While private equity may be a relatively young part of the investment industry, its participants typically are not. In the digital age – which is now – this is problematic.
Private equity firms are there to bring value-creating transformation to businesses, whether that means reviving and reshaping established players or positioning promising companies for growth.
Effecting this sort of change requires a thorough understanding of the business’s customer base, but this is something undergoing dramatic change.
The adult population in the UK is currently undergoing a generational transition; we are witnessing the demise of the traditional (pre-digital) consumer and the ascendance of “digital natives”, members of a generation that has grown up knowing only a digitally connected world. Sandwiched between these two generations are the “digital converts”: those who are adapting as adults to life in the digital age.
Right now, digital converts constitute the largest portion of the UK active adult population. By 2020, they will be overtaken by digital natives.
Small examples of generational differences abound in day-to-day life. I see it when I take my children for a day out in London. By the time we have returned home they have documented the day in beautifully sound-tracked and edited video using free Lego-blocks from the internet that I didn’t know existed.
Understanding the wants and needs of digital native consumers will only become more important in value creation. I addressed some of these issues at a recent event – the Financial Times’ two-day FT Innovate conference in London – and you can see the talk in full here.
I highlighted how we should think differently about some of the disruptive businesses with which we are all familiar; how the world in beta – which is how we are describing the rapidly changing digital age – is warping familiar business models and creating new ones.
A prime example would be the ‘taxi-like-but-not-quite’ service Uber. What I like about Uber is that it is not just about taxis. It is about making units of assets identifiable, sellable and auctionable, a model that can equally be applied to, for example, a logistics business accessing a fleet of lorries.
Anticipating and meeting the demands of the digital native
There are many things that private equity firms can and should be doing to anticipate and meet the demands of the digital native – both in terms of the portfolio companies they back and their own organisations. The first and easiest move is to foster diversity.
In this digital age you need diversity on a new level. Greater diversity has always correlated to better performance, but in the digital age the need is even more profound. The digital talent of organisations is held in the brains and hearts of young people, often with no budgetary or hierarchical power. Private equity firms should think about how to get these digital natives to contribute both within their portfolio companies and in their own firms. Some companies, for example, encourage digital natives to play an active role in their board meetings.
Digital Natives are also incredibly important for another reason. In today's digital age many things are changing, one of which is Information Technology (IT). IT is becoming much more agile and modular, and 'IT Lego blocks" will become more available and often for free. This creates a world with two types of software developers: a "traditional type" that writes code not too dissimilarly from 10 or 20 years ago, and that requires all the usual deep software development skills.
Secondly there's a new "drag-and-drop type" who creates code not by writing it, but by assembling a visual drag-and-drop block style. We believe that this second type of software developer will be mainly digital natives, and will have two important features that makes them attractive: 1) they will probably cost less than the "deeper" software developers; 2) they will have a better understanding of the end customer, and arguably a sharper business acumen.
One more reason to really identify the high-potential digital natives in your business and give them degrees of freedom so that their "slices of genius" can emerge and flourish. Basically identifying and empowering your own digital natives can give your business more agility. Why is this a big deal ?
Because in a world in which adapting to the future while the future happens is more important than predicting the future, agility is a great source of competitive advantage.
The equation is simple: Digital Natives = Greater Agility = Increased Competitive Advantage.
If you would like to discuss other ways in which either your firm or your portfolio companies can shape their business around the emerging digital natives, please do get in touch.