What does a business need to succeed?
There is no single recipe for business success (if there was, the job of a Private Equity investor would be much easier!). However over 14 years of working together at Key Capital Partners we have identified some common characteristics that are usually present in the successful businesses that we have backed.
The first is the market in which the Company operates. Is it large enough to accommodate the business's growth ambitions? Getting to £50m of sales in a £1 billion market is far easier that it is in a £100m million market. Also is it growing? Market growth is like a tailwind for a cyclist – it doesn’t mean that you don’t have to pedal hard to go fast, but it does mean that you’ll get more speed for that effort.
The second ingredient is the model employed. By this we mean how the Company delivers its product or service and why customers choose to buy from the business instead of its competitors. Examples could be being the quality leader in a market, being the leading online provider in the sector or having a distinct culture which generates superior service. We actively seek models that can be scaled up to deliver growth, but which cannot be easily replicated by the competition. This is probably the most difficult ingredient to find but potentially the one that can create most value.
The third ingredient is management. The leadership of a business is vital to its success. The senior team needs to have a vision of what the business is going to become and a plan as to how it gets there. While being focussed on this plan they also need to be flexible enough to react to changing circumstances and new opportunities. Finally, and equally importantly, they need to have the respect of customers and employees.
The final ingredient is the most capricious – luck. A business can find itself in the right place at the right time (a good recent example would be Zoom) or completely exposed (e.g. Pret-a-Manger which faces “significant operating losses”) through no fault of its own. Unfortunately, we’ve yet to develop a method for assessing how lucky a business will be!
Generally speaking, you do not need all four of these ingredients to be successful but if you can bring at least two to three of these together you have a better than average chance of building a profitable, valuable and growing business. If you can build a business with a strong team, in a large growing market and a model that is differentiated from the competition then luck will probably follow. As one senior private equity investor said to me a long time ago, being a lucky investor is better than being a good investor!