by Brian DeChesare

The Growth Equity Case Study: Real-Life Example and Tutorial

Growth Equity Case Study

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:

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:

Growth Equity Case Study Differences

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:

SaaS Customer Revenue

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:

Customer Revenue from Upsells 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:

Revenue Forecasts

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:

LTV / CAC Ratios

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:

Income Statement Forecast

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:

Balance Sheet and Cash Flow Statement Projections

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

Negative Cash Position

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:

Sources & Uses Schedule

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 - Cash Infusion

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:

IRR and Investor Proceeds

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:

IRR and MoM Targets

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:

Downside Case 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.

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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