How do growth equity investors find companies to invest in?
KISHAN SHAH: Growth equity investors find companies through a variety of methods. One, a referral or introduction from a trusted mutual connection. If you’re a series BCDE investor, you’re going to look at what seed stage, or series A firms you really respect, invest in them. The second would be marketplace buzz. Think about PR, think about mentions on the web, but also customer references. If customers are really loving the product, and they’re getting a lot of value out of it, it’s a great way to gauge demand and see if the dogs are actually eating the dog food. If the company’s actually dog fooding.
The third would be more thematically. Growth equity firms will have a set of themes that they’ll want to invest in. Let’s say, artificial intelligence. They’ll look at companies within a specific sector, figure out what the market dynamics are going to look like, build relationships with a set of those entrepreneurs, figure out which ones are doing well, and then ultimately figure out if they can do a deal under their fund mandate.
Why should your company raise a growth round?
KISHAN SHAH: When a company raises growth equity, the first thing it should think about are the use of proceeds. There is two types. Primary and secondary. Primary is going to be capital on the balance sheet. That can be used for a variety of things. I want to hire more sales reps. I want to invest in my product. I want to increase my customer success team. I want to spend more dollars on marketing and ads. Or, I can also think about I want to do an acquisition of another company to get into another adjacency or tangentially related market. Capital that goes on the balance sheet, that a company’s going to use to invest in, to effectively grow faster than it could on a stand-alone basis, but also thinking about it could be a path towards profitability, or towards a larger growth equity financing.
The other reason is secondary capital. Secondary capital would be liquidity to earlier investors, or earlier employees as well. For transformational businesses that have been around for a variety of years, it’s fine if they want to think about what’s the next generation of how the company’s going to look for the next five or ten years, because there’s a shift in the marketplace, or their product is doing really well. Growth equity can solve a variety of constraints.
How does a growth equity investor assess your performance?
KISHAN SHAH: In terms of thinking about performance, that could be the number of clients you’re landing in a specific time period. It could be the amount of customers you onboard. It could be the amount of expansion revenue that you’re getting. Do customers want the product? Is the product working? Would customers like to spend more dollars with your company?
How can price be used as a proxy for complexity?
KISHAN SHAH: I love B2B Enterprise SaaS companies that are in a vertical like financials, or healthcare, where the customer has a very, very specific set of constraints, and they’re willing to spend a large amount of dollars in order to solve that problem. Price is effectively a proxy for complexity. The higher the ACV, hopefully the more times you can renew that customer and get the value of that renewal revenue. But also, it means that from your product team and your R&D team, the product is going to have to be more robust, more feature rich, to solve that customer’s pain points, but also thinking about from a sales perspective, it may be longer to land that client. That’s okay. Because the amount of stakeholders that are required to actually make sure that at a large Fortune 500 buyer, they have the necessary support in order to feel that this is a partnership, not a transaction, and the partnership is going to generate a high amount of ROI, on not just the money they spend, but the time. I find that B2B Enterprise SaaS companies that rally around price as a proxy for complexity, are highly successful.
What’s one tip that every company can use?
KISHAN SHAH: I love looking at org charts as almost this manufacturing machine for efficiency and growth. What I mean by that is some folks will say well reporting structures aren’t important, or things change so quickly. I like thinking about a critical view of the organizational structure and asking myself what does the company need in the next quarter? Are we facilitating growth? Are we going to get maximum efficiency? Are the right people in those seats? How can those people be managed and mentored such that they’re able to achieve the objectives over the next quarter or two, and then thinking about how to scale up to achieve a whole other set of objectives. I find that every company in the world effectively has an org chart, but the question is, how many companies use it effectively?
How do you calculate the ROI for larger software projects?
KISHAN SHAH: Trying to figure out the return on investment for large transformational software projects is notoriously difficult. One tip I thought about, Salesforce does a great job of this, where they’ll send a detailed customer survey to all of their clients, engage the return on investment, and the value their clients are getting from using their product. I think that’s actually a great hack to engage with your customers, and figure out hey, what’s working and what’s not working, and ultimately it’ll help you quantify the value that a customer is getting, also triage and fix the problems that they’re having, and then utilize that collateral during your sales and prospecting process.
How can you hack customer references?
KISHAN SHAH: Nothing is more powerful than having a happy customer, and a happy customer that is willing to go to bat for you, when you’re looking to land another logo. There are companies that we all respect. If you’re lucky enough to land one of those companies as a client, think about all of the different ways you can incentivize that client to write out a testimonial, and then be able to leverage that as marketing collateral, run ads against it, put it in email campaigns, use it during your prospecting funnel, think about if you even want to re-market to a set of leads that may have gone bust on you.
Think about all of the different ways that that testimonial can be valuable, especially from an investment perspective. There’s nothing like looking at the front page of a deck where a company lists out all of the logos it has as clients, and they’re respectable. It’s social proof. It means that this is a business that was able to attract tier one clients as customers, and they’re happy. That is ultimately a gauge of whether the company is doing well or not. I think it also allows you to take it up from just a pure net promoter score, which is going to be a quantitative measure, to more qualitative factors as well.
What’s a tip to speed up deal qualification?
KISHAN SHAH: The hardest thing to do is qualification, and understanding if there is a deal to be done. If you’re in a competitive environment, and you’re thinking about okay, I’m going to land a client, but there’s all these other logos that are vying for this business. Well, it makes sense to come and tenth instead of second. Second place gets no trophy. It’s the first place who gets the winner, and gets the deal. If B2B Enterprise SaaS works well, it’s land and expand, and hopefully they’re going to have that client for a very long time. But, if you spent all of your resources getting to the finish line, and you don’t make it, that’s going to be time you could have spent chasing another deal. So, it’s better to come in 10th instead of second sometimes.
What’s your favorite book?
KISHAN SHAH: Ryan Holiday, The Obstacle is the Way, I think it is a phenomenal book that allows us all to think about the problems we have in our own little world, but going back thousands of years to the ancient Greeks and the ancient Romans, and how they navigated the challenges of life. Sometimes pushing through the obstacle is the way to success.