Growth and Feedback Loops
One of our portfolio companies recently completed our second tack-on acquisition, and we are hunting for more. That hunting, however, is not broadly across our entire portfolio, but only at companies for which tack-ons make sense. The reason that’s so is because growth is risk and if we try to do a tack-on at a company that is not prepared for it, then the complexities associated with finding, evaluating, closing, and then integrating an entirely new, different, and potentially messier operation might derail the core business.
In recognition of that, we developed a simple checklist to help us gauge when we might pursue tack-on acquisitions on behalf of one of our portfolio companies. For us, the company needs to have:
Demonstrated stable business performance;
While generating timely and accurate financial statements;
With trusted leadership in place that is likely to remain in place; and
Resources available to oversee integration.
Our view is that absent these characteristics, a business that makes a tack-on acquisition is:
Unlikely to know what to do with it;
Unable to manage it; and
Without any idea how it’s going (or, worse, liable to have hallucinations).
And that, for us, is a recipe for disaster.
Recently, we’ve started putting the many business models that exist in this world into two buckets: fast feedback loop and slow feedback loop, with a variety of factors determining the pace of the feedback loop of a business. In other words, if you make, sell, get paid for, and watch your customer consume your product all on the same day, that’s a fast feedback loop. If that happens over a period of years, on the other hand, that’s a slow feedback loop.
Our experience is that slow feedback loop business models are dangerous because you can’t have a precise idea of how you’re doing at any given point in time. You know how you’ve done and how you might expect to do in the future, but things could go off the rails at any time without you being aware that they have for quite a while.
To bring this back to tack-on investments, the point of our checklist is to make sure that any of our businesses that do one have the conditions in place to make sure that the feedback we get on the deal is fast. Because if it’s not working we want to know that as soon as possible in order to right the course and if it is, we want to know that too so we can try to do another one.
Because while organic growth is great, inorganic growth, done right, is a cheat code.
-Tim
