More and more deal teams are tapping into sector specialization to source new opportunities and create value in areas others may not have identified. This approach makes sense. Sector investing has proven to be a successful strategy to spur further growth and generate above-market returns.
However, investors’ biggest mistake when choosing sectors is assuming that strong market growth will lead to significant returns. While that can certainly be the case for more predictable sectors, like software or healthcare, entering a new market is about more than tapping what’s hot. It’s about leveraging the right data to determine where your firm can outsmart the competition and grow with confidence.
Identifying your firm’s competitive opportunities, and developing a sector-specific strategy, comes down to asking (and answering) three questions. Keep reading as we dive in.
Three Questions to Identify Your Firms’ Competitive Advantage
Are we in the right sectors?
When defining a sector strategy, many firms kick things off by asking, “Is this the right place for us to invest?” While that’s a great place to start, an even better question is, “Are we in the right sector to win?”
Think hard on that question, and look at your data for clues t where you have a “right to win.” In other words, what’s working to your advantage now, and what opportunities have been most successful?
Once you have a clear picture of your firm’s winning areas, it’s time to ask another question: “What would it take for your firm to be world-recognized in your ‘right to win’ sector(s)?” Use these questions to guide a sector strategy to get your firm to that place, including key milestones to track along the way.
Are we in the flow?
Deal flow is critical to a firm’s success, especially when putting capital to work. And, thanks to rapid digitization, PEs have access to internal and external data at the click of a button. This ease of access to information often leads firms to believe they’re as informed as they can be. But in reality, this is rarely the case.
Understanding deal flow within a sector, and its subsectors, requires additional data on critical areas like the number of deals closed, deal size, and even the firms and people involved. This presents a challenge for firms relying on traditional M&A databases since that data only captures publicly disclosed information, leading to gaps and room for interpretation.
Thankfully, richer data sets are emerging to arm firms with deeper insight into areas such as deal size. To use this information to your advantage, identify the gaps in your target sectors and outline the data you’ll need to fill in the story. Were there certain deals that should have been on your radar but weren’t? Ask “why?”, and begin building your sector-specific networks and relationships to raise your profile.
How focused should our strategy be?
As we alluded to, until recently, making “right to win” decisions based on data was chock-full of gaps. PEs have historically had to rely on combining data with a bit of guesswork to inform any strategy. It’s no wonder why one of the biggest challenges any private equity firm faces when building a sector strategy is knowing when to say “no.”
However, with richer data comes new insights to help organizations spot trends earlier and partner with the right teams. By being honest with yourselves in deciding on how many sectors to focus on, and how much potential is in your existing strategy, knowing which opportunities to say “no” to becomes crystal clear.
Software to Streamline Your Sector Strategy
The most effective sector strategies combine deep data sets and historic firm performance. To compile all of that information in one place, you need software designed with PE/VCs in mind. That’s where Altvia can help.
From streamlining business intelligence data, to providing actionable insights throughout your deal flow, Altvia’s centralized platform of powerful solutions can help streamline your sector strategy.
To learn how Altvia can fit in with your sector strategy, specifically, start a conversation with our team to discuss how you operate and the functional improvements you’d like to make.