Perspective orignially published by Propmodo. Written by John Cimba.
Private equity is often portrayed negatively in the popular media. Most people hear “private equity” and think of leveraged buyouts or companies being stripped for parts. Now PE is being increasingly associated with major bankruptcies like Red Lobster, Joann’s, and Party City.
But there are other kinds of private equity. Growth equity, for example, is a behind-the-scenes powerhouse for companies that are past the startup phase and in need of capital to expand or improve their offerings to make life better for their customers.
Three years ago, I was brought on as CEO of PropertyTek, the parent company of three popular PropTech brands. Who hired me? The PE firms that had recently bought the company. Their goal: find someone who could grow the brands, identify other companies worth buying, and set a path for integration that would make the products better for every customer.
Our PE backing did not lead us down the lean road to bankruptcy. Instead, (smart) private equity investment has helped turbo-charge our ability to innovate and deliver better products.
You’re probably familiar with how venture capital (VC) can help entrepreneurs go from an idea to a viable business. Private equity—especially growth equity—helps established businesses mature. While VC typically involves exchanging money and expert support for a small stake in a startup, PE investments tend to involve acquiring entire companies and providing the support necessary to speed up profitable growth.
Rather than giving us a blank check and some guidance on how to invest it, our PE firm has provided us with strong operational support that has helped us solve problems more creatively and identify new growth opportunities, both of which have made us more profitable.
And here’s the thing: if we’re operating profitable brands, we aren’t going out of business.
That means our software will continue to exist for the customers who depend on it and our team will be around to support those customers. That stands in contrast to what’s on offer from bootstrapped or VC-backed PropTech startups, which have a much higher probability of failing.
Put differently, leaders at PE-backed companies have to think about both their top line performance and their bottom line. If the startup days are all about growing as fast as possible, the PE days are all about growing as fast as possible while staying profitable. The best way to do that is by continually improving your product offerings and delivering them with a superior service model.
And it’s the very nature of PE investment that makes that possible.
Since the PE investment, PropertyTek has been much better equipped to deliver on our customers’ requests. For example, we just released a Zapier integration for one of our apps, something users had been requesting for months. We also created an API to connect the app to other property management software our customers use. And last year, we introduced open API reporting to make it easier to track performance.
All of these came from customer requests that we were happy to fulfill. More importantly, thanks to our PE backing, we were able to not only meet these client needs but also create a systematic approach to gathering, triaging, and addressing future requests.
One manifestation of that approach is our biweekly operations meeting. Every two weeks, I meet with the board to figure out what’s working, what’s not, and what we can do to make things better. In one session a few months ago, we looked at customer churn: how could we get our churn numbers down? One of the PE board members said, “Well, why are people leaving?”
And—I didn’t know. So we started calling customers when they canceled their account, an approach one of the board members had found effective at another company. We asked them why they were leaving, what we had missed, and what we could have done differently. In some cases, they were selling their property and no longer needed our software to help market it. But in other cases, they wanted functionality they didn’t realize we had. We were able to convince some of those folks to stay and we updated our onboarding process to highlight those capabilities better.
Even when we don’t end up retaining the customer, though, their feedback is invaluable. It often makes its way into our product roadmap. And here’s the really crucial thing: we never go more than two weeks without having these game-changing conversations. That consistency is a hallmark of the discipline private equity has brought to our brands.
When you’re in founder mode or startup mode, you’re fighting for survival. You may be trying to grow, but some days, you’re just trying to make it to the next day. It’s a tremendous amount of work but you don’t always have the luxury of making sure that work is in service of long-term product optimization or profitability. That changes once you mature into PE backing. You’ve established the basics of the business, and now you have the space and resources to think about higher-order problems like profitability and strategic product roadmaps.
What’s more, you’re accountable to more parties: a board, your employees, and your customers. Again, private equity investors expect you to grow profitably. The best way to do that is to continually improve the products your customers use. And the best way to do that is via serious operational discipline like adherence to release cadences, continuous prioritization of new features, and developing and refining processes.
The beauty of all this is that it’s a two-way street: as a CEO, I’m accountable to the board, but the board is also super invested (literally) in helping me run the company better. To that end, they’re an incredible source of advice, guidance, expertise, and connections that constantly push us forward.
Our clients, property managers, know better than everyone that staying relevant requires ingenuity and constant maintenance which, of course, requires resources. In the world of PropTech software, private equity, and especially growth equity, is an excellent source of those resources. Many startups creating digital solutions will do so with help from VC. More mature offerings will likely turn to PE. That’s the type of investment that offers both the capital and infrastructure for ongoing, long-term innovation—exactly what the industry needs to keep evolving.
