Latest / Uphoff on Media Podcast / You’re Running the Wrong Business Model. And Agentic AI Will Prove It.

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You’re Running the Wrong Business Model. And Agentic AI Will Prove It. · Uphoff on Media Podcast

• 0:01
  SPEAKER_00: You're running the wrong business model and agentic AI will prove it.
• 0:07
  SPEAKER_00: The operating company and the holding company are both legitimate models.
• 0:10
  SPEAKER_00: The graveyard is full of leaders who tried to run both at once,
• 0:14
  SPEAKER_00: however,
• 0:15
  SPEAKER_00: and discovered that the bridge between them goes nowhere.
• 0:20
  SPEAKER_00: Uphoff on Media by Tony Uphoff, Frameworks.
• 0:25
  Every operator develops their own way of making sense of hard
• 0:28
  situations.
• 0:30
  SPEAKER_00: Over 35 years in five CEO roles, I've accumulated a set of frameworks.
• 0:34
  SPEAKER_00: Some I built myself,
• 0:36
  SPEAKER_00: some I borrowed and adapted,
• 0:38
  SPEAKER_00: all of them tested against actual decisions with actual stakes.
• 0:43
  SPEAKER_00: Field tested frameworks is where I share them.
• 0:45
  SPEAKER_00: The goal isn't to give you a system to follow.
• 0:48
  It's to give you a way of thinking you can take into your own
• 0:51
  situation and make your own.
• 0:53
  SPEAKER_00: The best frameworks do just that.
• 0:56
  SPEAKER_00: They don't tell you what to decide.
• 0:58
  SPEAKER_00: They help you see the decision more clearly.
• 1:02
  SPEAKER_00: There's a conversation I've had more times than I can count.
• 1:05
  SPEAKER_00: It usually happens in an exacting meeting,
• 1:08
  SPEAKER_00: a boardroom,
• 1:09
  or sometimes over a drink after a particularly difficult
• 1:12
  quarterly review.
• 1:13
  SPEAKER_00: It goes something like this.
• 1:16
  SPEAKER_00: We need to increase EBITDA, but we can't stop investing in growth.
• 1:20
  SPEAKER_00: That sentence is the sound of a business that doesn't know what it is.
• 1:26
  SPEAKER_00: Not what it makes,
• 1:27
  SPEAKER_00: not what it sells,
• 1:29
  SPEAKER_00: what it actually is,
• 1:31
  SPEAKER_00: structurally,
• 1:31
  SPEAKER_00: operationally,
• 1:32
  SPEAKER_00: strategically.
• 1:33
  SPEAKER_00: And in my experience, that confusion is not a tactical problem.
• 1:36
  SPEAKER_00: It is the problem.
• 1:38
  It's the kind of thing that looks manageable for a few quarters
• 1:41
  and catastrophic
• 1:42
  SPEAKER_00: across a few years.
• 1:45
  A16Z published a piece this week arguing the same binary has
• 1:50
  arrived for software.
• 1:51
  SPEAKER_00: Accelerate growth by 10 plus points or rebuild to 40% operating margins.
• 1:57
  SPEAKER_00: Everything in between those paths is no man's land.
• 2:01
  SPEAKER_00: The framework I want to share isn't new.
• 2:03
  SPEAKER_00: Business school professors have been touching on it for decades,
• 2:06
  SPEAKER_00: but I've rarely seen it stated clearly enough to be actionable,
• 2:09
  SPEAKER_00: especially as an operator who has lived on both sides of it.
• 2:12
  SPEAKER_00: And right now,
• 2:13
  with the Gentic AI reshaping the cost structure of every B2B
• 2:17
  business in real time,
• 2:18
  SPEAKER_00: the stakes for getting this wrong have never been higher.
• 2:21
  SPEAKER_00: The two models are the operating company and the holding company.
• 2:25
  SPEAKER_00: Both work.
• 2:27
  SPEAKER_00: not at the same time,
• 2:28
  SPEAKER_00: however,
• 2:28
  SPEAKER_00: and not under the same leader,
• 2:30
  SPEAKER_00: and not with the same definitions of success.
• 2:35
  SPEAKER_00: An operating company is built around investing, capital, and growth.
• 2:38
  SPEAKER_00: It deploys resources,
• 2:40
  SPEAKER_00: people,
• 2:40
  SPEAKER_00: product,
• 2:41
  SPEAKER_00: marketing,
• 2:41
  SPEAKER_00: technology to acquire customers,
• 2:43
  SPEAKER_00: expand markets,
• 2:44
  SPEAKER_00: and build revenue.
• 2:45
  SPEAKER_00: Its north star is not purely margin.
• 2:47
  It's the slope of the growth curve and the quality of the
• 2:50
  revenue it's generating.
• 2:52
  SPEAKER_00: In an operating company model, if you aren't growing, you are declining.
• 2:56
  SPEAKER_00: The operating company leader is a builder.
• 2:58
  SPEAKER_00: They think about product market fit,
• 3:00
  SPEAKER_00: customer acquisition economics,
• 3:02
  SPEAKER_00: net revenue retention and market share.
• 3:04
  They are comfortable with calculated risk and they know the
• 3:07
  difference between
• 3:08
  investing in new revenue line and hemorrhaging cash on a broken
• 3:11
  go-to-market.
• 3:13
  SPEAKER_00: Their job is to make the business worth more tomorrow than it is today.
• 3:17
  The governing metric of the operating company and B2B SaaS has
• 3:20
  become the rule of 40.
• 3:22
  SPEAKER_00: The sum of revenue growth rate and EBITDA margin should exceed 40%.
• 3:28
  of over 200 software companies found that businesses exceeded
• 3:32
  this threshold only
• 3:33
  SPEAKER_00: 16% of the time,
• 3:35
  yet those that did commanded consistently higher enterprise
• 3:39
  value multiples.
• 3:40
  SPEAKER_00: The market doesn't just reward growth.
• 3:42
  SPEAKER_00: It rewards growth with a credible and sustainable path.
• 3:47
  SPEAKER_00: The holding company.
• 3:48
  SPEAKER_00: A holding company is built around capital allocation and optimization.
• 3:52
  It owns a portfolio of businesses or a maturing business with
• 3:56
  multiple revenue streams.
• 3:57
  SPEAKER_00: And its job is to maximize cash generation,
• 4:00
  SPEAKER_00: manage the portfolio mix,
• 4:01
  SPEAKER_00: and return capital efficiently.
• 4:03
  Its north star is EBITDA,
• 4:04
  cash conversion,
• 4:05
  and multiple expansion at exit.
• 4:08
  SPEAKER_00: Growth is desirable, but subordinate to margin.
• 4:11
  SPEAKER_00: The holding company leader is an allocator.
• 4:13
  SPEAKER_00: They think about which businesses to invest in,
• 4:16
  SPEAKER_00: which to harvest,
• 4:17
  SPEAKER_00: which to divest,
• 4:18
  and how to structure the organization to minimize overhead and
• 4:21
  maximize cash yield.
• 4:23
  SPEAKER_00: They are comfortable with cost discipline, sometimes ruthlessly so.
• 4:27
  SPEAKER_00: Their job is to protect and enhance the value of the existing assets.
• 4:32
  SPEAKER_00: The ad agency holding companies are the textbook case here.
• 4:35
  SPEAKER_00: Between 2016 and 2023,
• 4:37
  SPEAKER_00: WPP's revenue fell from $19.5 billion to $18.5 billion,
• 4:40
  SPEAKER_00: a 5.3% decline,
• 4:41
  SPEAKER_00: while its headcount dropped 14.6%.
• 4:49
  SPEAKER_00: In the same period,
• 4:51
  Publicis grew revenues by 48.7% by making a deliberate bet the
• 4:56
  company decision to
• 4:57
  SPEAKER_00: restructure as an operating platform,
• 5:00
  SPEAKER_00: not a portfolio of agency brands.
• 5:02
  SPEAKER_00: Publicis market cap more than doubled, a gain of 160% over five years.
• 5:08
  SPEAKER_00: WPPs dropped nearly $5 billion.
• 5:11
  SPEAKER_00: The difference wasn't industry conditions, it was clarity of model.
• 5:16
  SPEAKER_00: The bridge to nowhere.
• 5:18
  The graveyard of B2B marketing and technology is filled with
• 5:21
  companies that thought
• 5:22
  they could run both models at once and leaders who thought
• 5:25
  their investors would
• 5:26
  SPEAKER_00: wait.
• 5:27
  SPEAKER_00: Businesses mature.
• 5:28
  SPEAKER_00: Operating companies eventually reach a growth plateau.
• 5:31
  And the rational move is to shift towards optimization to
• 5:34
  harvest what was built.
• 5:35
  SPEAKER_00: Holding companies sometimes try to reignite growth,
• 5:38
  SPEAKER_00: acquiring new platforms or making bets on new markets.
• 5:42
  SPEAKER_00: Both transitions are legitimate.
• 5:44
  SPEAKER_00: Both are extremely difficult to execute.
• 5:47
  What is not legitimate and what I've watched destroy companies
• 5:51
  in B2B media,
• 5:52
  SPEAKER_00: marketing services,
• 5:53
  SPEAKER_00: and enterprise SaaS is the attempt to run both models simultaneously,
• 5:57
  to ask the same leadership team to maximize growth investments
• 6:01
  and deliver margin
• 6:01
  SPEAKER_00: expansion,
• 6:02
  to set aspirational growth targets while the cost structure is
• 6:05
  managed like a
• 6:06
  SPEAKER_00: mature harvest business,
• 6:07
  to promise investors the operating company story while actually
• 6:11
  operating decisions
• 6:12
  SPEAKER_00: are those of a holding company.
• 6:14
  SPEAKER_00: That's not a strategy, that's a bridge, and it goes nowhere.
• 6:17
  SPEAKER_00: The SaaS world is living through its own version of this.
• 6:20
  SPEAKER_00: For a decade, investors rewarded growth above almost anything else.
• 6:24
  SPEAKER_00: Then 2022 happened.
• 6:26
  SPEAKER_00: Capital costs rose, multiples compressed, a large cohort
• 6:29
  SPEAKER_00: cohort of SaaS companies found themselves on the bridge,
• 6:32
  SPEAKER_00: managed like operating companies,
• 6:33
  SPEAKER_00: burned for growth,
• 6:34
  SPEAKER_00: but now being valued like holding companies.
• 6:37
  SPEAKER_00: Show me the cash.
• 6:38
  The valuation premium for rule of 40 companies jumped from 23%
• 6:42
  in 2022 to 129% in 2024.
• 6:46
  SPEAKER_00: The market wasn't just rewarding performance, it was punishing ambiguity.
• 6:52
  SPEAKER_00: I don't know which model you're actually running.
• 6:55
  SPEAKER_00: This sounds obvious until you try to do it honestly.
• 6:58
  SPEAKER_00: Most leadership teams will say that they're operating companies,
• 7:01
  SPEAKER_00: that they're investing in growth,
• 7:02
  SPEAKER_00: building for the future,
• 7:03
  SPEAKER_00: competing for market leadership.
• 7:05
  SPEAKER_00: The language of ambition is cheap.
• 7:07
  SPEAKER_00: The diagnostic is in the decisions.
• 7:10
  SPEAKER_00: Ask these questions about your business.
• 7:14
  SPEAKER_00: Revenue reinvestment test.
• 7:16
  What percentage of gross profit is reinvested in sales,
• 7:19
  marketing,
• 7:19
  and product?
• 7:20
  SPEAKER_00: Operating companies reinvest aggressively upwards of 50 to 60%.
• 7:25
  SPEAKER_00: Holding companies harvest.
• 7:28
  SPEAKER_00: Where does new ARR revenue actually come from?
• 7:32
  SPEAKER_00: New customers or existing customers?
• 7:34
  SPEAKER_00: Operating companies build new logos.
• 7:37
  SPEAKER_00: Holding companies optimize existing relationships.
• 7:41
  SPEAKER_00: What is the budget response to a missed quarter?
• 7:43
  Operating companies protect investment,
• 7:45
  holding companies cut to protect EBITDA.
• 7:48
  SPEAKER_00: How about the leadership DNA test?
• 7:51
  Is the CEO's instinct to add headcount or cut it when growth is
• 7:55
  uncertain?
• 7:55
  SPEAKER_00: Builders add, allocators cut.
• 7:58
  Does leadership team have a track record of growing something
• 8:01
  from small to large
• 8:02
  SPEAKER_00: or optimizing something from large to efficient?
• 8:05
  SPEAKER_00: These are different skills and different psychological orientations.
• 8:09
  SPEAKER_00: What is the reward?
• 8:11
  SPEAKER_00: Growth metrics or margin metrics?
• 8:13
  SPEAKER_00: Whatever gets celebrated defines the model that's actually being run.
• 8:18
  SPEAKER_00: And the capital structure test.
• 8:21
  SPEAKER_00: Is the business PE backed with a defined hold period?
• 8:25
  That is structurally a holding company mandate,
• 8:27
  whether or not the PowerPoints say growth.
• 8:29
  SPEAKER_00: What are investors actually modeling
• 8:32
  SPEAKER_00: for at exit, revenue multiples or EBITDA multiples.
• 8:36
  SPEAKER_00: That determines which model the market thinks you're running.
• 8:39
  The honesty understood of these questions will almost always
• 8:42
  tell you which model
• 8:43
  SPEAKER_00: you're running.
• 8:44
  The problem is that the answer is often different from what the
• 8:47
  company believes or
• 8:48
  SPEAKER_00: what the CEO is telling the board.
• 8:50
  SPEAKER_00: Agentic AI, the clarion call.
• 8:54
  SPEAKER_00: Agentic AI is not a growth lever,
• 8:56
  SPEAKER_00: it's a stress test,
• 8:57
  SPEAKER_00: and it will expose every business that doesn't know what it is.
• 9:00
  SPEAKER_00: Agentic AI,
• 9:01
  SPEAKER_00: autonomous AI systems capable of executing multi-step workflows,
• 9:05
  making decisions and operating without constant human
• 9:09
  supervision is rapidly
• 9:10
  SPEAKER_00: collapsing the cost of execution across B2B businesses.
• 9:14
  Gardner projects that 15% of day-to-day decisions will be made
• 9:18
  autonomously through
• 9:19
  SPEAKER_00: agentic AI by 2028,
• 9:22
  SPEAKER_00: up from essentially zero in 2024.
• 9:25
  McKinsey estimates that activities consuming roughly 30% of
• 9:28
  current work hours in
• 9:29
  SPEAKER_00: the US economy could be automated within this decade.
• 9:34
  SPEAKER_00: The middle miles of execution,
• 9:35
  SPEAKER_00: the coordination,
• 9:37
  SPEAKER_00: reporting,
• 9:38
  SPEAKER_00: the process management,
• 9:39
  SPEAKER_00: the routine decision making are being automated.
• 9:42
  SPEAKER_00: For businesses that know what they are, this is great news.
• 9:45
  The operating company can redeploy execution automation savings
• 9:49
  into growth investment.
• 9:50
  SPEAKER_00: The holding company can harvest the margin improvement directly.
• 9:53
  SPEAKER_00: For businesses that don't know what they are, this is a trap.
• 9:57
  SPEAKER_00: The false positive problem.
• 9:59
  SPEAKER_00: Here's the specific danger.
• 10:01
  Agentic AI will create a false positive for companies stuck on
• 10:04
  the bridge.
• 10:05
  SPEAKER_00: If you're a SaaS company or services business with stalled growth and a
• 10:09
  SPEAKER_00: deteriorating cost structure,
• 10:10
  SPEAKER_00: the sudden availability of AI-driven automation looks like salvation.
• 10:16
  SPEAKER_00: You can reduce headcount,
• 10:17
  SPEAKER_00: compress the cost structure and show margin improvement,
• 10:20
  SPEAKER_00: all without solving the underlying model confusion.
• 10:23
  SPEAKER_00: For a quarter or two, the numbers will look great.
• 10:25
  Investors and boards may interpret the margin improvement as
• 10:28
  evidence that the
• 10:28
  SPEAKER_00: operating company thesis is intact.
• 10:31
  SPEAKER_00: But if the underlying revenue growth engine is broken,
• 10:34
  SPEAKER_00: if the product market fit is fading,
• 10:37
  SPEAKER_00: if net revenue retention is declining,
• 10:39
  SPEAKER_00: if the sales motion isn't working,
• 10:41
  then the margin improvement for AI automation is just a more
• 10:44
  elegant version of the
• 10:45
  SPEAKER_00: same problem.
• 10:46
  You've used technology to optimize a business model that needed
• 10:49
  to be rethought.
• 10:50
  SPEAKER_00: The bridge got a new coat of paint, but it still goes nowhere.
• 10:54
  This is precisely what happened to the worst performing ad
• 10:57
  agency holding companies.
• 10:59
  They used technology investment as proof of an operating
• 11:02
  company ambition,
• 11:03
  SPEAKER_00: while the actual decisions,
• 11:04
  SPEAKER_00: cost management,
• 11:05
  SPEAKER_00: consolidation,
• 11:06
  SPEAKER_00: overhead reduction,
• 11:07
  SPEAKER_00: were pure holding company execution.
• 11:10
  SPEAKER_00: The market eventually saw through it.
• 11:13
  SPEAKER_00: Agentic AI will accelerate this reckoning, but not delay it.
• 11:18
  SPEAKER_00: Speed of transparency.
• 11:19
  AI-enabled analytics will make it harder to hide model
• 11:22
  confusion behind complex
• 11:24
  SPEAKER_00: cost-structured or diversified P&Ls.
• 11:27
  Investors and acquirers will have faster,
• 11:29
  cleaner reads on what a business actually is.
• 11:32
  SPEAKER_00: Competitive compression.
• 11:33
  Operators who are clear in their model will deploy agentic AI
• 11:36
  in ways structurally
• 11:37
  SPEAKER_00: aligned with their growth or harvesting thesis.
• 11:41
  Those who are not will deploy reactively chasing efficiency
• 11:44
  gains that competitors
• 11:46
  SPEAKER_00: are using to widen the gap.
• 11:48
  SPEAKER_00: Valuation bifurcation.
• 11:50
  The market is already punishing ambiguity as agentic AI makes
• 11:54
  execution costs more
• 11:56
  SPEAKER_00: uniform across competitors.
• 11:58
  Differentiation will come from model clarity,
• 12:00
  capital allocation discipline,
• 12:02
  and leadership fit.
• 12:03
  SPEAKER_00: The spread between clear and confused businesses will widen.
• 12:08
  SPEAKER_00: The bottom line, both models work.
• 12:11
  SPEAKER_00: The operating company builds value by growing.
• 12:13
  SPEAKER_00: The holding company builds value by harvesting and optimizing.
• 12:17
  SPEAKER_00: These are not better and worse.
• 12:18
  SPEAKER_00: They are different disciplines requiring different leaders,
• 12:21
  SPEAKER_00: different capital structures,
• 12:23
  SPEAKER_00: different definitions of winning.
• 12:25
  SPEAKER_00: The bridge between them is the most dangerous place in business,
• 12:28
  SPEAKER_00: not because companies fail immediately when they get stuck there.
• 12:31
  SPEAKER_00: They often don't.
• 12:32
  SPEAKER_00: They fail slowly, then suddenly.
• 12:34
  SPEAKER_00: They miss growth targets while defending margin.
• 12:37
  SPEAKER_00: They miss margin targets while defending growth.
• 12:39
  SPEAKER_00: The confusion compounds.
• 12:40
  SPEAKER_00: The leadership team loses credibility.
• 12:43
  SPEAKER_00: The valuation of roads.
• 12:44
  SPEAKER_00: Agentic AI is not going to save businesses on the bridge.
• 12:47
  SPEAKER_00: It's going to accelerate the reckoning for them.
• 12:50
  SPEAKER_00: Businesses that know what they are will use AI to get there faster.
• 12:54
  SPEAKER_00: Businesses that don't will use AI to look better on the way down.
• 12:59
  Know your model,
• 13:00
  find your leader,
• 13:02
  then let AI do what it does in that order.
• 13:06
  Thanks for listening and please take the time to subscribe to
• 13:09
  UpOff on Media on Substack.