Top 3 Portfolio Company Value Killers
As operators within private equity firms, we pride ourselves on our ability to create differentiated value within our portfolio company investments. To capture this value, we develop detailed play books, partner with portfolio management, dispatch operating experts, and maniacally track operating performance. It’s only through successful execution that we are able to deliver target shareholder returns.
Despite best efforts and carefully crafted plans, my experience with dozens of enterprise software portfolio companies throughout the U.S. and Europe has clearly demonstrated that value creation is stymied – or destroyed – if the portfolio team does not master 3 key areas:
#2: Pricing Discipline
Each of these areas is worthy of a detailed deep dive and I will do so over the next few weeks in subsequent posts. In the meantime, the following summaries capture the kernel of each value creation killer:
Fear: “Nothing in life is to be feared, it is to be understood” – Marie Curie
Too often we delay action because we are afraid of potential negative ramifications. To move the value needle, we must have the courage to define an aggressive target, experiment, learn, and repeat. Succumbing to fear will cost your organization at least 10 points of revenue growth and profit each year.
Pricing Discipline: “If you are not willing to risk the unusual, you will have to settle for the ordinary” – Jim Rohn
A lack of pricing discipline goes hand-in-hand with Fear. As a result, sales leaders avoid an aggressive pricing stance and instead focus their efforts on sales activity metrics like “calls per hours” and “CRM hygiene”. A deep understanding of your accounts and courage to act, will unlock your ability to maintain pricing discipline and increase average annual revenue per customer by at least 25%.
Clarity: “Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” — Stephen A. Brennan
Seasoned leaders set clear revenue and profitability targets, ensure that functional activities are directly aligned with the specific targets, and routinely monitor progress to maintain positive value creation momentum. Doing so yields revenue and profit operating metrics that demand enterprise values 2x higher than competitors.
Todd Brooks is an Operating Partner at Razorhorse Capital, and continually evolves the firm’s value creation competency around the Rule of 50.