Across more than $8.5 billion of transaction diligence, product strategy was found as a leading indicator of future performance.
Based on our work transforming hundreds of companies and supporting billions of dollars in software transactions, we have found that one of the most common barriers to value creation is a deficient product strategy. If you’ve spent time in software, you are likely to have observed the same pattern as well: a lack of defined strategy and broadly perceived optionality leads to management teams that chase shiny objects, struggle with indecision, or take a reactive/ad-hoc approach to execution.
For companies with $15M or more in revenue, a superior product strategy represents up to 20% lift in CAGR.
The lack of a clear and defined strategy can have a major impact on growth. In fact, we have found that for companies with $15M or more in revenue, the difference between an underdeveloped strategy and a mature strategy is correlated with a 15–20% difference in CAGR, on average. However, despite the critical nature of product strategy, less than 35% of companies that Thinktiv evaluates can demonstrate a mature approach to setting guiding principles, evaluating investment tradeoffs, and road-mapping. The potentially large impact of poor product strategy means it is critical that issues be identified during diligence, and remediated immediately following a transaction.
So how can you assess whether a target investment has a good or bad product strategy? Our extensive experience has allowed us to identify three primary pillars required for a successful product strategy:
- A set of guiding principles or long-term vision that is compelling in the context of the market.
- An approach to investment tradeoffs that matches investment to value and reduces the risk of those tradeoffs.
- A product roadmap that is clear, measurable, and aims development towards value creation bounded by the guiding principles.
Identifying Issues
If you are with a PE fund evaluating an investment, the following heuristics can help test the maturity of your target’s product strategy:
Guiding Principles:
All of the senior leaders at the target, and ideally every employee in the company, should be able to describe the mission of the business/product, and the high-level goals for the next 12–24 months. If the organization is not aligned behind clear guiding principles, symptoms can include:
- initiatives that the target’s leadership can’t tie to a clear purpose or demonstrable ROI.
- frustrated or apathetic individuals and teams across the company.
Strong guiding principles will be based on a strong vision, aligned with market trends, and articulated the same way by everyone.
To check for alignment across the target, ask a senior-most product leader to describe the product’s mission, then ask an individual contributor in Marketing, Sales, Accounting, and HR. All answers should be closely aligned and each person should be able to describe why the product does what it does.
Investment Tradeoffs:
Product leaders should be able to clearly articulate the framework they use to decide what to invest in, and what NOT to invest in. If the target company does not have a strong investment framework, it can result in:
- the Executive Team spending too much time discussing investment possibilities, without gaining conviction on a decision.
- a lack of clarity from company leadership of how investment success will be measured.
- the target repeatedly delaying critical investments that block progress on multiple fronts.
A strong product investment framework will consider items like value to customers, opportunity cost, execution risk, cost of maintenance, and growth opportunities unlocked by a feature.
As a quick check to see how opportunity cost is considered, ask a product manager to pull a feature that’s being worked on and explain what other items were considered, and why they weren’t prioritized. Is there a clear, logical explanation?
Product Roadmap:
The product roadmap should be detailed and updated on a regular basis. The roadmap should also allow the product team to ladder individual sprint initiatives up to overarching investment themes. Ideally, the roadmap is updated any time there is a material change in plan, but it should be no more than a quarter old, at most. A poorly maintained roadmap can result in:
- the wrong initiatives being undertaken by the company, wasting resources.
- difficulty in communication between individual contributors and leaders at the target.
- difficulty in communicating plans to prospects, resulting in lost sales.
A well-defined product roadmap will account for things like the development capacity/velocity of the team, how the product milestones align to key business milestones, and how individual items ladder up to the guiding principles of the strategy.
To test for alignment to the guiding principles, ask a senior product leader to pull a feature that’s being worked on in the current development sprint/release. Have him or her describe to you how that feature ladders up to the product initiative/epic it belongs to, and how that initiative/epic ladders up to the overall mission of the business. Ask a mid-level product manager and an individual contributor to do the same. This should be a relatively easy effort for any product team member.
Codify Your Product Diligence
For funds contemplating an investment or executives charting a path to growth, a winning product strategy requires clear guiding principles, a well-defined investment framework, and a robust roadmap. Thankfully, there are tested ways to set these product strategy standards along with other product development best practices that maximize the chances of success.
Test the maturity of your product diligence ⇢
Thinktiv’s one-minute digital assessment will help you understand where product strategy may impact your current investment’s risk.
We have helped hundreds of software companies plan and build winning products in a variety of industries and growth stages. This experience has allowed us to build robust, codified approaches to investment diligence. For every business we look at, we start by evaluating and aligning the product strategy.
If you’d like to discuss our approaches or a specific challenge you are facing, contact us to set up a consultation. You can learn more about our Advisory Practice here.
Thanks to Lander Coronado for authoring, and to Kevin Callahan, Justin Petro, & AJ Watson for edits and commentary.
Thinktiv is a consulting firm headquartered in Austin, Texas. We partner with private equity sponsors and executive teams to transform software and tech-enabled companies into the most valuable versions of themselves. Established in 2005, we’re an expert team of business operators and software technology pioneers that uniquely weave customer & product experience, corporate strategy, and transaction advisory into our approach which we call Integrated Value Creation. Let’s connect on Twitter or LinkedIn or work with us to create more value.
