Natalie Cramp (pictured), Consultant and Strategic Advisor of commercial data solutions provider JMAN Group, discusses how founders need to look at data differently to attract investors
Since the launch of ChatGPT assessing the impact of AI has been on the agenda of nearly every business. The truth is that gen AI is just the latest and most visible groundbreaking innovation to come out of the data field. Over the past decade, data has transformed how we all live and work. The investment sector is no exception. Increasingly, private equity firms and venture capitalists are going beyond using basic financial metrics to leverage the latest data techniques to both assess potential targets and manage their portfolios. What this means for those seeking investment or an exit for their business, is that they need to adapt their approach accordingly.
Founder-led businesses often only begin to seriously consider their exit strategy after several years of operation. By that time they have most likely scaled to several hundred employees across several countries. Depending on the business model, they may have hundreds, thousands or even tens of thousands of customers. They will often work with dozens of partners and agencies, have already taken several rounds of investment and have multiple products with different revenue streams. In short, the business will be complex with a sea of information swirling through different platforms, teams and departments.
Traditionally, getting all this information sorted out to present to investors was a difficult but not impossible task. This is because most investors have previously prioritised a few important metrics including liquidity, cash flow and expense control. Most well run businesses will have a good grasp of these fundamentals and will merely need to get their ducks in a row in order to prove it.
Now, the situation is changing. As PE firms become much more data-led, they are looking at a host of new metrics to build a much more holistic picture of how a company is performing now, and, with predictive analytics, will potentially fare in the future. Everything from customer service data, product revenue, transaction levels, retention rates, organic versus inorganic growth, ARR, to customer profiles and team performance metrics are all of serious interest to investors. Investors have gone beyond looking at the ‘what’ of the performance, but now are expecting management teams to be able to have the data to answer the ‘why’ as well. Unfortunately, a surprisingly large number of businesses can not readily provide this information, nor do they have the data infrastructure or expertise to begin to gather it efficiently.
This can be a costly problem. It is much more difficult, expensive and inaccurate to try and collect and analyse data after the fact. Retrofitting data management infrastructure into already mature systems can be very disruptive. Upskilling or hiring a team to correctly manage, interpret and visualise the data is also time consuming. This means that a business leader who is already embarking on their exit strategy has two choices – face the delays and expense of getting their data house in order – which could mean market conditions end up turning against them – or run the risk of receiving much less favourable terms from investors who consider the lack of insights available a risk that needs financial mitigation.
Both options are obviously far from ideal. So let’s consider a third path – building your company with data at its heart. I’m sure most of us already know just how much value data insights can provide to a company’s operations and how it serves its customers. However, there is still a reluctance from many business owners to start investing in data infrastructure and expertise because either it seems like an unnecessary early capital outlay or a low priority when they are trying to keep the fundamentals of their business operating. This is the wrong mentality. If the ultimate goal of your business is to exit or list – you are going to be better placed to achieve this target if you build the data policies, expertise and infrastructure you need into the fabric of your business. Everything does not have to be in place from day one, rather you need to create a strategy that will enable you to ramp up to gathering all the critical data points you will need to answer every question an investor will ultimately ask. Doing this also lays the foundations to take advantage of the latest generative AI advances. AI applied to a shaky data foundation is unlikely to get you results, but applied to the right data foundations can transform the value of your business.
Luckily, the data points that PE firms now really value are the same insights that will make a fundamental improvement to how effectively you make decisions as your business scales. The important thing to remember with any data project is to start with the questions you want to answer. This means understanding modern PE professionals. Ask yourself, what metrics, beyond simple revenue figures, will tell the story of your company’s success and potential? It could be the diversity of your customer base – both geographically and by sector. It could be how strong your recurring revenue figures are. Perhaps it’s the longevity of your products or the exponential growth of a new service you have launched. It may even be the approach you have to customer service and marketing and how that links to customer retention and growth. When you have a clear picture of where your real strength and USP exists, the next step is to develop the data collection, management and analysis systems and policies that will prove what you know to investors.
The benefit of this approach isn’t confined to proving your company’s worth in its initial pitch. As mentioned above, investors are increasingly using near real time data analysis to monitor the performance of their portfolios. If you have your data in order, it is much easier for investors to undertake this type of ongoing analysis. Consequently, it can be more attractive to them knowing that their potential acquisition or investment can easily plug into their existing systems. In addition, for buy and build firms that prioritise the compatibility and synergy of their acquisitions, deep data insights are very attractive. Most importantly, it will make it easier for you as leaders to run the business day-to-day, know where to spend your time and where to place your bigger bets.
Finally, creating the infrastructure and policies you need to properly manage your data is only one part of your journey. It will count for nothing if you don’t focus on a culture of using these insights to power and present your business. This means upskilling your team so they have the skills and knowledge to use data effectively. Everybody, including your senior leadership should have at least a basic ability to scrutinise and apply data insights. Too many CEOs and founders rely on others for this expertise. If you start building up your own expertise, when it comes to the crucial investment pitch, you, and your senior team, will be well placed to amplify the argument that your company data makes.