Trading on equity, it turns out, is no longer enough. Talk to those at the sharp end of private equity (PE) and they will tell of the increased reliance on a range of value-generating tools necessary in today’s investment environment.
Judging by conversations at a recent NetSuite event putting PE investors in touch with founders and owners, one of those tools essential for investor value creation is technology. Start-ups and scale-ups, take note.
“We used to rely on leverage,” says Rob Foreman, Chief Investment Officer at Primary Capital Partners, a PE investment specialist. “Today, I’m no longer able to count on buying well and selling well in the way that I might have been able to do, say, ten years ago.” The result, he says, means either an increased focus on fast growth businesses in which to invest or active value creation. Smart investors are devoting more and more time to the latter. Foreman was speaking a specially convened NetSuite event to help start-up and scale-up companies better understand the investment community.
There are many ways to slice and dice value creation tools and techniques. Foreman places them into four broad categories: structural, revenue growth drivers, good housekeeping and professionalisation. Under structural sits activity such as roll-outs, carve-outs, acquisitions and internalisation. Under revenue growth drivers sits new product development, customer acquisition, retention and upsell, channel expansion, and pricing strategy. Good housekeeping includes efficiency through cash management, cost reductions and sales performance improvements.
Finally, professionalisation features management bandwidth, succession planning, management information systems development and systems implementation. It’s here you’ll find technology as a facilitator, driver and measure of business growth.
Technology allows for three things, at least: it fosters efficiency, enables faster and more effective decision making and demonstrates business maturity. Let’s take each in turn.
First, a good technology platform is the basis for operational efficiency, delivering a single and consistent view of business activity. It helps identify inefficiencies, smooths the path to investment and provides visibility during mergers, acquisitions and carve outs.
Second, technology enables effective decision-making. “Lots of businesses have lots of data they don’t use. It’s about trying to get dashboards for easier management decision making,” notes Primary Capital Partners’ Rob Foreman. That’s why MIS development matters. Customer churn, incremental product development costs and customer acquisition costs are all dashboard KPIs (key performance indicators) that aid informed decision making at speed. Without these, investors and owners are flying blind.
Third, technology is a useful proxy indicator of business maturity, an illustration that founders and owners understand the information needs of investors. “It’s surprising how rarely there are proper financial numbers available,” says Thomas Studd, Partner at Vitruvian Partners, another private equity specialist. “It’s quite rare that I see a business plan that has a cash flow forecast. So whenever I do see cash flow statements I always think it’s a good start.”
Think back to those other value creation tools and techniques and it’s clear that technology plays a role there too. For example, technology allows the business to measure cash management, effectiveness of cost reduction, retention, up-sell and the cost of customer acquisitions, to name but five.
The data good technology spawns cuts across traditional company siloes and draws on the synergies between traditional departmental metrics. That’s why at NetSuite we’ve created a unified, fully integrated system that combines financial accounting, enterprise resource planning (ERP), customer relationship management (CRM), professional services automation (PSA) and e-commerce. And because they are cloud-based, data and dashboards can be shared by functional heads and investors alike.
Our track record suggests that we can deliver the value creation discussed here. For example, we’ve proved the start-ups and scale-ups subject to investment can cut order-to-cash cycle by 50 per cent, accelerate financial close by 20 to 50 per cent. They can also reduce audit preparation by 50 per cent, invoicing costs by 25 to 75 per cent and days sales outstanding (DSO) by 10 to 20 per cent. Finally, they can reduce IT costs by 50 per cent, a material saving to the bottom line.
For private equity investors looking to create value and for start-ups and scale-ups looking to demonstrate future growth, it appears that technology is a good place to start.