
What happens when private equity buys your competitor? - ataussig
https://medium.com/lightspeed-venture-partners/what-happens-when-private-equity-buys-your-competitor-6095cb3c43#.ixzq1emnw
======
padseeker
So relevant info - I used to work at a Vista Equity owned company, one that
was eventually sold to Oracle. Vista was run by a bunch of MBAs that believed
that had the best insight on how a to run a software company, including what
technology to use.

We were evaluating better tools for version control as we had been using
Subversion. We were seriously considering Git, Jira, and Github. Then Vista
decided they knew what was best for all of their companies and decided it was
Microsoft Team Foundation and Foundation Server. :/

I know Vista has had a lot of success but it certainly is not related to their
ability to make technical decisions for the companies they own. They are
succeeding in spite of this kind of decision making, not because of it.

~~~
Sacho
> We were seriously considering Git, Jira, and Github.

You were evaluating Git, Not VCS and Git? Looks like your decision was already
made.

It seems like you were looking for a project management tool as well, and TFS
is both similar to subversion(easy transfer of knowledge) and fills that need.
Why Vista's decision was obviously bad is not clear to me.

~~~
NegativeLatency
Have you used TFS?

~~~
Sacho
Yes, for several years.

------
bigbossman
If a PE shop buys your competitor, you should rejoice. PE firms primarily
generate returns through (1) debt repayment from free cash flow, (2) multiple
expansion, and (3) operating improvements.

Because of #1, PE firms like annuity-like businesses with predictable cash
flow. A ventured-backed startup doesn't need to worry about #1, and therefore
can focus all their internal efforts on #3. (If multiples expand, then that's
even better.)

Here's an analogy. Venture-backed companies are busy building rockets, and
rockets either take off or blow up. When PE takes over, your competitor has
decided..."F this, let's go build a train instead."

~~~
dmix
Why is "(1) debt repayment from free cash flow" appealing vs VC growth? I'm
not familiar with that term. A quick search only gave me pages filled with
even more finance jargon.

~~~
jldugger
Leveraged buyouts: you borrow a bunch of money, buy the company with it, use
any stored cash to pay that down, and saddle the company with the debt you
used to buy the company in the first place. Then you repeat this a couple of
times to buy up portfolio of related companies that might be better together
than competing, reshape them and put them back on the public market at a
profit.

Debt repayment from free cash flow is appealing because it's comparatively
less risky. Startups building products have no free cash flow to speak of and
require regular VC cash infusions to balance the books.

------
dzink
One aspect missed is that the government is getting juiced by leveraged PE
deals, so a good chunk of PE returns are the tax deductions from the interest
on the debt that gets split between debt issuers and PE firms. Why isn't
everyone becoming a PE firm then? They did at some point in the 80s (re-watch
Pretty Woman), when there was a plethora of private companies with lots of
"fat" cash reserves on them and management that would rather spend that on
private jets than return them to shareholders.

Well-off corporate executives inspired PE activity. Well-off PE managers
drained the market of cash cows and tightened corporate rules. The funny thing
is in the real world, if you advertise how successful you are, you attract
competitors, which is why I find it quite puzzling that the first thing
startup founders do is advertise on TechCrunch when they've raised a big
round. It's like saying "Look how much money is in that pot of gold over
there, we are running for it." Does the value of the signalling increase the
risks/damage from it? Would love to get your thoughts.

------
zellyn
"Ping Identity, for instance, disclosed a 40% annual growth rate in its
acquisition announcement. That’s below the average growth rate for a 9 year
old public SaaS company"

Wow. It's crazy that 40% annual growth can be considered too low.

~~~
spullara
in that same paragraph the author says 15% quarter over quarter growth is
slower but it is in fact 75% annualized growth.

~~~
ataussig
OP here. I should have been more clear. 15% is the most recent quarter vs the
same quarter in the prior year. So it's an annualized number.

------
vthallam
It's definitely true to an extent that when the founders doesn't have any
control or motivation, the outcome tend to be subpar. Also, the post
highlights the obvious difference between PE and VC that PE mostly looks for
min guarantee return and companies which are predictable to get them returns
through either a sellout or IPO. What i wonder though is, why would founders
in general go for this buyout(apart from the obvious reasons like money). Is
there any reason companies are sold to PE investors in general?

~~~
beat
One could certainly interpret a PE buyout as an "exit".

~~~
alistairSH
This was true with my employer. The first PE transaction was the
owners/founders cashing out. The company was about 40 years old at the time
(and the founders, while on the board, were no longer part of the executive
team), so not quite the same as a start-up doing a PE deal.

------
sl8r
I think this is more about distributions than it is about expected values. If
VC and PE generate roughly the same returns to their investors (say 20% to 25%
IRR), what does this mean for the companies they invest in? Fred Wilson notes
([http://avc.com/2009/03/what-is-a-good-venture-
return/](http://avc.com/2009/03/what-is-a-good-venture-return/)) that with a
five year average horizon, he expects roughly three buckets of outcomes:

1\. 1/3 of investments go to zero, i.e. blow up and lose substantially all of
investors' money.

2\. 1/3 return 1.0x to 1.5x (on average across the bucket).

3\. 1/3 return 7.5x (on average across the bucket).

That is wide distribution of outcomes. In PE, on the other hand, you'd get a
much tighter distribution of outcomes around 2.7x returns. A single investment
(much less 1/3) going to zero would destroy the fund, so PE funds want to
prevent that from happening. The conclusion is that Vista is pretty sure it
can get a 2.7x outcome or better, and it's also pretty sure it wont zero its
investment.

So should Ping's competitors rejoice after the Vista buyout? It really depends
on how quickly they're growing and how much market share they think they can
win. Do they believe that either [1] Vista will fail in 2.7x-ing Ping, or [2]
they can succeed even in this 2.7x world? If they believe either of these
things, then the buyout is probably good news for them; if they don't, then
it's probably bad news for them.

------
mSparks
I read this as "when PE buys your computer" made more sense the second time I
read it.

------
ryandrake
> Founders are special people who somehow glimpse a vision of the future that
> few others understand, and then go build it.

Ughh, more founder-worship. What's more believable is that lots and lots of
people can see glimpses of the future all around them. Out of that larger set,
the ones that are lucky enough to have access to the capital and connections
needed to start up and run a company are the ones that end up as "founders".

~~~
mwfunk
Even worse is when someone's founder mythologization (if that's a word :)
reaches the point where they always capitalize the word "founder" and talk
about founders (sorry, Founders) as if they were some unique species distinct
from all other humans for their vision and bravery.

I'm convinced this comes from a combination of extremely stressed-out people
psyching themselves up, plus VCs wanting to psych up the fresh meat. If you're
going to give someone a bunch of money on the off chance that they might turn
it into more money, it helps if you can convince the people you're giving
money to that they are courageous superhuman visionaries creating the future,
rather than people who are about to ruin their lives for a few years in
exchange for a small chance at a big payout.

~~~
avs733
>mythologization (if that's a word :)

The term I have heard used is mythicizing or mythization[1] but its not only a
problem in the public sphere, it has a significant impact on entrepreneurial
research and understanding/teaching entrepreneurship.

[1] Ogbor, J. O. (2000). Mythicizing and reification in entrepreneurial
discourse: Ideology-critique of entrepreneurial studies. Journal of Management
Studies, 37(5), 605–635.
[http://doi.org/10.1111/1467-6486.00196](http://doi.org/10.1111/1467-6486.00196)

