SPEAKER_01: 0:00

Welcome to another episode of Growing Pains, where we help entrepreneurs and founders who are considering funding get prepared for what that funding brings. And I'm here today with David Raleigh, an operating partner with Diversus Capital. They have about 1.7 billion AUM and are currently investing out of a$680 million discretionary fund, institutional fund. What I love about Diversus is their focus on software and technology companies, especially in the enterprise and B2B space. and the quality of their value creation team with operating partners like David. It's also the size of their operating partner team. It's rare that you have such quality and size in a mid-market private equity firm. And so Diversus is definitely a great company to deal with. David, as leader in the technology side of the operating partners, is responsible for both due diligence and post acquisition transitions. David is here to tell us everything we should know about how to prepare ourselves for growth equity or an exit with a private equity company with the sophistication of diverses capital. David, welcome to the podcast. So I guess the first question is, can you describe a bit about your specific thesis in this?

SPEAKER_02: 1:15

Sure. So when a PE firm is considering acquiring a company, a platform, so primary acquisition, the thesis isn't firm at that point. So we might have an idea about the potential that the company might have given sort of the market conditions, how the market's growing relative to competition. Is the total addressable market sufficiently large, growing? And do we feel like the company has the potential to sort of expand there? But at the beginning, we're not exactly sure how or whether that might be the case. So during the diligence process, we're exploring a lot of different things we're looking at sort of the overall the tam so we understand sort of the where where the company plays and what the potential is but we also care about market dynamics we care about the competitive dynamics we obviously care about the performance of the company up until that point and so there are a lot of factors now technology plays a big role uh Generally, as you mentioned, Diversus is looking at software companies. So technology is kind of core to that. And in some cases, we're looking to acquire companies that have been built up over many years. And so there could be a lot of legacy technology. So that has to factor into our thesis. If we're investing in a growth thesis, let's say, like we believe that the company has an opportunity to grow and expand to take up more of that pie or take on an adjacent pie, then is the technology going to be an asset? asset or is it going to be a liability? And so even without sort of making judgments about, you know, is it purely good technology or purely bad technology, it's never that simple. It's just how would the technology sort of support that thesis if there is a growth thesis.

SPEAKER_00: 3:09

Okay.

SPEAKER_02: 3:10

Other PE firms have sort of a different approach and they're primarily looking at how they can optimize the operation of the business because they might believe that there's sort of inefficiencies built into the way that the company is operated. And so you're looking for ways to achieve those sorts of economies. And in that case, the technology can play a role there. Does the technology inherently incur a certain operational burden that you might have to address. And you might have to address that by re-platforming or dealing with tech debt or something like that, or simply changing the way the company goes about doing the business of building and delivering their product to their customers.

SPEAKER_01: 3:55

So that is not your MO to go fix broken technology companies? Oh, there's

SPEAKER_02: 3:59

always an aspect of that, right? So firms are looking for good deals and opportunities to create value over a relatively short period of time. And so if a company or It was like... killing it and just like a really high achiever and there's not really a lot that we think we could do in that period of time, then even though it might be a great company, it might not be a good deal for us, right? It's not a good opportunity to create a significant value. So even though we might be investing in a growth thesis, typically there's work to be done on the technology to achieve. Okay.

SPEAKER_01: 4:34

And then, so that sounds like the thesis follows the opportunity to acquire a company, right? as opposed to a thesis and trying to fit companies into that thesis?

SPEAKER_02: 4:44

Yeah, there will be a general thesis based on, you know, what we perceive as the company potential. But I can tell you that during the diligence process, it's a participatory exercise, right? So it's not just led by the deal team or sort of on the investment side. Operators and advisors and consultants who know something about the face are contributing to that. And so we're formulating the thesis and we're building a model that represents the kind of investment, the kinds of changes that we think would need to happen to achieve a particular outcome. Now we have sort of general ideas about what would look good at the end that we would want to achieve. And so the thesis is really like, so how are you gonna get there? And what's it gonna take to get there? So those aspects of it just become clarified. And we have to get to a level of clarity and conviction before we make the decision to invest.

SPEAKER_01: 5:44

Right. And some companies actually have work with the team that they're looking at acquiring and actually walk through what their plan is for that company as part of the pre-acquisition phase. Is that your process as well?

SPEAKER_02: 5:57

So there's certainly, you know, we're asking them to open the Komodo, right?

SPEAKER_03: 6:02

Yeah.

SPEAKER_02: 6:03

But at the same time, you want to avoid introducing bias into the conversation at that point. And you want to sort of get to the truth so that you can decide, you know, make decisions about what it would take to achieve the outcome you're after. So we don't want to telegraph an answer and then sort of hear that back. So there's a certain level of sort of trying to avoid introducing that kind of bias. We try to be forthcoming about what the opportunity looks like because, you know, we We want to understand, especially as we're talking to the leadership team, our members of the leadership team during that diligence process, what role they might play in helping us achieve

SPEAKER_01: 6:43

it. Right. Okay. And you talked, I want to go back to the market size and the TAM because it doesn't seem like a clamp on strategy for you guys in enrolling into a market. It seems like you're picking verticals, SaaS verticals and sticking and letting that company grow within that as opposed to amalgamating a whole bunch of companies. Is that a fair statement?

SPEAKER_02: 7:02

Yeah, that's generally true of diverses, obviously that's not true of a lot of other PE firms. One thing I've learned sort of working on the PE side and talking to other folks and other PE firms is like no two PE firms are exactly alike, right? And they may have very significant differences in their approach. And so some might approach it by looking to do roll-ups of different assets that are brought together. Typically we're looking for a solid platform and certainly M&A and adding on could be part of that thesis and how we achieve what we want. Right. It's rarely the case that we go into a transaction pulling together multiple parties. That can happen, it's just not, it hasn't been our experience primarily, where other PEs may do that exclusively.

SPEAKER_01: 7:52

Right. Yeah, yeah. So that's the federation of, and sometimes it's a federation of companies, and sometimes they're looking for synergies across those portfolio companies that they can bring the best of breed and reduce operating costs.

SPEAKER_02: 8:05

We like to have sort of a solid foundation. So even though a company that we acquire might not be able to get us where we need to go by themselves, just by sort of investing organically into the company, we typically don't sort of handicap a deal by saying like, well, it's only worth investing this company if you also get this company or these other companies. So, but that's just, you know, again, other PE firms might do that exclusively. That might be their primary approach. And we may do that in the future. So, you know, but... But for the most part, we're looking for a solid platform to build on.

SPEAKER_01: 8:42

Okay. And unlike Venture, which is always looking for the moonshot to cover their portfolio of losses and other fundings, what is your approach to that company? So, I mean, I don't want to pick on any specific company, but I happen to use RoadMonk, right? And RoadMonk is interesting because it's a much simpler user experience in terms of using an Asana type of product, but it's not Asana, right? So it's not a moonshot. It's got a very specific niche for the early adopter, I guess, in that space.

SPEAKER_02: 9:12

And Roadbunk was an add-on to Tempo. So it was part of building out and rounding out a larger strategic portfolio management capability that Tempo represented.

SPEAKER_00: 9:27

Okay.

SPEAKER_02: 9:27

So it was not acquired to be a standalone platform. It was adjunct to a platform that had already been.

SPEAKER_01: 9:35

Interesting. Okay. Interesting. So that, so then that begs the question when you bring in, so you look at the company and look at the team, you're doing due diligence. You've got a great article that you posted a while ago about how you shouldn't look at the spot in time that you're acquiring. You should look at the evolution of that technology. Can you share with us some of those insights?

SPEAKER_02: 9:53

Sure. So, so oftentimes when I brought in to do tech technical diligence. I will be engaging with the principle, you know, the technical principles at the company and they will show me basically a snapshot of where they are right now. And that's interesting, but I'm not, you know, I'm not buying into a static asset, right? I want to understand how it got there and the decisions that were made that led to what it is because it's never perfect, right? It's like you're adapting to changing conditions. You're sort of applying yourself to your best ability given the resources that you have available. And so I want to know the backstory to understand what I'm looking at. And that tells me a little bit of something about where it could go and how hard it might be to get there. But it also tells me a little something about you as a technical leader being able to tell that story and provide me that narrative. So I want to feel convinced that you have a deep enough understanding of the path that got you to the snapshot that I'm looking at today so that you can help get it to the next thing. And sometimes it's like I feel really good about what you have to say and And I totally understand the trade offs that you made that led to what we have today. And that would sort of inform maybe how we would build on that or leverage that experience. Other times it may be clear that like you weren't really involved and maybe you're not part of the picture going forward. So it's both a way for me to get an understanding of this complex asset that is the technology, but also it tells me a little bit of something about the technical leadership. It's really

SPEAKER_01: 11:33

interesting because that story can be read different ways, right? In your agile development process, you're always tinkering and changing. That leads to the evolution of the product.

SPEAKER_02: 11:45

Yeah, yeah. So what are you looking

SPEAKER_01: 11:48

for in the storytelling of those iterations?

SPEAKER_02: 11:51

Yeah, typically along the way, the path is punctuated by you know, hitting roadblocks and having to architect beyond them. And so, so I want to understand what was the last roadblock you hit and then how you sort of dealt with it, because almost certainly you're going to hit another roadblock at some point down the line. And I might be very involved in that experience. So I want to understand sort of how you went about assessing your options. Did you see it coming? Do you know what to do? And frankly, it's like, I want to know, do you see the next roadblock? Like you should be able to identify because it's there. It's always there, right? And you should be able to tell me like, well, when we scaled at this point, I know that I'm going to have to revisit the architecture around some component up here. And so here's what I'm looking at to tell me when I'm getting close so that I can begin that work. And it's frankly, even as scary as that potential roadblock might be, it's comforting to know that like you can see it and you have a plan for addressing it. That's actually says a lot to me about your ability

SPEAKER_01: 12:58

to help growth. Have you ever faced a situation where that was just selling themselves, but they really didn't? They were more like firefighters in their gut. They're not solution architects.

SPEAKER_02: 13:10

Yeah, so there's a couple of ways to address that. So one thing is like, they don't know what they don't know, and you can sort of get to that. And if you have sort of an understanding of architectural patterns and the inherent limitations with different approaches, you can kind of see whether they recognize that or not. So that tells me something. If there's sort of patterns of behavior that suggest that decisions around, architectural decisions are being driven kind of singularly and The team is generally made up of people who take the hits and just implement what they're told. That's a limitation unto itself, right? Because that means that I'm putting a lot of emphasis and pressure on the one person who sort of sees the big picture. And that's a lot. I would rather have a smaller, more actively, a team that's more actively involved in the solution space who's contributing to that. And so that's a tough one to assess, certainly during the very concentrated period of doing diligence, but it's certainly something that you strive to understand, if not before a transaction, very closely afterwards, because it may affect the very makeup of the team and you might have to rebuild this team with a different kind of resource than has been there in the past

SPEAKER_01: 14:32

yeah those are really tough calls to make i'm sure and i guess what you know we've done a fair amount of due diligence on existing teams when we help companies refactor and stuff and we do find those scenarios where you've got a firefighter you just love whose importance is the firefight you put out all the fires with a new product They're out of a job, it feels like, and they resist it. How do you deal with that transition when you're... I mean, obviously, you've got a much bigger stake in the company, so you can be pretty prescriptive, but you also don't want to lose the whole engineering team. And there might be a lot of gold in the Nara Hills where the engineering team has been doing tickets, but they really want to do more solutions engineering.

SPEAKER_02: 15:10

Yeah.

SPEAKER_01: 15:11

How

SPEAKER_02: 15:11

do you

SPEAKER_01: 15:11

transition there?

SPEAKER_02: 15:13

So there's no superficial way to do that. Like, you have to, as quickly as possible... you know, talk to and get to know and assess everybody down to the individual contributor. Like you have to gain a direct opinion on the strengths and weaknesses of the team, not just at the leadership level, but sort of all the way out to individual contributors who are writing code. Wow. So that's a big investment of time to do that. And time's wasted. You don't have a lot of time to waste to get there. But there's no way around it. So there's no shortcuts to doing that. Here's something to consider, though. It depends a lot on our thesis, right? So if we're going to grow or if we're sort of underwriting significant growth and potentially changing to address an adjacent market, let's say, or sort of exploit a part of the market that they're already in more fully than they do now, or going up market or something like that, Getting stuck in firefighting mode, you could just spend all of your time just sort of spinning that wheel. Right. And so if it's the case that I need to make some substantial changes, that would be sort of a red flag for me. Like if they're really stuck in that firefighting mode or just sort of tactically being responsive to issues that they are now, I'll probably have to introduce a different kind of leadership that is thinking more holistically about how we grow or change to exploit a market that we don't right now. So that happens. That begins to happen on your first call during the So you're already starting to form an opinion about the capabilities and limitations of the mindset of the folks that are on board. Because in a very short period of time, post-transaction, you have to put in place a plan for how you're going to potentially reshape the organization to execute against the plan that makes

SPEAKER_01: 17:09

up. Right. So we'll go into the first hundred days in a minute. But going back to that, so if you were to look at your due diligence process, how much, I mean, technically, technology is easier to fix than people, right? Generally true, yes. I would say that's true. It's pretty blatant fact or not fact, whereas people issues are much more nuanced. So you must become also not just a technical due diligence guy, but also very much a people reader. Yeah. Is that an acquired skill or is that something that you've always had intuitively?

SPEAKER_02: 17:45

Well, that's tough to say, but it's certainly important to be able to do it effectively. When I do technical diligence, I'm looking at a handful of areas. So obviously I'm looking at the architecture, its ability to scale, baggage that it might carry, that sort of thing, limitations there. I'm also looking at the data architecture for similar concerns and that sort of thing. And I'm looking at those things with what the potential thesis might be about where we need to take this thing. But I'm also looking at sort of their software development lifecycle and how they go about the business of building software and how that works. I will look at artifacts that are part of that process to see for myself how well they are at communicating ideas and initiatives and how that turns into work that's executed by the team. I'll look at the organizational structure in particular. I'll look at the relationships between engineering and product. That's sort of the foundational relationship. And I'm looking for sort of anomalies that would potentially limit their ability to execute effectively. So what do you mean by that? Yeah, so if they're... If they operate in a very disjointed way and there's sort of any evidence of finger pointing or us versus them or anything like that, that's going to get in the way of the progress that needs to be made. So I want clarity about how requirements and initiatives come into being, how they're expressed, how they're conveyed, the role that the engineering team plays in coming up with solutions. It's being told just, you know, implement

SPEAKER_01: 19:31

this thing. Once you got to build it next month, right?

SPEAKER_02: 19:34

Yeah. Or, yeah, or like, I'm going to tell you how to build this thing, you know, so I'm looking for there. I'm looking at sort of how what their testing approach is. And I say testing approach versus like how they do QA, because QA can sometimes be just like limited to a title or department of people. And typically testing is broader than that. So I'm looking at sort of holistically how they Think about testing. Testing is also, you know, is this feature that we're developing delivering value, right? So I need a test hypothesis about value delivery. And so how do they go about doing that? So I'm interested in sort of the overall interaction and sort of the way that they work together to achieve a specific, you know, outcome. The

SPEAKER_01: 20:28

other thing I looked at, Before you leave that, because that's very interesting. Because usually you're testing technically whether it's going to take the load capacities and not break, et cetera. You're not testing value. The value should have been pre-tested by customer success teams that talk to product or sales team that talk to product. How do you...

SPEAKER_02: 20:47

But if you're defining a capability that you think was going to deliver value, and maybe it's going to deliver value to sell more software or reduce your... retention and that sort of thing, or to open up a new market segment that depends on that capability. So as you conceive of that, you start to think about like, well, how will I know whatever I come up with actually is effective at achieving that? So you need to sort of build into your planning process and your development process the things you're going to measure that will tell you whether you got it right or not. And I want to see that kind of thinking early on. And sometimes you can find it in the artifacts that get generated, in the PRDs and the epics and the user stories and the accepted criteria that's associated there. And how much are they thinking about that? Now, I have to tell you that it's rare that I find that that practice is fully embraced by product development teams. But it's certainly, I think, important to a high-functioning team that's going to deliver value and able to iterate on it. So it's sort of the essence of being agile. And if that's going to be important to what we're trying to achieve with this company, then I have to assess what it will take to get that company there. And it might affect their philosophy of how they do things. that it might affect the makeup of the teams that are involved. The last point I'll make about organizational design that is part of my diligence process and why it matters. So I think we all know about Conway's Law, right? So Conway's Law suggests that an artifact generated by an organization resembles sort of the communication channels and the structure of that organization. So more simply stated, like teams tend to build software that looks like themselves, right? If you have two teams working independently, they will generally create two things that are independent of each other. And so I'm looking for the impact of Conway's Law or how Conway's Law manifests in the artifacts that an organization has created. And in some cases, it's like well-considered and it's like, yep, that's exactly what we want and the organization is well-suited to delivering that. But in other cases, the objective might be to integrate two systems or to bring things together, and yet the organization is structured in such a way that that's not natural. And so Conway's Law will have an impact on that. So I'm looking for the telltale signs of how Conway's Law is affecting the artifacts that are produced, the products that are produced, and whether that needs to change.

SPEAKER_01: 23:41

Interesting. So let me guess, when you have that singular architect who's the firefighter, that person has hired people very similar to he or she, or to be subservient to that person, and you have a very bad... ConwayLaw.com in that respect. Is that consistent? It depends.

SPEAKER_02: 24:01

That's a little bit different. So Conway's Law would be more directly associated with the team that's actually delivering, like building out whatever that architect might be sort of describing, dictating. I think there's a different kind of bias you get when you have sort of singular control over architectural vision. Now you're putting a lot of, you're betting a lot on that architect getting it right. And perhaps you're not leveraging the input and capabilities of other people. So it's kind of a single point of failure. which we always try to avoid in anything that we build or any organization that we create. So we look for and try to eliminate single points of failure, even during the diligence process, where we sort of have our eye out for both in the software architecture and in the organizational structure. Interesting.

SPEAKER_01: 24:54

And when you're doing more, do you do any consumer product? For the most part, yes.

SPEAKER_02: 25:00

Yeah, for the most part, we're investing in B2B software companies and sometimes those, you know, B2B to C. So it's businesses that are building products and services for other businesses that might serve the children. Okay,

SPEAKER_01: 25:13

yeah, because I was going to ask about diversity of the engineering team, ethnically everything, right? It impacts who they're building for in the demographic. So

SPEAKER_02: 25:22

diversity is a big word. Yes. Its impact is profound in ways beyond sort of the superficial way that we sometimes think about diversity. Right. that diversity isn't just sort of the makeup of the team and where those people came from, but it's like what kind of companies they work for, their levels of experience, the industries they've been in, the type of background and education and that sort of thing. So oftentimes, especially with earlier startups, you tend to hire people who kind of look like yourself in some fashion, right? you know, I hire people who want to this particular school or who have experience from this particular company. And I know, and those are like high achievers and, and, or that company has given them great experience and you might absolutely be right. And maybe it makes sense actually to be sort of very uniform early days because you have to outperform much bigger companies. You have to hit above your weight. And sometimes the most effective way of doing that is having very like-minded people who are working together. However, you are susceptible to change that you won't see coming because that similarity is effectively putting blinders on you and you don't have sort of the perspective that will allow you to adapt to change. And typically when we're investing in a company, it's already past that. PE firms tend not to invest in very early stage startups. And so you're already past that. And maybe diversity plays even a more important role because you are having to adapt to change. And frankly, you're introducing change and you need people who are able to sort of adapt. And a diverse set of dimensions, I think, helps.

SPEAKER_01: 27:14

And what are the biggest changes that happen? So let's go into the first 100 days. You're going to have a whole new reporting metrics for some companies that don't have good FP&A. I've been through these growth stages And you just let stuff fall through the cracks just to get to where you need to get to. And then you get professional investment capital. You have to be a professional. That's why we call this podcast Growing Pains because you're growing up. And even a sophisticated venture is going to make some of those demands on you. So what are the most important changes that you see consistently happening for you and for Diversus as a whole? Because there's a whole bunch. There's go-to-market, there's talent, there's everything else in those first 100 days.

SPEAKER_02: 28:00

Yeah. So... One thing that happens is you've started a process during diligence, you've formulated a plan, the beginnings of a plan, but you only have limited access to everything, to the people, to the systems, that sort of thing. So very early day, like on day one, you have to dive in. So we tend to take kind of a swarm approach where we have operating partners with different functional expertise. And you're just really absorbing and getting your hands on everything. So you have to do a deep level of assessment to confirm or refute what you thought you knew going into this transaction. And the outcome of that, sort of the output of that exercise is a transformation plan, right? So in the first hundred days or sort of like before your first board meeting, you have to have a plan of attack Now, some things may take place on day one or day zero or day minus one. The leadership of the company that we acquired might not be part of the transaction, right? And certainly across PE, that happens more often than not. Like it's actually quite rare that the CEO will stay on post-transaction. I think it's about a quarter of the time that maybe that happens. And then, you know, of those that stay on more than half of the time within the first two years, they're replaced. And it, you know, it's not necessarily because like that person is incompetent. It's just that they might not be what you need to get to the next stage that you need to bring this company to, or they might just not be fully aligned with what you have in mind of doing with this company because you have taken control over the company and they might be done. It's like, yep, I got my exit and, and I've done, my work here is done. So in that first hundred days, you're, you're sort of assessing and having to put in place a new work structure oftentimes. Right. And, and then, you know, there may be an assessment period where it's like, I want to give this, you know, executive a period of time to see how they do. But like, I'm going to keep a close watch on this because I can't, you know, get into year two and two, year three with any regrets about not having leadership in place. So you have to make like the biggest thing that you can do is getting the right leadership in place. place. And typically you wait longer than you should. Like you never look back and say, I was too fast by making that change. It's usually, I probably should have made it six months earlier. Yeah, exactly. So you need to do the work necessary to inform potential changes in leadership. And you have to feel good about it because these changes don't come without cost. Um, and, um, and so, but there, there's certainly a cost of, of not, of, of not making action.

SPEAKER_01: 30:58

Yeah. And when you do those leadership changes, how much, so you mentioned 25% of the CEOs will stay, then another 50% of those are gone. So really only about 10 to 12% are staying, uh, post exit. How does that impact the rest of the SLT? And for that matter, if it's the leadership of engineering that changes next, how many of those are loyal to that engineer and want to move on with them?

SPEAKER_02: 31:24

It could happen, right? So it depends on the nature of the company and how it's built. And it's something that you have to keep in mind. So we're always going to be doing sort of talent assessment and identifying who the keepers are that we really have to invest in to make sure that they're part of the solution and they feel good about that. and they're ready to step up and that sort of thing. We might identify some where it's like, well, I don't have enough data to know whether they're part of the solution or not, but I have to make that decision within a quarter or two. So how am I doing that? And if there are others where it's like, well, we need to uplevel this or like we're going to change the shape of the organization in a way and maybe there's efficiencies to be gained in doing that. then you have, you know, in that first 100 days, you have to have your plan of what changes you're going to make. And you don't want to do these changes sort of onesie-twosie over the course of a year. It's better to sort of have a strong plan of what you want the organization to look like and kind of do it all at once. Sort of take the hit, but also get the full benefit of putting in place the organization that you think you need.

SPEAKER_01: 32:40

I like that. That's sort of the Bill Horowitz line. If you're going to eat shit, don't nibble.

SPEAKER_02: 32:45

Yeah, I try to avoid that metaphor when I'm in the

SPEAKER_03: 32:54

midst of

SPEAKER_02: 32:54

it. Yeah. And you have to come to terms with the fact that you might have 50 or 60% attrition in the first year or two, right? That seems very extreme and detrimental to the success of the company. But it happens. This represents a pretty significant change in the direction of the company and how it goes about its business. You know, if you've invested in a company that's sort of a lifestyle company, meaning like it's been, they've been doing just enough to sort of maintain a nonprofit to keep, you know, happy and that sort of thing. And then along comes an acquirer that has a growth strategy in mind. And so you're going to put the pedal to the metal. And it was like, that's not what I signed up for. I don't want, you know, That's too hard, right? And I don't want a piece of that. And so you want those people to self-select out or you need to help them out, but they're not going to help you get to where you need to be. You need to... attract and retain people with the right mindset. And it's typically a high performance mindset.

SPEAKER_01: 34:02

Right, right. Okay. And your MO in terms of company tenure within the portfolio is three to five years? Just to say anymore, right? You

SPEAKER_02: 34:11

know, it used to be five years was sort of a good rule of thumb of a horrible period for a PE firm. You know, the market dictates that, right? And so that can certainly be extended. And it's possible that you know, you could achieve your sort of your value creation goals earlier than that. And the market is good and there's a good opportunity, but, but usually we're focused on getting to where we need to be. And, you know, there's all sort of the standard metrics that we look at around either done, rule of 40, retention metrics and that sort of thing. And there could be other measures that are, that are particular to the company and the situation around the product mix or the markets that they play in and that sort of thing. So that's what you have to focus on is achieving those. The timeline is important though, because it forces a sense of urgency. You have no time to waste. And so that's why that making the big changes early. And sometimes you're going to be underwriting a significant investment to grow And you want to do that early days, right? You don't want to do that in the out years. So you're going to be more focused on in the out years. So if you're going to be taking a hit and spending a lot, you're going to do that in the first couple of years. So you have to be ready for that.

SPEAKER_01: 35:38

Right. And let me ask you, I can't do a podcast without mentioning the impact of AI. Are you using any of that in your due diligence process? Have you built an agent to do some due diligence? I have

SPEAKER_02: 35:54

not been replaced by AI

SPEAKER_01: 35:56

yet. No, of course not you, because there's all the people interviewing you still have to do it.

SPEAKER_02: 36:02

Yeah, so we do so in some limited ways, but it's not sort of core to our process yet. Okay. But because I have a lot of experience applying AI both to business operations and to technology, And I see what the potential is and being able to aggregate knowledge obtained from a variety of sources and being able to interrogate it in a way that gives you meaningful answers is useful. And, you know, that's what we're doing. And so leveraging LLMs and leveraging agents to help with that is certainly, like, the potential. And I imagine that there are other PE firms that are doing that. And there's certainly lots of solutions providers that are building such systems.

SPEAKER_01: 36:49

How many agent sellers are you seeing a day? I don't

SPEAKER_02: 36:55

know, because I have an agent that weeks them out.

SPEAKER_00: 36:58

Exactly.

SPEAKER_02: 37:00

Yeah, a lot. You know, AI is sort of on everybody's mind. It's on the mind of the LPs that are, you know, investing in the funds that we are deploying. It's certainly in the minds of the operators. And it's, you know, it has to be in the minds of the companies. And part of that is like, you know, how does that impact your thesis, right? So now, if you're not contemplating leveraging AI or putting AI at the center of your offering, you're probably behind. And so it factors pretty much into every thesis, every acquisition that we make, and certainly into the companies that we already own as part of our portfolio. It's front and center. And obviously it's like table stakes that you're using AI for Code Assist and for all of these other things using Copilot or OEM or something like that. You're using Cursor or Windsor for one of these tools. That's just sort of the assumption now. And obviously it's not always evenly applied, but on us to make sure that we're getting the full value there.

SPEAKER_01: 38:09

Okay. Yeah. Somebody said, I'll happily get my 450 bucks an hour to Yeah, right. Yeah,

SPEAKER_02: 38:17

exactly. You're my code, yeah. Um, but, uh, yeah.

SPEAKER_01: 38:23

Um,

SPEAKER_02: 38:24

uh, yeah, that's, that's legit. Right. How do you sort of turn something that you effectively rapid prototypes using cursor into something that will scale into a multi-tenant SAS solution. Right. So, but you can't deny the impact that very quickly without having to write the code directly longhand.

UNKNOWN: 38:48

Yeah.

SPEAKER_02: 38:49

Being able to prompt up a functional POC.

SPEAKER_00: 38:52

Yeah.

SPEAKER_02: 38:54

You know, it involves stakeholders and even customers and that sort of thing to shape it. Having something that actually works is profound. And, you know, it's sort of a logical progression from having, you know, like high fidelity prototypes to now like clickable prototypes that sort of behave, you know, pretend to behave. And now it's like actually the application, right? And because our interaction, sort of our expectations of how we interact with software is changing with agents, it actually kind of shifts the focus away from presentation and more on interaction.

SPEAKER_01: 39:30

Right, right. And so let me ask you a business question around that. You know, there's the famous quote from, I think it was from Sasha Nadella, who said that SaaS is going to die through agents now because, you know, vertical SaaS anyway. Yeah. And how are you seeing that, A, with your portfolio and B, generally?

SPEAKER_02: 39:48

Yeah. So provocative statement, which SaaS is a big word. So I don't know if my if I'm going to apply it that broadly, but certainly

SPEAKER_01: 39:56

vertical SaaS. I mean, think about it. It's an attribute on a database and agents can go across databases.

SPEAKER_02: 40:02

So there's certainly categories of SaaS applications that are sort of workflow built around other systems of record that lend themselves to like crime for disruption with a general workflows. And so if you find yourself investing in or building a system that can be replaced by agentic workflows, you should be looking on how you get into the agentic workflow business and out of the business that you've spent potentially decades. So it definitely impacts how we view investment opportunities, and it does impact the role that the systems that our portcodes build, how they play in that world. So it used to be the case like, well, your application has to have an API, right? It has to be connected, programmatically accessible in a larger ecosystem. That's been true for well over a decade. Now, that's not good enough, right? You have to expose capabilities that can be leveraged by an agent that may be working across multiple systems like your own, and you have to be able to plug into that. Or potentially you're building the agents that are leveraging different systems that do specific work. And so it's a different pattern. model to be thinking about. And other people are thinking about that. So if you're not, then you're probably

SPEAKER_01: 41:31

wrong. Roadkill. Yeah. Yeah. Interesting. Interesting. So in the last while, have you changed your thesis as a result of the advances in AI?

SPEAKER_02: 41:43

I think we've refined it. And basically there's an AI component to not just the criteria that we used when evaluating companies that we might potentially acquire, but thinking about the role that they might play in a largely agentic world. Also sort of expectations about the velocity of software development. And so we may look at a company that has a very large engineering team and the first thing that we'll think about is like, if we're able to apply AI more significantly, what would this team look like? And sometimes it's not just like, oh, we could reduce the headcount here, but it may actually change the people who participate in product development.

SPEAKER_01: 42:32

Right, right, right, right. Or you just use that engineering team and scale with AI.

SPEAKER_02: 42:38

You could, yeah. So it also may give you broader capabilities to pursue more things or pursue things faster, for sure. Right.

SPEAKER_01: 42:45

Well, listen, David, it's been great to talk to you. I appreciate all your insights and for voting for what's going to happen and helping our audience out understand what you're looking for when you're doing these due diligence processes. And perhaps they can shape up in advance of meeting you. You've got a great reputation, both yourself and your organization within the tech community. So congratulations on the portfolio you've built and the rewards you're gaining from it. So thank you very much for joining us today.

SPEAKER_02: 43:12

Thank you, Sean. Thanks for the opportunity to

SPEAKER_01: 43:14

talk. All right.