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View from the Boardroom: The Next Magic Bullet for Private Equity

November 2, 2017

The conversations in the world of private equity are often quite different than the day-to-day conversations that occur in operational businesses. Investors and management teams don’t always align on the need for change, however, one thing is for sure: change is front and center in the minds of private equity investors.

From the moment they pull the trigger on an investment - indeed even before that for the successful firms - private equity investors are laser-focused on identifying the value-creation opportunities that can be captured from change. Not surprisingly, they want management to efficiently deploy their capital to pursue changes that can most tangibly and immediately impact the business’ financial performance in order to maximize equity returns.

The Substantive Value of Transformational Change

A piece by the consulting firm, Oliver Wyman, describes how substantive this impact can be: each $1 increase in EBITDA in a private equity portfolio company is worth $8 -10 to the equity holders in a private equity fund circa 2014. This then translates into a dialog that goes something like, ‘if I spend $1M/$10M/$100M, what is the impact on the operating parameters of the business such that I will see that investment played out many-fold in the business?’

Mark Gillet, Managing Director at Silverlake Partners, discusses leading transformational change in his recent book. As quoted in PEI’s The Operating Partner in Private Equity, Volume 2, Mark observes, “[Transformation] is not a standardized deterministic process. While it too can be analysed, planned, and effective reporting and monitoring of the delivery put in place, often the most important contribution to success is the ability to adapt.”

Pinpointing the ‘Magic Bullet’ for Private Equity Firms

As Chairman of Traackr, I’ve had many recent conversations with private equity folks whose backgrounds are rooted in technology, who have seen the impact successful technological implementations can have on a company and its transformation.

The effective deployment of technology can be a ‘magic bullet’; a change that can result in either large revenue increases, large costs savings or substantial gains in productivity (see http://tomtunguz.com/three-value-propositions/).

Examples include deploying advanced robotic manufacturing systems that allow for flexible manufacturing runs, decreases in marginal costs of production and improved quality; implementing procurement management systems that drive significant cost savings; or increasing the efficiency, predictability and capacity of the sales function by implementing a CRM.

Finding the Market Fit for Private Equity Firms and Influencer Relationship Management

As my former colleague, George Kadifa (Sumeru Equity Partners) observes, “Private equity firms such as mine are actually buying technology companies and restructuring them to create value in a variety of ways; one obvious opportunity in some of these situations is the reinvigoration of the sales and marketing function to more effectively create and fulfill demand; Influencer Relationship Management (IRM) is an obvious approach to adopt in these firms.”

In my role at Traackr, I have seen the adoption of IRM behave as such a ‘magic bullet’ for our customers and even our own team.

For private equity investors, there are three reasons why IRM can provide a transformative impact on their businesses:

1. Influencer marketing is a core component of the new emerging sales and marketing best practice that emphasizes relationships, focus and intelligence over blind spending and spray and pray tactics, and is the “magic bullet” for using marketing to cost-effectively drive top line growth.

2. As part of the new go-to-market technology stack, IRM is a cost-effective way to power fundamental operating performance by delivering revenue increases, cost savings, and productivity increases.

3. The full embedding of IRM in a business goes far beyond simply implementing a new system; it demands a fundamental shift in how the company thinks about and addresses its end markets, thus facilitating the shaking up of the status quo for companies stuck in low growth mode.

IRM and its adoption into the fabric of a company can be transformative. Traackr customers are using IRM, not just as a more effective marketing and corporate communications platform, but also as a fundamental operating principle within their businesses. IRM is one of the most capital-efficient strategies a business can deploy to massively impact revenue, cost and productivity.

Revealing the Power of IRM as a Foundation of Substantial Growth  

Traackr is a company that “drinks it’s own champagne”. Notably, the team has used the power of IRM to bootstrap a substantial Enterprise SaaS business with minimal amounts of capital. Traackr’s lifetime revenue up through Dec 2016 was 300% vs initial capital raised. This remarkable performance is the inverse of what would be expected of a typical SaaS business at a similar stage, i.e. if lifetime revenue is $X, then capital raised is typically $3X. Essentially, the large amounts that SaaS companies typically spend to ‘find’ the market, the buyers/customers, was dramatically reduced by Traackr via use of its own IRM product as the foundation of its growth, using its own toolset in both marketing initiatives and sales practices.

Another example of a Fortune 500 company driving its digital transformation with IRM is Hasbro. Recently interviewed by Jim Cramer (the segment at 4.30  - 5.50), CEO Brian Goldner describes how they use IRM strategies and techniques to win in the toy wars. Specifically, Hasbro inspires its community of gamers to create user generated content that fosters conversation and engagement around their games.

Al Aguirre a former Partner in a Private Equity firm, and now Board Member in a number of PE owned firms who works closely with both financial sponsors and management teams comments:

Levers that can fundamentally transform a business are few and hard to find. In today’s customer-empowered world, IRM is a lever that has applicability across a broad range of portfolio companies. It’s a no-brainer to aggressively embrace IRM and introduce it in appropriate situations.

Embedding IRM Requires a Fundamental Shift in Thinking

Embedding IRM in a business requires a fundamental shift in how management thinks about and addresses its end markets, as described here. This is the type of change that private equity investors can help drive as they often have effective, if not outright, control of their portfolio companies, and can serve as the agents of needed change to maximize return on their invested capital. Implementing IRM in a portfolio company can provide a transformative impact on the business and lead to dramatic changes in how customers perceive the company.

Of course, successful transformation is never as simple as implementing a new technology. There are often business process reengineering (BPR) efforts required to ensure that the business leverages the technology to maximize its utility.

To that end, we have worked with a number of services partners who are familiar with the types of associated process changes required in deploying IRM. These firms include, but are not limited to WhatIf, Vertic and Social Tribe.

One note of caution: IRM at its core is a form of marketing that requires a more complete alignment of message and product with one's potential advocates. Bottom line, if your product is crap, then don’t do IRM. The influencers will destroy you in the market, so spend the time to fix your product/service, and then go hard at IRM.

Let the games begin...

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