Revenue growth is the lever that compounds. Get it right and operational leverage amplifies every pound of incremental income into outsized EBITDA. Get it wrong and no amount of cost discipline makes up the difference.
Revenue growth anchors any private equity story and sits at the heart of value creation across the investment lifecycle. Operational leverage amplifies it: a business with high fixed costs converts incremental revenue to EBITDA at a rate that dwarfs what cost reduction can deliver alone. Buyers pay for growth so multiple expansion amplifies it further. And it takes time to build revenue, so revenue initiatives need to start early. Start in year two and you’re already behind.
The three cases below each illustrate different routes to revenue growth. Buy-and-build within the existing domain, buying capability to build adjacent revenue and a revenue model pivot. Case studies in different sectors but with a consistent underlying logic. Rank the opportunities by size and certainty, stress-test for margin, and move.
Buy-and-Build in pre-school TV
Our first case is a PE-backed children’s entertainment company skilled in producing branded content, distributing it through broadcasters, and monetising the resulting audience through licensing from greeting cards to theme park rides, but mainly toys. Any new development property required 18 months to be greenlight-ready and a further 24 months to reach the screen, with significant capital committed at each stage and no certainty of audience traction at the end of it. That timeline and risk profile did not work in PE, where we needed proven brands to plug into our licensing machine.
Our most compelling opportunity was close to home. We co-owned our third brand fifty-fifty with a regional broadcaster and had de-prioritised further production because we were doing all the work for half the returns. Buying out our partner could double our returns, and we could potentially limit our programming investment by changing the production model to amplify the returns. But how receptive would our partner be, given that selling assets to release cash did not further their goals.
The answer emerged through careful courtship. Their primary concern turned out not to be price. They wanted a commitment to new content and assurance that the brand would retain its regional personality, both easy to deliver. New content was central to our acquisition plan. On personality, we gave them an executive producer credit and a formal process for editorial notes, without relinquishing creative control. Price was not the obstacle that either side had expected.
With new series costing £4m each, we identified a 30% cost saving by moving from stop-motion to computer-generated animation, retaining direction and asset creation on-shore, while pushing the labour-intensive animation off-shore. This single move offset most of our co-owner’s former contribution to productions. In practice, we were investing around 40% more per episode in absolute terms, but our share of licensing income had doubled. The maths was straightforward. We could also reboot licensing activity immediately, based on the current content library and a new commitment to licensees that future series were already in production. The investment delivered returns ahead of our 40% IRR hurdle.
Buy-and-build also required discipline. We were pitched a German IP portfolio that looked promising until closer analysis revealed that the vendor had already banked the majority of future broadcast income through long-term deals. With a 20-year-old content library, ancillary licensing would require new series, and an updated look and style guide, so the brand would generate no licensing income for at least two years. The selling price, combined with the required content investment, made the numbers unworkable. We passed on the deal.
We also looked at a girl-skewed early reader franchise with a strong global publishing footprint and untapped potential in episodic television and ancillary licensing. Publishing royalties and a pilot ancillary licensing programme, built on the existing book audience, could deliver acceptable near-term returns. A significant revenue bump once TV was in production established a potential growth story for our next owner. We made the acquisition.
Buy-and-builds are a microcosm of the investment lifecycle. The deals you pass on are as important as the deals you execute.
Adjacent Markets: data monetisation in grocery
One of the more unusual corporate development transactions I have worked on monetised “big data” in a major grocer before that term was even coined. We identified an opportunity to convert a latent data asset into a substantial new revenue stream, creating significant shareholder value.
This was an era when most retailers could only retain a week of ITEM by STORE by TRANSACTION data. Beyond one week, all they could retain or analyse was at ITEM by STORE granularity. But we were working with a service provider that could retain the transaction data and also link transactions to specific customers through our store loyalty card, for which they provided all back-end services. They did this on a bank of desktop PCs and it was a huge technical achievement, enabling us to pinpoint promotions to each individual customer.
The service company had signed an exclusivity with us and we were their dominant client. They were cast as a data processor and had no rights to use the data. Neither party was fully capturing the value latent in their relationship.
Taking a majority stake would align incentives and unlock that value in two directions. It would be worth our while not just to release them from the exclusivity but to help them pitch a turnkey loyalty service to other retailers. And it would be worth our while to offer them a licence to monetise our loyalty card data as a unique repository for empirical market research, using their exceptional capability in data analytics. For example, they could define “chocoholics” and map chocoholic purchasing behaviour to brands and product types, while correlating this with TV advertising activity.
We bought out the service provider’s seed investor for cash, then granted the founders a data licence and a release from exclusivity in return for a new equity issue, taking us to majority ownership.
Over the following years they expanded into seventeen countries, including delivering a turnkey loyalty programme for a major US grocer. Press reports valued the business at around £2 billion, valuing our stake well in excess of 50x our original investment. The value was latent in the partnership all along and the transaction unlocked it, although realising that value required extraordinary commitment and hard work from the service company team.
Revenue Model Transformation: an e-sports pivot
This third case is different because the company was a venture-capital-backed startup, and the raw energy inside the business reflected that. The management team were committed enthusiasts, genuinely excited about what they were building. My own position was also different, sitting in the fund, not the portfolio company.
The company organised and broadcast a quarterly cycle of professional e-sports leagues, initially based on a single game title. Our investment thesis was based on adding game titles and growing the pay-per-view audience.
The fund team had deep media experience and we guided the company to build audience by improving production values, with a recognisable on-screen host, upgraded graphics, and proper studio kit. But we weren’t seeing the up-tick in full season subscribers we had hoped for. We coached the team to test pricing and promotion but this still didn’t deliver.
We joined the management team in a conversation with Twitch, our main streaming partner and the dominant live streamer for gaming audiences. We learned that when Twitch promoted us on their landing page, our viewership rocketed and Twitch were doing an exceptional job on ad sales, for a modest commission.
We encouraged the team to explore a sponsor and ad-supported model, moving away from pay per view. We encouraged them to propose that Twitch take a bigger advertising commission but to get Twitch to commit to a minimum guaranteed revenue per season. Now our own fixed costs of staging each league were de-risked by a minimum income level and the team with the biggest influence on our viewer numbers now had a stronger incentive to build our viewership. We played our own part in building audiences by adding peripheral content, bringing the champions to life with back stories and gossip and filming them taking on physical challenges inspired by scenarios in the video games.
“Free” turned out to be much easier to manage with gamers being notoriously expert in circumventing pay walls, sharing codes, and other ruses, all of which were neutralised by this move. Phasing out paid subscribers altogether was a calculated risk, but the net result was that revenues quickly surpassed the minimum guarantee. Within three months they had doubled.
The pivot delivered a more resilient model, better aligned with our exclusive streaming partner, a significantly better foundation for taking the business to the next stage.
Revenue is the compounding lever. Start early.
Three cases, three mechanisms, one common thread.
Feed revenue growth to operational leverage and multiple expansion and they will amplify its value. The compounding needs time to build, which means starting early.