What should I expect out of a growth equity investor? (Part 1)

We get asked a lot about how we “engage” with management teams. It’s a good question. More teams should ask. The answer is: it’s changed over time and it depends on where a company is in its maturation process, but we generally find that we focus more on People and Process than earlier-stage investors.

Consider the elements of any business: People, Process, Technology (Product), Customers. When we were venture investors back in the ‘90s, our partners spent a lot of board meetings talking about whether we were selling our product to the right customer segment. That is – we were hyper-focused on our companies proving product/market fit. A lot of our value came in making introductions to potential pilot opportunities, and our management teams were often a conglomeration of extraordinarily talented utility players that at any given time could be interchangeable Chief Sales Officers and Chief Finance Officers. Chief Operating Officers were mythical creatures. Churn calculations were often binary.

As growth investors, our relationships with our management teams are different. And they should be different. It makes sense. Given the same topic, one would expect a conversation with a teenager to be of greater depth and sophistication than a similar conversation with a toddler. Likewise, compared to a teen, a toddler has vastly different expectations of a mature adult. And so it should be that the relationship between entrepreneurs and investors should evolve as a company matures. So before we talk about how we engage, it’s first important to acknowledge how a company should expect to change as it matures. In a subsequent post, I’ll get to the corresponding expectations of where a good growth equity investor should engage.

Since we’re talking about growth investing let’s assume we’ve found a management team that has product/market fit nailed down. Based on our experience, we find that mature teams:

1. Have specialized, functionally-focused A-players in key positions. Kudos to the CEO who is the industry thought leader / chief technology officer / chief salesperson / human resources / queuing model expert / amazing mother and wife. We think you’re amazing. We honestly do. But mature teams need CFOs who can quickly discern important financial metrics, raise a line of credit without having to call their B-school professors, and most importantly: challenge the CEO when decisions are not in the financial best interest of the company. Good COOs can truly be the difference in whether a company is scalable. And historically we’ve found that the biggest upgrades in quality can occur in senior level sales staff. We can go on about CMOs, CTOs, CROs, etc.

2. View processes and metrics as a means to make them more efficient, focused, and informed, rather than a “necessary evil”. Stay with me here…no one likes the word “process”. But processes are at the heart of what makes a company scalable, and we find that great teams are made up of great individuals who know what processes are necessary to achieve repeatable, successful results. A lot of these processes come along with the hiring of A-players, described above, but process orientation starts at the board level and goes all the way to the customer service floor.

“I sure am glad we established a different customer service strategy for each of our top 10 customers.” - No company that ever looked past $200m in revenue

3. Know their weaknesses. When we’re in diligence, we actually love it when a CEO acknowledges an area that needs improvement. It says three things to us. First, it indicates integrity. Second, it tells us that the CEO knows his company. And last, it tells us that the CEO is willing to take outside counsel. Many of our best CEOs aren’t the type of do-it-all rockstars described in point 1 above. More often, they’re self-aware individuals that have a knack for building teams that cover their weaknesses.

The answer might be obvious given our outlook on the discussion above, but stay tuned for a follow up post to answer the question about where an entrepreneur should expect a good growth equity investor to add value.

About SSM Partners. SSM has partnered with talented entrepreneurs for more than 25 years. The growth equity firm invests in rapidly growing companies that have proven and differentiated software, technology, or healthcare business models. Starting with a relationship built on trust, SSM offers its entrepreneur-partners a thorough understanding of the growth company lifecycle and a collaborative approach to building great businesses. Learn more at www.ssmpartners.com.