Value of Revenue Based Due Diligence for PE Firms and VCs

by | Sep 14, 2023 | Insights, Strategy

Revenue Due Diligence

Market Dynamics – Increase in Growth Funds

According to the McKinsey Global Private Markets Review 2022 report, there is a renewed emphasis on growth equity opportunities. With the volatile economic conditions and firms seeking stronger returns amidst a decrease in exits, growth and middle-market funds have been the focus of fundraising.  It’s no wonder that the demand and need for revenue based due diligence and sales strategy is increasing.

“Strong fundraising growth in 2021 was fueled by a few specific sub-asset classes and regions: relatively higher-risk growth equity and VC segments hit record fundraising levels. Fundraising for growth equity, which posted the biggest decline among PE sub-asset classes in 2020, rebounded across all major regions to reach $132 billion globally. Meanwhile, the allure of VC’s potential returns continues to attract institutional capital—top performing managers remain perpetually oversubscribed—and the strategy is now 36 percent above pre-COVID-19 fundraising levels, at $185 billion in 2021. VC fundraising was driven primarily by 31 percent growth in North American– focused funds. Conversely, buyout, still the largest PE sub-asset class for both fundraising and AUM, had a slower recovery…Of the top 20 firms, almost all have dedicated teams for technology or healthcare, which speaks to the growing importance within PE of these rapidly expanding sectors and the need for specialized teams to successfully invest in them. Three-quarters of the top firms have launched a growth or middle market fund adjacent to their flagship products; roughly half are large, multi-asset managers.”
Fundraising levels in 2021

Increase of Growth Funds is fueling need for revenue due diligence to ensure sales growth strategy

Emerging Importance of Revenue Based Due Diligence

Given the emphasis for investment firms on growth and revenue scale for potential Assets Under Management (AUM), there is an emerging demand for assessment focused on sales and marketing in addition to the traditional financial and technical due diligence.

Altus Alliance has engaged many PE firms and VCs and has gotten feedback on how partners and investment managers are spending more time evaluating and optimizing the sales and marketing go-to-market strategy and execution.

Some of the key reasons why an investment firm would want to evaluate and do a deeper dive into the sales and marketing capabilities of a target company or existing portfolio companies are:

  • Risk Assessment: Sales and marketing are critical functions for any business, as they directly impact revenue generation and growth. By conducting due diligence, the private equity firm aims to assess the risks associated with the target company’s sales and marketing strategies. This helps them identify any potential obstacles or weaknesses that could affect future performance.
  • Revenue Generation Potential: Obviously, private equity firms invest with the goal of generating returns on their investment. Analyzing a target company’s sales and marketing practices allows them to evaluate the company’s revenue generation potential. They can assess the effectiveness of current strategies and identify opportunities for improvement that could lead to increased revenue post-investment. Other key facets of risk assessment are to understand revenue stream validation – are the current revenue streams and margins (EBITDA) accurate and sustainable?
  • Customer Base and Market Position: Understanding the target company’s customer base, market position, and competitive landscape is crucial. Private equity firms want to ensure that the company has a solid market presence, a well-defined customer segment, and a competitive advantage. This information helps them gauge the company’s ability to withstand market challenges and capitalize on growth opportunities.
  • Operational Efficiency: Sales and marketing due diligence can reveal insights into the target company’s operational efficiency. The private equity firm can evaluate whether the company’s sales processes are streamlined, whether its marketing campaigns are cost-effective, and whether resources are being utilized efficiently to drive growth. Another key element is organizational alignment – How are sales and marketing working together? How is the sales team providing voice of the customer (VOC) and market insights to the product team?
  • Alignment with Investment Thesis: Private equity firms typically have an investment thesis that outlines their strategy for adding value to the target company. By assessing the target’s sales and marketing functions, the firm can determine whether the company’s current strategies align with their intended value creation plan. If misalignments are identified, they can plan for necessary changes after the investment.
  • Integration Planning: In cases where the private equity firm intends to merge the target company with another portfolio company or integrate it into an existing business, understanding the target’s sales and marketing practices becomes even more critical. This helps the firm develop a comprehensive integration plan that addresses any challenges related to merging sales teams, marketing strategies, and customer relationships.
  • Due Diligence Documentation: Private equity firms need a complete picture of the target company’s operations and financial health before making an investment decision. Sales and marketing due diligence provides essential information that contributes to the overall due diligence documentation required for investment approvals.

In summary, conducting sales and marketing due diligence allows private equity firms to assess the target company’s revenue potential, market position, operational efficiency, and alignment with their investment strategy. This information helps them make informed investment decisions and develop post-investment plans for value creation and growth.

Altus Alliance’s 21 High Performance Revenue Framework

Altus Alliance 21 HPR Framework

Altus Alliance’s proprietary sales and marketing framework breaks down key revenue growth elements for assessment, prioritization, and optimization.

Altus has developed a unique framework to evaluate, prioritize, and optimize key sales and marketing elements that provides a roadmap for growth stage companies for scaling revenue.   This Practice was jointly developed with Mark Leslie (former CEO Veritas, which was acquired by Symantec for $13.5B), and Charles Halloway, Kleiner Perkins Chair of Entrepreneurial Studies at Stanford University.  It is an interview driven process that helps assure real market alignment.

Altus Alliance Revenue Due Diligence and Market Driven Baseline Assessment

The 21 HPR framework forms the basis for Altus Alliance’s Revenue Due Diligence solution designed to address all the key aspects of evaluating a target company.  For any existing portfolio companies who need sales and marketing optimization to drive growth, Altus’ Market Driven Baseline solution provides a comprehensive and actionable insight driven analysis.  One PE firm founder who recently worked with Altus on a growth equity project said, “This is an end-to-end complete assessment and above and beyond the deliverable expectations…the presentation is a slam dunk, and your report will be the cornerstone of our overall assessment plan…”

The goal is to develop a predictable and highly efficient sales model that delivers consistent growth to provide return on investment and fast track to growth and potential exit.  Altus Alliance’s investor solutions are tools and services to help investors and their portfolio companies drive predictable growth and success.

Strong revenue due diligence and assessment is key to driving high-performance sales model