By Paul Lindsell, managing director and founder of ThoughtSpark
In a revealing piece of research, the British Venture Capital Association highlighted the fact that 2,200 companies in Britain that are currently being financed by private equity (PE) or venture capital (VC). So this form of investment financing is clearly a popular option for new or growing businesses. Additionally, new international banking regulations have made banks more risk-averse, resulting in a growing need for PE and VC funding. Other commentators have additionally highlighted the wealth of government support and incentives, alternative investment appetite and rapidly changing customer buying habits, as a perfect storm of encouragement and demand for PE and VC investment.
So with VC and PE appearing to be a key funding partner in the development of British businesses, whether at the seed-stage or later-stage, acquired firms need to position themselves appropriately if they wish to attract these investment partners. So, how can UK firms looking for financing attract investors and maximise their value?
It is fundamentally important for firms to demonstrate strength in the key skills that drive rapid and sustainable growth. In order to understand the relative strength of these key skills in recently funded companies, we commissioned research earlier this year among private equity firms to obtain their views on the subject. The results revealed that IT and Marketing were the most commonly cited skills weaknesses amongst PE-backed firms.
The research asked UK Private Equity houses with assets under management of over £2 billion to rate a range of skills in companies they acquire or fund on a scale of 1-100%, where 100% is the optimum skill level. IT Management (48%) and professional, accountable and measurable Marketing (44%) were rated the lowest. These contrast with stronger skill areas such as new product development (71%) and sales (69%), where Private Equity houses considered acquired firms to be performing well.
It is clear, therefore, that if directors wish to attract PE or VC funding in order to develop their company, they can provide a much more attractive investment proposition if they can demonstrate strong skills in these highlighted areas of vulnerability.
The revealed areas of weaknesses are particularly worrying given their importance in driving business growth. Marketing is a critical capability, playing an integral part in ensuring that the right prospective customers are reached, through the right channels, with the right messages. These activities are crucial to developing a strong flow of qualified sales leads.
Equally worrying is the identification of sub-par IT skills in PE-backed firms. Businesses are reliant on their IT systems to identify their best customers, profile them, and then target similar prospects. Moreover, IT is widely regarded as critical to delivering high levels of customer service, effective marketing and operational efficiency.
These weaknesses can mean that business development funds are often misapplied, resulting in an ineffective sales lead pipeline, and poor market awareness. It is absolutely vital that firms address these skill weaknesses to avoid the significant reduction in their ability to go to market, target the right customers and generate effective sales.
With early stage businesses often basing their success on an ability to identify market gaps develop ‘disruptive’ and innovative new products, and evangelise about those breakthroughs, it is perhaps no surprise that sales and product development capabilities were rated highly by the Private Equity houses. These skills are important for getting a business off the ground, converting sales through the business owners’ personal passion and in-depth knowledge. However, as a company grows, these key strengths are not extensible without strong parallel capabilities in Marketing and IT.
Identifying skills shortages and acquiring experienced and skilled workers in these weaker areas will help bridge perceived skills gaps. Hiring the right people is essential when it comes to building a fully-functional company, however this process can be lengthy and time consuming. Many firms, therefore, opt for calling in specialist and experienced consultants that can deliver reliable results immediately and help build brand messaging, strategy and expertise.
High skill levels in IT and Marketing are essential for rapid growth and scalability, so if firms want to tap into the funding that is available, they should take a long hard look at their capabilities and ensure all key skills areas are strong, whether in-house or through an external supplier. With 581,173 new companies registered with Companies House last year, which is more than one a minute, competition for investment will continue to rise, so firms must position themselves in the best place possible.