What Does Critical Mass Mean?
Critical mass is a term used primarily by private equity for their platform companies that are rolling-up several smaller players in a specific industry. When critical mass is achieved, the company is large enough to provide integrated products and/or services to its customers in many geographies. This potentially allows a platform company to be a price leader. Similarly, critical mass allows platform companies to realize savings from suppliers since vendor lists from the various companies that have been rolled up can be combined. This allows the platform company to command better pricing and terms with suppliers due to the combined volume.
Divestopedia Explains Critical Mass
Critical mass and the scalability of a platform company are related concepts. As a private equity firm builds a platform company that reaches a critical mass, it must also ensure that it is scalable so it can continue growing. Alternatively, the platform company reaches a ceiling in its growth.
In order to make a company scalable and reach critical mass, private equity ensures the following is done:
- Unified branding across all divisions, services and geographies;
- Placement of senior management including a CEO, COO and CFO;
- Information systems that provide key performance indicators;
- Documented standard operating procedures (SOP);
- Standard marketing programs and defined lead generation activities; and
- A procurement process that ensures the best supplier pricing and terms can be obtained.