Want to know how to outgrow fintech rivals? Spend significantly more on sales and marketing.
That’s according to Edison Partners, the growth equity investment firm, which released a list of the seven traits its fastest-growing portfolio companies share. Rounding out the top three: outspending rivals on sales and marketing, customer acquisition and retention and headcount.
“Great growth companies are customer-centric and know how to multi-thread. Fast growers in our portfolio have built up these muscles and are exercising it effectively in how they engage and drive outcomes with all of their ‘customers’ – employees, prospects, customers, partners, investors alike,” said Kelly Ford, partner at Edison Partners. “To be a fast grower, finding and developing talent that share in this mindset is key.”
Edison’s fast grower portfolio consists of companies that are growing at an annual rate of at least 30% and have revenue of between $5 million and more than $50 million. More than half are serving the enterprise market, while 38% are fintechs and 8% are focused on healthcare information technology.
On the sales and marketing front, these companies are spending to acquire more customers or to grow wallet share. The more mature ones have diversified their products and are looking to sell more to their current customer base. Consumer-focused fintechs tend to spend more than their commercial brethren. Edison found it's to the tune of 20% to 30%. On a whole, Edison’s fast grower companies spent 100% more on sales and marketing than the slower growth ones.
These companies are also aggressively investing to improve the customer experience. They realize retaining a customer is equally as important and recruiting one and will spend to achieve that. It's true in the fintech market where new entrants are popping up seemingly every day. Edison Partners found its fast-growing portfolio companies are spending six times more to onboard and retain customers. The outcome: the companies were able to grow annual recurring revenue with existing accounts by 35%, retained revenue at 17% higher rates and achieved a net dollar retention of 102%.
They also had Net Promoter Scores that were 40 points higher than slower growth companies. The Net Promoter Score is an index ranging from -100 to 100 that shows the willingness of customers to recommend a product or service. Fintechs with high Net Promoter Scores tends to be rewarded by investors. Brex, the provider of a credit card for startups, cited its high Net Promoter Score as one of the reasons it has a valuation that as of earlier this year stood at more than $1 billion.
On the hiring side, the fast growers outpace the slower growers by a large rate. Fast growers increased their headcount by 22% and derived three times more revenue per employee than the slower growth companies. They also get accolades for building corporate cultures that extol discipline, engagement and performance management. They are quick to make difficult personnel decisions, enabling them to retain employees at a better rate. “A big driver of this is corporate culture. Employees are super engaged. There’s organizational transparency and cross-functional ownership of business objectives and financial performance. Talent and performance management is a focus, emphasizing the hiring of A-players and swiftly exiting poor performers,” said Ford.
There's a price to pay for their aggressive pursuit of growth. The majority of the fast-growing startups had losses that were higher than their slower growth peers. They do have gross margins that are expanding more efficiently. And pricing models that are becoming more sophisticated at an earlier stage of growth. They are “finding ways to promote and capture value through multiple price levers, which ultimately drove 75% higher deal sizes for fast growers, vs. slower ones,” Ford said. “Like in the public markets, growth tends to be prioritized, as increases in growth rates tend to increase company value by twice as much as improving EBITDA margin.”