Private Equity Blog

In Pursuit of Growth: What the Numbers Don’t Say

Posted by The Chief Outsider

private-equity-growthToo many GPs rely on raw sales numbers rather than seek out the root causes of growth issues at a portfolio company, and that hinders their ability to develop effective strategies beyond rote solutions. And given today’s competitive landscape, those simply aren’t sufficient.

In private equity circles, the industry is well beyond the point of relying on mere financial engineering to generate returns. But we’re fast approaching a point where operational tinkering alone won’t do the trick either. Today’s assets don’t come cheap, and require real growth to produce an adequate ROI.

Still, the pursuit of growth comes with its own clichés and standard issue solutions. According to a recent webinar hosted by Karen Hayward of Chief Outsiders and Jim Tallman of Tallman Insights, many GPs have blind spots when it comes to looking at growth issues and developing solutions for them.

Given private equity’s bias towards numbers, there can be a tendency to ignore the more qualitative information surrounding growth. GPs should invest in research that digs deeper into customer’s actual habits and perspectives, not merely what the current senior management of that portfolio company assumes them to be. 

And with that far richer, more detailed picture, it won’t be enough to simply add sales staff. GPs have to apply those insights in ways that develop sales staff, so they operate more effectively. This also requires a willingness to invest in growth experiments to discover how best to win customers, even if they sometimes fail. There’s only so much the data can tell. At a certain point, assumptions need to be tested in the real world. 

It’s only natural for GPs to make balance sheet matters a priority. Most deal partners come from a finance background, so they speak a different language from sales and marketing teams. Jim Tallman notes in the webinar that if a GP finds their profits at a portfolio company increasing, but the revenue has remained stagnant, that’s a good sign they erred on the side of reducing costs, over addressing their growth issues. 

Invest in research that looks beyond the numbers

Nowadays, some forward-looking GPs are already making sales and marketing programs a core part of their investment case. Hayward says that these GPs are investing in expansive marketing research projects that can provide concrete data into customers’ habits, preferences and needs. Senior management at portfolio companies may think they understand their customers, but those assumptions must be vetted. 

Too often, GPs will forget the sales number is only the result, not the reason. And to improve those numbers, they have to understand the root causes of an uptick or decline in sales.  Customers may not always be willing to share an honest assessment of a product with the Company, which is why third-party marketing research can get to the bottom of what’s working or not working with a given product or service. These objective, customer-driven insights won’t always be numbers; sometimes they’ll be attitudes or bias that nonetheless impact the bottom line. 

Apply those insights to develop strategy and staff 

This more qualitative view can inform a better go to market strategy. It can develop incentives that align with customer wants. And it can help craft messaging that wins new customers into the fold. But this information is only valuable if it’s used effectively. There’s a bias towards merely adding sales staff, which can make a difference, but only if those sales folks are better trained and incentivized. It’s not enough to throw more people at the problem. 

Instead, a portfolio company should ensure that new and current sales staff upgrade their customer knowledge, and be armed with the right marketing message, so they can articulate the strategic value of what they’re selling.

That also means that marketing efforts should be driven by the facts about customers and the market, even if they run counter to the assumptions that might have been true in the past. GPs should be careful to think of marketing reforms as merely a matter of improving a company’s website. Hayward cautions against relying on “random acts of marketing” in the hopes something will stick. 

Try new tactics (even if they don’t work out)

That doesn’t mean that experimentation doesn’t play an important role. Tallman notes that some of the most forward-looking GPs today are investing real money in growth experiments, where they test different messages and go to market tactics. He admits it can be hard for GPs to accept the inevitable failures that come with those field tests, but along the way, they’ll learn how to build a growth engine that runs in the real world.

Hard as that may be, the alternative isn’t any more attractive. Revenue growth isn’t a luxury any longer and growth required to sell an asset for more than was paid, is as concrete a number as anything else. But getting there may require looking up from that spreadsheet to study the customers too. 

The webinar from Chief Outsiders and Tallman Insights discusses several other blind spots and emerging strategies for GPs in pursuit of growth. You can find it here.

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