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Lessons From P.E.

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Lessons from P.E.


P.E. to me always firstly means Physical Education.  You know those school lessons on a cold damp Thursday morning in a misty soggy English field where you have to jog 10 times around the rugby pitch in short shorts.  Oh the joys of a Victorian style education.  I am sure it taught me something.  Probably to move to California.


But I am not talking about that type of PE.  I am talking about VCs big brother.  Private Equity.


In good times and bad, the top private equity firms have outperformed most businesses over the past forty years - even and especially during down cycles.  While many of their strategies and tactics don’t work for growth businesses, a number of them do.  Specifically high-growth businesses can learn from their use of cash and balance-sheet hacks to super-charge or at least brighten their numbers.


It is well known that private equity operations follow a set of disciplines that are not rocket science.  Some of the lessons will be familiar, and many even appear obvious. However, in times of increasing economic uncertainty, these proven techniques are especially relevant.


Firstly top PE firms mercilessly prioritize the top potential initiatives.  They scrutinize the demand numbers, customers, competitors and how money is actually made in the business.  Then they chase down the handful of initiatives that shift the needle in a major way.  Many scaling businesses talk about prioritization, but few actually adopt it to anywhere near the degree they should.  Almost everyone can learn from PE here.


PE firms always have a plan or blueprint.  ALWAYS.  This plan is not some beautiful powerpoint to be admired at the next board meeting.  It is always about action. The plan has a reasonable number of interlocked MECE initiatives with specific goals.  Initiatives are all about results, and if the choreographed actions don’t bring those results about things are changed.  And changed quickly.  Another lesson scale-ups and traditional companies can learn from.


The best PE firms don’t just let it lie with a nice set of initiatives.  They bring with them a rigorous operating system to help execute the initiatives towards the handful of metrics they track.  The organization is in service to the initiatives, not the other way around.  And so is often molded to fit the plan.  This is something that SpaceX has also adopted.


Talent is the next lesson.  Time and money is precious so you don’t have much opportunity to mess around with newbies.  The stabilizers are off and speed is of the essence.  To operate in this mindset having top talent is not enough, they also need to be incentivized fully.  Employees need to act like owners, and so equity is used more freely.   Boards are also decisive and efficient (something VCs should take particular note of, but I suspect most founders are not as keen about).


The balance sheet in PE is used aggressively.  It is probably hard for scale-ups to embrace this to the same degree but as the business grows this does become a factor.  A more sophisticated FD, and certainly by the time there is a CFO involved, all these options should be on the table for scaling companies and their boards.  Cash and leverage focuses management in a way that purely revenue growth and equity focused businesses can never do.


Another good lesson from PE is about mindset.  One that focuses relentlessly on repeatable processes and strives for better results and performance improvement pushes everyone to do better.  Now this more hard headed approach can feel counterintuitive to some growth company cultures - especially in technical groups - but managed in a sophisticated manner fusing the two is possible without losing a friendly and collaborative feel.  Especially if the modus operandi is set-up properly and everyone has a unified set of incentives.


I would argue that no scaling company that is not the clearcut market leader with an almost insurmountable moat in their industry can afford to ignore how the best PE firms operate.


You may never get on well with your bigger sibling, but they can often teach you a thing or two.


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