When I was in business school, a close friend made a referral for a potentially prestigious role with one of the leading private equity firms investing in Africa. This was an opportunity I was desperate for. One of the partners at the firm invited me for a coffee chat in San Francisco.

When we met, I was relieved to see that he hadn’t brought a computer with him. I had purposefully left mine at home to avoid being ambushed with an on-site modeling exercise. After we ordered our drinks, we had a small chat and I was doing really well showing off my knowledge on different industries and business models.

The partner then pulled out a piece of paper and sketched out a short five-year financial summary for a “hypothetical” company. He then asked me to model a “quick” leveraged buyout analysis by hand. I got all the mechanics right, double checked my mental math and handed it back to him with that “nailed it!” grin. The exchange that followed was one of the most important lessons of my life and one of the reasons I decided to write this blog.

In my cash flow statement, I assumed no changes in working capital; no investment in capital expenditure and made silly assumptions on other fundamentals that were meant to make the arithmetic easier to perform. After reviewing the model and obviously in a state of total flux, the partner asked what type of company I was presenting and in what industry it was? I briefly tried to get the focus back to my mechanical prowess, but he became so infuriated that I ended up apologizing for wasting his time. 

The partner told me that he gives the same test to everyone who applies for a job at his firm (Analyst to Principal) because the fundamental unit of investing and entrepreneurship is the same. However, the depth of analysis and debate that is expected changes dramatically for every role. As a Senior Associate candidate, I was expected to ask relevant questions and make credible assumptions about all operational aspects of the business – Growth stage of company; Unit economics; Capital structure; Working capital requirements, Investment in capital expenditure. I was also expected to debate other investment considerations – Effect of investment cycle; Exit considerations and multiples etc. The work I had submitted was only good enough for a summer analyst.