To measure is to know. For investor and company owner alike, it’s difficult to overestimate the power of up-to-date, real-time, cross-functional intelligence.
Data informs investment decisions, it demonstrates maturity and it is an essential marker for accelerated growth. The technology that underpins it is an essential tool for value creation.
Indeed, so rare is it to find fully-scoped business metrics among start-ups and scale-ups being considered for investment, private equity specialists have expressed their surprise when they do come across useful data. “Whenever I see cash flow statements, I always think this is a good start,” noted Thomas Studd, partner at Vitruvian Partners, at a recently convened NetSuite event that put PE investors in touch with founders and owners.
Given the weight applied to data, what are the key metrics a likely investment prospect should be able to produce? Here’s what some of the UK’s leading private equity (PE) specialists told us:
1. The essentials
“The metrics depend on the business you run,” said Vitruvian Partner’s Thomas Studd. But beyond the specifics, he adds: “If I was introduced to a company… I’d want to know what the P&L [profit and loss] statement looks like. I’d want to know top line growth, churn in the customer base and the upsell. If you were to tell me that, I’d have a pretty good perspective.”
2. The payroll
“Aggregate payroll data is helpful because you can compare it to various benchmarks,” said Jack Alcock, investment director at Permira. Rob Foreman, chief investment officer, Primary Capital Partners agreed, pointing to salaries. “How much of it is fixed? How many businesses do we find that haven’t had a pay rise for a few years, where the staff say, ‘We were promised a pay rise when the business was sold.’” That imminent strain on payroll can have a direct impact on future growth plans.
3. The salesforce
“One area where we might spend a little bit of time is around the salesforce,” said Permira's Jack Alcock. “What is the efficiency of your salesforce? How much is your salesforce being paid versus how much revenue is being brought in? What is the acquisition cost per customer in terms of amount of sales person time it has taken? How much sales compensation is variable versus fixed?”
“Ultimately, you could then benchmark this across a wide range of companies so you could tell relatively quickly whether things are way out of whack, and whether your people are overpaid or underpaid,” Alcock said. “It’s really valuable data because your sales people are the people who drive the top line.”
4. The customer
Provide Vitruvian Partner’s Thomas Studd with as much information on your customers as you can and you’re likely to impress. What is the value of each customer? What is the likely upsell value? If a customer is worth £100 in year one will the same customer be worth £110 or £80 in year three? By attributing value to each customer – or cohorts of customers – the investor has a better view on future potential and the company will know where it should be concentrating its efforts.
5. The top line (not the bottom line)
Broadly, private equity firms are less interested in indicators of cost cutting than they are in data that points to top-line growth. “There’s probably a slight bias towards measures of revenue growth and what that says about the market,” said Lewis Bantin, partner at ECI Partners. “We’re all here because we’re investors in growth,” noted Permira’s Jack Alcock. “We’re not people who go into a business and say that your EBITDA [a measure of a company's operating performance] margin could be 10 percentage points higher if you cut out all of your sales people. It’s not how we operate.”
Learn more about how NetSuite is helping private equity firms with its Private Equity Services Practice.