Private Equity software investments often need a catalyst for increasing enterprise value. Those familiar with the “Rule of 40” know that for any SaaS business to be attractive for acquisition, operators must look at increasing revenue growth percentage plus profit percentage to reach a total of 40% or greater. This is easier said than done and it requires a deliberate strategy to balance the growth and profitability on a consistent basis. Can Generative AI (GenAI) be a catalyst that can have a significant impact on the outcome of turning over acquired assets for higher multiples? With all the hype that is going around GenAI, the obvious answer would be – “Of Course Yes!.” Then the question becomes, why has GenAI not become an important conversation in board meetings? If getting to “Rule of 40” is one of the most important metrics for PE firms, why is GenAI not yet identified as a strategic priority? Let’s explore this further.
The Inertia: The glass seems half empty.
The narratives that one often hears on challenges of AI adoption can sound realistic in the beginning. Some of the big concerns for SaaS businesses around putting GenAI in the roadmap are no different than what we have observed during previous innovation cycles when Internet or Cloud adoption was in question. Let’s analyze if it is any different now. Here’s what we hear:
“Large language models are trained on data. Data Security and Privacy of our enterprise data is paramount. Until that is resolved, we don’t want to embark on this journey.”
“Training private local models is cost prohibitive for large datasets as it requires investments in expensive GPU’s and training the models with reinforcement learning from human feedback (RLHF) can become resource intensive”.
“It is too early as the technology is evolving. We will wait for the tech to stabilize. We will embark on a ride once GenAI stops hallucinating and technology is less expensive.”
“We have other priorities for the business. Resources are tied up on important projects. Finding capacity to invest in a GenAI initiative is impossible.”
“Our customers are happy with the core functionality and they are not asking for GenAI features in the product. So this is not a high priority in the product backlog.”
The list can be long, but if you believe in the above statements, the glass looks half empty. While some of these concerns may be rooted in the reality of the current state of business and we are perhaps at that moment in the beginning of the AI hype cycle. Thinking out of the box is necessary as we deal with some uncertain economic conditions.
2024 – Year of efficiency with AI
Businesses that are closest to the technology i.e. Google, Microsoft, Amazon, IBM, SAP, and Salesforce have already recognized that the innovations in GenAI are no longer experiments and proof of concepts. Copilots are delivering tangible business benefits by automating operations and augmenting human capital. The recent announcement on headcount reduction, freeze and reallocations shouldn’t come as a surprise. Meta just recently announced their plans for investments in 350,000 Nvidia H100 GPU’s by the end of 2024. Data security and privacy concerns are now addressed as part of core GenAI offerings from the large tech firms. These are a clear indication that this innovation is ready for prime time to drive efficiencies in all aspects of the business – sales, marketing, manufacturing, inventory, finance, product development and many business functions. Additionally, the margin growth in these companies have exploded because of growth in new offerings while adding efficiencies to drive down costs. Customers are now starting to open their wallets for high-value GenAI product offerings that can demonstrate business value. What can Private Equity firms do to catch this wave to help them maximize on the cardinal “Rule of 40”?
A deliberate strategy: Attention is all you need.
Ironically, the transformer paper "Attention is all you need" that sparked the GenAI innovation in the first place may be the right place to get some inspiration for having a deliberate strategy for GenAI adoption with a sole focus on the two metrics that matter – revenue growth rate and margin growth. Profitable investment firms have done a great job at holding the management team of their SaaS companies accountable at the board meetings on these fundamental metrics. When the goal is maximization of these two metrics, it becomes important to identify – how are we improving revenue growth rates and margins? What initiatives are in play to showcase a positive trend in these numbers? Here’s a framework that might help PE firms pay attention to the initiatives in GenAI that can drive the right outcomes.
1. AI Modernization in every part of the business
Having a concrete plan that gives the team the confidence to embark on new AI projects. Setting the right tone at the board level is important to drive the urgency. It is important to understand the potential of the impact that GenAI can have on the overall business. This should include GenAI adoption mandates for operations, customer success, product and technology groups. There is more to benefit from GenAI in various business functions besides product innovation. The efficiencies that the big technology firms have started to see will surface in sales, marketing, operations, finance etc. Automation to reduce task, augmentation to human tasks like emails, call transcription, content generation, copilots for sales, marketing, customer support and product development functions are easy target areas to drive efficiency, which has a direct impact on the “Rule of 40”.
2. Innovation Agenda in Product Roadmap
Thinking hard on how GenAI can significantly drive incremental revenue for the product by adding value to customers will help the discovery of new revenue generating offerings. As a technology provider, your company needs to be in the driver’s seat to bring product features that improve productivity, drive efficiencies and help improve their margins. It doesn’t have to be everything at once, but incremental innovation that delivers value and a perception that company is delivering on the promise of AI is of utmost importance. New product introductions are key drivers for revenue growth.
3. Measure what matters
While having a mandate on GenAI initiatives is important, measuring the effectiveness of such initiatives in equally important. Understanding how the use of GenAI tools in Sales and Marketing is helping to reduce costs with automation is an important metric to measure. Understanding the impact of using Copilots in productivity of developers building products is key. Use of GenAI capabilities in automating responses for customer support questions by unleashing the knowledge base and training material is another opportunity to drive efficiencies. Leveraging GenAI tools will have a positive impact on customer satisfaction, reduce churn and improve product quality. Measuring the progress regularly with proper metrics will help not only provide an ROI analysis on the investments made here, but also help measure how this has impacted revenue growth rates and profit margin growth rates.
At Wingspan, we believe that Private Equity firms have now a unique opportunity to get a tailwind effect with GenAI. We have formulated a deliberate strategy that first looks at leveraging the technology to help increase the consumption of GenAI in various business functions. With deep expertise in the Hyper scaler ecosystem (Amazon and Azure), we understand the right options to include in a technical architectures for product innovation. We have hands-on technical expertise for the use of various Large & Small Language Models. The open-source models like LLAMA from Meta, Mistral and various options on Huggingface platform present a diverse range of options that need to be tailored for specific use cases with strategies for prompt engineering, fine-tuning, data prep for training models and reinforcement learning with human feedback. We are in the business of serving the Private Equity firms with our expertise as experienced operators in Hyper scalers and SaaS businesses. We have a passion for driving the benefits of cloud technology with GenAI to help with accelerated outcomes for PE firms. We believe in our strategy so much that we participate in risk sharing with equity as a committed partner for PE outcomes.
Connect with us at Wingspan to explore how how we can collaborate to help you drive successful outcomes.
コメント