There are the five stages of grief: denial, anger, bargaining., depression, and acceptance. Similarly, many middle market PE investors, too, go through predictable stages with their portfolio. There’s the excitement from closing the deal, the focus from enacting the thesis, the anxiety of waiting for gains to play out and the elation of a successful exit. But recently, many investors are going through an all new emotional stage, one they haven’t experienced in quite a while.
Since starting Stage18 in the Spring, we have been very active in the market, talking to a wide range of middle market companies and their investors. Certain common themes have emerged, providing a clear perspective on where companies are facing challenges. Here’s a summary of what we’ve learned.
Merger Hangover
For many companies, the era of free money, culminating in 2020 and 2021, led to acquisitions which have not gone as planned. Overpriced purchases, unclear strategic objectives and a lack of post-merger integration execution have left many companies hobbled with assets that have diluted their strategic focus and created ongoing integration challenges. While many businesses have worked through these issues, others remain burdened with too many poorly integrated products and inconsistent go-to-market strategies that are creating confusion for their clients.
In our experience solid planning before the deal closes goes a long way in mitigating risks down the road; however many companies in this situation are in need of a fresh set of eyes from experienced operators and hands-on resources to deliver a pivot to growth.
Marketing in the Hot Seat
A highly successful Fortune 10 CMO recently reminded us that, “marketing is the last one to get credit, and the first one to take the blame.” So true. Now, more than ever, the Chief Marketing Officer is one of the hardest executive seats to fill and keep filled. We are hearing CEOs and investors express more than normal frustration with the marketing overall performance against unreasonable expectations. Marketing has become more metrics driven while the effectiveness of many tried and true vehicles (content marketing and digital advertising in particular) has declined, meaning that demand generation shortfalls are immediately visible to the board.
Despite all of this, marketing remains a vital function for driving revenue growth. Marketing has a broad spectrum of obligations, and it’s critical to find candidates that can also grow with the company as needs evolve, not just solve a tactical issue in the short term. Alignment on goals between the CMO and management, as well as with other functional areas such as sales and product, is critical to establish up front..
Organic Growth Required
With the era of easy money past us, growth through acquisition is harder to justify. To grow at rates which result in a meaningful exit, companies need to redouble their efforts around organic growth and well executed go-to-market plans. In our discussions, we continuously hear that sales execution remains a challenge, especially as clients become more discerning in how they are spending money. While some companies have double-downed on large, internal sales organizations dominated by cost efficient SDRs, other companies are looking to achieve scale through channel partnerships with fewer, but more committed partners.
The approach taken by companies seems to be determined by their market dynamics, company culture and balance sheet. One consistent trend is a greater emphasis on upselling to existing clients as logo expansion becomes harder. Regardless of which approach is best for your organization, having the right KPIs in place to guide the business is critical.
In conclusion, many middle market investors and their CEOs are learning to deal with all new challenges to achieve growth and successful exits. Getting help navigate through some of the biggest challenges is critical to experiencing that thrill of a profitable exit.