focus on what to do if you did not perform well or if something outside your control resulted in no return offer.

Much of this guide also applies to related opportunities, such as investment banking spring weeks in the U.K., though there are some subtle differences (see the full article for more).

Step 1: Figure Out Why You Didn’t Get a Return Offer

You need to start by asking why you didn’t get a return offer.

Sometimes, it was because of something outside your control, such as the firm not hiring anyone, the group shutting down, or a bad market.

But in many cases, it was because you made specific mistakes, didn’t perform well, or didn’t “fit” with investment banking.

If you’re in this category, there’s no shame in admitting it.

It’s mostly the banks’ fault for accelerating recruiting so much that they hire many students who are not good fits for the job.

There are ~5 main reasons why you might not have received a return offer:

1. Poor Soft Skills – For example, maybe you made off-color comments, didn’t dress appropriately, or didn’t communicate effectively with full-time bankers. Or maybe you came across as weird or anti-social.
2. Poor Hard Skills – Maybe you could not use Excel or PowerPoint effectively, made math mistakes, or failed to check your work before turning it in.
3. Bad Market and Very Few or No Return Offers – Maybe deal activity was so bad that the bank didn’t need to award many return offers. Finance firms are notorious for under-hiring and over-hiring, so this happens a lot.
4. “No Return Offer” Policy – Some boutique banks hire interns but never plan to bring them back full-time. If you’re in this category, at least it’s easy to explain in interviews!
5. “Special Circumstances” – For example, maybe you had to start the internship late due to scheduling issues, or you had to work remotely for part of it, and these factors made it difficult to get to know the team.

You must understand which category best matches your situation because it determines your next move.

If it was something “beyond your control” (categories #3 – 5), it makes sense to give it another go and recruit for full-time IB roles or off-cycle internships.

But if it was “your fault” (categories #1 – 2), you may want to consider non-IB roles or give yourself time to improve by staying in school longer.

Step 2: Pick Your Best Next Move

Once you’ve determined why you didn’t get a return offer, you need to plan your next move.

In most cases, you have 6 main options, depending on your region and level:

1. Delay Graduation – This one no longer works well due to the accelerated internship recruiting timeline in the U.S. But if you can somehow delay your university graduation by ~3 semesters, you could use the extra time to apply for summer internships once again, ~18 months in advance.
2. Do a Master’s in Finance Degree – This one is best if you need to fix multiple issues in your profile, such as a low GPA and poor technical skills; it’s similar to delaying graduation but more realistic for the recruiting timeline.
3. Do an Off-Cycle or Post-Graduation Internship – This one is more viable in Europe because off-cycle internships are more common there. You don’t need to pay extra to stay in school, but many of these internships never turn into full-time offers, so it is a bit of a gamble.
4. Recruit Directly for Full–Time IB Roles – Banks hire most of their full-time Analysts from their summer intern classes, but you can always find a few firms and groups that under-hired or had terrible interns.
5. Aim for Non-Banking Roles in Finance – Maybe you discovered that investment banking is not for you because you don’t like the hours, the work, or dealing with sociopaths all day. But you could use the experience to aim for other finance roles, especially ones like equity research or corporate banking with less structured recruiting.
6. Aim for Non-Finance Roles – Or maybe you learned that you hate finance and never want to work in the industry. Great! You saved yourself years, and now you can find another job that’s a better fit (tech, consulting, marketing, startups, etc.).

At the MBA level, options #1 – 4 are not available, so you usually need to look for other full-time jobs outside of banking.

(Addendum #1: There’s a small chance you can find a full-time Associate role at a smaller bank, but I would be very cautious about these roles.)

(Addendum #2: Occasionally, an MBA student will fail to get a return offer and still find something else in banking, so it’s not impossible – but it is a lot more difficult than at the undergraduate level, so “not widely available” may be a better description.)

So, which of these options is best for you?

If you failed to get an offer because of your performance, you should consider options #2, 5, or 6 (Master’s degree, non-IB roles, or non-finance roles).

You need to be honest and ask yourself a simple question: “Do you want to work in banking but simply need to improve, or is it not for you?”

If it’s the former, consider another degree and how to use the extra time to improve your profile and get more experience.

If it’s the latter, read our guides to equity research recruiting, asset management internships, corporate banking, or product management (for example).

If you failed to get an offer mostly because of external factors but are still very committed to IB, you should consider options #3 and 4 (another internship or full-time recruiting).

Even if you’re in Europe or another region with off-cycle internships, I recommend networking to look for full-time roles first.

Yes, it’s difficult, and your chances aren’t great in a terrible market, but spots sometimes appear – and if you can win a full-time offer anywhere, that’s much better than interning again.

Step 3: Network and Prepare for Interviews

If you’ve decided that investment banking is not for you, please search this site for recruiting guides to other industries.

In short, you need to be a lot more proactive if you aim for something like equity research or asset management; there is less competition, but there are also many fewer spots.

If you are still aiming for full-time investment banking roles, this interview about how a reader won an IB offer at the last minute has some useful tips.

The short version: Aim for roles outside of major financial centers, target smaller banks (middle markets, in-between-a-banks, etc.), and do a ton of networking.

You can reach out to your existing contacts, find new ones, and send a message like the one below via email or LinkedIn:

“SUBJECT: Investment Banking Intern at [Bank Name] – Positions at [Name of Person’s Firm]

Hi [First Name],

I’m a student at [University Name] with a [XX] GPA and investment banking internship experience at [Bank Name] and [Describe Previous Internship Experience]. I’ve attached my resume here. I’m seeking full-time investment banking roles and just wanted to know if your group is hiring.

Thanks,

[Your Name]”

There is no magical secret to getting a response. Find people, email them, and follow up after 5-7 days until you get an answer.

If you eventually make it through to interviews, the #1 question will be:

“Why did you not receive a return offer at [Bank Name]?”

I recommend telling the truth, but not the whole truth, and spinning the reason slightly more positively.

If you say something like, “Deal activity was bad, so the group didn’t give out many offers,” the interviewer’s follow-up response will be:

“OK, but they did give out some return offers, correct? Why did some interns receive return offers while you did not?”

You can keep going back and forth like this forever unless you admit a weakness or mistake.

So, similar to the “Why is your GPA low?” question, it’s best to say that you made mistakes initially and improved over time, but it wasn’t quite enough to put you among the top few interns.

For example, you could say that you made some mistakes in email communications or office protocol at the start of the internship.

You received feedback that you had to improve, which you did, and your final review said you were much better.

However, they only brought back 1-2 interns due to the market, and because of these mistakes in the beginning, you didn’t quite make the list.

Besides this, investment banking interview questions will be the same: Expect to walk through your resume, answer technical questions, and discuss your deals.

Similar topics will come up even if you target off-cycle or summer internships.

So, if you’re already well-prepared for standard interviews, you mostly need to plan your explanation for why you didn’t get a return offer and discussions of your deals and internship work.

Step 4: Reevaluate Your Options If Nothing Worked

If you go through everything above and fail to win a full-time offer or another IB internship, return to Step 2 and reevaluate your options.

In most cases, the best choice is to aim for non-IB roles because you don’t want to spend much time without a full-time job.

So, consider related roles such as corporate banking, Big 4 firms, business valuation firms, corporate finance at normal companies, etc.

The #1 point is that you need to line up something post-graduation, even if it’s not your ideal role, it’s in a bad location, or it has below-market pay.

If you’re still 100% committed to IB and unwilling to compromise, your best option is to do a Master’s in Finance degree – but the timing may be tricky if you’ve already spent months recruiting for other roles.

No Return Offer: The End of the World?

It may seem like the end of the world if you complete an investment banking internship and fail to get a return offer, but it’s a common outcome.

The key is to be honest about why it happened so you can plan what to do next.

If you hated the internship and decided that IB is not for you, great – move on and start applying for other roles.

If you like “the idea” of investment banking but couldn’t perform well or tolerate the long hours, fine – think about something like corporate banking with better work/life balance.

And if you are 100% committed but failed to get an offer because of factors outside your control, start pounding the pavement and looking for full-time roles or internships.

In the short term, “no return offer” hurts, but in the long term, it can lead to more fitting careers if you handle it properly.

Want more?

You might be interested in:

• Distressed Private Equity: The Best Place to Invest When the World is Collapsing?
• The Definitive Guide to Equity Research Internships
• How to Decide on Investment Banking Summer Internship Offers: Who Has a 97.5% Full-Time Offer Conversion Rate?

The post No Return Offer from an Investment Banking Internship: What to Do appeared first on Mergers & Inquisitions.

There’s plenty of information online about case studies in finance interviews (IB, PE, etc.), but the venture capital case study remains a bit mysterious.

Depending on your source, a VC case study might consist of a “cap table” exercise where you calculate the company’s ownership over many investment rounds and the proceeds to each group upon exit…

…but it could also be a qualitative discussion of a market, an evaluation of a specific startup, or even a simple 3-statement model.

But if you’re interviewing at an early-stage VC fund (i.e., Seed and Series A investments), the most common type is the “Evaluate a startup and recommend investing or not investing” one.

The VC firm might give you a short investment memo or slide deck for the company, ask you to read it, and then say “yes” or “no” based on your analysis and interpretation.

We’ll go through a short example for a fictional startup called PitchBookGPT, which comes directly from our new Venture Capital & Growth Equity Modeling course.

This is a summary version, but it should be enough to give you some practice:

The Video Tutorial and the Files

If you prefer to watch or listen to this tutorial, you can get the 14-minute video walkthrough below:

If you prefer to read, you can continue with this article.

You can get the files, including the company’s pitch deck, here:

• PitchBookGPT – Seed Round Pitch Deck (PDF)
• Venture Capital Case Study Prompt (PDF)
• Venture Capital Case Study Solutions and Investment Recommendation (PDF)
• Case Study Walkthrough and Explanation – Slides (PDF)
• SaaS Valuation Multiples and Historical Data (PDF)

Video Table of Contents:

• 0:00: Introduction
• 1:58: Part 1: What to Expect in VC Case Studies
• 3:10: Part 2: What Do VCs Want in Early-Stage Investments?
• 4:51: Part 3: “The Numbers” for PitchBookGPT
• 8:16: Part 4: The Market, Product, and Team
• 11:45: Part 5: Recommendation and Counter-Factual
• 13:04: Recap and Summary

This Venture Capital Case Study Example: PitchBookGPT

In short, this startup is riding the AI hype train and plans to offer a subscription service that will automate parts of the pitch book creation process at investment banks.

It won’t replace Analysts or Associates because it can’t create entire presentations with all the correct details.

But it speeds up the process by generating slide templates based on your queries, presentation data, and free examples on the sec.gov site.

For example, if you type in “SPAC vs. IPO” or “Market overview slide with monetary and fiscal factors,” the software will generate sample slide images, and you can click the one you want to get an editable PowerPoint version:

The “artificial intelligence” part comes in because simple keyword searches do not work well when searching for specific slides; a slide’s purpose often differs from its text.

Also, machine learning could work well for a problem such as converting slide images into editable PowerPoint templates.

This is much trickier than it sounds for moderately complex slides, and a rules-based system is less efficient than using huge data sets for the image-to-slide translation.

This startup claims that its service can boost Analyst productivity by 30% and generate millions in extra fees for the average bank, and it plans to sell it to boutique banks for $2,000 per month.

They want a $2 million seed investment at a $20 million post-money valuation, meaning that we (the VCs) will own 10% if we invest.

So, should we do the deal?

What Do Venture Capitalists Look for in an Early-Stage Investment?

To answer this question, you need to think about what early-stage VCs look for in deals.

Most early-stage companies do not have revenue, but they do have markets and teams.

Since early-stage investing is so risky, VCs seek opportunities with the potential for very high cash-on-cash multiples, such as 10x in Series A rounds or 100x in Seed rounds.

To be clear, these are the targeted multiples.

Most startups fail, and even the ones that succeed do not come close to a 100x multiple in most cases.

Since this failure rate is so high, early-stage VCs need to aim high by finding companies with the potential to serve huge markets.

Here’s a summary of the different stages:

Since the asking valuation is $20 million, we can reframe this case study as:

“Could this company potentially reach 100x that valuation, or $2 billion? If not, what about something like 10 – 20x, for a $200 – $400 million valuation?”

You can answer this question by doing some quick math and qualitatively evaluating the market, product, and team.

Venture Capital Case Study, Part 1: The Numbers

In its slide deck, this company claims that there are ~4,000 boutique banks worldwide with 1 – 20 employees and that these banks alone can support a $100 million market size (since 4,000 * $2,000 / month * 12 months = $96 million).

They plan to target these smaller and mid-sized banks because they’re easier to reach and they have fewer resources for pitch book creation.

But this company makes a common mistake with this claim: it assumes it will capture 100% of this market.

That never happens in real life, even in a narrow niche like this one – because there are competitors and many firms that don’t need the product.

In large markets (tens or hundreds of billions of dollars), capturing even a tiny percentage might be a good result.

In a narrower market like this one, something like 10 – 20% might be plausible if the company executes well.

That means a more realistic revenue estimate is $10 – $20 million.

Startup / SaaS Valuation

Subscription software companies are usually valued based on a multiple of annual recurring revenue (ARR), and this multiple is typically between 5x and 10x for public companies (more on SaaS accounting):

If we apply these multiples to the company’s revenue estimates, we get a valuation range of $50 million (5x * $10 million) to $200 million (10x * $20 million).

This is a great result for the company, but it’s far below what most seed-stage VCs want.

A $50 million exit value would be a 2.5x multiple, while a $200 million exit value would be a 10.0x multiple.

And these numbers represent the potential outcomes and assume that everything goes well.

Also, these numbers do not account for the dilution in future funding rounds.

This 10% ownership will likely fall to 7%, 5%, or even 3% as the startup raises money in the Series A, B, and C rounds, which means even lower returns multiples.

You might say, “OK, but couldn’t this company’s revenue go much higher? They should charge per user, not per firm, for this service” (so the Average Revenue per User would be higher).

And that leads us to the next point about the qualitative evaluation of the market, product, and team.

Venture Capital Case Study, Part 2: The Market, Product, and Team

I wouldn’t say this company’s product is “terrible” – I’ve seen much worse startup ideas.

But it faces a “no man’s land problem” because the ideal customers differ from the reachable customers.

Boutique banks tend to be much more cost-conscious than large firms and don’t necessarily want to add a $2,000 monthly expense for multiple employees.

If a boutique bank needed this service for 5 Analysts, $2,000 per user per month would mean $120K per year, which is about the cost of hiring a full-time Analyst.

Many small banks would look at this and say, “OK, it speeds up presentations… but for that price, we could hire another Analyst and get client support, Excel work, and more.”

Also, small banks depend far less on long and detailed pitch books than large banks.

Most new deals come from longstanding relationships, not inbound inquiries or bake-offs / beauty pageants.

PitchBookGPT could target large banks (the bulge brackets) instead, as they are more willing to pay for training and productivity tools.

This service would be more useful for large firms because they tend to produce the 100+ slide pitch books where automation tools could save time.

However, it’s also much more difficult to close deals in this market, and compliance concerns mean these banks are less willing to share their data with external parties.

Could you imagine Goldman Sachs or Morgan Stanley uploading all their pitch books and slides to a VC-funded startup that may not even exist in a year?

Here’s my summary of the product/market fit problem:

Other Points in This Venture Capital Case Study

We don’t have time to analyze the team or the expected use of funds for this $2 million investment, but you would consider both in real life.

In short, they’re “fine but not amazing” – some of the budget numbers seem a bit too low (e.g., for the engineers), while others are on the high side (sales & marketing), but nothing seems completely crazy.

Similarly, the team (all fake names and bios) has relevant experience but looks a bit “junior,” so we’re neutral on them.

Our Final Decision

In short, we’d say no to this deal because we think a 100x multiple in any reasonable time frame – such as 5 or even 10 years – is implausible.

A 5 – 10x multiple might be feasible, but that’s not a great “stretch goal” for a seed-stage deal.

To reach a $1 – 2 billion valuation, the company would need hundreds of millions in annual revenue, and we don’t think that’s realistic for its business model and market.

The company could develop a different product or offer higher-end services to larger firms, but it doesn’t even have a “Version 1.0” yet, so that would be putting the cart before the horse.

You can view the full recommendation here.

What Would Change Our Mind?

If a few factors were different, we might be more inclined to recommend this deal:

1. Per-Seat Pricing – Maybe they can’t charge $2,000 / user / month, but even something like $1,000 / user / month could increase potential revenue at many firms.
2. Lower Asking Price – While a $2 million seed investment at a $20 million post-money valuation is not unheard of, it is aggressive. If the asking valuation were only $5 – 10 million, the deal math would be more feasible (maybe not for a 100x multiple, but something like 20 – 30x).
3. Higher-End Product – For example, banks might be willing to pay more if this product could replace employees rather than just boost their productivity. But that would require far more capital to develop and might require technology that doesn’t exist.

The Venture Capital Case Study: Final Thoughts

In short, unlike many startups, this PitchBookGPT idea isn’t necessarily “bad.”

There are proven markets for productivity tools, slide templates, and reference models in both PowerPoint and Excel.

But the problem is that this isn’t a great early-stage VC idea – at least not for the deal terms the company wants.

That’s not great news for this fictional company, but it is reassuring if you’re a junior banker worried about getting replaced by AI anytime soon.

It probably won’t happen – and in the near term, these new tools might even improve your life.

Want More?

If you liked this article, you might be interested in:

• The Growth Equity Case Study: Real-Life Example and Tutorial
• The Full Guide to Healthcare Private Equity, from Careers to Contradictions
• Healthcare Investment Banking: The Best Group to Check Into When Human Civilization is Collapsing?

The post The Venture Capital Case Study: What to Expect and How to Survive appeared first on Mergers & Inquisitions.