Latest / Private Equity Data Guy / The Metrics Look Fine. So Why Is the Business Stalling?

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The Metrics Look Fine. So Why Is the Business Stalling? · Private Equity Data Guy

• 0:00
  Private equity used to be a financial industry and now it's a talent industry.
• 0:03
  And I think he's right.
• 0:04
  I mean, I think that describes it as succinctly as you can.
• 0:08
  And we are in a period of change in private equity, I think.
• 0:12
  Right.
• 0:12
  Everybody feels that pressure from the top to the bottom and around the board table.
• 0:17
  And I think that there are a lot of portfolio companies that are experiencing that.
• 0:20
  We know that.
• 0:21
  And I think we are sort of on the.
• 0:24
  We're on the step of a change.
• 0:26
  Right.
• 0:26
  Where value creation and value extraction is going to be a different cadence than it was historically.
• 0:32
  I think we're about to see a change in the industry.
• 0:35
  I think that's very real in B2B technology portfolio companies.
• 0:40
  Behind every value creation plan, there's a data problem nobody wants to talk about.
• 0:44
  Fragmented systems, metrics nobody trusts, and decisions made on gut feel dressed up as analysis.
• 0:49
  Welcome to the PE Data Guy.
• 0:51
  Each week, host Graham Crawford talks to the operating partners, advisors and practitioners who are who are doing the work inside portfolio companies.
• 0:58
  If you care about what actually drives returns in the market, then you're in the right place.
• 1:02
  The PE Data Guy starts now.
• 1:06
  David Newcomb has done something almost nobody in this industry has done.
• 1:09
  He sat in the operator's seat through two private equity transactions at the same company, including the founder's exit.
• 1:16
  And the second buyer told him to his face that they were buying the business because of what he was building.
• 1:20
  Here's a name for what happens to companies after the wire clears.
• 1:23
  And it's the most useful phrase I've heard this year.
• 1:25
  And that phrase is value drift.
• 1:27
  Today we're going to talk about what erodes after close, why the board pack stays green while it happens and why the people who see it first are the ones who can't say it.
• 1:35
  Welcome to the show, David.
• 1:36
  Thanks so much for coming on.
• 1:38
  Thanks for having me.
• 1:39
  Graham.
• 1:39
  Good to see you.
• 1:40
  Yeah.
• 1:41
  And I should reference that you and I were brought together by this wonderful tool called Bawdi.
• 1:45
  Bawdi AI, for those interested, who facilitates introductions between people who it thinks might be interested in talking to each other.
• 1:52
  So I've had a great experience so far with Bored M.
• 1:55
  I think I'm over 50.
• 1:56
  Introductions with bawdy now, what's your experience been?
• 1:59
  Oh, it's fascinating.
• 2:00
  I'm probably at about 20.
• 2:02
  Equally as valuable.
• 2:03
  I'm very impressed with what they're doing.
• 2:06
  Yeah, it's interesting.
• 2:08
  There's a kind of agentic infrastructure going underneath it.
• 2:12
  It's independently facilitating introductions in a way that humans used to, but it's able to do it at so much more scale with likely much more accuracy as well because it has a, a fuller picture and it knows.
• 2:22
  And all the time, of course, as a data person is building up a knowledge base of the intros that work, the ones that don't, et cetera, et cetera, and it gets smarter.
• 2:30
  Impressively accurate.
• 2:31
  Like that's one of the things I'm most impressed with.
• 2:34
  How it's learned and how it's gotten even more focused is really remarkable.
• 2:39
  I would highly recommend it.
• 2:40
  Yeah, it is interesting and one thing I've observed about it, and this is true of many software platforms, you notice that calendly started with wanting to just arrange meetings, but now it wants to take transcripts and organize other
• 2:53
  things.
• 2:53
  And I think that's one of the risks with bawdy that goes off into other areas, you know, add too many features on to do everything.
• 3:02
  But it's just fantastic at the introductions for sure.
• 3:04
  So I'll put the link in the comments for anyone who in the show notes for anyone who wants to try bawdi out for themselves.
• 3:12
  Fun fact about bawdi, by the way, did you know that my body is Australian?
• 3:16
  When he calls me on WhatsApp or whatever else, it's Australian.
• 3:19
  Is yours the American version?
• 3:20
  Have you ever spoken?
• 3:21
  No, no, no.
• 3:22
  Yeah, it's Australian as well.
• 3:23
  Yeah, yeah.
• 3:24
  Apparently there's an American version out there and I think I actually asked him about it and he said, oh, you got me there, Graham.
• 3:32
  And it was funny because I've spoken to many other people and most everyone else I've spoken to has got the American version of.
• 3:39
  Really?
• 3:40
  Yeah.
• 3:41
  The only other people I've met who've got the Aussie one have been Brits.
• 3:44
  I don't know whether it's a sense of humor thing or a dry wit sarcasm thing.
• 3:48
  I don't know, we'll see.
• 3:49
  But yeah, yeah, yeah.
• 3:51
  Just another wonderful personalization thing.
• 3:54
  We talked about value drift and this phrase and this concept that you introduced me to when we were talking.
• 3:59
  Can you just share your definition of it for me again and for the audience's benefit?
• 4:03
  Because I think this is something that the whole industry experiences and companies inside and outside of private equity experience.
• 4:09
  Yeah, I agree.
• 4:11
  I think it's probably most prominent in the founder exit cycle in that first hold.
• 4:17
  Although if it's not managed well, it certainly will continue to the second hold or third hold.
• 4:25
  But really I think what it amounts to is the non metric contributors to a business's success that maybe aren't as visible or tangible in a spreadsheet or a report, but absolutely have contributed to why a business sits where
• 4:49
  it does in a market and why customers respond to that business.
• 4:54
  And generally, I mean it's tied directly to a founder and that makes sense.
• 4:58
  And I think we all talk about a founder's contribution and the absence of a founder.
• 5:02
  We recognize that that that's something that has to be managed.
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  But I think, you know, that value protection that that founder created often goes overlooked.
• 5:12
  And I watched it, I had the fortune of watching it happen where you know, sponsors come in and they're very focused on the asset right as you would expect them to be.
• 5:22
  They're focused on revenue, they're focused on margin, they're focused on earnings.
• 5:26
  And all of those things are prioritized.
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  But what's not prioritized is the why the what, what allowed that to happen?
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  What, what compelled customers to be acquired and to continue to be re retained.
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  What created the presence in the market that that sponsor was attracted to in the first place beyond the revenue, beyond the earnings.
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  And what happens is when that transaction occurs, you know, as we all know, first thing that generally is on the table is the transition of that founder.
• 5:59
  And as soon as that begins, things start to change across the business.
• 6:03
  And generally they're not metrics, they're not numbers and they're often as I said, hard to see, but they start to change.
• 6:12
  Do you see this equally when a founder is exiting like imminently after the wire hits compared to a founder's on a two year owner, do you see the dynamics change?
• 6:22
  Even if there's a two or three year owner attached to that founder, do the dynamics still change after the ownership shifts?
• 6:27
  I think they do.
• 6:28
  And the reason I think they do is because the founders passion, the founder's connection to the business has shifted and you know, even the best intentions can't really avoid that passion change.
• 6:42
  I certainly watched it happen in acquisitions that we did where founders came in on earnouts and you could tell immediately that there was a shift in the business and you could feel it with the other employees, you could
• 6:55
  feel it with customers, you could feel it with just how the market responds to that business on day two versus on day zero.
• 7:02
  I think it does happen and I think, you know, I think we're aware of it.
• 7:08
  I think the business or the industry knows that, you know, founder exits are a tricky business.
• 7:13
  I mean that's, that's, this is an event that needs to be managed.
• 7:16
  But I think what we forget about is why, what the underlying, you know, drivers are when a founder moves.
• 7:24
  I mean, if you think about, in my experience, I, I was lucky enough to be recruited by the founder in my last endeavor and you know, his enthusiasm and his passion and his drive inspired me.
• 7:36
  That inspired customers, that inspired employees, that inspired partners and vendors.
• 7:41
  And when that was gone, it was noticeable.
• 7:44
  I mean, I could see it across the business.
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  And even the best, most well intended operators can't replace that.
• 7:51
  In a perfect world, what happens is sponsor comes in, they start financial engineering, they start operational efficiency.
• 8:03
  The market is organically growing, which is our legacy.
• 8:06
  And that drift, you don't really notice it so much, right?
• 8:10
  It's not as, it's not as prominent as it is today.
• 8:14
  It might be hidden by other things, right?
• 8:16
  Correct.
• 8:16
  And maybe the damage it does or the impact it has isn't as big as it might be today where we're looking at so many small businesses and we're looking at really sort of reimagining value in those businesses and
• 8:29
  those portfolio companies.
• 8:31
  I managed to see this from 2020 to 2026 through two transactions.
• 8:38
  And the further away we got from 2020, the more obvious it became.
• 8:42
  And, and to your point, on day one it wasn't so visible.
• 8:46
  But on the third year of the hold, looking back, sort of like, well, I can see that we didn't protect that value well enough.
• 8:56
  We could have done a better job as a, as a, as a leadership team, as a board, and now we're paying for it.
• 9:03
  Just on the other side of the coin here, right.
• 9:05
  I'm the founder, CEO of a nearly 12 year old company now.
• 9:07
  Right.
• 9:08
  One of the mistakes which I've been led away from, that I think some founders make too early is that the founders who start a company with an exit in their eyes often I think build the company the wrong
• 9:16
  way and try and remove themselves from all aspects of the business as soon as possible because heaven forbid they have to do an earn out at the end of it.
• 9:24
  So that's why I think starting with an exit in mind is the wrong idea.
• 9:28
  When I started this business, I had worked internally at large corporations for most of my career, so sales and marketing weren't really a thing.
• 9:35
  Sales in particular because the work lands on your desk usually most of the time, like, hey, go make this initiative happen, go deliver this program.
• 9:43
  I'm going to migrate to this infrastructure, whatever it might be.
• 9:45
  I still do.
• 9:45
  I'm 18 months in, quite well established, up to 14 employees.
• 9:49
  I still do all the Sales myself.
• 9:51
  And that's because anecdotally I was told by a very great salesperson that I met that founders have a 30% higher close rate than almost anybody that they can hire.
• 10:03
  So I kind of held that close, did the hard yards, taught myself the craft, and still do it.
• 10:09
  And I think it will be one of the last things that, that, that I let go of.
• 10:14
  To your point, that that wouldn't show up on a board metric anywhere.
• 10:17
  Like if I stopped doing it, then I think if we assume the anecdote to be true, then then close rate would drop 30%.
• 10:23
  Amazing.
• 10:23
  On the deals that nobody, you know, it's hard to, it's hard to draw a line.
• 10:28
  It's hard to draw a line back to that.
• 10:29
  So from a founder's perspective, actually Bill, like there's a hard balance to, there's a, it's a tricky tightrope to walk, right, because you want to, you, you want to make the business independent enough running without you, such that
• 10:42
  it's an attractive acquisition target.
• 10:43
  But on the other hand, if you try and make it too independent, then you lose some of that magic which, which creates that value drift on the other side.
• 10:50
  No, I agree and I, and, and the interesting thing about that is, you know, in my experience there, there are fundamentally two, two kinds of founders and two kinds of leaders, right?
• 10:58
  The, the sort of Command and Conquer leader that, you know, surrounds himself with a leadership team that, that waits be told what to do or how to do it and then the real sort of aspirational, inspirational leader who
• 11:11
  is really trying to build an effective, high performing leadership team.
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  However, in both cases, the absence of that founder has an impact.
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  Right?
• 11:21
  So the Command and Conquer team stand around and wait or they don't know what to do.
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  So someone new has to tell them what to do, right?
• 11:28
  Correct.
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  And the inspirational team loses that encouragement, they lose that support, they lose that, that aspirational North Star that they've had a purpose.
• 11:40
  And, and so again, that drift begins.
• 11:43
  And, and, and you know, it's so imperceptible at first, but if it isn't identified, I think, you know, it, it starts to amplify and it becomes a, a bigger and bigger factor in how the business is performing.
• 11:58
  Particularly when, you know, the operators that are installed after the fact don't really have the institutional knowledge that the founder had.
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  They don't have that domain expertise.
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  And, and I've seen, I mean we've all seen that they're excellent operators.
• 12:14
  They, they certainly understand financial engineering, they certainly understand operational efficiency, but they don't understand how that correlates directly the thread that ties that to that, to that business and that market and that customer base.
• 12:27
  And when that's absent, it's, you know, there is a, there is a result, there is an outcome and it's generally not good.
• 12:32
  Yeah, the same is true.
• 12:34
  And I was, I had Kit Lyle on the podcast a couple of weeks back and he was talking.
• 12:40
  Actually the opposite can also be true.
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  That if you over index on industry experience and not on leadership in the particular situation the company's in, then you can also lose out on that.
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  Because if, you know, you might have all the industry experience in the world, but if you don't know how to lead a team that's in sort of chase mode or in crisis mode, then you might be, you might
• 12:58
  be struggling.
• 12:59
  No, I agree.
• 13:00
  And you know, I think that the most successful executions have Bo Dealy, that leadership team, that, that, that stays after that transaction, provides that bridge.
• 13:11
  I mean, that's the ideal scenario, right?
• 13:13
  But that's not always the case, especially in a command and conquer or even in that inspirational scenario where suddenly that's gone.
• 13:21
  But that team struggles as well.
• 13:22
  I think ideally that the partnership between, in my experience, partnership between myself and you know, that board and the sponsor was really important.
• 13:34
  We understood each other, we valued each other and it was very successful.
• 13:39
  So yeah, let's talk about KPIs and board decks and why this doesn't always catch it like again from my side of the fence, when we're doing data advisory for a company, I always insist that my team goes on
• 13:51
  site for at least the majority of a week, like during a six week diagnostic window.
• 13:58
  Because with just the board decks and the database access and the zoom calls, you don't get anything like the full picture of how a company runs and how data is being used to make decisions in the company.
• 14:07
  My hypothesis is the same is true on these board decks.
• 14:10
  Like you make an acquisition and the sponsor sets it like decides, here are the KPIs we're going to have in the board deck that are going to give me complete control over the company.
• 14:18
  But I don't think it does, does it?
• 14:21
  No, I don't think so either.
• 14:22
  Well, I shouldn't say no just unilaterally.
• 14:25
  I think often it doesn't.
• 14:26
  I think it could, but I think often it does not lead to that kind of control and that kind of command at all.
• 14:33
  In my experience There are really two sets of KPIs, right.
• 14:37
  We were, we were engaged in two things.
• 14:38
  One is sort of continuing to grow an existing mature business.
• 14:41
  But we were also very engaged in transforming that business and opening a new go to market strategy and a new operational architecture based on the product and, and the technology that, that had always been there.
• 14:54
  And so one was sort of a very new high growth, accelerating channel and one was a mature, you know, very tried and tested channel.
• 15:05
  And so we had two sets of KPIs.
• 15:07
  The drift didn't impact the high performing accelerating new channel as much as it impacted the mature, tried and true channel.
• 15:18
  And that makes sense.
• 15:19
  Right?
• 15:20
  Right.
• 15:20
  What happened is what I saw or what I experienced is that the dashboard was green as, as we've talked about in the past.
• 15:27
  Right.
• 15:28
  Things look good, growth was within tolerance, margins were within tolerance.
• 15:32
  This was a software company.
• 15:33
  So Churn was well within industry tolerance.
• 15:36
  But the reality was behind the scenes, if you looked at the metric set really mattered, that part of the business was actually atrophying.
• 15:42
  Net new sales, net new sales were down.
• 15:44
  Even though those other metrics were green and looked great.
• 15:47
  There was a trend that was beginning that wasn't as visible as it should have been.
• 15:52
  And I noticed it because I had the, the, the good fortune to have been in the industry for some time and, and so I could see it from, from a very long distance, but others couldn't.
• 16:03
  It just wasn't as visible.
• 16:05
  I actually wrote a guest article for the Not Very Private Equity newsletter talking about this in the context of software businesses in particular, if you don't look at the right metrics, especially now, customer Churn is obviously one of
• 16:17
  them.
• 16:17
  Ghost users is another users that are paying the monthly subscription or the annual subscription, but not logging into the platform Requests for full data exports is another one that I think is particularly useful.
• 16:26
  And those things are very rarely on the board pack.
• 16:29
  But particularly now when some software is going to be super powered by AI and other software is going to have its moat disintegrated by AI.
• 16:38
  Like those are, those are the critical things that I think more and more people should look at.
• 16:42
  No, I agree.
• 16:43
  And the key thing that we just discussed, one would think that's what matters.
• 16:48
  Those are the things we should be looking at.
• 16:49
  Right.
• 16:49
  Growth margin Churn, if all that looks great, stands to reason that you would think you've got a healthy business on your hands.
• 16:58
  But the truth is there's a lot of beneath that that signals, you know, bad times coming for sure.
• 17:04
  Yeah, the leading and the secret leading indicators, they're unchanged all the time depending on the conditions of the industry again like four years ago in software, like you wouldn't need to worry about those things, but here we are
• 17:16
  in a new paradigm in terms of getting people settled.
• 17:18
  You shared a story with me when we talked about a newly installed, I think, CEO and CRO that you sat down with and you asked them the question of how do you think this business got here?
• 17:27
  Can you just talk me through what happened?
• 17:29
  That room for the, for the audience please?
• 17:31
  Yeah, so this was my third CEO and I think third CRO that had been installed.
• 17:37
  And in talking to them I, I, I got the sense that they, they weren't really connecting very strongly with the business or the market or the customer base or, you know, the catalysts and contributors that, that really matter.
• 17:51
  And so I asked the question, how do you imagine, how do you think we got here?
• 17:54
  You know, what were the driving factors that, that allowed the business to get here?
• 17:57
  And, and there was simply zero answer.
• 18:00
  And as you can imagine, it got very uncomfortable because I think it was perceived as, you know, sort of an aggressive challenge.
• 18:07
  What I was really trying to do is start a conversation and, and, and really kind find some common ground that, that we could align on and, and, and, and bridge what was happening to this value creation plan that
• 18:19
  existed that might have been a little disconnected, sort of playing out over and over again.
• 18:23
  It didn't mean that they didn't understand the industry exactly.
• 18:27
  It just meant that they didn't understand the business's place in that industry and in that market.
• 18:32
  And my conclusion was, well, if, if you don't understand that, how can you execute this, this plan effectively?
• 18:41
  How, how can, how do you know that, that you're succeeding there, there's a translation between the what and the why and then the outcome that is missing.
• 18:52
  And yeah, I've seen that, I've seen that repeat over and over and over again.
• 18:58
  Unfortunately, in that instance, I wasn't able to fix that gap successfully very well.
• 19:04
  So then you had the fourth video.
• 19:05
  No, I think it was very telling.
• 19:06
  This is where our world's crossed over a little bit and probably what led Boardie to introduce us in the first place.
• 19:10
  So I keep meeting funds who are a couple of years into a hold.
• 19:13
  They're staring at a combination of two things.
• 19:15
  They've got an all green board pack and a flat enterprise value for the last two years.
• 19:19
  But you've, you've lived that from the inside.
• 19:21
  So what, what do, what do things feel like inside a company that sort of lead it to arrive to that point.
• 19:29
  Uncomfortable for sure.
• 19:33
  Do people know it's happening and just don't say it or like, what's the dynamic?
• 19:37
  I, I think there's a little bit of that.
• 19:39
  I mean, I, I think that it's no secret, especially in, you know, the more volatile parts of the market, you know, the small and mid mid sized market that, you know, there's a lot of pressure and a lot
• 19:50
  of stress on, on all sides of the table.
• 19:53
  So, you know, I think that, that there are some conversations that are at best uncomfortable and at worst don't happen.
• 20:01
  And certainly I've experienced that.
• 20:03
  I've been on both sides of that where they did happen.
• 20:07
  And, and it was even more uncomfortable because I started it.
• 20:13
  But I think there's a lot of head shaking, a lot of hand wringing.
• 20:17
  I think what I experienced most was a lot of operators pointing at the wrong things.
• 20:22
  Right.
• 20:23
  You know, I think you and I have talked about it a little bit where, you know, I have been in businesses where I've seen operators get replaced and reinstalled and replaced and reinstalled.
• 20:32
  And I think that that's a reflex that isn't new and there is a legacy of that.
• 20:37
  But I don't think it's effective and I don't know if it was ever effective, but it's certainly not effective now.
• 20:42
  It does not solve the problem and it doesn't provide the insight I think that the sponsor needs, that the partner needs, that everybody in the business needs.
• 20:50
  Right.
• 20:50
  I've seen a lot of that where the reflex happens just too quickly before the real contributors or the real catalyst can be uncovered.
• 21:00
  I've also had the misfortune of, of knowing what the answer was and, and trying to give it as, as directly and succinctly as I could and that not landing well at all.
• 21:11
  And any of us that have been in the boardroom probably know exactly what I'm talking about.
• 21:15
  Yeah, I think, was it, Tom Cruise does it best when he says, you want the truth?
• 21:19
  You can't handle the truth.
• 21:21
  Yeah.
• 21:21
  Yeah, there it is.
• 21:22
  Yeah.
• 21:22
  I mean, I think, look, the, the reality is that, and I don't think this is a secret and, and I've seen it in lots of podcasts and I've seen it with some of your guests.
• 21:30
  And, and you mentioned the, the Not Very Private Equity newsletter, which is great.
• 21:36
  It's a great read all the time.
• 21:38
  I don't think it's the secret that, you know, there are a tremendous amount of portfolio companies with a thesis that's just not right.
• 21:45
  It's Just missing the mark.
• 21:47
  And you know, that was hidden by a lot of factors for a very long time.
• 21:52
  But you know, a thesis that's wrong is going to lead to plans that are incorrect.
• 21:58
  It's going to lead to objectives and KPIs that are missing the mark.
• 22:02
  And I think that's a reality.
• 22:03
  I mean I think that is a, that is a truth that is emerging in the industry.
• 22:08
  And I think, you know, some really smart people are dealing with it really well.
• 22:12
  I think others are having a much more difficult time sort of embracing that and acknowledging it.
• 22:18
  And frankly I've experienced it.
• 22:22
  Yeah.
• 22:22
  And it's, you know, and I've dug through the spaghetti that kind of gets created in this situation.
• 22:28
  It's actually very rare that you find anyone who's a bad actor in the, in, in the scenario.
• 22:32
  It's, it's often far more I've found misalign.
• 22:35
  For example, we might be measuring profitability on a per order basis or whatever it might be, but we haven't agreed company wide where cost gets attributed.
• 22:43
  Right.
• 22:44
  So obviously the cost of the parts involved in making the widget, of course that's attributed.
• 22:51
  But what about the cost of like heating the factory?
• 22:54
  What about the costs of the specific machine that's needed for just certain types of orders?
• 22:58
  And I see that the sort of mid layer of cost that's not absolutely top of the house and not absolutely tagged to the cost of goods sold often gets, gets floated around and gets attributed or not attributed in
• 23:10
  terms of whatever suits the KPIs that the person who is reporting them wants.
• 23:17
  And so you end up with this misrepresentation of margin, misrepresentation of all sorts of other stuff.
• 23:22
  People have manual exceptions for pricing, for manufacturing, whatever it is outside of the system that don't get recorded.
• 23:31
  And these things come, I think when you push KPIs too hard because humans always respond to the behaviour system that's put in front of them.
• 23:37
  And if you say the entirety of my assessment of how well you're doing a job is the color of this number, then I'm going to do everything I can to make that number green.
• 23:46
  Everything.
• 23:46
  Even if it doesn't necessarily serve the company because that's not how you're incentivizing.
• 23:50
  You're incentivizing me on this one number.
• 23:53
  So it's rare that I find bad actors.
• 23:55
  I find people who have kind of.
• 23:56
  And that's why I love your phrase value drift.
• 23:58
  People have drifted into like, well, I'm going to report it this way, and it's not, it's not incorrect because there's no formal company wide definition of what correct is.
• 24:09
  Well, I agree.
• 24:10
  And I don't know if you've ever had that good fortune to experience working in a privately held company with a team and a group of people that join that business in that sort of lens or through that lens
• 24:26
  and then being in a, you know, year one, year two, year three hold when it became private equity backed.
• 24:33
  I don't know if you've ever experienced that, but you know, for somebody like me, I, I knew what was coming, I knew what to expect.
• 24:39
  I, I was, you know, well positioned, well prepared.
• 24:43
  But as you go down that org chart and across that business, a lot of people that are responsible for those KPIs have never experienced this and, and suddenly they were working for, you know, either a family business or
• 24:56
  a founder business and now they're working for an asset.
• 24:59
  And it's a much different rhythm, it's a much different narrative.
• 25:04
  And that's when I think you start to experience what you're describing is that, wow, I've drifted away from what my true north was to begin with and now I'm wholly focused on this thing and making this number green.
• 25:16
  And, and that's, that's my mission rather than building this valuable thing that became the asset.
• 25:23
  Right.
• 25:23
  That's really the disconnect.
• 25:24
  That's a great sort of way to, to describe what we're talking about.
• 25:28
  And you're looking at it as the, some of the parts you talked about, the managerial merry go round of, you know, C suite people being rotated in and out.
• 25:35
  It does set things back and it doesn't work.
• 25:37
  And it, you know, someone else has to onboard and come up to speed for another three months and then, you know, a new executive always wants to set a new direction so that, you know, the rails get shifted.
• 25:46
  I think it's pretty clear to me and you that the reflex of oh, I'll just fire and replace isn't the most effective thing.
• 25:54
  So what?
• 25:55
  Why do people keep doing it, do you think?
• 26:00
  Wow, that's a really great question.
• 26:03
  I assure you, if I could answer.
• 26:04
  That, when we both answer it, we'll write the book together.
• 26:08
  Yeah, I agree 100%.
• 26:10
  I mean, I think there are a lot of factors there.
• 26:12
  I think probably the leading factor is just legacy.
• 26:15
  Right.
• 26:16
  It's what we did and, and the outcome was still successful.
• 26:21
  So some of doing that must work.
• 26:24
  I mean, I think it's, it, you know, it's a misnomer.
• 26:27
  But, but I think that has a lot to do with it.
• 26:30
  And then I think the other thing is that if, if you have to take action and you can't articulate or identify what the real challenge is, your options become pretty limited.
• 26:45
  You know, what else is there?
• 26:46
  But I think, you know, again, we're going to talk about this newsletter that's pretty good.
• 26:50
  We're actually plugging a lot of other people.
• 26:52
  Yeah, I'll be asking Lee, I'll be asking Lee for some advertising dollars.
• 26:56
  Yeah.
• 26:57
  But I think, I think it was Lee that said, you know, private equity used to be a financial industry and now it's a talent industry.
• 27:03
  And I think he's right.
• 27:04
  I mean, I think that that describes it as succinctly as, as you can.
• 27:08
  And we are in a period of change in private equity, I think.
• 27:11
  Right.
• 27:12
  Where the really good firms are going to acknowledge that and embrace that and try and solve that problem in a different way, either before it occurs or when it's occurring.
• 27:22
  So I think it's a journey.
• 27:23
  I don't think it's going to happen overnight.
• 27:25
  And I think we're still going to see these headshots happen.
• 27:28
  I think the problem is rarely the operator.
• 27:31
  I think it's more goes back to that drift, those unseen metrics, the unseen factors, the unmeasurable.
• 27:40
  That just leads to those challenges.
• 27:41
  And the constraint you mentioned, if the original thesis of the fund is an inarguable truth that must not be challenged, then you're constraining the options that the business can take to, to, to grow itself.
• 27:54
  Well, and yeah, I mean, I agree.
• 27:56
  And, and you know, you could take that a step further.
• 27:59
  And you know, if the, if the value creation plan is, is off by five degrees, it, you know, somebody's got to take responsibility for that too.
• 28:09
  And it's a very uncomfortable conversation to have.
• 28:13
  And you know, again, our legacy is, well, you know, we'll do this thing and it's gonna, the outcome's gonna be fine anyway.
• 28:19
  Right.
• 28:20
  So certainly people that have been in the industry for a while, that's their experience.
• 28:25
  And there are gaps.
• 28:26
  Right.
• 28:27
  There are gaps in that that I see.
• 28:29
  So say, for example, you know, when we do a diagnostic on a company that might have issues with data quality issues in the CRM, from a financial due diligence perspective, you can say some things don't quite add up.
• 28:41
  There's probably some CRM issues.
• 28:42
  From a CRM perspective, you can say everything adds up.
• 28:45
  We're going through the issues are probably on the other side and no one owns the kind of the moat in the middle or the moat underneath of what's actually happening.
• 28:55
  And back to your point about the merry go round.
• 28:58
  Yes, maybe sometimes it was successful or maybe sometimes the company was successful despite the merry go round and it was falsely interpreted as the signal of the thing that made the difference difference.
• 29:09
  But in your case, I think the one you were at that had the merry go round happening did some.
• 29:17
  It eventually something worked.
• 29:18
  Right.
• 29:18
  What broke the cycle and what made it work in the end?
• 29:22
  I don't know that I would say that it worked.
• 29:25
  I think it, I think my succession was natural and sort of predicated by, well, we did what we said we were going to do.
• 29:35
  We're successful, it's time for the business to take the next step.
• 29:38
  And part of that is the succession plan that I developed.
• 29:42
  And that was good.
• 29:44
  But what's happened since, I don't know that you could say one way or another that it's successful yet.
• 29:52
  I think the after effects of a third CEO and a third or four CRO are real.
• 29:59
  That's tangible and there are real costs and there's real Runway and there's real time and space required.
• 30:06
  So.
• 30:06
  And change fatigue throughout the organization.
• 30:08
  Like it's, it's, it's.
• 30:10
  I've been in organizations that, that have had big leadership changes happen regularly or organizational shifts and people just get so tired of it and actually don't commit.
• 30:19
  They stop committing to the change into the new leader because they're like, oh, well, they'll just be somebody else in six months.
• 30:24
  That you create real fatigue, change fatigue.
• 30:27
  Well, you do.
• 30:27
  And if you, if you tie that directly to, you know, the feeling that, that that workforce has now about, well, I work for an asset.
• 30:37
  I don't work for this business that I used to work for.
• 30:39
  Yeah, the results are really start to get ugly.
• 30:42
  And I think that's what's, you know, here we are in a second hold of this business that, that we're kind of talking about.
• 30:46
  And, and that's what I see looking in is a lot of fatigue.
• 30:51
  Not just change fatigue, but, but just a general fatigue and apathy and, and some of that's, you know, sort of expected.
• 30:58
  I mean, it's a difficult thing when, when a company stalls, everybody feels that pressure from the top to the bottom and around the board table.
• 31:06
  And I think that there are a lot of portfolio companies that are experiencing that.
• 31:09
  We know that and I think we are sort of on the, the, we're on the step of a change right where Value creation and value extraction is going to be a different cadence than it was historically.
• 31:22
  I think we're about to see a change in the industry.
• 31:24
  I think that's very real in B2B technology portfolio companies.
• 31:29
  I think it's starting and I think it'll spread across the industry.
• 31:33
  There was an article again which I've commented on in a couple of places in the New York Times four days ago.
• 31:39
  It was titled Private equity is stuck with 33,575 unsold businesses.
• 31:44
  So that's a pretty hefty number.
• 31:48
  And people like, again, it's about the leading and lagging indicators.
• 31:54
  People are quick to rush and say, oh, it's just the weakness in the market, it's the high interest rate rates, whatever else, without looking at actually the shift, the, the entire industry wide shift that you're talking about, that
• 32:04
  I'm talking about, Lee's talking about of like this is now a talent business and not a finance business.
• 32:08
  And until people are willing to confront that KPI, that number of unsold portfolio companies is going to keep going up.
• 32:16
  Well, as is the, the number of continuation vehicles which is skyrocketing as well.
• 32:21
  I mean these are all signals that, that we need change.
• 32:23
  Right?
• 32:24
  I mean that's, and, and I don't think anybody argues that.
• 32:27
  And I mean, I think everybody that's adjacent and around the industry, like the le, people like me and people like you, are ready to acknowledge, yes, we need change, but I think it's slowly making its way through the
• 32:39
  rest of the ecosystem and we'll see how quickly that happens or doesn't.
• 32:45
  Continuation vehicles are just in my mind, another financial lever, a trickery lever you can pull to say it's a polite way of saying the value creation plan didn't work.
• 32:56
  Maybe with a little bit of time it'll work.
• 32:59
  And maybe some of those companies are changing the vcp, maybe some of them aren't and they are just, you know, still clinging on to the old hopes that, that it will just work in the end.
• 33:06
  You said to me your key to surviving through two transactions in, in, in your business was do what you say, which I think I love as an ethos.
• 33:14
  Can you tell me a bit more about what sits behind that?
• 33:16
  Well, I mean, I think it's, listen, that's, that's should be a, you know, an ethos to survive any business.
• 33:23
  Right.
• 33:23
  But I think particularly in sort of the pressure cooker that is private equity, I think, you know, doing what you say is, is the, the way you walk into the boardroom.
• 33:33
  Right.
• 33:33
  Like if, if, if you didn't do it, it's, that's a tough door to walk through, particularly in private equity.
• 33:39
  But I, you know, I, I think that the outcome there is that I managed to demonstrably contribute value to the business and to the plan.
• 33:51
  And I did it consistently, you know, quarter over quarter, sponsor over sponsor.
• 33:57
  And so, you know, I think it was an easy decision for them.
• 34:02
  I think even that has a lifespan.
• 34:05
  And it did.
• 34:05
  I mean, there came a time where it made sense for the business to accelerate globalization and it made sense for me to step down in my role.
• 34:15
  And, you know, that was a natural ending.
• 34:18
  But I do think that the expectation to contribute value consistently is what makes the difference for any operator.
• 34:28
  But for me, again, I was lucky enough to be there with the founder early.
• 34:34
  Well, not early, but prior to sponsor arrival and investment.
• 34:39
  So I was already on a trajectory to contribute value in a meaningful way.
• 34:43
  And so I was set up to be successful for those transactions.
• 34:47
  But, you know, I think that goes back to this sort of merry go round that we talked about, which like, okay, well, you know, here you are and whether the plan is right or not, whether the thesis was
• 34:57
  right or not, you're not contributing.
• 34:59
  I have to go.
• 35:00
  And, and I think again that that's sort of a mistake.
• 35:03
  But, but yeah, I mean, I use that, that line on a lot.
• 35:06
  I, I remember a CMO asked me once, like, why, how come I don't get the same response from the board or from the CEO that you get?
• 35:14
  And I said, you know, look, I, I do what I say and it's that simple.
• 35:19
  I mean, if you just do what you say you're going to do.
• 35:23
  Yeah.
• 35:25
  I read a line yesterday that said trust is something which is earned through passing up on multiple opportunities to disappoint.
• 35:33
  That's a good way of putting.
• 35:35
  Which I thought was a lovely phrase.
• 35:37
  Well, David, it's been so wonderful to have you on and thanks for sharing all those insights and stories.
• 35:43
  Very much appreciated.
• 35:45
  If folks are listening and want to hear more from you, I want to talk to you, I want to reach out to you.
• 35:49
  Like, what's the.
• 35:50
  Other than getting on boardy.
• 35:54
  What's, what's the.
• 35:55
  What's the best way to get in touch with you?
• 35:57
  I mean, certainly LinkedIn is, is an easy method.
• 36:00
  I'm very accessible there and I respond pretty quickly.
• 36:03
  So.
• 36:03
  Cool.
• 36:03
  I'll make sure the link goes in the, in the show notes and thanks so much for your, for your time and enjoy the rest of your day.
• 36:09
  Yeah.
• 36:09
  Thanks, Graham.
• 36:10
  It's good to talk to you.
• 36:10
  Talk to you soon.
• 36:12
  Thanks for listening to the PE Data guy.
• 36:14
  The place where private equity meets data.
• 36:17
  Please forward this episode to your favorite private equity friend.
• 36:20
  Thanks for listening.
• 36:21
  See you next time.