Equity Firms Should Leverage Innovation

On the strategy side of our business, we work with many private equity-backed companies. We get called in when the growth trajectory and investment thesis aren’t being realized as projected.

We complete a diagnosis, based on a holistic evaluation of the market, competition, culture, marketing and operations of the firm. Applying a variety of in-depth primary and secondary forms of research and analysis, we develop a roadmap of real, organic growth.

Given the left-brain methods, a lexicon used by the best business schools and the Harvard Business Review, the analytic rigor and accurate modeling of probable growth, down to the intoxicating bar graphs and spreadsheets filed with the right proxies, we earn the trust of the company’s board – usually comprised of their biggest investors, associates in a private equity firm – founders and leaders.

They know these idioms, share a level of comfort with the form of the presentation, and find solace in the fact that we use our mastery of this business school approach to management consulting. Without fail, those who follow our advice perform better in the market.

Then, we mention the “I” word and it is as if we are insulted their mothers; the conversation is over. Innovation, too often misunderstood, is not a disease, nor is it an airy-fairy notion. In fact, private equity firms should place an imperative of genuine innovation on the companies into which they invest, as it is a real, repeatable and cost-efficient lever of top-line revenue generation.

Maybe it is because innovation started in the design and engineering fields, rather than part of the core B-school business management or finance tracks that imprinted their thinking about business?

Maybe it is a shared sense of risk-aversion that wards off anything outside of an industrial-revolution era sense of business practices that people prone to PE work may exemplify? Maybe they just haven’t seen the real and tangible benefits of a disciplined innovation program and its bounty firsthand?

Whatever the reasons for the blank stares and lack of interest in innovation by many PE firms we have met around the globe, we predict that once one major PE firm retains an innovation firm for its portfolio and sees the incremental, breakthrough and disruptive – and massive – growth, that innovation will become a core engine of growth in this sector.

PE firms are slow to change behavior, given their cautious worldview and the gravity of their investment; however, once they find something that works, the whole industry changes course.

Given that several established innovation methodologies are now being taught in leading business schools – from MIT to Stanford to Rotman and others – and that book after book about market leaders who use these techniques are being digested, it is just a matter of time. Once private equity groups understand how innovation works and how it can be used to inspire transformative growth, innovation will be one of the foremost toolkits in a segment that ignores its power.