Diligence Seems to be the New Watchword in Both Private Equity and Venture Capital
Diligence Seems to be the New Watchword in Both Private Equity and Venture Capital
Reports across the financial news media seem to be reinforcing a few facts over and over:
* Deal speed is slowing down.
* Diligence is increasing.
* Valuations are coming down.
What does this mean to me in terms of how people have looked before and are looking now at the market:
* Valuations:
Previously>
Investors were straightlining revenue and its growth across many years, and companies were getting credit for that growth in current valuations.
Now>
Investors may not be valuating revenue at all, and have flipped over to EBIT, and valuations placed on growth have declined.
* Sales Efficiency:
Previously>
Hardly anyone talking about boring metrics like employee productivity. It was growth at any cost.
Now>
CNBC reports CEOs being asked tough questions about things like sales rep efficiency, time for a new rep to become productive, etc.
For CEOs, who by now have seen 1,000 reports about how to survive and preserve cash (hint: most of your backers are promoting layoffs because that's where 90% of your costs are), the "What Now?" question becomes paramount.
I would advise a few things:
* Don't rest on your laurels if you have made adjustments and now have an additional 6-12 months of cash runway, or whatever your investor is happy with. You may still be "default dead" even if your decay rate has been reduced.
* You can't cut your way to growth. You still need to figure out where your growth will come from. In the face of a wide and competitive market, most founders incorrectly assume they must expand into adjacencies to grow. "Niche down" is often a much more effective strategy because a simple message is clearer in the market, and when you serve specific, profitable customers more deeply, you can command higher prices.
* Many GTM leaders are waking up to the fact that they don't talk to their prospects and customers enough. You can't assume your team is doing a good job on calls and understand how to guide the business.
There is a reason Churchill built a war room during WWII where all intelligence was centralized so that he could personally review it -- UNFILTERED - together with all his generals. If this is what you do when the stakes are highest, doesn't some measure of this idea also apply to your market intelligence -- whether that is customer service calls, prospect calls, customer quarterly business reviews, or customer site visits?
In a time of transition, you don't just need metrics and analytics. Those are good to flag problems, but inherently cannot "steer the ship". To steer the ship (i.e. make significant changes in your company's market trajectory), you need deeper qualitative insights into your target market -- what is resonating, what is not. Where you should double down, and what customer segments you should move away from.
Some thoughts from the field that might help companies navigating the current environment.
