The investment value of Design

Can design be used to drive superior returns in private equity?

Black background with White Serif font that reads ‘The Investment value of design, can design be used to drive superior returns in private equity’.

The way that Private Equity firms create value is changing. The traditional methods of aggressive financial engineering and ‘slash and burn’ cost-cutting are gradually being replaced by a new breed of firms seeking to deliver new growth and recognisable change to the customers and markets they operate in.

This shift changes the nature of the transformation being sought, the technology investments being made and the skillsets required in value creation teams/partners to pull it off. But whilst many fund managers recognise the shift few have updated the skills and techniques in their arsenal to really deliver it.

I believe this presents an opportunity designers to take a greater role within the Private Equity industry — bringing both the customer insight and practical delivery experience to shape more concise, creative and confident ways to increase a company’s value.

We’re exploring this in our everyday work at Tupelo Capital and share a few of our thoughts and experiences below.

Managers need to earn their returns

The singular job of a private equity firm is to leave a company in a more valuable state than when they bought it. The last few decades have seen a steady change in the makeup of that ‘value creation’: shifting from financial engineering (the use or reduction of leverage) to operational improvements (active interventions to grow revenue or reduce costs) (see Figure 1)

Today, almost half of company value creation is attributable to GP-driven operational improvement, with the majority of that focused on revenue growth (see Figure 2). It’s not a stretch to say this is likely to persist amongst a “higher for longer” interest rate environment.

Chart showing that the contribution to total value creation by operational improvements has changed from 42% pre-2000 to an average of 47% between 2008–2018, whilst the contribution from leverage and deleveraging has decreased from 70% pre-2000 to 25% in 2008–2018. Multiple expansion changed from -12% to 28% over the same time period.
Figure 1: Category contribution to Total Value Creation, Institute for Private Capital via CAIS
Table showing breakdown of contribution by GP-driven vs. Market driven-factors of value creation. Trend shows consistent decrease in GP-driven excess leverage (from 46%in pre-2000 to 22% average over 2008–2018) compared to a growth in non-leverage GP-driven factors from 36% pre-2000 to 50% average over 2008–2018).
Figure 2: Market vs GP-driven factors to Total Value Creation, Institute for Private Capital via CAIS

More recently, there has been a shift in the nature of the operational improvements being made: from cost focused ‘slash and burn’ to revenue focused ‘grow and earn’. This requires a different type of skillset — not one that can bring operational functions in line with benchmark efficiencies, but one that can understand what is going to make more customers buy more each year.

In response, managers of all sizes have stepped up their recruitment efforts for Value Creation teams, bringing in sector and functional skills to add knowledge and credibility to the transformation plans required to drive returns.

Amongst these, one powerful but regularly misunderstood or entirely overlooked functional domain is Design.

The Business Value of Design

Design — here defined as the collection of disciplines under the broad banner of ‘human-centred design’ — has grown into a prominent lever for companies to create value. Naturally, as more of your business relies on digital interfaces and systems, the more its success depends on those systems being able to interface successfully with your customers and employees.

Success here is big business. McKinsey found that companies who demonstrated a higher design maturity and capacity increased their revenues and total returns to shareholders (TRS) substantially faster than their industry counterparts did over a five-year period — 32 percentage points higher revenue growth and 56 percentage points higher TRS growth for the period as a whole. (See McKinsey, Figure 3)

Line charts comparing outperformance of top quartile McKinsey Design Index performers over industry benchmarks for revenue (10% increase vs 3–6% benchmark from 2012–2017) and total return to shareholders (21% increase vs 12–16% benchmark increase from 2012–2017).
Figure 3: Revenue and TRS outperformance of companies with top-quartile MDI scores, McKinsey

Despite this, Private Equity has been slow to bring elements of the design discipline and its methods into the value creation process. Where designers do appear — typically at larger managers with the capacity to staff proprietary value creation teams — design largely remains an execution-only competency focused on ‘delivering screens’ downstream of decisions, instead of contributing to upstream analysis and strategy.

Design as investment advantage

We think there’s an opportunity in harnessing the techniques of modern design for investment advantage.

By bringing a deeper and more detailed view of the customer-product-market relationship into the investment process, we believe managers can identify, validate and exploit opportunities to create value where other investors see none. Simply, we think our companies will ‘win’ by better understanding the customers in a market and identifying better ways to serve them efficiently and effectively.

Whilst applicable to any manager, we believe that a greater use of design will be particularly potent in our small (fin)tech buyout strategy where product and market risk tends to be greater, and customer-led growth is the dominant focus of value creation.

At Tupelo, we focus on three areas where we believe design techniques can provide the biggest competitive advantage and uplift in investment performance:

  • Finding contrarian investment opportunities through a deeper qualitative understanding of the customer-product-market relationship,
  • Developing more creative and concise growth strategies to create value, and
  • Using a test-driven approach to build conviction and credibility in both, pre-investment.

Finding advantage in qualitative insight

Most investors are quantitatively biased, and becoming more so as data sets and data analysis tools become readily available. Many herald this as a return to rigour and discipline — particularly in ‘data-light’ early stage venture and growth investment domains. But an over-adoption of data-driven, quantitative approaches presents a two challenges for outperformance.

Firstly, it means we’re all looking at the same picture in the same way. With every investor capable of building the same ‘data-led’ picture — through cheaply available tooling, or even more cheaply available artificial intelligence systems — it is likely they’ll begin to draw the same investment conclusions. You might argue this is maximum efficiency — more effectively clearing the market for good/bad investments. But it’s more likely we’re snapping to the ‘average opinion’ — slap bang in the middle of the bell curve — which destroys any chance of developing the contrarian perspectives that typically drive outperformance in investing.

Secondly, we’re missing the part of the picture that drives value creation. Quantitative research is fantastic at providing insight into what’s going on and by how much, but is usually lacking and even misleading as to why it’s happening at all. The latter is critical for informing how we might use product interventions to create value, not just the size of the prize if we are successful.

Howard Mark’s summarises both dynamics wonderfully in his memo I beg to differ:

“Readily available quantitative information with regard to the present cannot be the source of superior performance…success in the highly competitive field of investing is more likely to be the result of superior judgements about qualitative factors and future events.

…Instead, [investor] superiority has to come from an ability to:

better understand the significance of the published numbers,

better assess the qualitative aspects of the company, and/or

better divine the future”

At Tupelo, we intend to build investment advantage through qualitative insight — specifically, a deeper understanding of customer-market-product relationship than our competitors.

We do this by employing sophisticated design and behavioural research techniques to better understand the context and behaviours behind the numbers.

This can include

  • A greater focus on behavioural drivers: the ‘why’ — we dedicate more time towards deeper qualitative insight, typically conducting upwards of 50 customer and user interviews, depending on the particular product-customer-market relationship we’re trying to explore.
  • A wider range of research techniques — based on the investment thesis, we can employ a much wider range of professional design and product research techniques that help us instil precision in our diligence and credibility in our value creation plans. (see Figure 4)
  • Direct participation by in-house professionals — good customer interviews are a skill — just the same as good data analysis. We employ professional design and behavioural research specialists to conduct inquiry in-house. We don’t believe that these interviews should be outsourced; the investment and management team should be steeped in the mindset, language and behaviour of their customers to identify and chart a good outcome.
  • Contextual inquiry — observing and interacting with customers in there native environments — instead of sterile design labs or formal interview scenarios — is critical for getting an accurate view of true behaviour (thus avoiding the Hawthorne effect). Where possible, we employ ethnographic techniques to embed ourselves with institutions (or simply hit the conference circuit) to understand customers and buyers where they are instead of under an artificial microscope.
Quadrant chart showing a range of user research techniques organised by behavioural vs. attitudinal inquiry on the vertical axis, and quantitative vs qualitative method on the horizontal axis. Chart highlights a greater range of qualitative and behavioural techniques available that are not currently undertaken by most PE firms.
Figure 4: Scope of design research methods, Tupelo Capital adapted from Nielsen Norman

I want to stress that focusing on qualitative insights doesn’t mean that we’ll abandon quantitative methods. We’ll continue to be analytically informed as part of an overall evidence-based approach. We simply believe that we do not have the capabilities (or cash) to be exceptional data investors, nor do we think it leads to better outcomes in our small cap buyout strategy.

Building credibility and conviction pre-investment

Rigour is lopsided in Private Equity. Our historical due diligence is steeped in analysis and checked in triplicate, whereas our value creation cases regularly hinge on the highest-paid-person’s ‘gut-feel’ assumptions.

This stems from an understandable challenge. After-all, it’s easy to measure what a customer has already done, but incredibly difficult to predict what they’re going to do with any degree of certainty. Of course, we run scenario and sensitivity analyses on each assumption, but really we’re wrapping what we don’t know in contingency instead of finding ways to truly build confidence.

Today this means we end up taking unnecessary leaps of faith — that can easily be tested before any investment is made.

Within the design disciplines, we make heavy an regular use of prototyping to measure the potential impact of our design on the user objectives we seek to improve. Using prototypes — single or small batch production runs of a product -allowed design teams to understand the efficacy of their design before committing the resources to a full run — a costly investment to make in the ‘good ol’ days’. These prototypes needn’t be a full manifestation of a target design, but can be created to test to understand a specific dynamic. For example, the original designer of the palm pilot carried a pilot-sized block of wood in his pocket for a week to test it’s convenience to carry and serve ad hoc use cases.

In the last two decades, forward-thinking practitioners and entrepreneurs (including Steve Blank, David Kelley, Eric Ries, and Alberto Savoia) have stretched our thinking on the form and function that prototypes can take within a business, and the cost of conducting experiments has come down drastically.

Today, modern growth marketing and experimentation techniques help companies cost-effectively validate ideas before committing investment to them. These can range from testing small incremental changes to drive continuous performance improvements (like Booking.coms renowned experimentation platform), or gauging demand for an entirely new business altogether (see Dropbox pre-product video demo, or Zappo’s drop-shipping prototype).

Beyond traction, prototypes can contribute to a deeper understanding of a product’s unit economics. For example, by deploying smoke tests — driving highly segmented traffic to pre-release landing pages and conversion points — we can measure the cost of acquisition and likely return on that spend (see Peter Denton’s real example of traction testing at Pioneer Square Labs).

Together, prototypes — in their broadest sense — can help us not only sense check the efficacy of our value creation plans, but help us to more accurately quantify them before an investment is made.

We’ll need to build a different firm

Bringing design into the investment process will require us to adapt the Private Equity firm to accomodate new talent, processes and technologies.

Several leading firms are already doing so:

Juxtapose is a top-decile creation-orientated private equity fund. They use a 50:50 talent mix of traditional PE and design skillsets to conduct deep, long-form customer-based thesis development across qualitative and quantitative methods.

Blackstone, one of the world’s preeminent private equity firms, hired Jonny Bauer from leading Creative Agency Droga5 to lead the Brand Strategy and Transformation practice to ensure brand purpose, categorical positioning and values are clearly defined upstream in the sequence of value creation.

Cyberstarts is a top decile venture fund, specialized in Cyber security themes and technologies. They maintain a large panel of Chief Information Security Officers (CISOs) with whom they validate ideas and sign design partners prior to committing funds.

Pioneer Square Labs is a leading venture fund and studio creating software start-ups in the Pacific Northwest. PSL co-create start-ups with founders, using smoke-tests and live prototypes to rapidly test and measure potential traction pre-investment.

Whilst the precise combination of ideas will be different for each firm based on their strategy and typical investment target, we think the following people, process and technology modifications would act as an appropriate template for any manager seeking to bring design disciplines into their process.


  • Hire craft-based designers, across Research, Product Design and Brand Design disciplines. We specifically seek designers with generalist skill sets and with hybrid backgrounds in sales, marketing or engineering as they are more likely to provide the cross-functional input and collaboration that drives performance (McKinsey).
  • Create a ‘vertical network’ — one that compromises not just the exec- or board-level contacts who can opine on top-of-house strategy, but the also the end-users and end-customers who provide the detailed view of product, service and system performance on the ground.


  • Run a double diamond design process alongside FDD and CDD streams, with clear points where both can come together (see Figure 5). The first ‘diamond’ focuses on customer and market discovery, using generative research techniques that converge with initial CDD findings to provide a clear articulation of the as-is state and investment hypothesis. The second diamond uses both generative and evaluative research techniques to test potential value creation levers, contributing unique feedback to intervention impacts and return scenarios.
  • Use prototypes to test and quantify the impact of a product or service intervention, and create ‘living’ assets (such as prototypes, concept designs, illustrative marketing and web materials) that better align deal teams and managers on the way forward.
  • Use the ‘design studio’ environment to set a more collaborative relationship with management, bringing them into the design process to benefit from their customer connections (or identify a lack thereof) and co-create a strategy that all stakeholders have conviction in.
Anotated diagram of a double diamond design process, split into 4 sections: research, synthesis, ideation, refinement. Each section provides a series of specific bullet points linking design research activities with equivalent activities in a typical Private Equity due diligence process.
Figure 5: Illustrative design process for target due diligence and value creation planning, Tupelo


  • Invest in tooling that accelerates the pace at which you can get a clear signal from a customer (e.g. research and analytics platforms such as NewtonX, Wynter, CustomerIQ and hotjar), and get something in their hands to illict a response (e.g. Figma, Webflow, LinkedIn Ads, Google Ads).

In summary

We think there’s an opportunity in harnessing the techniques of modern design for investment advantage.

As a greater proportion of value is being ‘created’ instead of ‘engineered’, we believe design methods can help us better identify and realise investment value.

By investing heavily in qualitative insights, using a broad spectrum of product and brand interventions, and using prototypes to test our thesis pre-investment, we will find efficient and effective ways to create value where other investors see few.

Our experience and that of top quartile funds informs how we can build a design-led firm, bringing new talent, methods and technology to enhance our diligence and these development activities.

If you’re an investor or manager interested in learning more about design and its potential in the Private Equity asset class, I’m happy to share what we’ve learned at Tupelo.

If you’re a designer and are interested in what we do, have a deep curiosity for financial services and a backstory that meets our talent brief, I’d love to here from you.

You can get in touch with me here.

The investment value of Design was originally published in UX Collective on Medium, where people are continuing the conversation by highlighting and responding to this story.






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