Why Growth Investing Is Not Really About Money

I have recently been talking to a number of seasoned growth investors about some of their most successful investments, and have found a common theme. What they do to create growth has very little to do with injecting capital. It is based on insight. Let me give you three examples.

A private tutorial business had operated very successfully for decades helping students from Japan prepare for entry to top British universities. The investor provided an insight; the market was now much bigger than Japan.

Economic development had meant that many other asian countries had a substantial middle class who liked the idea of their children studying in the U.K. or U.S., and had the money to pay for it. The result was  a growth in student numbers from 350 to 3,500.

A psychometric testing company offered a range of tests to use for recruitment, and that was what it sold.

It had also built a unique database of results of past tests which could enable users to make comparisons and benchmark applicants.

They could predict likely success of a recruitment, or tell whether or not their recruitment efforts were bringing them the highest quality candidates.

The investor provided an insight; this database was hugely valuable, and was not being anything like fully exploited.

A software company had around 500,000 subscribers and was still thinking in start-up mode; don't spend any money until you absolutely have to.

The investor provided an insight; to continue growing you need to start selling to larger companies, who care much more than your existing customers about resilience.

To satisfy them you need to move to more resilient data centers and stop outsourcing software development. This involves spending money in anticipation of revenues.

That's a new concept, but not hard to do. The amount involved was about £200,000, against annual profits of £4 million. Again, the result was 3x growth in subscriber numbers and profit.

All of these insights fall into the category of "obvious once you see them," but then, so do all great insights.

The interesting question is why it took an outsider to have them. It can't be from any defect in the management team; the fact of these investors being in the companies in the first place was proof of a high quality team; they would not have invested otherwise.

I can think of three reasons why outsiders could see what the insiders had not:

1. They were outsiders, and fresh to the business. If a management team has been running a business in a particular way for a long time, it becomes very hard to imagine how things could be different.

2. Outsiders spend their time looking outside the business; insiders spend most of their time looking inside. If Japan is your market, you have to concentrate on that. You don't have any compelling reason to follow what is happening in the rest of Asia.

3. Maybe the skills needed to run a business are different from the skills needed to see where the business could be going, and the two don't correlate.

If 1 in 1,000 managers are excellent at the first and 1 in 1,000 are excellent at the second, then only 1 in a million are excellent at both.

So, and this is the really important question, what do you do if you are running a successful business but starting to think that more is possible?

For the reasons above, it's unlikely that you can generate the insight yourselves. You could do a deal with the right sort of investor, if you can find one who's interested.

Alternatively, just find a one or two suitably qualified outsiders and get them to help you see what you are missing. Problem solved; obvious once you see it.

Popular

More Articles

Popular