Investing in growth companies involves the deployment of value-creation initiatives and insightful metrics. Delivering profitable growth and managing the risks of an asset hinges on the ability to make informed, holistic, and adaptable decisions. In the sea of available operating and market data, the right facts, data, and analyses really matter. Too often, organizations operate with a static set of metrics or dashboards that create the appearance that "everything is under control" until it is not. Why are management teams and private capital sponsors so often surprised?
We define "metrics that matter" as those which:
- provide a lens into the financial, cultural, and operational
health of a company and its core functions (e.g., revenue, margins,
working capital, employee productivity) AND
- deliver real-time insights to enable management to act on investment prioritization and sequence transformation execution to build operating agility
Below, we examine metrics in four key areas that can significantly help private capital investors and portfolio company management track success and reduce risk in their portfolio companies.
Sales and Marketing Indicators | Fueling Growth
Sales and marketing efforts beget revenue and the metrics related to pipeline and conversion to revenue require extra scrutiny. Most growth-stage companies are in competitive and dynamic markets, making certain metrics more important than others. The specific metrics that are tracked will vary by sector, sales channels (direct vs. indirect), etc. These and other factors must be considered to determine the specific metrics needed to get a view of sales and marketing effectiveness.
So before selecting from a myriad of potential sales/marketing metrics, ask a few key questions, such as:
- What is the range of your marketing efforts and how do you know how successful you are in converting leads into sales?
- How do you sell? What is the actual process to create leads, pitch, and close them (i.e., convert to revenue)?
- What are the cost drivers associated with that sales process? What is the profit expectation on any $1 of revenue?
- If commissions are involved, are they tied to break even on any sale/account?
- Is the model a one-time sale or an account sale (meaning a relationship can be developed with the customer to expand the sales of any first-time buyer)?
Revenue drivers such as customer acquisition cost, customer lifetime value, bookings, annual recurring revenue, and conversion rates provide valuable insights into the effectiveness of sales and marketing efforts. These metrics inform sales strategies, performance, and resource allocation.
Additionally, it is critical to monitor client customer loyalty to build sustainable, long-term value. KPIs such as customer satisfaction, retention rates, and Net Promoter Score assess the strength of client relationships and the resilience of the company. Additional metrics needed will depend on the answers to the questions above and other strategic considerations.
Velocity of Profit for Investment | Maximizing Returns in Minimal Time
In addition to maximizing returns for investors, it is important to do so quickly and efficiently. By focusing on the velocity of profit, private capital firms can assess the profitability of their investment strategies, identify underperforming assets, and refine portfolios for optimal returns. This area ensures that capital is deployed judiciously, driving a culture of agility and responsiveness.
Velocity of profit metrics that matter include revenue growth rates, profit margin, return on investment, and return on assets.
Employee Productivity and Bench Strength | Unleashing Human Capital Potential
Irrespective of the industry or product offerings, value creation is simply not possible without unleashing the value trapped in the talent capital of the workforce. Said simply, the workforce needs an "in it to win it" mindset and execution orientation. If the human resources functions across your portfolios have not evolved to leveraging advanced technology, partnering with sales, marketing, operations, and finance to determine productivity and efficiency metrics of the workforce, then you are setting yourself up for performance surprises.
- Are the human capital metrics received during board meetings focused on review mirror areas such as hiring and attrition numbers only?
- How is the organization measuring the time to productivity of new hires to assess the return on hiring and efficacy of onboarding?
- How does the organization maintain insight into long-term high performers and mitigate the risk of retention and succession gaps?
- Have your portfolio companies identified the roles that drive the most value creation?
- How are you measuring the depth of the talent bench in the most critical roles?
Begin with metrics such as manager instability ratio (MIR), talent bench strength (TBS), and pipeline utilization (PU) to assess front-line talent quality and depth. Leveraging metrics such as time to first deal (TTFD), career path ratio (CPR), and key role revenue leakage (KRRL) will deliver insights into both employee productivity and the efficacy of your recruiting and onboarding investments.
One of the most important steps missed in organizations when implementing human capital or enterprise data solutions is the strategic formation of the underlying human capital data model and the intersection with key operating and financial data – missing this step will slow down the organization's ability to deliver real-time and predictive talent insights.
Given the total cost of today's workforce, the metrics that matter must holistically assess the workforce and cultural health to drive sustained profitable growth.
Tracking Cash Flow | Cash is King
Cash flow is the lifeblood of any business; it is a measure that is not easily manipulated and provides a "real" snapshot of a company's financial health. An accurate cash forecast is vital to identify liquidity issues, working capital improvement opportunities, and potential areas of risk or covenant or borrowing base concerns.
Cash flow drivers that are critical to consider include operating cash flow and free cash flow. Measuring cash conversion cycle is another key metric to consider for a measure of how quickly inventory is being converted to cash.
In the competitive landscape of private equity (PE) backed growth companies, success is contingent on a nuanced understanding of the growth drivers and operations of businesses. This is impossible without tracking and analyzing the metrics that clearly show where the business is operating efficiently and effectively and where it is not. Weaving in sales and marketing, velocity of profit, employee, and cash flow metrics into the fabric of the decision-making processes supports company managers and operating partners with a full view of risks and opportunities. The strategic application of metrics that matter can be the differentiating factor between those who survive and those who thrive.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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