Conventional knowledge dictates that PE firms make investments with a time horizon of 5-7 years. But as the strength of the private equity market has increased, holding periods have gone down. They have decreased from an average of 6.2 years to 4.9 between 2014 and 2019. Shortened holding periods and higher multiples often put a strain on a company’s executive team. Despite this, there are three common pitfalls you can avoid when an exit is in sight. This article will walk through each to mitigate risk and prepare for a profitable exit.
Pitfall #1: Misalignment Between Marketing and Sales
Companies with sales and marketing misalignment see annual revenues decline by 4% on average. Conversely, companies with strong sales and marketing alignment average 20% annual revenue growth.
The misalignment can be attributed to blind spots regarding mutually beneficial activities, and misaligned goals. It can have a very negative impact on the morale and performance of the team.
A Harvard Business Review study highlighted three key dangers of misaligned goals between sales and marketing:
1. Misaligned goals demotivate. Goals are out of sync with the customer expectations and the sales rep’s compensation goals. This leads to poor performance.
2. Misaligned goals signal unnecessary difficulty. Reps feel like it is impossible to be successful with what they feel are arbitrary negative conditions.
3. Salespeople will find the resources to achieve goals, at a cost. Reps will “sweeten the pot” by offering free services which reduces profits.
With such stark consequences, you would think that misalignment between sales & marketing would be addressed immediately. Unfortunately signs of misalignment can be easily confused for other issues. This makes addressing these problems difficult for executive leadership teams. But a profitable exit means tackling these issues, prior to putting the company on the market.
Traditional thinking states marketing focuses on the top of the revenue funnel whereas sales focuses on the bottom. This mentality perpetuates the disconnect between the sales and marketing teams. The reality is that both teams should be concerned with the whole funnel.
Segmenting the sales funnel into sections compounds the “us” vs. “them” thinking. Neither is concerned with the entire customer journey and fail to maximize collaboration to drive more revenue.
Aligning sales and marketing can be daunting. Nonetheless the increased revenue generation will drive the company’s valuation higher, positioning for a successful exit. It begins with a mutual understanding between the sales and marketing leaders of a shared goal. This goal is to bring in high quality prospects and convert them into customers. An effective framework to approach sales and marketing alignment includes the following steps:
1. Restructure the customer journey.
2. Develop an agreed target customer persona.
3. Use a “marketing first” approach.
4. Measure joint key performance indicators.
5. Gather sales feedback and voice of customer data.
6. Match messaging across the whole campaign.
7. Create marketing-led sales assets.
8. Work together in post-sale, retention, and growth.
When sales and marketing are aligned, the portfolio company’s revenue engine will operate at maximum capacity. This allows the investment team to focus on improving the Go-To-Market motion to increase valuation.
Pitfall #2: Incomplete GTM Strategy
The most important factors early-stage investors look at are team, product, and sales and marketing approach. This includes a go-to-market plan. As investments mature, the conditions change but the formula essentially stays the same.
For portfolio companies that are preparing for an exit, sales and marketing excellence becomes increasingly important. As the customer base grows, decisions on how to bring products to market need to be made. The go-to-market strategy is highly dependent upon the products, market, and risk tolerance of the company.
It does not matter where your portfolio company lies within the above matrix. You must maximize revenue growth to drive value for potential investors. At the end of your holding period have a plan and reward for investors taking on risk. That can be done by developing a coherent go-to-market plan.
Ask yourself these questions to determine what type of go-to-market strategy will be the most effective:
1. Does our product constitute a big or small expenditure on the customer’s budget?
2. Is it easier for us to find customers, or for customers to find us?
3. Is our product self-service or do we need to educate the customer?
4. Once the purchase has been made, how much is there left for the customer to do?
5. Are we pushing primarily a B2B or B2C product?
6. Do I measure customer relationships by transactions or longevity?
7. How much influence do I have on developing a customer relationship?
Mark Leslie of Stanford’s Graduate School of Business has developed a framework for most effective go-to-market strategies. It all comes down to the relationship between sales and marketing within the organization. He contends that simpler, more transactional products require more marketing and less sales. And more complex products rely on sales more than marketing.
When done correctly, a dynamic go-to-market strategy leads to successful promotion of the portfolio company’s products. This leads to higher revenues, which then leads to a more lucrative exit.
Pitfall #3: Limited Tech Stack Capabilities
Sales tech stacks are essential to maximizing revenue growth. It is estimated that 40% of sales people use Excel or Outlook to store lead and customer data. This leads to poor accountability, inconsistent results, and missed opportunities to leverage data when making strategic decisions. Without a structured tech stack your sellers will lag behind competitors and produce lower win rates. And ultimately, it will suppress the multiple that you can sell your business for.
Successful sales teams leverage their tech stack for key activities and insight into pipeline and performance metrics. This allows for meaningful insights into KPIs that drive results, such as:
1. Client acquisition rate
2. Number of calls
3. Number of emails
4. Upsell/Cross-sell rates
5. Average deal size
6. Conversion rate
Below Gartner breaks down which technologies are likely to have the greatest impact and ROI. They are technologies related to Strategic Account Management, Sales Performance, Testing & Certification, and CRM/SFA. Conversely mature technology around RFP generation, Gamification, and Sentiment Analysis are less likely to have an impact.
Without a proper tech stack, data is replaced with “gut” feelings that inevitably lead to poor outcomes. Take the following steps to ensure the efficacy of the tech stack within your portfolio company:
1. Sit down with the sales leadership. Have them describe the tools used, data collected, and how data informs the decisions made.
2. Have a one-on-one with members of the sales team at all levels. Learn how these tools are used on an everyday basis. Ask how they would rank them in terms of the value that they bring.
3. Perform competitive analysis to see what competitors are doing. Compare the company’s tech stack to peers. There should be comparable functions between the two.
4. Once gaps are identified, let the sales leaders select the solution that best addresses the problem. Trust your team to handle the situation.
The value of an integrated tech stack can drive efficiencies and increase revenue generation. This supports a higher valuation as you shop your portfolio company. And allows others to see a clear path for their own investment theses.
Conclusion
In a competitive landscape, buyers want to purchase portfolio companies that can have an immediate impact. This impact is quantified by the revenue generated and the company’s trajectory into the future. Addressing common hurdles to an exit opportunity (sales and marketing misalignment, incomplete GTM strategy, limited tech stack capabilities) is critical. It ensures your revenue fundamentals will hold up against even the most critical investment thesis. Optimize revenue generation to maximize your ROI, allowing you to capitalize on the next investment opportunity.
