The Growth Equation - PE Perspectives on Product - With Harry Taylor of TA Associates

Harry Taylor is a partner at TA Associates, a firm with decades of investing in growth companies. Harry’s focus is on software companies and is a maven on the changes that have taken place in the marketplace.

Harry and I talk about many things. Among the topics are: 

• Big refactors - they are generally shunned but Harry points out when they are necessary, even multi-year re-factors, and how to consider them.

• CTOs for growth companies and startups, how they are the same and different.

• We go into more depth about large company CTOs, and the attributes they need when they are doing organic growth of the products versus acquiring tuck-ins;

• We also talk about GenAI and its impact on companies, both buyers and sellers of GenAI. We discuss where companies are investing and how growth equity investors think about their investments in light of GenAI.

Please let me know what you think of the episode. I look forward to your feedback.

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Timestamps:

00:00 Discussing growth equity with Harry Taylor, TA Associates

03:40 Shift from licensed software to cloud, experimenting GenAI.

09:29 Strategic investments for future gains discussed frequently.

12:12 Aligning business goals, investments, market, and customers.

15:06 CTO shouldn't be seen as a cost center.

18:20 Companies allocate budgets to AI initiatives, balancing resources.

21:34 Investment is continuous; focus on long-term innovation.

27:09 Investment strategies vary by company size and growth.

30:42 We prioritize companies with high customer retention rates.

32:38 SaaS growth expected; on-prem revenue more stable.

Transcript:

David Subar [00:00:00]:

Hi. Today on “The Growth Equation, PE Perspective on Product”, I talk with Harry Taylor of TA Associates. Harry's a partner there, and TA associates invest in a lot of things, but particularly growth companies and growth software companies. That's Harry's main focus. We talk about several different things, and Harry has perspectives that I think are pretty interesting. Typically I'll hear from investors that refactors, big refactors, are bad or difficult to get approved. But Harry here talks about how they're important and necessary and how to think about them, when to do small ones, when to do big ones. We talk about the nature of CTOs, and he breaks them up into two ways.

David Subar [00:00:47]:

One is CTOs for growth companies versus startups, how they're different. He also talks about CTOs, different for companies who are doing organic growth versus purchased tokens. The interesting thing about this is size matters. Companies with large amounts of product, organically growing them are very different than product extensions that are tuck-ins. And last, of course, we talk about GenAI and the impact in companies and wherever companies are investing and where TA is investing. Stay tuned. I hope you enjoy it. So let's just start by talking about TA and talk about how you got into this career.

David Subar [00:01:36]:

What was TA? Does a lot of invests in a lot of different kinds of companies. Not all our technology companies tell a TA in general, if you could for a moment. And then what brought you to TA? What brought you to want to be involved with technology companies?

Harry Taylor [00:01:53]:

Sure. So TA has been around for about 55 years, and we are a growth private equity firm. So we invest in growing, profitable businesses globally. So Boston's our headquarters presence in London, West Coast, Hong Kong and India. About 55% of our investments are in technology, which today is mostly software. Software and payments. Historically, we would invest primarily in founder-owned companies, and often we were the first institutional investor. As private equity markets matured and our funds have become bigger, often there are other investors that have invested in the company previously, whether that's a venture capital firm or another private equity firm.

Harry Taylor [00:02:46]:

But we often still invest in founder-owned companies. We'll make minority investments, co-control investments and majority investments. So we say we're ownership agnostic, but we're always very active with our company. So we're not passive investors. We like to, you know, be very involved working with the management teams.

David Subar [00:03:08]:

So you've been doing this for a bit of time. What have you seen change? I mean, obviously there's GenAI currently changing the world. Cloud computing changed the world. Have any of those, have any of the technology significant technology changes changed the way investments work fundamentally? Or is the model really the same through these different kinds of technology earthquakes?

Harry Taylor [00:03:40]:

Yeah, no, good question. I mean, clearly, a number of years ago, most of the software companies we invested in were licensed and maintenance models, so on-prem software with maintenance. Now, most of the companies, a lot of the companies we invest in have a combination of still some on-premise, whether that's sold through a license model or subscription term model, but then obviously have a cloud product and often migrating customers or primarily investing behind the cloud business. GenAI, that's something that every company obviously is trying to figure out how it benefits or could be a risk to their business. And we're seeing every company do something. But candidly, at this stage, most companies are still, I would say, at different levels of experimentation, of seeing benefits, whether that's on the R&D side, on the efficiency side, or on the revenue product side and selling the customers.

David Subar [00:04:47]:

Iowa had this conversation with a partner at a different firm where I had proposed. In the GenAI world, there's three kinds of companies, and he proposed three others. So I'm interested in your take. I had said, there's GenAI for developer productivity, the copilots of the world. There is GenAI for internal IT infrastructure, expediency, efficiency, and then there's product line extensions. And he had said to me something that I really should have had thought of before. Well, he said, David, you missed the infrastructure stuff, the Nvidias of the world. He said you miss the companies that help other companies use GenAI.

David Subar [00:05:34]:

How do you label data, that kind of thing? And then the productivity suite around just the process of fielding GenAI, collecting data monitoring called the QA process. Does the world look like that to you? Do you have modifications to that?

Harry Taylor [00:05:53]:

No, I think that's a pretty good way to broad strokes and swim lanes, a pretty good way to look at it. The first three that you mentioned is absolutely at least how we're talking about how our companies are talking about it. And as I said, I think different companies are seeing benefits. I think probably more benefits in the first two buckets so far and in the process of rolling out product extensions and customer benefits now. Right. But that's, I feel like, less developed today than the other two slim lines.

David Subar [00:06:28]:

So let's jump into the world, the CTO Chief Product Officer, how they talk about their products, important to you and invest and important to you post-close. Let's start there.

Harry Taylor [00:06:42]:

Yeah, absolutely. And a lot of our companies, I would say, I don't want to say all but 90% of our companies have a product portfolio, and it's not a single product company where it's one product that we're selling. And a lot of companies have, before we got to them, have grown through acquisition. So they've got some products that are their go-forward products, some products that are more in maybe maintenance mode or converting the go-forward product. And as I mentioned, we invest in growing, profitable businesses. So there's not an unlimited IT spend and product development spend. So for me, the best CTOs and CPOs are the individuals that can make trade-offs. Right.

Harry Taylor [00:07:38]:

Because it is about trade-offs. And where are we going to place the bets, so to speak, for growth and for taking our customers forward? And where do we have to make some trade-offs on products that we certainly want to support customers? Well, what are not the growth initiatives and so being able to frame what the, the product portfolio looks like, being able to allocate clearly, where are we spending dollars and where are people allocated as an onshore or offshore, and where are we placing the growth investments to achieve the growth that we want in a clear and defensible and concise way, knowing that we may not be done making acquisitions and we're going to have another product portfolio, another product into the mix. And that may be complimentary, not necessarily overlap, but it's usually a very complicated set of decisions as to how to organize the R&D staff and where to allocate dollars.

David Subar [00:08:52]:

Okay, so that's interesting. It sounds like some of those decisions are based on product impact. Sometimes the CTO comes and says, we've got to refactor this set of things. And how do you, how do you, how would you like to be able to communicate that? Because that's it. That's a difficult decision. When a CTO says, I need four months to do nothing but fix things, and you'll get no impact immediately. That's a hard thing to say yes to. How do you like to have that conversation?

Harry Taylor [00:09:29]:

Yeah, you know what? It happens a lot where we may have to make a big platform investment that we know is going to be a big investment and it's not going to yield any financial gains in the near term. And we're working with the team, have to map it out very clearly, what are the risks of not doing it and of saying, just keep the status quo and what are the benefits economically to customers, to future product expansion if we do make the investment? And then we talk about what's the timeline of the investment? Should we be investing more upfront as sort of a surge investment to get there more quickly. What would that take? Can we actually do that or do we do it in a more moderate pace? And that's okay and we're comfortable with that. So that's a conversation we have all the time. Especially as I mentioned, if you have some products that have been around for 30 years and are key products that companies run their businesses on, you certainly can't. You've got to make sure you continue to invest in those. But we may want to be invested in those. But also knowing that we're going to be investing in the whole underlying platform.

Harry Taylor [00:10:53]:

As you know, sometimes it's not the big bang. We're just going to rewrite the whole platform. Sometimes it's incremental. And we have those conversations all the time.

David Subar [00:11:03]:

Yeah, I worry about the CTOs who go and say, hey, we want to do this big bang thing and I want six months to do nothing else because that's not easy to say yes to.

Harry Taylor [00:11:15]:

And sometimes it's multi-years. Right. It's not six months. This is going to be a three-year journey. And those are candidly the harder ones to decide. Many times we've said, yep, we understand and we understand that thesis coming into the investment, that we are going to make this big investment or the company is already down the path of making that investment. We factor that into our underwriting case and the expense case and the margin profile, and then hopefully in what that's going to do on the other side in terms of revenue growth.

David Subar [00:11:52]:

So what are the attributes you like? We'll do CTO first, then Chief Product Officer. What are the attributes? Let's say you in a portfolio company, it's post-close. The last CTOs not there for some reason, you're going to hire a new one. What's that person look like?

Harry Taylor [00:12:12]:

Yeah, I think it's someone that, and I think to your point of having this conversation can sort of under, we have to all be aligned. What are we trying to do with the business? Right. With both the investment, but what are we trying to do with the business with our customers and the market? Where do we need? And having that framework and then saying, okay, this is what we're all aligned to try to do. What does that mean for product investments as opposed to just I want to come in and build this great big thing and having the full perspective and being able to look at it from both the technology side, but also the financial and market and customer side, I think is critical because you can be much more, I don't say pragmatic but much more balanced on understanding the full holistic view of what we're all collectively trying to do. When we come into an investment case.

David Subar [00:13:13]:

That would imply to me that a good CTO has a good product sensibility, good business sensibility, good financial sensibility as well.

Harry Taylor [00:13:23]:

Is that map that definitely maps. For our types of companies, that maps 100%. I'm not suggesting that in a startup world that may be different, it may be all about the product. In the companies that we invest in, that definitely maps.

David Subar [00:13:40]:

What about CPOs? Do they look different? They look the same. As far as those attributes.

Harry Taylor [00:13:46]:

I think they look similar in that sense, that they also have the holistic picture, and I think that they can best CPOs can work obviously very well with the CTOs, right? It always works well, and they are very much aligned. Right. Of vision, of strategy. I've certainly seen situations where they're not totally aligned, and that creates some issues. So I do think they're similar characteristics of, at least from my perspective, of when it all works well.

David Subar [00:14:24]:

So a CTO can become a cost center. So the kind of structure, if the CPO is putting together the product roadmap, and yet everything on the roadmap is a bet. Some are going to work and some may not work, but we're thinking them as a series of bets. And the technology group, the engineering group job is to actually make them look like a cost center. That's a kind of dangerous position to be in, especially if you have a big number associated against your budget. Do you see that as a problem, and if so, how do you avoid it?

Harry Taylor [00:15:06]:

Yeah, yeah, I think it's a problem if the CTO feels like the investors and the company views that organization as a cost center. I think that's a big problem because we're a tech company. It's not a cost center, it's the lifeblood of what we're investing in. Obviously, you need to execute on go-to-market and marketing and everything else, but if you don't have the right product and the ability to execute on the product roadmap, then everything else is kind of moot. We certainly never try to position the CTO as the cost center. I do think the CTO needs to live within a cost constraint that we all come up with. What is the budget? And I think the forward-leaning, the best CTOs are those that can say, okay, I've got x number of dollars, I am aligned with what we're trying to do. How do I position my R&D staff most effectively to get the most out of those dollars.

Harry Taylor [00:16:16]:

And that could be we've got 100% onshore now. We can move some offshore and not offshore, like kick it over to the offshore and they're at the cost center, but having an integrated team of different resources to get the most out of the dollars that we can spend, because, again, we are growth investors. We don't come in and say, how do we just maximize EBITDA and keep revenues? We want to grow the top line. We want to put out good products, but there are constraints that we've got to operate under. Everybody's got to operate under.

David Subar [00:16:51]:

Right. I tell companies this all the time, you'll never have enough money. You'll never have enough people. So the question is, what do you do?

Harry Taylor [00:16:59]:

Sales will never have enough leads. It's like there's a, it's all got to work within, in certain constraints.

David Subar [00:17:06]:

Right. And by the way, some congratulations. That means you, a big market, you're attacking. If you put, if you finally, finally find yourself in a world like, oh, we've solved all the problems.

Harry Taylor [00:17:18]:

Right.

David Subar [00:17:18]:

But you're probably not growing.

Harry Taylor [00:17:20]:

Right.

David Subar [00:17:21]:

Yeah. So what is it? So, does data science fit into this differently? Does it fit on, did data science fit under engineering? Do you want to be separate with GenAI, stuff like that coming? How does that change?

Harry Taylor [00:17:36]:

Yeah, it's a good question. And we have, TA has data scientists that we'll use a lot of times on analyzing customer trends or pricing, and that's more outward facing. But we'll also have data scientists within companies. They do tend to sit in the, underneath the CTO, maybe a separate pocket, because they're focused on a certain initiative, but often it is. I've seen both, but often it is under the CTO.

David Subar [00:18:11]:

Do you think that world changes now with GenAI becoming important, or maybe does it change for some kinds of companies and not others?

Harry Taylor [00:18:20]:

I think it does change, and I think it changes in some ways it doesn't. I think each company, and I think this is very fluid because I think companies are in different stages of understanding the impact companies are. A lot of our companies are saying, again, we're going to spend x amount on these data science AI initiatives. Not to say you ring fence that, but we are, because it's dollars that we weren't necessarily spending five years ago. So if you're growing your R&D budget, but now you've got this different pocket that we know we want to allocate resources to, but at the same time, we need to keep the other initiatives going. So as we go through budgets each year. We're certainly talking about how much people dollars are we willing and want to spend on certain initiatives. And obviously, if those are especially on the efficiency side, the hope is you spend money there and you're getting efficiencies elsewhere.

Harry Taylor [00:19:32]:

You could not necessarily save that money, but spend it to something more productive, or we're going to allocate more dollars because we're seeing those benefits. But I do think it's, it's fluid, at least it has been over the last 18 months or so.

David Subar [00:19:50]:

What kind of industries are you seeing? GenAI sprinkled amongst the existing products. So making existing products better versus creating new product lines that upset change existing markets create new potentials. Do you see markets like that or how does that look?

Harry Taylor [00:20:14]:

Yeah, I think in companies where there's a workflow element or a document processing element, we're certainly seeing AI have a big impact on what we incorporate into products that we can now provide to customers. That's been a big area. On the security side, we've definitely, and that's really maybe less offering to customers and more on the back end of making our security products better. That's been a big push in some of our non-software businesses. If there's manual processes of claims administration to pick an example. Certainly seeing AI have a big impact there of becoming more efficient.

David Subar [00:21:03]:

Let's go back to the relationship between CTOs and Chief Product Officers and investors. You have a fund with lifetime of the fund, maybe it's seven years, maybe it's ten years. You invest in a portfolio company, maybe you have three or four years left in the fund. Is that something you want your technology product executives to think about aligning against that? Does it matter? Does it not matter? What are the implications for that?

Harry Taylor [00:21:34]:

Yeah, the fund itself, I think of it more as typically we invest in a company for four to six years. However, if we sell the company or when we sell the company, it's not like you make the investments upfront, hope it works, and then you stop making the investments. I feel like the CPO, CTO, it actually shouldn't change a lot in terms of the lifecycle of the investment, with the exception of potentially where we were talking about earlier, the big multi-year re-platform. If you're on year, we may still, if you're on year five of the investment, you may still do it, but you know that you're making that investment and you probably won't see the economic benefit of it, but the next buyer will benefit from that, and that could turn up in a multiple that they're willing to pay for the business because you've already, we look at companies that if you see the R&D line has been cut or has been flat for a number of years and you're doing customer references and you hear, geez, products a little stale, it impacts your view of the valuation because you know the company's been underspending and you're going to have to take on that burden and try to try to catch up as opposed to a company that has continued to spend throughout the lifecycle of the investment. And you're stepping into a business that is planning for the next five years as opposed to there was investment for the first couple of years and not much since. I do feel like on that side, it's very continuous. We want to keep innovating, keep spending, as if we talk about these forever businesses. We want to invest in forever businesses.

Harry Taylor [00:23:35]:

We may only be investors in them for five to seven years, but we're not looking at it as that's the end of the company. It's got to keep. We wanted to keep thriving. Yeah.

David Subar [00:23:45]:

Otherwise the buyers, it's not attractive for the buyers. Right, right.

Harry Taylor [00:23:51]:

Yeah.

David Subar [00:23:52]:

Interesting. We frequently see an unfortunate situation where a CEO will come to us, a board member come to us and say, we keep putting money into product management, engineering, and we're nothing. Getting more out. How often do you see something like that happen? You know, clearly don't name any companies, but how often do you see things like that happening? And if so, are there common problems that you see? We see common problems. What are the common problems that do you see in there? Those coming?

Harry Taylor [00:24:28]:

Yeah, that's a good question. You know, it's happened. We've seen some times where we've tried to invest it in a product extension. So maybe it's a new product that's related. We feel like we can cross-sell the product and we make the investment to develop. It takes a year or so and you don't see a resonate in the cross-sell or the market take-up is not as good. And I wouldn't put that on the CTO. The R&D group did what we asked them to do.

Harry Taylor [00:25:12]:

We may have just gotten it wrong on the market appetite or our ability to sell the product. Generally speaking, those wouldn't be, they're not bet the company kind of investments. Typically they're more incremental, but they're definitely, we always look at, and I'm sure you see what percentage of your R&D dollars you're spending. Keep the lights on incremental and growth initiatives. And so there is a, you obviously love the growth initiatives to be as high as possible, but that's probably the most frequent misallocation of dollars is maybe we got the market demand wrong.

David Subar [00:25:57]:

Yeah, it's interesting. Yeah. McKinsey's got the three horizons model exactly against that. Here's the cash cow stuff. Got to keep going. Here's the stuff that's new and growing that's some kind of proven attraction to the market. And then the R&D and balancing those three is, well, there's not a formula that works all the time.

Harry Taylor [00:26:17]:

Yeah. And they may be different over the course of the investment, not because of the time of the investment. But, you may feel better about the keep the lights, there may be more investment needed for the keep the lights on because there's key things that just have been neglected and you've got to do. And can a customer may not even notice. Right. If you're bulking up security and then there are times when you feel like that's in decent shape and you can allocate more dollars to the growth initiatives.

David Subar [00:26:47]:

The CTO's and Chief Product Officers. When you buy a platform where you're doing a bunch of tuck inside, those CTOs and Chief Product Officers look different than the ones that you're growing the product organically within the confines of the company or all companies are both. And so its exactly the same.

Harry Taylor [00:27:09]:

No, I think it differs a little bit on the scale of the company. We invest in both. I wouldn't say small but smaller, really high-growth businesses. Where I could think of one that I work on, where we identified coming in that there was not a gap in the core product, but there was clearly, we got all these references and there was clearly one aspect that we did not offer that was a key reason for customers to churn basically agent or agent Washington offering. And we knew going in that was going to be, we were going to develop this internally and we recruited a CPO and a CTO because they didn't exist. They existed at the company, but not, we needed to upgrade to do this. And so that was maybe a different profile than if we invest in a business with several hundred million of revenues. And it's more of a product portfolio approach.

Harry Taylor [00:28:13]:

And of course, you're introducing new products, but it's more extension of product as opposed to building something brand new.

David Subar [00:28:24]:

So the, so do those CTOs and Chief Product Officers look different for the ones that are building it internally versus the ones that need to be able to integrate external purchases to fill gaps.

Harry Taylor [00:28:44]:

Sorry, break out the. No, I wouldn't say they. It's also a function of just the size of the company and the skill sets that's required. Yeah. For that role.

David Subar [00:28:56]:

So what do they look like for a smaller company or bigger company? How do the roles change for you? How do you want them to operate differently or what are the attributes that would change?

Harry Taylor [00:29:07]:

Yeah, I think at just this broad generalization at a smaller company, generally speaking, I think the product portfolio is smaller, it's more focused. There may be two or three key products. In a larger company, you may have 20, 30 products, may have fewer product families, but a number, many more different products. And so the complexity of managing those products and again, making those trade-offs, I think changes, it's neither good nor bad. I think it's just a different skill set.

David Subar [00:29:46]:

So a company is out there looking for investment. How do they find you? First, what are the, what is that company that you want to find you? You said to talk about profitable growth. You mentioned some things like that. Are there other things that you want a company that fits in this frame? Like, call me at TA. What do they look like? Let's start.

Harry Taylor [00:30:13]:

Yeah. Yeah. So hopefully we find the company. We're making six, 7000 calls a year. We're meeting with thousands of companies and we make 30 investments a year. So we're very active on our pipeline and outreach. We talk a lot about high-quality business models and what we mean by that. We want high-quality business volume growth by high-quality business model.

Harry Taylor [00:30:42]:

We spend a lot of time looking at retention rates. So to us it means a lot of, if the retention rate of a customer is very high, and so that's 90% plus retention rate. And us that it could be a very small company. But if retention rate is very high, it just highlights to us how critical it is to its customers to run their business. And so that is, we don't want a company that's got a very low, may have a high growth rate, but a very low retention rate. And so every year you got to go fill that bucket to go grow more. Thus, if you have a high retention rate, it also means you have the right to sell them more products because they're clearly like your product, use your product, and hopefully that means you can sell them other products. So we look for high gross retention, net retention growth.

Harry Taylor [00:31:37]:

And then we do like businesses that are, that are profitable. And by profitable, our average EBITDA margins over 30%. So not just breakeven, but show that they can run the business very profitably and with really very little capex.

David Subar [00:31:58]:

So if someone wants to get a hold of you, what's the best way?

Harry Taylor [00:32:02]:

Yeah, we're on ta.com. dot can email us. We don't want to. We don't get too. We obviously look at the size of the market and clearly big markets, but we don't shy away from something that may be viewed as a small market. If the company is a leader in that market, it's not a prerequisite that it's this massive market for us to invest.

David Subar [00:32:32]:

More SaaS businesses than anything else.

Harry Taylor [00:32:38]:

Yeah, absolutely. More SaaS business. However, we really do look at it. Because many of our business has been around for a long time. Certainly, many companies our portfolio have this combination of on-prem and I won't call it legacy, but it's on-prem software that customers have been using for dozens of years. And then often there's that revenue line and then they have the SaaS revenue line that's growing very nicely. And typically the investment thesis is that SaaS revenue, that SaaS, those SaaS products are going to grow very quickly and maybe that maintenance base, the on-prem will be more muted.

David Subar [00:33:20]:

Well, thank you. Thanks a lot. Appreciate your time.

Harry Taylor [00:33:25]:

Oh, my pleasure.