Does Your Portfolio Company Have A Clear Path to Profitability (P2P)?
Updated: May 31, 2022
Growth and profitability are not mutually exclusive, each are critical to building and sustaining a successful company.
We pose the question - ‘Does your portfolio company have a clear Path to Profitability?’ -, because the global investor community has been rocked by two seismic shocks in the past several months:
Firstly, the faltering public market debuts in 2019 of several high-profile technology companies - Uber Technologies, Lyft Inc and Peloton Interactive, Inc. – each of whom suffered a significant post-IPO plunge in value.
This situation was further exacerbated by the aborted IPO of WeWork and the continuing implosion of the beleaguered company - evidenced by a string of lawsuits, a continuing leadership team ‘merry-go-round’ and a series of employee lay-off programs.
Secondly in 2020 came the ongoing volatility and uncertainty arising from the COVID-19 pandemic. This has caused a worldwide financial meltdown and a feverish succession of market sell-offs.
The COVID-19 situation is still evolving throughout the world, but It is becoming increasingly evident that entire sectors will be forced to fundamentally transform their underlying business models as the crisis is averted and new operating norms emerge.
These two occurrences - both entirely unanticipated - have changed the conversations taking place within the investor community across the planet.
In particular, these factors have prompted an urgent re-assessment of the downstream risks associated with placing top-line revenue growth ahead of bottom-line profitability – either for a new venture or an existing portfolio company.
The underlying uncertainty associated with an investment in the current crop of newly-public ventures - Uber, Lyft, Peloton et al – has evoked recollections of those dot-com companies that failed in the early 2000s despite the exuberance surrounding them.
During the dotcom bubble, investors around the world flocked to bet on the purported ‘next big thing’. A similar pattern are evident in today’s IPO market, with some companies asking buyers to place big bets on unproven technology and untested revenue models.
Many of these new wave ventures can claim to have growing revenue streams (often measured in billions of dollars), high customer retention rates, scalable business models and an established competitive space.
Nonetheless, overall investor sentiment is shifting rapidly towards ‘sustainable growth models’ while resisting a ‘growth at all costs’ mindset.
And the post-COVID reality will be that many companies are now compelled to undertake a fundamental ‘reset’ with finite cash reserves. Cutbacks are commonplace as founders adjust to the new socio-economic circumstances in all geographic markets. That being said, start-ups are rarely able to cost-cut their way to success. They need to pursue a growth plan.
Simply out, growth and profitability are not mutually exclusive, and both are likely necessary to build and sustain a truly successful company.
Hence, a clear and realisable Path To Profitability (P2P) is a ‘must-have’ item for investors in their discussions with existing and prospective portfolio companies.
A Path to Profitability (P2P) strategy defines ‘the when, the how and the how much’ of achieving profitability and is typically articulated in the company’s business plan:
P2P strategy outlines how long it will take a company to reach profitability
P2P strategy outlines the means by which a company will reach profitability
P2P strategy contains the basis for the assumptions underlying the profitability projections
The key measurements of any P2P projection are generally associated with the dynamics of the customer relationship, such as:
At WCA, we refer to these measurements as ‘actionable metrics’ as they are central to understanding and interpreting the profit performance of the enterprise.
Generally we do not focus on what we call ‘vanity metrics’ - such as website visitors, page views, app downloads and social network followers - on the basis that they do not directly impact profit performance.
WCA has developed an outsourced proposition called ‘Integrated Execution Service (IES)’, which ensures that the chosen profitability metrics are embedded into every component of the IES proposition hierarchy, namely:
The overarching company business plan (driven from the Investment Thesis)
The ‘Vital Few’ strategic initiatives (extracted from the company business plan)
The detailed work programs (aligned with the chosen strategic initiatives)
At the core of the IES eco-system is a high impact, low maintenance Project Management Office (PMO) function – which in essence is the ‘nerve centre’ of our entire service delivery platform.
The PMO team monitors continually the performance of the enterprise and reports back to the primary stakeholders (i.e. the on-site operational management team, the BOD/BOC members and - if appropriate – the investor HQ organisation).
Our IES offering reflects the ‘activist and interventionist’ approach that we adopt in managing enterprise investments. We deploy dedicated local resources in Indonesia to act as the on-the-ground representatives of both private equity firms and venture capital companies.
Our rigorous approach to performance reporting is characterised by these two simple, but important guiding principles:
What gets measured gets done!
What can’t be measured can’t be improved!
These guidelines allow us to balance the competing strategic imperatives of accelerating growth and sustained enterprise profitability.
And by pursuing a Path to Profitability strategy, the key stakeholders will develop a finer understanding of the following aspects of the business:
Key sensitivities of the overall financial model
Break-even points and contribution margins
Cost allocation and resourcing decisions
Return on Investment (ROI) calculations and other profitability tests
Alternative scenarios for future profitability performance
At WCA, we are committed to a charter of safeguarding the integrity of your investment thesis throughout the life of the enterprise.
Our single-minded focus is to create extreme value for your investment portfolio and thereby optimising the outcome of your planned exit event.
Our experience indicates that putting in place a clear, realisable Path to Profitability strategy provides a firm foundation for achieving these goals – both for early stage ventures and for established operating companies.
Want to know more? You can read about our customised IES offering. Better yet, please feel free to contact our Indonesia office directly.
Don’t delay, our team of specialists in Jakarta are ready to discuss your requirements today!