Summary:
Does the investment thesis still hold true?
Is the leadership capable of executing the plan?
Can the products produce the needed revenue and profit results?
Are they making the most of all the external help that they can get?
So, you have invested millions of dollars and hundreds, if not thousands of hours of time into acquiring and mentoring a young company, that on paper at least, is a perfect fit for your strategic portfolio development plan. And now, several months down the line, it is clear the initial targets, written in stone in the investment thesis and turned into a set of “North Star” goals that everyone has bought into, are going to be missed.
Even small companies have hundreds of “moving parts” and KPI’s that roll up to support a set of True North goals. Even companies that are on target to deliver their numbers will have some red areas on their various scorecards. But there are a few metrics that must not and cannot be missed if the original investment thesis is to be realised, on time.
When it comes to a PE owned independent software vendor (ISV), one of these metrics is the revenue switch from a perpetual license model to an annually recurring revenue model (ARR). It’s this metric, more than any other, that drives a higher valuation multiple and is the key to the investment thesis.
When the switch over to an ARR model falls behind plan, the PE owner needs to quickly gain an understanding of what is going wrong and develop a recovery plan that will course correct before it’s too late. So, what are the 4 things you must do to get back on track?
Number one on our list, and the first thing to do, is to revisit the investment thesis and confirm it still holds true and is still attainable with good execution. Have the team in the PortCo been trying to deliver a flawed plan? Are there assumptions or data points that need to be changed in the light of new experiences? As a PE owner, you must be prepared to acknowledge issues with the original thesis and make changes where necessary vs continuing down a flawed path that cannot deliver to the original goals. There are things you can control that may have changed; Maybe key talent has left the building, a key customer has chosen to not renew, the engineering team is too busy maintaining the existing customer experience versus innovating the next lighthouse offering. There are also things that are out of your control; Market sentiment may have changed, new entrants are moving faster than expected, accelerated technology evolution is disrupting the status quo. Another old time saying that still rings true; ‘change is the only constant', it’s often not your fault, but it is yours to solve for continuously.
Assuming the original thesis still holds firm, and the opportunity is still achievable, are the PortCo leadership team capable of executing to plan? By this time, you’ve seen them in action, seen them under pressure and you’ll have a good idea of their capabilities (or lack of). As the business tries to scale, are they receptive to new ways of working and are they able to empower their teams to make decisions and extract themselves from the day-to-day minutia and step up to become true leaders?
Are the product offerings capable of generating the revenue and margin performance that is required by the investment thesis? The founders of the business you’ve invested in will almost certainly say they are because after all, this is what they sold you. But, after a period of operating where sales and not meeting expectation, is there a product issue that means it would not scale as planned? Not every product can “cross the chasm” and deliver the type of revenue and margin that comes from a mature market, and not every software product can make the leap from being sold with a perpetual license to being sold as a recurring revenue service. Change may be needed to get the product offerings into the right shape and maybe the original developers, who love their baby, are resistant to that change?
Is the PortCo fully leveraging all the outside assistance that is available to them, or are they trying to do it all themselves because they believe no one can do it as well as they can? They’ve just sold their business for millions to their new PE owners, and they are still basking in the glory of the sale (at least the ones that owned equity). They firmly believe the investment was proof that they are the very best at what they do, and they don’t believe they need help, even if the numbers are not where they need to be. A great place to start when looking at outside resource and experience that can help accelerate revenues is to the hyperscale Cloud vendor(s) that the ISV partners with. There are massive amounts of free financial, technical, and commercial experience and resource available to ISV partners from both AWS and Microsoft if you know how to secure it. See our other blog for more about working with the hyperscalers.(hyperlink)
If the cracks are starting to show and you come to the conclusion that what the PortCo really needs is help and guidance from an experienced set of operators, Wingspan are on hand to help. As well as working as co-pilots to assist the PortCo leadership team in scaling their business and their products, Wingspan can form a bridge between the PortCo and their PE owners. All Wingspan operators have first-hand experience working in PE held ISV’s and for one or more of the major hyperscale Cloud vendors. Wingspan operators can assist with Investment Thesis validation using real-world experience to sanity check assumptions and a proven methodology to course-correct where needed. Wingspan can also provide an expert assessment of a PortCo’s technical strategy and plan to a level that the PE owner would be unable to do themselves. This independent voice can be vital when assessing the need for further investment in product development or plotting a course to a completely new product position and revenue model. That brings us onto the PortCo’s commercial operations and Wingspan’s ability to rapidly zero in on the underlying reasons behind a revenue or margin miss. The Wingspan team have all been business owners and come from high growth software businesses and have transitioned over to ARR models. It’s a depth and level of experience that is unique and that you are unlikely to find in the PE owner’s team or the PortCo and in fact, anywhere else in the industry.
In this list of 5 things to do, no. 2 is not a todo but rather an observation - I needs a recommendation: One thing we could 'observe from experience' is that the PE playbook often follows the 'get the old bastard out, lets replace him/her with a new moron'... only to discover in 18 months this person 'ain't Jesus either'. Considering the disruption, cost and timeline of the fire/hire mechanism, consider coaching with real experienced operators and get more productivity at only a marginal additional cost. - thoughts (pushing co-pilot here) [BK1]
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