Ever had a portfolio company that ate up every bit of advice you had on how they could run better, but could not seem to grow? We at Chief Outsiders see this all the time. Often the best run companies have the hardest time growing. It’s a classic challenge, especially in the B2B world where engineers who run companies fall in love with the thing they make or the service they deliver… or simply with the technology they love.
Some Management Teams Love to Run
Research at the University of Texas showed that about 55 percent of founder/owner-run mid-size companies are Operationally focused. The CEO and the management team spend most of their time focused inside the four walls of the business. They love running their companies. They may struggle with figuring it out as they grow and try to scale, but they love the ideas of metrics, management, process and procedures that help them make their widget or deliver their service.
When it is time for Private Equity to get involved, they are often quite ready and open to help in professionalizing the way they run. PE provides money and can provide the resources and expertise to do what they love to do even better.
Cost Savings Alone Can’t Drive Multiples High Enough
Unfortunately, running an efficient shop and taking costs out of the system is not driving the increases in multiples that are needed in today’s competitive PE landscape. The rate of top-line growth and the processes, procedures and ‘machine’ to continue the top-line growth rate is becoming more and more important.
The challenge is that those same management teams that love running the company may not have the skills or experience to significantly grow a company. While running a company is about looking inside the four walls of the business, growing a company is about looking outside the four walls and even taking an outside perspective back towards the business. At first blush, you would think that the VP of Sales, who should be spending all their time outside the four walls of the business, should be leading this effort. Unfortunately, the skills needed for transacting the revenue this week, month and quarter, are not the skills or tools needed to drive significant growth.
Our Amazon-bestselling book, The Growth Gears, is based on the previously mentioned UT research and is targeted at helping operationally focused business owners look at growth in a logical, linear manner. It’s this perspective that is key for a new portfolio company to grow or for a stagnate portfolio company that is no longer delivering on its investment thesis to get unstuck and reinvigorated.