Overlooked factors in private equity/venture capital investments

Are you considering making a private equity or venture capital investment? Or, are you the CEO, or a member of the board of directors of a company preparing to raise capital from private equity or venture capital sources? If so, buckle up—we are going to talk about a subject sensitive to both of you, and something that can put you at odds with one another.

It is relatively common for investors to be highly experienced in finance or have a bent toward accounting. These are their comfort zones, and they can go into any business and assess the potential investment, based on the numbers, with their eyes closed. This is great and necessary, but by looking at only the numbers of an investment, investors might be missing some crucial red flags.

As a part of exploratory and due diligence efforts, many investors come in to a potential investment target and ask to assess the finances. In these efforts, all too often prospective investors look at financial statements, measure the revenue growth and evaluate the last 12 months health of the business—basing their future financial models on historical facts. The executive teams of target investments are keenly aware of this and often focus their cycles on “getting the numbers right”. Although we often believe numbers do all the talking, financial statements and the current financial health of the company will only tell a fraction of the story. Forecasts can be skewed by many internal factors, and can lead investors to make a decision that isn’t fully informed.

It is essential to take a deeper look into a company, beyond what can be shared on spreadsheets and financial statements.

Similarly, more diligent investors will look at the product, its design, construction and supporting components and partnerships. They will look at the development processes and the amount of revenue being consumed in Research & Development (R&D). Again, all necessary things to assess, but like financial statements, strong product management and development processes do not necessarily result in strong business performance.

Current revenue and future financial forecasts can be flawed, and can change tomorrow based on several different factors. A company is only has healthy as its go-to-market operations. By taking the time to assess the team and the leadership, an investor can see the bigger picture of where the company is and where they are going.

It is important that elements of the go-to-market platform are examined and benchmarked against leading practices, as well as validated by the financial assessment. Below is a framework we created to thoroughly baseline the operational disciplines necessary for sustained revenue performance. We call it the “Revenue Performance Blueprint™”.

Demand Progression

  • Audience Readiness: Market awareness, perception and thought leadership as it pertains to the targeted audience demographic and solution focus
  • Demand Development: Lead generation and prospecting campaigns/incentives, demand capture capabilities, sales discovery and lead nurturing to create and advance pipeline opportunities
  • Sales Process Alignment: Aligning the sales process to the buying cycle, competitive environment and solution to deliver predictable profitable revenue

Solutions Marketing

  • Power Profile Identification: Pinpointing target market segments including industry, location, size and decision maker, stakeholder and champion buyer personas, how they buy and the understanding of their business, financial and personal pains
  • Positioning & Messaging Readiness: Market position and messaging framework necessary to effectively win an unfair share™ of opportunities
  • Customer Advocacy: Programs, processes and sales assets that communicate and deliver compelling customer proof points in support of the differentiated value proposition

Sales Operations

  • Sales Governance: Consistent adoption and enforcement of a sales methodology and operational cadence enabled through supporting systems and demand progression reporting
  • Territory Management: Segmentation of the target market, allocation/prioritization of scarce sales resources and the enforcement of congruent territory planning
  • Compensation Strategy: Incenting the appropriate behavior and results to achieve both short-term profitable revenue objectives and sustainable long-term growth

Sales Enablement   

  • Sales Skills: Requisite sales techniques and related activities of sales and other customer-facing professionals required for revenue performance scalability
  • Solution Knowledge: Enabling the sales and customer-facing professionals with applicable and relevant industry, business process and solution insight
  • Sales Kit/Tools Maturity: The development, currency and accessibility of relevant sales kit assets for sales channels and accessible, relevant and compelling tools

Think this all sounds great but don’t know where to start? Hire someone who has run a sales or marketing team to get involved and lead this assessment, or find a third-party with operational expertise. The expense and time will be more than worth it in the long run—here are a few reasons why:

  1. As an investor, you may choose not to make the investment at all because the required fixes are too much relative to company value and potential. As an executive, your business may not be at the right point to capture the value you want, so you too should walk away now and prepare for it another day. It will save you money in the long run if you uncover the investment ahead of time.
  2. As an investor, you may choose to make the investment, and because you know more about the company, you could negotiate more value for your investment. As an executive, you can proactively remediate value drags that may surface during due diligence while properly positioning your company to maximize the valuation and impact of the capital.

As either a potential investor or as a prospective investment target, by looking beyond the financial factors into the operational elements, you can gain some critical knowledge beyond the health of the business and into its scale and true viability. With that knowledge in hand, you are better prepared to engage the right resources to remediate the problems your operational experts surfaced to make the most of the capital infusion.