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  • Writer's pictureMichael Hunter

On Thin Ice: The Hidden Risks of Hockey Stick Graphs

Updated: 3 hours ago


(Sources: Actual private equity investment prospectus / market study; scale adjusted for confidentiality. Pure Hockey, CCM)


As a hockey fanatic (trapped in a basketball player’s body), I know a thing or two about hockey sticks. One was first put in my hands at around age 4, and I play in a “beer league” on Thursday nights. Even if you don’t play or watch the game, you’ve undoubtedly seen graphs that look like the one above.



What’s the Problem?


Don’t most businesses grow revenue in a way that makes the chart move “up and to the right?” Yes, companies strive to sell more products at higher prices to more customers, and its leaders should be held accountable – and incentivized – for doing so in a way that wouldn’t just happen anyway. But the underlying industry or category growth rate can be difficult to bend upward – in hockey stick fashion – if for no other reason than the prior growth is the sum of all industry forces (both favorable and unfavorable). Shakespeare wrote “What’s past is prologue,” meaning that history sets the context for the present. That doesn’t mean an industry, product category, or company’s revenue pattern is set in stone, a perennial victim of its past. The problem is that hockey stick graphs are the norm when forecasting growth, but the exception in reality when we have the benefit of hindsight.

 

I could’ve easily inserted above the graphs from two other market studies done for PE firms or, for that matter, many Fortune 500 business plans. I worked as the head of marketing for a digital cameras company that declared its intent to double revenue; an exciting aspiration at the time… until Apple put a camera in the iPhone.

 


Left- and Right-Handed Sticks


~60% of players in the NHL shoot left-handed. This may be surprising to those who play golf – which resembles hockey on grass – where ~5% shoot left-handed. So in the same way that a hockey stick can curve either way, so too can a hockey-stick graph. In other words, not only might CAGR fail to accelerate and bend the curve of the stick toward the left, it could decelerate and bend toward the right. Examples:

  • You’d be hard pressed to find an electric vehicles adoption graph in the last decade that didn’t look like a sharp hockey stick, with accelerating adoption as far as the eye could see. And yet quarterly sales growth has already flattened in 2024, meaning there could be fewer sold in 2025.

  • Similarly, product categories that were “winners” during the pandemic – not necessarily by virtue of companies’ performance or innovation but by the good fortune of favorable legislation – have found that the sugar high has worn off. Examples are exercise equipment and other home-based consumer durables. And given how active private equity firms were in those years, being highly acquisitive amid low interest rates, many have since had to revise expectations downward.

 

With a unique, 360º vantage point from operating roles with leading firms in product manufacturing, retail, ad agency, and management consulting to corporations and private equity firms, I’ve seen the full cycle play out, often over a period of years:


The Good Ol’ Hockey Game  (also a folk song by Stompin’ Tom Connors)


  1. Amid deal enthusiasm, the out-year revenue targets are set in a way that makes the deal thesis work, not necessarily by reflecting the underlying industry / category growth rates or what a competent management team can deliver. Most people around the deal table have finance backgrounds; very smart people who hire smart management consultants, but all with a comparative lack of perspective earned in industry operating roles, where growing revenue through category expansion or market share gains can feel like a hockey fight. For every punch you land, the other guy can land one on you. The result is a plan that’s somewhat plausible on paper, but which requires nearly everything to go right. Example: in a commercial diligence I led I heard that the plan, post-acquisition, was to A) cut advertising spend and a lot of the sales team while B) growing topline revenue at above-industry averages. You can usually do A) or B), but seldom both, as very few companies have cut their way to prosperity (at least on the topline).

  2. The new portco is staffed with top talent whose best efforts are insufficient to make the plan.

  3. The Chief Marketing Officer (CMO) swaps out ad agencies (creative, media, or both).

  4. The private equity firm and/or the portfolio company CEO replaces the CMO, the C-suite function most often tied to revenue growth. I’ve heard this directly in the past several months: “We just fired the second Chief Growth Officer of a portfolio company in the last year. Would you be interested in taking on an interim role?”

  5. When the next CMO doesn’t work out, the private equity firm ousts the CEO and ultimately brings guidance / expectations down.

 


A Better Way to Play the Game

 

  1. Don’t confuse what’s possible with what’s probable. Ensure all industry, category, and company headwinds are properly quantified alongside the tailwinds so that the deal thesis is realistic.

  2. Hire a management consultant with industry operating experience, and who can perform a commercial diligence – or value creation work – built from plausible assumptions.

  3. Aim high, yet achievable. Hold your management teams accountable for delivering better-than-average – even top quintile – results, but not the somewhat arbitrary targets set by an early Excel model that forms a hockey stick graph. PE firms might be tempted to assume that they hold the balance of power in the employer/employee relationship, but top talent has choices about where they work and are likely interviewing the PE firm as hard as they're being interviewed. They're also savvy enough to sniff out a hockey stick business plan. Once a PE firm begins a "coaching carousel" of fire-the-leader, it can be increasingly hard to stop.

 

Hockey sticks help you score goals, but when used improperly can put you in the penalty box. Hockey stick graphs are easy to create – as easy as plugging numbers into an Excel model – but the downstream effects can keep you and your firm out of the playoffs.


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