What happens when private equity buys your competitor? | Hacker News Reader

What happens when private equity buys your competitor?

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62 pointsataussig38 comments

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.

Wow. That’s pretty crazy.

i had a very similar experience so i set up a git bridge for my part of engineering to use. it was not well-received by management, but it might be still running

You worked at BigMachines too. I know you! That's impressive, the whole git bridge.

> 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.

Have you used TFS?

Yes, for several years.

For the record I had no input in this decision. When I say we I was saying we as a company.

If they had asked me I would not hesitate to at least vote for git. I've used Subversion enough and I have always found the process of merging a branch as absolutely painful. I've never used VCS so I'm not qualified to evaluate it. As for a project management tool I don't know enough to make a compelling case against TFS. I can say that (a) I hated using it and (b) I was not along. It's been so long since I last used but I am thankful I don't anymore.

As someone who has used Microsoft TFS and its suite of tools versus using github or gitlab as well as jira for issue management I can tell you that git/github like tool/jira is preferable to subversion/TFS. I am willing to wager a large sum of money that most of the team members at the vista owned company would have agreed. And I am nearly certain TFS and Subversion was more expensive than the other tools.

You know why I think Vista's decision is bad? MBAs and finance people should not be dictating what tools should be used technical/coding/project managers. That is dumb. I'm glad you like whatever tools you use, what's with the snide attitude?

What's wrong with Team Foundation? I have never used anything but git, but I have had people suggest TFS.

TFS used to be pretty clunky but MS has modernised it quite a bit. Especially their SaaS version [1].

[1] https://www.visualstudio.com/en-us/products/visual-studio-te...

> 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.

Ironically, this is the case for 90% of software-run businesses. The technology matters very little beyond initial profitability. Initially, technology is important because it allows you to leverage, but once you can leverage revenue instead, the quality of your technical decisions generally don't matter so long as they aren't super dumb.

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."

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.

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.

Before the buyout, the firm didn't have that debt! This scenario is a way of converting equity (which costs the firm nothing) to debt (which must be repaid). Of course VC deals can have debt too, but their goal is some sort of equity event, whereas this is almost the opposite of an IPO. The theory is that a PE will buy a firm with the revenue to support such debt payments, or that will have that revenue once the PE partners give it their special kind of love.

Anecdotally, I must disagree with TFA's "...they rarely lose capital..." since the only company I ever worked for that got bought by PE ended up a giant loss.

Did you ever watch The Sopranos? It's a more legal, slightly less unethical version of what Tony and his crew does to the sports store. They bleed it, leech it dry oil it's a shriveled corpse, ready for Chapter 11, at which point (or ideally before) they walk away.

Here's an example that helps explain how this works. When people talk about financing engineering, a lot of the nuance is figuring out how to manipulate the "capital structure" like this.

A) Imagine buying a $100,000 house and borrowing $80,000 from the bank to finance it. Then you rent out the house for a bit more than the total cost of the mortgage, taxes, and other expenses. Eventually the value of your $20,000 investment will grow based on a combination of (1) more ownership from the house and (2) potential market appreciation on the total value of the house.

B) Compare this to buying a $100,000 house but getting someone to co-invest $80,000. In this case, your equity is fixed at 20% (vs 80% for the co-investor). The value of your investment will depend on your share of any intermittent cash flows from rent and market appreciation of the house.

Debt (A) is attractive if there is certainty you can finance the debt payments, but that's obviously not the case for many startups.

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.

"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.

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

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.

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?

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

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.

Sometimes the most obvious reasons are obvious because they're the reasons. PE companies are quite happy to buy founders out and let them sit back or earn out. As another user has pointed out, that's essentially an exit. It's much more attractive to many founders than the VC offering them at best a 50/50 chance of cashing out in future once liquidation preferences are factored in and demanding much more performance, probably over a longer period, to get to that stage.

Also, there are plenty of companies which are attractive to PE companies (profitable, steady growth which could be a bit faster) but not attractive to VCs (market is pretty well defined and never going to be huge) so the PE investors are the only ones approaching them.

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/) 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.

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

> 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".

Well, that's on a VC blog so it's a sales pitch do get people to pitch them. All businesses will tell you "we love you".

Of course the entrepreneurs (founders or not) are not the customers, the LPs are.

Just curious, it sounds like you think this statement is either not true or just a coincidence: " In consumer technology, especially, there are very few success stories that don’t involve at least one founder in an active role. "

My past experience is that it's actually pretty true. Some individual from the beginning of the company needs to be in an active role until a certain degree of maturity sets in.

Sometimes they need to bring that guy back after he leaves and things fall apart.

I've never done a statistical analysis though, so maybe I and the lightspeed guy are wrong.

I think for sure that company success requires engaged, future-seeing leaders with vision, taking an active role. My argument is that "founders" are not the sole possessors of such leadership qualities. The "founder" title has much more to do with one's access to capital and connections than one's intrinsic personal qualities or product judgment.

It seems like it would be sufficient to say that not everyone has the ability to glimpse the future, envision a product given that, and initiate and direct the implementation of that product. Not everyone has that ability, but probably many do: however, in an established business with specific fiscal goals, how many people have the ability to do those things? Founders don't just bring some evidence of talent, they also have an authority and influence to make things happen that other people don't. Another way of thinking about it is that an established company typically does not have the ability to develop and empower that kind of person within the company. A founder precedes the company, and so is not constrained by the company in the same way.

My point is that "founder" is not some distinct species of human that uniquely and intrinsically possesses product sense, future-seeing vision, ability to execute, etc. etc. etc. There are many people out there with these abilities, and they could just as successfully found and grow companies. What sets apart founders is that they have these traits AND have the access to capital and connections that permit them to actually go out and do it.

For example, I would put forward as a basis of argument:

There are many people (thousands?) who, given $1 billion, could go off and build a space program. Elon Musk was actually able to do it though, not because he's a genius (he is), but because he ALSO is super-well-connected and actually could gain access to that $1 billion.

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.

>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

So it sounds like you think you have the "glimpse of the future". Well, nothing is stopping you from doing it RIGHT NOW, instead of posting on HN about how you need money to do anything.

When you think you have a good idea but not working on it, it probably means either: 1. you don't think the idea is good enough to risk your stable life; 2. you are too lazy to do it; 3. you don't want to risk regardless of how great of an idea you think it is.

In every one of these cases, you're not cut out to be a founder--you just can't do the most important part--"then go build it". That's what makes "founders" special, they just do it instead of complaining how it can't be done.

This. I suppose I am a successful founder, but it sure wasn't some mystical "vision of the future" - I have about ten of those a day, and I'm sure everyone else does too.

We succeeded due to blind luck - right place, right time. And a lot of hard work of course, but there are multitudes working just as hard who don't succeed because their thing isn't quite compelling enough, or a large competitor suddenly appears out of nowhere, or even the stock photo they used is also used by a popular gambling website and turns people off.

I guess the whole VC thing is predicated on the idea that you can pick winners, and therefore those winners (founders) must be something special. We're not - we're just dice that came up six.

This. Can't mention luck and coincidence enough. Most startups can trace their success to meeting person x at the right time in the right way. X be an investor, an engineer, a business developer, whatever.

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