The Growth Equation 1: Navigating Challenges for Profitable Outcomes with Ben Levin

Welcome to the first episode of our new podcast series - The Growth Equation: PE Perspectives on Product.

There is plenty of information in the world about how to execute technology development (e.g., process, architecture, management) and similar but less about product management (e.g., roadmaps, user stories, product owners.) There is surprisingly little about how CTO and CPOs should interact with their investors and board, and how the board and investors should interact with product management and engineering leaders. Focusing on the intersection of private equity and technology product development, The Growth Equation will host conversations with our community, in order to bring learnings from PE partners to the investment community and their portcos. We hope you enjoy!

David’s notes:

I had the pleasure of talking to Ben Levin for the first episode of The Growth Equation. Ben is the co-founder and CEO of Level Equity, a PE firm that invests exclusively in technology companies. Ben has invested in many companies - both at Level, and previously at Insight Partners where he was a managing partner. I've known Ben as an investor and as an intellect for years, and I was excited to talk to him for the first episode of this podcast.

Drawing from his personal journey, Ben shares his unconventional entry into private equity and the passions he's developed for the industry over the last 26 years. After talking a bit about these beginnings in the PE world, we'll dig deeply into the intersection between PE and technology. Ben discusses the challenge facing private equity investors when it comes to understanding product management and technology and explains about his perspective on getting alignment. In this episode, he gives advice to investors on how to align with their CTOs and chief product officers, and those executives how to align with their investors. Not only that, but he delves into challenges of hiring the right personnel, particularly from investors' perspectives, talking about clinical roles like chief technology officers where the investors themselves may not have the background.

That’s not all - there's a lot to be gleaned here, so please join me as I talk with Ben. I think you’ll enjoy our conversation.

Transcript:

[00:01:59.640] - David

Thank you, Ben, for joining us.

[00:02:06.620] - Ben

My pleasure. Super nice to be with you, David.

[00:02:10.010] - David

Good to see you again, my friend. Let's frame it. Let's talk about your career. How did you get into PE? What did you do before you… What was your career arc into PE?

[00:02:22.990] - Ben

I will say it was opportunistic. It wasn't planned. I graduated from college. I was a liberal arts major. I got a political science degree. I graduated from college in 1994. I had no master plan for my career. I, until I was 25, followed advice from others. I thought when I graduated, I could be a banker, a consultant, a doctor, lawyer, or do something in public service in the mid-nineties and liberal arts background. I felt like that's what most of the folks I knew did. I did that. I did a two-year investment banking internship, like a classic investment banking analyst training program at what was then Solomon Brothers. Again, I had a political science background, had worked at a startup during the summer, had worked for a mutual fund company during the summer, had no hard skills. We'll call that a rough entry to the analytics workforce where you're working a lot of hours and I didn't know how to financial model and I didn't understand financial statements. I did that for two years. I did that two year program. I still didn't know really what I wanted to do in my life. I threw in an application to a prestigious business school, which rejected me, which was probably good because I didn't really necessarily want to go to business school.

[00:03:36.470] - David

Not that it's a bad thing, but it wasn't something that I aspired to do. It was another thing in the list of items that other folks thought might be a good idea. I took a year off. I pursued a personal passion. When I came back from that year off, I did miss finance. I wanted to work in finance. I was told that with an analytical skill set, which I had gotten quite good at towards the end of my Analyst program, the buy side is better than the sell side. You have more control over destiny and a better work-life balance and a bunch of things that to a young, headstrong person, sounded appealing. I started to apply for private equity jobs. Not a world I understood well. I, in retrospect, got super lucky. I got a quirky job working for a wealthy family office that had a bunch of different business lines, one of which is what you'd characterize as a lower middle market industrial buyout business. I joined as a 25-year-old, as really the first person with that background as an associate. Doing analytical deal support, helping you do due diligence. Again, I was 25, my life changed.

[00:04:38.270] - Ben

I found this thing that A, I was not the most skilled person in the world, but I was probably the most skilled person in that office. I got to touch a lot and do a lot. I found this amazing connection between working on a thing that had value to a team and then getting accolades and getting rewarded for that work. I fell in love with that cycle. I think I also fell in love with the work. I really liked the diversity of experience and having to learn new things and investigate new companies. I'm 51. It's 26 years later, and almost everything I just said is still true. I still love the job. I love the diversity experience. I love how many different types of things you need to try and figure out and master. I love the feedback cycle. Makes me feel good. It makes me feel good about myself. It makes me feel productive. But it was happenstance and luck in a much smaller private equity industry where there were certainly folks at the ages of 20 and 22 that understood how to get into private equity? I was not one of them when I left college.

[00:05:37.660] - Ben

I stumbled into it.

[00:05:41.120] - David

That's interesting. I want to dig back into how private equity has changed in a minute, but tell me about the evolution of your firm. Obviously, you told the story you didn't start here. You started the firm. Tell me about starting the firm, how did you make that decision to start the firm? What is the story arc of Level Equity?

[00:06:00.760] - Ben

I'll start where I just finished. I worked at this family office for five years. They took their main business public, which was a real estate business. Effectively, I was out of a job. I wanted to stay in private equity. I transitioned from being an industrial buyout investor to being a software investor. I joined a very large, well-known buyout growth equity firm. I stayed there for a little under seven years, and then I left the found level in 2009 with two really simple goals. The first of which was I left with two folks that I enjoyed, I liked, I felt were complementary. I was probably at the time even more of an entrepreneur than I knew. I wanted to build a culture, I wanted to build a firm. I loved the day job, and I wanted to control the atmosphere. Then the slice of private equity that we focused on, we had observed at larger growth equity firms, was a really attractive slice of the now very diverse, and even then, relatively diverse private equity landscape. Rapid growth, private, mostly software or other technology businesses that didn't necessarily have to or need to raise money, hadn't raised institutional capital, so were definitionally bootstrap.

[00:07:11.950] - Ben

I had observed that those businesses, mapped with an ability to serially identify and locate and invest in those businesses, was a really good business model. It had been a good business model for decades before for other firms that had gotten large enough to create what we thought was a market vacancy in this what I'll call the lower middle market of growth equity, which is what led to us founding level to pursue that opportunity, to pursue it together, to pursue it with a belief that we could build an awesome culture that would attract talent, attract investors, attract potential portfolio companies. Almost 15 years later, those two things are foundational. We're still super focused on trying to build a place where people can build families and lives and careers and also focused on a slice of the world that, again, is now in a much broader ecosystem of what is private financing, both credit and equity, but that we have viewed as serially very attractive. We tried very hard to intentionally stay at a scale where we can pursue those types of transactions, which are generally sub-25, often sub-10 million dollar, non-institutionally backed, mostly software businesses.

[00:08:24.340] - David

When you're looking at investment, what companies are you looking at? What to invest in? What are the portfolio companies… You mentioned people hadn't invested in them yet. Obviously, some high growth. Are there any other ways of verticalizing that are attractive?

[00:08:41.350] - Ben

The most layman's finance person's view is like, if you pick up the balance sheet and the income statement, it's impossible not to know what we like. It's a rapidly growing income statement. It's got high gross margins and they really haven't raised much capital. They've done a lot without a lot, and that embeds usually a great market opportunity. Generally founded by domain experts who understand the market and understand the market need, either in a new or a large existing market and very tactically build a really good product that fits a market need. That business's approach is $5, $10, $15 million in revenue, generally hasn't consumed a lot of cash, but sees an opportunity to do more potentially with a partner. They get off of the track of being generally the only owners of the business and bring in a partner. We aim to be that partner or a partner of choice for that category of business. Again, built without traditional venture capital, often built in small vertical markets, and often controlled and continue to be controlled by the founders. We do both minority investing, a lot of minority investing. We also do control investing. But we're very open to being a minority investor and a founder-controlled.

[00:10:02.300] - David

Where do they find you? How do these companies find you when looking… Or do you find them?

[00:10:06.510] - Ben

Or is it the next? The largest nuance in the business model is if you take for granted that what I just said exists in large quantities, definitely, those businesses often don't have to find investors. They might have wanted investors when they got started, but they couldn't raise or didn't raise venture or early stage capital. They earned the luxury of choice, the choice of deciding whether to take capital and if they take capital, whether to take credit or to take equity and who to take it from. The first thing we need to do is identify them, and then we need to pick up the phone and we call them. That's embedded in what we do. We talk to tens of thousands of companies a year to try and find businesses that have the characteristics and the goals that I outlined and can outline. The goals being, again, somewhat intuitive, but to build big, sustainable businesses without raising inordinately large amounts of capital.

[00:10:58.930] - David

Okay. Tell me some stories. Tell me some stories about past portfolio companies that have been great successes. Then I'll ask about the other side, too.

[00:11:09.380] - Ben

I'll give you three examples. There are four different ways generally that private equity investors can exit businesses. They can sell them to other private equity firms. They can sell them to private companies. They can sell them to public companies, or they can take them public, or they can recapitalize them. But I'll give you three examples that are super different businesses, but great outcomes and super fun rides and all started right in that sub $10 million revenue range. One is a company that we're still involved with called Planet DDS. It is a dental practice management software business. We bought a majority of that business a little less than five years ago. They grew successfully. They did several acquisitions of adjacent technology. They are the system of record for a dental office or a set of dental offices like a dental service organization. They bought a company that does imaging. They bought a company that does patient engagement. Then a little over a year ago, we sold half of that business to another private equity firm, Aquiline Capital Partners and the business has continued to grow. They also provide a suite of payment services to their customers and have continued to do M&A.

[00:12:23.740] - Ben

Post that recapitalization, they acquired a company called CloudNine, which is in an adjacency, in orthodontics... And the business continues to do great. The gentleman that was running the business had actually bought that business. When we purchased it, he had bought it several years earlier with a search fund. Eric Geisebest still runs the business. He's the CEO. He's built a big, really capable management team around him. Again, done a lot of M&A. It's been a great partial outcome already. We got a great new partner. It's a fun business to be involved with. We think they have a shot of being the dominant leader in cloud-based dental practice management. It's a very big vertical within health care, so a super exciting journey that continues. A second example that I would give is a company called Instacuster. Instacuster is a business that was founded in Canberra, Australia. They had raised a small amount of local venture capital, but many businesses in Australia tend to have a bootstrapping-ish mentality because it's a small geography and there's not as large a venture ecosystem. It was a relatively capital-efficient business, but we invested sub $10 million in revenue. They managed open source databases.

[00:13:39.850] - Ben

They managed initially Cassandra and Kafka and a number of other open source complex databases for large enterprises. That business grew dramatically during our ownership. A little over a year ago, we sold that business to a public business called NetApp. It was an amazing outcome for us. It was an amazing outcome for the founders. It was a super cool story. When we invested in that business, they had hired a professional CEO who had signed up for a five or six-year stint. He was about two and a half years into that stint. At five years, that gentleman, Peter Nichol, decided to retire. He'd done an amazing job. One of the original founders, Peter Lilly, took back over as CEO. A founder CEO who brought in a professional CEO then took back the reins as CEO, continued to grow and diversify the business. We had a great outcome. He continues to run a big chunk of the business doing what they do at NetApp is a super amazing guy and has been a fun ride. These tend to be the type of deals that are super fun to talk about. Then the third example is an investment similar to Planet DDS and Structure, where we invested in a business called Archive Social, which provided archival social media for governments.

[00:15:07.550] - Ben

They did two acquisitions: a business that provided software for managing foyer requests, and then a business that provided access for the disabled to websites. We had separately invested in that business. It was called Monsito. Those businesses all got combined to create a business called Optomir. That business got sold about a year ago to a large government services business in the portfolio of our former firm, the firm that we all left to start a level called Insight Partners. That business is called Civic Plus. Optomir was acquired by Civic Plus. We took significant rollover in Civic Plus. My partner, Sarah, is still on the board of Civic Plus. The business, we think, has, again, a huge opportunity to continue to grow and scale, providing a variety of different services to local, state, and municipal governments and has been an awesome story. The CEO of that business, the CEO of Optomir is a gentleman named Ray Kerry. Ray has just joined Level to run our operating partner group. Just, again, a cool experience that hits a lot of the different things that are fun to do in our business. You got growth, you got the build of a great management team.

[00:16:20.230] - Ben

You have a good partial or a full outcome where investors and employees and managers do well and fulfill a big chunk of the vision, which is to grow a big valuable business. Those things tend to be just some of the funner things that we get to do or get to be a small part of it.

[00:16:37.580] - Ben

Those are all great stories. I love the story about the founding CEO, the professional CEO and the founding CEO coming back. It's like a-.

[00:16:47.130] - Ben

And truth be told, I didn't think it was going to work. We had the CEO, Peter Nichol, said we should bring Peter Lilly back as the founding CEO. I joke with Peter Lilly to this day that I was like, Really? Is that the right thing? We shouldn't go hire another professional manager. Never been more wrong, never been more happy to be wrong. Pete Lilley, I had not had as much exposure as I could have early on in the investment. He's an astounding individual, amazing manager, and led us to an amazing outcome. Sometimes it's awesome to be wrong.

[00:17:18.410] - Ben

Yeah, absolutely. Let's talk about some lessons learned on the ones that didn't work out as well. I don't have to name the companies, obviously, but tell me some stories you learned around some of those investments.

[00:17:33.890] - Ben

Yeah. I'd be lying to say that everything we've done or everything I've done in my career has turned out as amazingly as those. Those are certainly the most fun to talk about. Although I tend to think that you learn a great deal more generically from things that don't go exactly as planned as from things that go amazingly. If things go amazingly, there's a bunch of awesome expressions like Success has a thousand fathers. It's hard to disaggregate sometimes why things went so well. It's usually not that hard to disaggregate why things went wrong. I'd say there's a couple of categories of mistakes that investors like us make, including mistakes that we've made. One of the most fundamental mistakes is thinking you're in a larger market than you're in. I'll use an example that's not germane to something that we did, but you can invest in the security end market, and it can be a niche security application that has a $250 million addressable market. But broadly, it's in the $50 or $100 billion market that is enterprise security. You can convince yourself that you've got a $50 to $100 billion market when you have a $250 million end market.

[00:18:41.160] - Ben

If you pay $150 million pre-money in a $250 million end market, you're probably not going to do great. Not a lot of business to sell for their end market size. Very few businesses sell for north of their end market size. That is a mistake we've made. More often, I think the mistake that growth equity investors make are lack of alignment mistakes where they back a founding team that wants to do X and the private equity firm thinks the most loud... The most logical path to success is why. These are different trajectories. The most obvious would be someone that never wants to have an exit, someone that wants to run the business like a lifestyle business and pass along with their children. That's a terrible private equity investment. We haven't made that specific case, that specific mistake, but there are some stories of wonderful investments that have turned out poorly because the founders never wanted to sell them. Similarly, there's founders that only want to go public for a business that's maybe, at least in our view, not the best fit for going public. Then there's the large amount of gray area that is lack of appropriate execution.

[00:19:56.830] - Ben

Again, there's probably multiple people, multiple parties to blame when execution goes poorly, but it tends to be the largest reason for failure in growth equity deals, not in venture investing, but in growth equity deals. Because when you close a growth equity investment, generally, the income statement looks great, it's growing. Generally, the business isn't consuming a lot of capital and you feel like there is a big market to go after. Now, I've already said occasionally you get it wrong and the market is not big, but even if the market is as big as you thought, you can mis-execute. You don't hire the appropriate folks to scale your sales organization or your customer success organization or your product organization. Those things can lead to decrease in growth, an increase in churn, a variety of challenges, an increase in burn, which may not mean you lose all your money, but it means at a minimum, you're sub-optimizing your outcome. And most often I have found in growth equity, those are your bad deals, where you're just not aligned with founders on exactly what the right path to an outcome is and/or for whatever set of reasons, the collective group of constituents that manage the business, the board, the managers, the owners do not see their way to flawless or highly functioning execution, and that impacts outcome.

[00:21:19.400] - Ben

Whether it impacts the outcome such that you lose money or you just don't make as much money as you could, those things are hard because it feels like in most of those examples, there was a great path to success and you missed it. Whereas if you got the market wrong, it's very hard to make five times your money in the previous example of where you paid $150 million for a business in a $250 million market. You can execute flawlessly. You're still probably not going to do as well as you want to do.

[00:21:48.820] - David

You're right, you're correct.

[00:21:51.030] - David

Let's.

[00:21:52.010] - David

Dig in from the general to talk about CTOs, chief product officers, technology and product management orgs. Given your experience having seen a lot of companies, what things would you have liked the technology leaders, product leaders to know? What attributes? What would you have liked them to possess?

[00:22:17.840] - Ben

I think this is… I will caveat that I think, private equity investors are the least capable of understanding product and technology versus finance or sales and marketing or customer success, and oftentimes understand product organization and technology organization's efficiency through metrics, which may or may not be the right overlay, but it's the easiest overlay to assess them. But I think the simplest and most poignant is that alignment piece. Internally, is the product and development organization aligned with the sales, the marketing, and the customer success organization? And are they building what the market wants, what the market needs, what the customers will require to maintain their subscription? I think that's easy to miss over time as organizations at scale and have folks building product for product's sake and have finance organizations trying to minimize spend on product for financial sake, meaning it would be better if we spent a lot less on product, it's easier for the finance organization to ignore what the customers need, and it's easy for the product organization sometimes to similarly ignore what customer needs, but in the opposite way, which is we think they need X, Y, and Z, and this would be the most elegant product, and this is really the best product we could build when, in fact, customers may not need all that functionality.

[00:23:51.270] - Ben

And if they do, they might not need it on the same time frame. That tie in between identifying what a customer needs, the tie in between sales, marketing, product, product, product marketing, and customer success is like that critical piece of the software business where all the magic happens. Are you building what a customer wants? Are you building it on a time frame that they want it? Are you building it in conjunction with what sales and marketing is telling you about those things? And are you underwriting the actual cost and time to do it? I think that was long winded - the business side. How does the product and technology organization fit into the business from a financial, from a timing, and from a product lead perspective? I think the best product organizations do really, really good jobs of that. It's - one of the things that's embedded in founder, bootstrap businesses is a lot of times founders, all those roles I just talked about, a lot of times those live within one human. You got a domain expert founder who's got pretty savvy financially. He's not a bad sales woman or sales man, understands the market, has no money, so has to be very efficient.

[00:25:00.840] - Ben

They do a super job of building exactly what the market needs, exactly when they need it, and they sell it. As you distribute all those functions into different humans, you tend to get sometimes siloed behavior where things aren't being built quite as intuitively based on market need.

[00:25:25.210] - David

That's interesting because I've seen a lot of businesses, they bifurcate. The ones that have that first pattern that you talked about where the finance person says, How do we do this for less money? And the product person may not be aligned to the objectives of the company and therefore they tend to diverge. And the other ones that you're talking about, the other opposite where everyone's focused on the market. The first case, where product and engineering become cost centers and feature factories, that's really hard to move out of that. Okay. Have you seen a lot of that bifurcation? And have you found a way to bring them back in? So Proct is really thinking about serving the market and finance understands the benefit and the ROI on these investments. Or do you find that once they diverge, it's a problem?

[00:26:22.600] - Ben

Yeah. I'm a big believer that the vast majority of things in life and in business are fixable with agreement and reasonable discourse. I have seen lots of organizations who underspend because they're optimizing for margin only. Generally, that bears itself out in retention rates over time, like you start to lose customers. I've also seen businesses that massively overspend because there's not a perfect link between the market and the development organization. I think we're talking about product management. It is the product management function. I think of the seven or eight different vertical areas within the software business is one of the hardest things to hire for, and it is the fix to both problems that we talked about. A highly functioning product organization, which could include product and product build and product marketing, is the bridge between the various constituents in software business and can generally solve problems of either polarity that you described. Yes, I've seen organizations transform by a really good product leader. Now, sometimes you're hiring what you would call a CTO that's doing both the architecture and the product scope. But in a larger business, it would be literally a product role. I think it's a very hard role to fill.

[00:27:42.910] - Ben

I think it's an easy role to get wrong. I think especially for folks with financial backgrounds, it's harder to define what is the nuance that makes that product role so effective and what are the barriers to hiring the right person or doing the right thing. But yeah, I've seen organizations transformed and their ability to manage tech debt, to manage wildly over-featured product that's way more expensive than needs be given market need. I've seen both of those solve pretty well by product. Again, I've seen it go unsolved lots of times too, but I think those are both fixable with the right product organization.

[00:28:20.320] - David

One of the things that we preach, and I'm interested to see how you think this maps to successful organizations, is when people put the product roadmap together, stating specifically the impact of all of the things on the roadmap, on creating value for the users and creating opportunity for the companies, do you see that as a necessary pattern, a successful pattern, or one of the successful patterns for product to integrate in that way?

[00:28:52.890] - Ben

It's an interesting question, and I don't think I thought of it in exactly that way, but it is literally the definition of success is you have a challenge A and you bring in a change in the way in which product is managed and created. It will be reflected in some set of business statistics over a reasonably measurable period of time, meaning retention can go up, upsell, cross-sell can go up, product release, time frames will go up. All those things should be the basis for the spend and they should be mapped into a business case. Yes. Do I always see that mapping done? No, that's something that honestly, from a board member or from a minority or majority owner perspective, you may not see in every board interface, but that's either being done well intuitively or it's being done well tactically, functionally. Meaning people are actually making decisions around, Okay, I got 30 features that I think I should build. Which ones are going to allow me to sell things in Q3 of this year and Q4 of this year and Q1 of next year and Q2 of next year? Conversely, we've got a 96 down from 98 down from 99% retention rate.

[00:30:14.440] - Ben

We've got a pretty good sense for why we're losing customers. There's four reasons. What are we doing to make sure that customers are getting what they need? In Q3, Q4, Q1, Q2, Q3, Q4, you're going to see those metrics, again, barring market changes, which is always hard to disaggregate, but you're going to see that stuff start to normalize and trend in the right direction. You should be targeting a return to a previous place or a return to, or arrival at an industry benchmark or just a target. There should always be a target. I found that this is applicable in product, it's applicable in life, pretty hard to measure success if you haven't defined a goal.

[00:30:56.100] - David

Yeah. Right. We talked about the proxy. That's about the technology side where the CTO and the chief product officer are different people. I have a sense of what you think about what the attributes of the chief product officer should have based on what you just said. What about the chief technology officer? Are there specific attributes that are different from the chief product officer that you want to see communication with the board, that stuff?

[00:31:25.120] - Ben

I'll say this is, I think, and maybe I'll limit it to myself and not broad generalizations. I think it's one of the harder things to assess as a private investor, is whether it's the flat, when you're meeting with a number of different CTO candidates, who's going to be the best for what the company needs. I personally think it boils back down to, given what I, if I have a highly functioning product organization, know needs be built or knows know what the market needs, how and when do I build that? How much is function versus aspiration? How much is function versus esthetic? How important is the function of the product versus the UI? What is the time frame that you have from the market to build the most appealing UI? How much is sexy versus critical? That can apply to both product look, feel, and function, and it can apply to technology stack. Now, that's a business person's overlay. But I feel like when you come across a situation where a technology organization is massively overspending on technology versus a benchmark or versus where just that company needs to be based on capitalization, you tend to find one of a number of categories of issues.

[00:32:59.150] - Ben

Sometimes it's what I just talked about. They're building a lot of things that are needed in six quarters, not two, or in two years, not six months. They're building because of a purist view of how technology should be architected, and it's elegant, but it's not what the market necessarily requires. You have to be extremely happy and to be happy buyers. Or you have huge amounts of one-off development associated with customers that have specific needs that if you had a product or a sales organization that did a better job on figuring out an ideal client profile, you might not have taken. Many, many successful businesses that sell large customers have huge both services organization and development organization drags associated with huge contracts that have a lot of special needs. It can be a very, very, very challenging thing for the subset of businesses in the portfolio that will sell large enterprises. You sell a million dollar deal and you're a five million company. Sometimes it's amazing and it's transformative and they're using your base product and they're super happy with it and it's really profitable. Sometimes you didn't think a lot about what that customer or that client might need and it's a set of pain that you live with for a very long period of time.

[00:34:17.250] - Ben

If you actually were really disciplined about doing gross margin on a customer-by-customer basis, you're losing money. Yeah.

[00:34:25.640] - David

Not all sales are good sales. Definitely not. Yeah. That conversation between sales and technology and when to bend for a customer and when not to, I found it to be critical. That relationship between the chief revenue officer and the CTO and the chief product officer talking openly about that. It's hard.

[00:34:48.070] - Ben

Listen, sometimes old is not bad. Sometimes older technology is not bad. Customers are fine with it. Rewriting it because it's elegant and it's pure and it's exciting is not a good economic consideration. There are thousands of examples I've seen in my career where people like the old technology more than they like the new technology and people spend huge amounts of money, re-skidding or rebuilding products, only to find that they've created a catalyst event for someone to look around. They did it at a time when retention rates screamed that there wasn't a challenge and the sales organization screamed that there wasn't challenges. But as technology purists, it's what they wanted to build. Everybody's seen that happen too. Yeah.

[00:35:36.520] - David

There's the counter side, which is we have drag because we have old code and we have to invest capital to make this better. Knowing how much investment to make sense versus, Hey, we're going to wait six months, rebuild everything. Everything's going to be great six months from now, which is frankly, always a no. Knowing where to draw that line.

[00:35:57.020] - Ben

I've been seeing a ground-up rewrite go as planned on time. The scale of the business is usually indicative of... If you've never done that and you've got version 1 of a product and you're coming out with version two and you think it's going to take six months and you got a feature-rich product, it's very, very, very easy to underestimate. Underestimating the number of things that have to happen to do a real switch out of a product as opposed to migration. Yeah. It's hard.

[00:36:30.780] - David

Actually, I'm not sure if I can recall them ever coming in exactly on time. With all of the promises fulfilled, how they're going.

[00:36:39.920] - Ben

To November- I certainly can't.

[00:36:48.980] - David

Let's talk about... We've talked in Turner with companies, investors, portfolio companies, where the CEO said, Hey, I keep putting capital into product management and engineering and not getting more out. I don't see the effect on the company. We need some change. Have you seen patterns about what that change should look like? One is you could change the executive. That's an expensive, from a rail standpoint, change to do. Are there other patterns that you've seen that have been successful where more capita is going in, not more effective in the market going out? That pattern that we're shooting for that you were talking about decreasing turn of that thing?

[00:37:40.860] - Ben

I think they're related. I do think very often, generically, if you were to criticize private investors, one of the things I think external competition would both provide accolades to private investors for and criticize them for, is for making changes to personnel to solve business problems. I think it's super obvious, sometimes 100% accurate, sometimes not. I think the things that add to the analysis of whether that's needed are some set of diagnoses as to what is the problem. It's very hard to... Listen, you can know something's going wrong, have a relatively good sense that it's not going well because you don't have the right leader, but still not know what's needed. You need to fix it, but in order to need to fix it, you might need to understand what's going on. This is somewhat self-serving and you guys have been helpful to our portfolio. But having a third party do an assessment of what is going wrong, why it's going wrong, and disaggregate it. You may be putting more money into product, but you may be focused on new feature sets that allow you to sell more new product. It may be delayed and you may simultaneously not be addressing issues that are causing churn.

[00:38:54.030] - Ben

So your net ARR is not changing at all. But the gross ARR is actually growing. You're selling new customers. You're just losing more than you used to. And so the CEO is saying, My God, I'm spending a lot of money on technology, but I'm not getting anything. Well, you are getting something. You're getting a lot of new sales. You're just losing money and you're not optimized for fixing both sides of the revenue equation, new sales and retention. I have found that not always, but a good consultant. We have an internal value add group that has technology resources, so diagnostics around what's going on. There may also just be the flat example of you're actually just not being efficient as a technology organization. You have 30 people doing what 15 people can do. That tends to be something for folks like us who invest in very small businesses. We invest in lots of 5, 7, 8, 10, 12 billion dollar businesses, many of them have very small development organizations initially, like two, three, four, five, six, eight people that are shockingly efficient at product generation and product management. Then as you create a matrix organization with mid-level managers like efficiency just goes down.

[00:40:01.900] - Ben

Having either an internal, meaning internal to level or the private equity firm set of resources that can help diagnose or an external like internal or other consultancies that can come in with little if any bias. We don't know any of the people, we don't have confirmation bias on the last person we hired or didn't hire. It's all we do. We do it 100 times a year. We do it with sponsor X, sponsor Y, sponsor Z. I know all the different end markets. I don't really care. Here's a flat view of what's going on and what you probably need to solve then can wind its way into the right process. If a new leader or a new set of managers are needed, you've got a better roadmap as to what you're looking for? What do I need to fix? What's the background of the person that I need to hire? Have they done this thing? Have they simultaneously built a new product and managed churn at the same time? Because that's hard. Those two things don't go hand in hand. Generally, you release a new version of product and you're probably going to have some retention associated with migration.

[00:41:10.310] - Ben

If you're trying to do both those things, well, then hire a person that's done both those things. If I got eight legacy technology stacks that all need over a long period of time to be integrated, do you want to hire a CTO that's built two super modern single product stacks, or do you want to hire someone who's come out of a private equity rollup that took a bunch of old businesses and over a long period of time in a nuanced way, first built a uniform UI, then built a middleware layer, and over a much longer period of time, built out what needed to be built out in the core legacy code. You want to hire the second person for that. It's like, what's the task? What do you need to fix? Do we have an internal person that's actually good at this but not empowered? I do think a lot of times it ends up with new hires. If you got a really poorly functioning organization and this isn't a product or a technology specific thing, like if you got a really poorly functioning sales organization or a really poorly functioning customer success organization or a really poorly functioning finance organization and you could only make one decision and that decision was to hire a new person, it's probably the one decision that you should make.

[00:42:13.610] - David

Yeah.

[00:42:14.780] - David

I'll follow up with one question. Pe firms have their own timelines, vintage of funds when they have to pay out, that thing. What would you like your tech and product leaders to understand about PE that they can better align goals with you or with other investors? What should they know that they probably didn't learn coming out of engineering score, running a product here or there?

[00:42:43.940] - Ben

I think there's an abstract and there's a specific set of concerns. The specific set of concerns is really hard to solve for. Did I take money from... Was it the last investment in a fund? And so the PE firm is more likely to want to sell in three years versus six years? I actually think more gets talked about that than I've seen in my career. I've seen very few private equity firms ultimately selling for exogenous reasons. When most people have really highly performing businesses that are growing and doing great, they want to hold on to them for as long as they can because they're such huge value contributors to the funds and the individuals, and it's so much fun. But I think something everybody, every constituent and private companies doesn't miss but doesn't articulate to themselves as emphatically as they could is you don't know how long you're going to have, but it's a defined period of time. Maybe eight years and maybe seven years and maybe five years, maybe three years. You only have a certain amount of time to execute. This is true in life as it is in business, but you don't know how long it is, but it's all you've got.

[00:43:52.910] - Ben

Delays in decision making or suboptimal performance or lack of efficiency or thinking very, very long term when you don't know that you're like, Well, listen, 20 years from now, you're going to have to rebuild all this. Well, that's great. What if you're not going to own the business for four years? Then you're going to spend a huge amount of money that no one's going to pay you for it, because it's 16 years outside the whole period. I think of trying to do as many things as you can early on in the whole period is very important. Trying to set an intention, understand what you need to fix. If we want to be massively successful, here are all the things we're going to need to do. It's hard to do everything at once and you need to have guiding principles, but trying to get those things done early is important for a variety of reasons, the most poignant of which those things tend to unlock growth. You will own it for - pick a number. Maybe in hindsight, it will have been four years. If you don't make any of the important decisions in the product or the sales or the marketing or the customer success organization until year two, you have two years of optimized growth instead of three or four years of optimized growth.

[00:45:02.440] - Ben

That will have a massive impact on return. Time's growth is return. You can't predict multiple, you can't predict timing. But having a lot of time and having a lot of growth, long periods of growth solve for lots and lots of other challenge. Yeah.

[00:45:20.810] - David

Take your swings early.

[00:45:22.920] - Ben

It's the time gap. There's a famous investor who's like, You can't eat IRR. That expression means that duration is super important. The only controllable thing as it relates to duration as an investment organization or an operating team is starting early because you don't know when you're going to end. You don't know when you're going to have liquidity.

[00:45:45.290] - David

Thank you. This has been super valuable. As I said in the outset, the dance between private equity and tech and product, not talked about a lot, not well understood. Thank you for these insights and thanks for sharing them with everybody.

[00:46:03.190] - Ben

Oh, my God. My pleasure. I hope it was helpful. It was super fun. As always, talking to you, David. I am flattered, humbled, and thankful that you had me as a guest. I hope it turns out okay.

[00:46:13.020] - David

Yeah, thank you.