"venture capital"

Sun 21 August 2022
Gallup has extensively researched the relationship between employee engagement and company profitability, and they showed that engaged employees are 22% more profitable than disengaged employees. 

The tides of the economy seem to be shifting, making this a time when it is even more critical to focus on culture and employee engagement. Many companies, especially private equity-backed firms, have responded by laying off employees rather than investing in them. I was curious to know, “Why are private equity-backed firms more prone to layoffs in a down economy compared to private or public companies?”

I reached out to my network to learn more. I interviewed multiple employees, leaders, and professionals working for private equity, and their consistent answer was that “They are seeking an exit – at any and all costs and that part of achieving an exit is showing numbers that your costs are down and revenues are up.”

Ryan, a former VP of Operations, was recently laid off from a private equity-backed firm. He proposed some ways for the company to consolidate its overlapping expenses. They loved the idea so much that after consolidating those expenses they consolidated him…and replaced him with a junior middle manager to take his role at a fraction of his salary. 

Don’t get me wrong, I am all for eradicating inefficiencies and driving profitability. 

But can the short-term focus of achieving an exit coexist with a thriving company’s long-term goals, especially when these goals require an engaged employee base with a great culture?

I would imagine that most private equity professionals land somewhere on this scale from unapologetic to compassionate. The unapologetic professionals don’t care about the people because revenue growth reigns supreme. On the opposite side, compassionate professionals care about building a sustainable business and invest accordingly. In between these two sides, many professionals will say all the right things but their actions will reveal whether their true focus is sales and reducing costs to show short-term metrics.

Another focus of my interviews was on the reputational cost. I was curious to know if there was any reputational risk for offloading a company that looks great on paper but is a dumpster fire internally. I'm envisioning a prospective investor checking something like a Carfax to find out if they are working with somebody that has a history of leaving others to hold the bag.

Unfortunately, I haven’t received any great responses so far. 

And until we have a way for companies to assess the reputational risk of how private equity firms treat their acquired companies' employees, there is nothing to stop these private equity firms from propagating bad cultures to dump onto somebody else’s plate.

The issue with all these scenarios is harm done to the people at these companies. Hundreds of thousands of professionals work for private equity-backed firms, not realizing how little security they have in their role or the value they have in the minds of the owners. 

Or worse, many professionals end up working for a company and feeling trapped because of economic worries or personal constraints. These workers end up miserable, and the whiplash effects from ownership changes only exacerbate these effects. Imagine starting with an executive team that cares about you (e.g. the founders), and suddenly you find out that the new private equity owners want 120% more revenue but for 30% less pay. These paradigm changes wipe away years of work building company culture and leave a hollowed-out company in their wake.

Research has shown how powerful investing in culture and engagement can be for profitability. But until we have a way to hold private equity firms accountable based on their reputation for either building great companies, inside and on paper, or mirage companies, great on paper but awful inside, it will be difficult for private equity and company culture goals to align.

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