By Paul Lindsell, managing director and founder of ThoughtSpark
Over the last few years, new international banking regulations have made bank credit less available, resulting in a greater need for alternative funding. Private equity is proving an increasingly popular growth funding option for firms, whether as seed capital or at a second stage. However, buoyant business growth typically requires a set of key business skills – ranging across business management, financial management, new product development, HR, sales, product/service distribution, IT management and marketing. Weakness in any of these areas will undermine growth potential, affecting both the funder’s return on investment and the company’s ability to attract private equity funding in the first place.
The Research
In order to understand the relative strength of these core skills at the point of funding, we conducted research amongst UK Private Equity houses with assets under management of over £2 billion. Critical skills were rated by respondents on a scale of 1-100%, where 100% is the optimum competency in each area.
The skills private equity houses rated positively, and typical of successful entrepreneurial start-ups, were:
Financial and business management, human resource management, and product/service distribution skills attracted moderate scores, but all over the critical 50% watershed.
However, these ratings contrast strongly with competencies felt to be sub-par:
Directors who are growing a company with the view of attracting private equity investment will present a far more attractive investment proposition if the firm can demonstrate strong skills in these acknowledged areas of vulnerability.
Beware the skills shortage
It is perhaps not a surprise that stronger skills are found in sales and new product development amongst businesses at the point of funding. Poor performance in these areas would stop a business even getting off the ground. In the early stages of a start-up business, much can be achieved through personal passion and inspirational founders. However, this is not scalable as the business begins to grow. A firm’s originators only have so many hours in the day. Effective methods of automating interaction with customers and prospects have to be found – typically in the form of IT applications and marketing techniques.
In light of this, a lack of IT management capabilities is a particularly worrying lacuna, with businesses nowadays critically reliant on their systems for operational efficiency, effective customer management and intelligent sales activity. IT management continues to be increasingly important to business development in the modern era where sales automation and online interactions are becoming more and more the norm, and vital information needs to be immediately accessible at the point of need (such as customer data, performance analytics, etc).
Similarly, a lack of marketing skills can negatively impact a firm’s ability to identify and reach out to high-potential markets and prospects, and then generate business from those markets. Poor marketing skills will result in business development funds being misapplied so that an effective pipeline of sales leads is not generated, nor market awareness effectively built. In essence, sub-standard IT and Marketing skills will significantly reduce a businesses’ ability to go to market, target the right audience with the most effective messages and generate effective sales growth. Firms looking to attract private equity funding can’t afford to overlook these highlighted skill sets.
Addressing the skills shortage
One way to bridge the skills gaps is to acquire experienced and skilled workers in weak areas. Finding the right people, with the required relevant experience, is imperative when building a high-functioning business. Despite this, hiring and selecting staff can be a time-consuming and difficult process. Sometimes, the right person simply does not present themselves as a candidate, preferring the security of a more established or larger company. So many firms opt for calling on third-party specialist consultants that deliver immediate expertise and help to build growth strategies.
So whether via in-house personnel or an external supplier, ensuring high skill levels in Marketing and in IT are essential for rapid and scalable growth. This is particularly important for businesses that are looking to tap into the rich vein of private equity as a source of growth funding. These companies should take a long hard look at their capabilities and make sure their strengths are fully rounded. Being able to demonstrate this will ensure a market advantage over competitors, attracting investors, and realising sales potential on a scalable, sustainable level.
Access the full research note at http://www.thoughtsparkagency.com/mind-the-gap/.
