Vista Equity Partners revamps software companies by following detailed protocols
wsj.com
wsj.com
1. I agree with the "tastes like chicken" argument, especially for enterprise software. Most enterprise software is basically CRUD apps with a data analytics component where most of the complexity is in integrating with existing 3rd party systems and processes. It really is mostly plumbing.
2. I think this article does a fairly good job in raising the red flag that most of the profits are on paper. I say this because a funny thing about enterprise subscription software is that companies can spend a lot of money on it, but the purchasers are often not the people actually using the software. This can create a situation where things look OK for a while as the revenue rolls in, until one day when the folks with purchasing decision power actually talk to the end users, and the end users say how much they hate the product and all they are doing is working around it with an inefficient process (yes, I've been involved with enterprise software before). Then the software subscription is cancelled, and the subscription revenue can have a huge decline over a very short period.
Sounds like the formula is:
1) Buy the company
2) Shut down the main office and move it to some cheaper city, accept attrition
3) Fire all employees over 30 (using the patented "IQ" test as a cover), replace them with young kids or "HPELs"
4) Install a Glengarry Glen Ross style sales regime
5) Hold on for a few quarters while numbers are improved from all the cost cutting
6) Quickly bail and sell the thing off before anyone notices it's all being held up by duct tape and bailing wire
7) Wash hands. Repeat.
The main office is in a pretty expensive location and it is currently being expanded to close to double the size it was when the company was acquired.
There are a lot of young kids being hired, but also a lot of older people as well. Attrition has been pretty low and I think only a handful of people at the entire company have been layed off.
Cost cutting does not seem to have been particularly extreme if it has occurred. The benefits package and travel policies have gotten slightly more generous since the acquisition and annual raises have continued the trends from before the acquisition which made it possible to keep reasonably close to what you could get by changing companies.
All that is missing is loading the company with debt to pay "management fees," to the acquirers before cutting and running, leaving the founders and remaining shareholders with the bill. Organized crime have been known to do this as well. A handbook of investment anti-patterns, common hustles, and ways to identify crappy investors would be really useful.
There seems to be a tier of capital that just needs somewhere to go. It is not allowed to take the direct risks of angel or seed rounds, but can participate in venture funds, or funds of funds that include hedge funds and alternative assets, participate in growth rounds, and some really sketchy penny stock RTOs, but it's like they are prevented from investing while exercising any specific expertise.
Also, whatcha think on the article? Do you feel the process was valuable or brought positive non-obvious changes faster than they might have otherwise occurred? Also given the "tastes like chicken" genericism comment in the piece, what's a story that you think could /only/ have happened there?
Thanks!
Edit: real question
It very much reminds me of that show The Profit. Fix the books first, so you know where you're really at and what really needs fixing. Cut anything not making money. Focus on scaling the core business. I've seen all of these changes happen or are in progress.
Overall they've done a good job. As an old timer that's seen the good times and the money just spilling out, I can't help but want to grumble when they start cutting the fat, but it all makes perfect business sense.
I guarantee you that unless your company recently downsized (or is very small) there are things you can cut, because no one cared enough to fix them or they thought it was cool to have X even though X is not returning value.
A million times better that GSuite.
Does this mean unprofitable markets or things like janitors?
They were dumb projects anyway.
Of course, that was nothing that couldn't be solved through further attrition.
Also the liberal use of the word debt in the article worries me in the UK there have been a number of scandals where PE buys a company loads it with debt and flogs it to some dozy fund mangers and a few years later it all collapses - Debenhams is one example
The primary reason is that protected minorities score lower than average on IQ tests; without a legitimate business reason to set an IQ cutoff, you can be sued for discriminatory hiring. And because IQ is so granular, you don't want to argue in court that 1 point is a business necessity when you set a threshold of 110, and you reject a minority candidate with a 109 score.
Any employment requirement that produces a disparate impact has to be proven to be reasonably related to job performance. In practice, that probably means some kind of validation study tailored to each specific job catagory. That’s expensive.
[1] - https://www.theatlantic.com/business/archive/2017/04/economi...
We do quite a bit of general research and proof of concept as a part of our backlog, so the budget is there.
What do you/Vista consider to be the well-defined problems that machine learning solves? My understanding is that it is less well defined but I'd like to know what you think.
https://www.criteriacorp.com/resources/ccat_prep.php
Source: myself. I also work for a Vista company
https://www.facebook.com/l.php?u=https://www.wsj.com/article...
[1] https://www.google.com/search?q=Billionaire’s+Secret+Buyout+...
I'll just say this - whatever Vista's top secret directives are, they didn't seem to have any sensible directives around employee retention for individual contributors. IMO their policies actually encouraged people to leave. The team I was on lost 6 people in 6 months and it became comical to watch my manager try to hire people as upper management constantly froze/unfroze hiring, destroying hiring pipelines and providing a terrible experience to some great candidates.
I've kept in touch with quite a few of my colleagues from those years and there's a clear pattern. People who have left (including me) have gotten promotions, large pay raises, are working for companies with better brand recognition, etc. People who stayed are doing the same jobs for basically the same pay, but have a much higher workload to fill all the gaps that came from multiple rounds of layoffs and higher than expected (the CEO stated this in an all-hands call) attrition.
Lesson I learned in all this: Private equity acquisition = Immediately find a new job. If you have a good manager ask them to lay you off so you get a severance package and help the manager hit their headcount reduction quota. Unless you are in a privileged position, you're not going to get anything for sticking with the company through tough times.
Translation - the majority of the returns reported here are based on estimated valuations calculated by Vista rather than actual returns resulting from business sales. It goes without saying that 99.99% of the time this means the returns are inflated. It is possible that they've only calculated returns based on companies sold, but unlikely.
So not only can they manipulate the valuation on firms they haven't sold to make their funds look better. Even with that + the ability to fudge IRR numbers, their last few fund returns are not so mind blowing that we should believe these guys have a magic formula.
So, here's the complication - I can speak for myself in this regard, but i'm not sure how a principal could or should navigate this issue with coworkers or on behalf of employees.
ideas?
Ok
His company is progressive and he's a philanthropist to boot!
No negative acquisitions experiences or anything like that in the article either.
A friend who works at ANZ tells me that they have come up with another way of culling jobs. They have embraced Agile wholeheartedly. And every employee has to be certified in Agile. Once an employee is certified he has to apply to be part of a squad, chapter, tribe etc.
Now to ensure that people are fired for "performance" reasons, there are only 800 openings up for grabs for 1000 odd people.
I think it is a nightmare when after spending years in a company you have to re-apply back to just keep your job.
Is this correct? That sounds like the measure of success for a VC, I thought PE was about a consistent return better than the public markets, I didn't think that had to mean "cashing out".
Unlike LBO operators and private equity firms, we have no “exit” strategy — we buy to keep. That’s one reason why Berkshire is usually the first — and sometimes the only — choice for sellers and their managers.
Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage. Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70 ¢ on the dollar, and the public debt has taken a far greater beating. The private-equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private.
https://www.quora.com/Is-Berkshire-Hathaway-a-private-equity...
Ultimately investors in both kinds of operations want to eventually sell their holdings for cash. It is only at that point that one can truly judge the success or failure of an investment.
That's all this is really saying. Vista owns a bunch of stock that will probably be valuable but they won't really know for sure until they turn it into cash.
As a company becomes big the risk goes down but the growth goes down as well by necessity as it saturates its niche. Look at say Cellphone manufacturers - when everyone has a phone already growth potential is limited vs selling everyone a phone. On the other hand it becomes far harder t be wiped out when a behemoth. Corporations that were pretty much dead and everyone else knew it zombied along for decades. Even if they closed operations tomorrow they would still have a large amount of capital and collateral and thus investments are more protected and less risky.
You can turn a restaurant into a franchise chain or have it go bankrupt or but short of managing to get the entire chain seized as a front for illegal activity or similar extremes you can't lose all of the value of an entire franchise.
They technically can hold onto their early successes as the start-up became google but then they aren't really venture capitalists anymore and have shifted into being company stockholders. In order to see those types of exponential returns again you need to fund new businesses. However there is also the growing expense of all of the failures making it not a free lunch. If their total returns between all of their failures and successes are less than just holding their existing ones it is clear in retrospect that they should shift their funding to just the safer investments and they should have quit while they were ahead.
Or any paid-reader only sources?
HN FAQs [1]:
It's ok to post stories from sites with paywalls that have workarounds.
In comments, it's ok to ask how to read an article and to help other users do so. But please don't post complaints about paywalls. Those are off topic.
If my eyeballs were rolling any harder at this they'd pop out of their sockets and race off over the back of my head.
That's the thing about billionaires. Everyone agrees with them. Just ask them: everyone they knows agrees with them. Every brainfart is the golden truth, hand-delivered by Minerva. The idea that people might be nodding at any halfbaked notion to get a fullbaked paycheque seems to have slipped their mind.
> Vista, which has done more than 300 deals, tells investors it has never lost money on a buyout
I can't tell who they're kidding here, their customers or themselves.
That does sound completely absurd. They must have some very specific definition of what it means to "lose money on a buyout".
Then they pay large sums for "proprietary" signals, like satellite image analysis.
If one person is sustained by issuing fake smiles to strangers, and another by exchanging real ones with colleagues, how is that extroversion vs. introversion?