Diligence done, but the painting ain’t complete!
18 May 2017
Financial or strategic investors, especially ones who make long-term bets, have a long road ahead in an investment. When they start out, they are a bit like a painter trying to create a masterpiece. The investor and the painter are quite alike in several respects – both bet on a vision, both don’t know how the outcome will be when the painting is complete (or investment is exited) and both have to persevere and go through several iterations of course-correction to get the right effect.
One thing that simplifies the investor’s job compared to a painter’s is that the entrepreneur they bet on has to do the painting for them. Interestingly, this is often also the most complicated aspect of ‘creating their masterpiece’.
Investors often try to identify the ‘best painters’ who have the ‘best vision’. And they look at the previous paintings to forecast how could the current outcome will be. To effect this, they conduct long-drawn, strenuous due diligence multiple aspects before they bet on a team of entrepreneurs or management personnel.
"Masterpieces take time and an incredible amount of tenacity and perseverance to create. And astute ‘alpha-generating’ investors know it."
In my quest to learn from non-related topics, I came across an interesting blog on the 7 steps a painter must take to create a beautiful painting. I thought that there is an inspiration to be drawn from there for ‘patient’ financial investors like Private Equity funds, long hedge funds and even corporates with an inorganic approach to growth.
- Step 1: Study your subject. You got past that in the due diligence phase, didn’t you?
- Step 2: Underpaint the canvas. Painting freely without worrying about ‘free white spaces’ is an incredible feeling and helps create a good background. Setting the right KPIs for the operators of the business is an important aspect of painting a value-creating backdrop. Level-setting the You will often not see the effects of this in the final painting directly but this really is the foundation.
- Step 3: Identify the big shapes. Identifying the top 3-5 value levers in a deal and aligning the management team is the most important thing an investor or strategic acquirer can do. Stay razor-focused on these. Burn more than 80% of your and investee company’s calories in getting these right. Other things can fail but these 3-5 value levers should stay on course.
"Success or failure of a deal, or an initiative, or acquisition is pretty much decided in the first 10-15% of the run. If you don’t set it up well, finishing well will be 10 times as hard."
- Step 4: Squint and study the value. Keep squinting – see the dark and light colors – if you can see the values you wanted to see, you’ve got the painting. Investors generally seek to report from the companies but that’s not so helpful. Creating dashboards that help monitor the top value levers and if possible, automating them so that they draw the data from the ground can make this easy and will make your engagement with the portfolio company a lot sharper.
- Step 5: The Color Block-in. Keep the paint thin. Don’t block the burnt underpaint (Step 2). Smart investors drive a fine balance between how much they engage with the portfolio company. Preserving the spirit of the company, energy of the founders/ entrepreneurs and overall motions in the investee company is important. The brush strokes from the investor should enhance the value, not seek to re-do everything (unless it is a turnaround)
- Step 6: Adjust colors and make them sing. Look at the painting holistically. Don’t get stuck in one place. Bolster areas of strengths and dampen weakness areas. Get specialist, pointed expertise. Investors in minority-deal markets often rue a lack of influence. An open conversation on the painting and the desire to enhance the overall value is a more constructive discussion to have than trying to ‘cover-up’ the weaknesses.
- Step 7: Finish the painting (by knowing when to stop). Do not finish the painting but know a good time to stop. Resist the temptation to fix everything. Give the finishing touches but let it bother you. There is always more to do but this is NOT when you scrub the painting. As long as the exit thesis is broadly in line with the value levers (Step 3) and the painter (the entrepreneur, founder, and the management team) is feeling confident enough for his next painting, step back and admire!
You hold the kit of brushes – go ahead, equip the painter and create the masterpiece! Now and again.
If you want to read the original blog where the inspiration for this blog was drawn from, please read here (inspired by a book by brian Simon – 7 steps to a successful painting)
Authored by (at the time of writing):
Madhur Singhal, Leader, Investment Advisory Practice
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