Outsiders often think private equity and venture capital are the same thing. There are actually a number of differences, but similarities as well. So this study of venture capital firms caught my eye as something those of us in private equity could learn from. (Are ‘Platform’ Teams The Key To VC Success In Down Markets? | Cruchbase). It finds that the use of “platform” teams by venture capital firms has been steadily growing since about 2010.
Platform teams combine people with non-investment-related expertise such as marketing, community building or content development. A firm’s platform team helps identify and drive operational improvements not only at the firm but also in its portfolio companies.
Per the article, VC firms which use platform teams are outperforming. Specifically, firms with “significant” platform teams outperformed those with “moderate” teams, which outperformed those with no such teams. And the improvement was significant in both good times (2010-2019, when overall IRR was 29.4%) and bad (2000-2009, when overall IRR was only 6.1%).
What lesson can private equity firms take from this? Like venture capital, the private equity world has been cooling off lately. As interest rates rise, fewer deals are being done and exits are being delayed. Without a rising tide to lift all boats, operational improvements, especially in portfolio companies, are increasingly crucial to fund performance, something I wrote about in a past post. (How Private Equity Firms Generate Returns | A Simple Model) And platform teams are all about operational improvement.
But that doesn’t mean putting together a platform team is simple. As Dan Kozikowski explains in a different article, “The question isn’t whether Platform works. It’s whether your Platform is working toward the right things.” (Why The Best VC Platform Teams Are Focused on Outcomes | by Dan Kozikowski | Jul, 2023 | Medium) In other words, like anything else in the investing world, platform has to be done thoughtfully and purposefully to be effective. And, as the VC Platform study noted, the right focus areas can vary substantially by fund size and strategy, with smaller funds seeing greater impact from focusing on pre-investment activities (e.g., marketing, community outreach, etc.) whereas larger funds see greater impact from focusing on post-investment activities (e.g., talent development, acquisitions, etc.).
It’s exactly the same for private equity. To be effective, expertise such as that found in a platform team must align with the firm’s overall strategy. In the coming years, this may be a major separator of wheat from chaff among private equity firms.