We talk a lot about Process, Product and People.
In the venture world, investors look at these three buckets in this order:
- People
- Product
- Process
If you don’t have great people and at least a good product idea, who cares about process?
It’s different when you’re buying an established company. The order looks more like this:
- Process
- People
- Product
It seems absurd to value process above people. After all, every great business is built by great people, right? Absolutely, and if we could maybe we’d number them 1a and 1b. However, from a risk perspective, there is as much or more risk introduced into a transaction with a company that has little to no process than you might realize. Here’s why.
People Hate Change.
It’s almost certain that people will leave during or soon after the transaction. It’s not the same company anymore, and it’s human nature to poke your head up and look around. Plus, some of the people were there just because of the previous founder. Change scares people, particularly developers.
Good processes help to insulate the business from key personnel turnover. The business will still feel the pain, for sure, but it will be significantly less pain.
Process over People?
Process affects EVERYTHING in the new ownership’s ability to deliver the same product to the same customers for as long as required to get the new owners settled. Anything that only one person knows (and in these companies that’s typically a lot) increases the risk in the company’s ability to operate as people leave.
Furthermore, lack of process means that you can’t drop someone new into the chair and have them be productive immediately. Every minute spent learning something the long way is a minute not spent serving the customer or building the next feature.
Last, bad processes almost always induce new bugs into the product, which frustrate customers and increases churn. Churn eventually kills the business.
How Do I Know?
As with anything, the devil is in the details, but when you’re first looking at a company here’s a few high level questions you can ask to get a quick assessment of the level of process within the company:
- What’s your process for determining what features make it into the product?
- When was the last time you hired someone new into the development group and how long did it take them to become productive?
- How do your customers communicate with you about product requests or bugs?
If you hear things like “Jim handles all of our customer service” or “We haven’t hired anyone in five years and I don’t really remember”, these are signs of company culture that will generally persist throughout the organization.
None of this is necessarily fatal, but wouldn’t you rather know beforehand that the business can survive a few key people leaving?
If you’re an investor or entrepreneur looking to acquire a software business, let us work alongside you as your trusted partner to throughout the deal lifecycle to properly assess not only any risks but the potential as well.