Episode 27: Adam Solomon of Thoma Bravo
on How to Identify and Scale High-Quality Software Companies
On this episode
Shiv interviews Adam Solomon, Partner at Thoma Bravo.
Shiv and Adam discuss how Thoma Bravo’s focus on market-leading companies impacts their approach to evaluating assets and value creation.
Hear how one of the biggest PE firms in the world approaches due diligence, performance metrics, profitable growth, and founder relationships in high-quality companies. Plus, learn how they leverage pattern recognition and internal benchmarks to maintain a competitive advantage.
The information contained in this podcast is not intended to constitute, and should not be construed as, investment advice.
Key Takeaways
- Thoma Bravo’s approach to identifying and evaluating potential investments - 2.22
- What makes Thoma Bravo stand out in a competitive market - 8.57
- How to develop a value creation plan that drives alpha in high-quality assets - 11.02
- How to keep portfolio companies accountable with a hands-on approach to data - 16.02
- Laying the groundwork for high-impact value creation initiatives - 18.37
- How being a bigger firm impacts Thoma Bravo’s approach to due diligence - 22.03
- Which metrics are improvable in potential acquisitions, and which are harder to fix - 26.36
- How Thoma Bravo finds the balance between growth and sustainable profitability in the current market - 30.13
- How high-quality assets can grow while maintaining best-in-class margins - 33.37
- The ongoing market opportunity in software - 36.29
- A collaborative approach to working with founders and management teams that values market expertise and culture - 39.08
Resources
Click to view transcript
Episode Transcript
Shiv: Alright Adam, welcome to the show, how's it going?
Adam: Good, good, thanks for having me.
Shiv: Thanks for being on. We're super excited to have you. Of course Thoma Bravo is one of the biggest PE firms in the world. So really excited to have the audience learn from all the different experiences that you have. So why don't we start by you sharing your role and your mandate at Thoma Bravo, and we'll take it from there.
Adam: Yeah, absolutely. So again, appreciate you having me on. I'm a partner here at Thoma Bravo. I co-run our Explore Fund, which is our lower mid-market buyout fund. We've raised two funds for that product, about $3 billion in AUM. And as a firm, we are entirely focused on enterprise software. So my fund is just the lower mid-market kind of version of that. So our flagship fund is doing the really big buyouts. We've got a fund in the mid-market called Discover, and Explore, the fund that I co-run, is in that lower mid.
Shiv: And can you go into a little bit the criteria that you look for when you're evaluating these companies in terms of size and other characteristics?
Adam: Yeah. So across all of Thoma Bravo, I would say what we're, what we're really most focused on is a couple of things. One is just fundamental business and quality, right? So we want to be buying high - companies that got high IP products, delivering a lot of ROI for their customers, very, very sticky. Market leaders. We're very, very focused on, on all of that. And we want that to be reflected in the numbers, right? So you can say you've got a great product and your customers love it and you're a market leader. But if your attention isn't very good, if your gross margin isn't very good, then, you know, maybe that's not so true. So we look for that kind of qualitative side of quality, the really quantitative side of quality in terms of gross retention, net retention, gross margin, customer acquisition costs, all that good stuff. And then what we really look for too is, is a management team that we can collaborate with. We always try to back the existing management team and drive a lot of operational change at the business, to kind of take both growth and profitability up. And we really kind of pride ourselves on being super collaborative with the management team. So we look at - just as important as the fundamental business quality is the ability for us to really collaborate and work with the management team.
Shiv: That's great. And why don't we start with each of those and take a separate thread on each. So on the business quality side, can you expand on that? What are - beyond just the stickiness like in terms of numbers or other characteristics. How are you figuring out if a company is a market leader and actually is a product that customers love and are going to stick around with?
Adam: Yeah, absolutely. And this again is where the kind of the qualitative does have to marry up to the quantitative. So when we're looking at a company, we will talk to as many of their customers as possible. One thing that actually really helps as being part of the Thoma Bravo platform is we've made so many software investments of different companies of different sizes, that dollars to donuts, we're going to have a point of view on that company or on that market that we're digging into already.
And that again is the benefit of having the firm having done this for so many years and being just focused on enterprise software for so many years. Just the institutional knowledge is tremendously helpful. But we're going to get out there and do our diligence, right? And talk to customers, hear what they're saying, get underneath the product, make sure we understand the architecture, all that stuff to make sure that it all hangs like, you know, that we're hearing the same thing, that the product is high ROI, that it is a market leader, et cetera.
And then, you know, we are very quantitative people so that the numbers that matter most to us - gross retention, debt retention, gross margin, customer acquisition cost. And if you've got a great - those numbers are looking good and you've got, you're in a good market where you're the leader and you're delivering real value to your customers and you've got a great team, that's a Thoma Bravo company.
Shiv: And do you start with a market thesis first or is it the company first? Cause a lot of firms they'll first try to figure out like, we have a perspective on a market here that we think is growing or the industry is ripe for, for accelerating and having more companies emerge or more successful companies emerge. Is that - is that the place where you start? How are you determining where to deploy your fund?
Adam: It can be a little bit of both. And what I'll say again, this is the advantage of us being part of the bigger platform is at our flagship fund, we do have dedicated teams by cyber, infra, apps, et cetera, who go really deep on markets. And so we kind of know the markets that we as a firm are gonna like or love. I personally don't - I personally cover all of software, so apps and cyber and infra - and what I found is that that knowledge is extremely helpful. That institutional knowledge is extremely helpful in terms of saying, we're probably going to like something in this market or that market. But also we found kind of great companies, great opportunities in markets you wouldn't necessarily even think of. And so we really are open-minded to finding that really, really great company, that really, really great team wherever we can.
Shiv: And in terms of the numbers that you shared, like gross retention, net retention, are there internal benchmarks that you have that you're measuring these companies up against? Because obviously like net revenue retention looks different in construction management software than it would in, let's say, invoicing software. And so are you trying to calculate which - how are you trying to measure those companies that you're looking at and their respective metrics?
Adam: Yeah. So as I said, we are very, very data driven. So we have benchmarked our entire portfolio. Uh, cause the other thing is you can also kind of play games with those numbers, right? You can, you can fudge what your gross retention is or your net retention is a little bit just by defining it a little bit differently. And so we are maniacal about benchmarking our entire portfolio on those and kind of standardizing the way we calculate it. So that way, when we look at a new opportunity, we kind of know where, where does, where does it fall? And to your point, different industries do have different kind of typically structural areas where those metrics will fall. And we kind of don't have a lower bar really for an industry that maybe has structurally higher churn. We just will end up not buying a company in that industry. We really are focused on having really, really strong gross retention no matter what end market the business is in.
Shiv: In general, does that look like gross retention above 90 % at the very least? Is that like a threshold kind of?
Adam: That's a threshold exactly. I mean, if you look at our portfolio for my fund, for Explore, you know, our median company is 95, 96 % gross retention. And, you know, again, it's not this positive. It's not - it is probably the single most important number. It needs to be taken in the context of not only all the other numbers, but also, as I said, the team, the market, the product, all that stuff. But it is a number we focus on a lot.
Shiv: And with those kinds of companies, like when you have gross retention above 90% and net retention above 100%, those are some of the most prized assets in the marketplace. So especially in the last, let's say 18-ish months or so, the supply of number of deals out there is lower. So you probably come up across a lot of competition for those kinds of assets. And so how do you separate out the Thoma Bravo approach against some of those other investors? Because all private equity firms are trying to pitch similar benefits to those founders.
Adam: Yeah, that's right. It's a really good question. And to your point, the market has moved very much in terms of towards quality, which is what we've been doing for two decades plus. But the market recently unquestionably has moved in that direction. And those companies that do have those bulletproof metrics and market positioning on all that are really prized assets. There's a few things that we do to kind of differentiate ourselves. One is we've been doing this for a very, very long time, right. So we actually have the credibility to say, you know, when we are evaluating a business, we really do, you know, have kind of know that it's really high quality. We're not - this isn't our first time doing this. We've been doing this for a very, very long time.
Secondly is - part of the reason why we focus on those super high quality businesses is because you can just do more with them operationally, right. So you can improve the P&L, you can accelerate a margin and accelerate growth at the same time. You can kind of break that growth versus profitability trade-off in a way that doesn't seem like it should be doable, but we've done it so many times across our portfolio that we know that it is doable.
And then the third thing that we do to kind of differentiate ourselves is we really do have that management focused, management friendly, where we're not gonna drop in someone else to run the business, we're gonna be very transparent with the management team. Tell them, here's what our expectations are. Make sure those line up with your expectations and be very, very collaborative in the way that we run the business.
Shiv: And for assets like that, where they're almost trading at a premium, right? You kind of have to have a robust value creation plan behind that to generate alpha for your fund. And so talk a little bit about that when you are going after premium assets at premium multiples, you kind of need to do more to now produce value on the back end. So what's your philosophy behind behind that for companies?
Adam: You hit the nail on the head. We won't buy a company unless we have a pretty transformational thesis on value creation. And that takes a lot of different - it comes in a lot of different flavors. It is almost always getting - improving margin. And it's almost always as well improving the growth rate. And this is the part that I said, that I alluded to - it sounds like it shouldn't be doable, right? It sounds like there's - everyone says there's a growth versus profitability trade-off. I think that that's one of the key insights we've had is that for those super high quality businesses, there are things you can do specifically that will increase margin, but will also actually increase growth rate even at a higher scale. And again, for these super high quality assets, you need a - it's not enough to have a small value creation plan. It has to be pretty transformational to get the conviction you need to own these businesses.
Shiv: That's exactly what we've seen as well as we work with some larger private equity investors and the more premium assets that we see - we see that the room for margin expansion actually increases as you drive more growth, especially if you're data-driven and you look for all those different opportunities. So why don't you expand on that and talk about the different components and your approach as you're evaluating those assets and building out that detailed value creation thesis.
Adam: Yeah, I can touch maybe a couple of things that will be, you know, that impact both growth and margin. One is pretty basic and pretty tactical and pretty uninteresting in some ways, but it's pricing and packaging. And particularly in, you know - with a founder-run business or what have you, they kind of never change pricing. They've built a bunch more product, have delivered a bunch more value to their customers. And they're just at the point where they're just not getting paid fairly for the value that they're delivering.
And so oftentimes, there's a chance to, as you say, look, you know, we've brought more product to market. Let's tweak our pricing and packaging to make sure that we're getting fairly compensated for the, for the very hard dollar ROI we're bringing. And that obviously is accretive to growth, clearly, but it's also a hundred percent margin revenue, so it's accretive to margin as well. Another maybe more generalized example is - and we see this all the time, both for companies, big and small - is they'll have 10 different growth initiatives, none of which is getting fully funded, none of which is getting really measured, none of which has somebody on the executive team who is fully responsible for making that successful. And they're all kind of getting some attention, but not full attention. We've had great success doing is say, let's pick the best two out of those 10. Let's give them way more funding than you're giving them right now. Let's shut down the other eight for now. We maybe come back to those later, but let's focus on these two, give it a lot of funding, actually accelerate the timeline, decide on what the milestones are, what the metrics are, how you're going to measure success, report religiously on it to make sure that we're on track and have someone on the executive team be personally responsible for the success of that initiative. And when you do all that, obviously you can take a margin up, right? Because you're really focusing your spend, but you also dramatically increase the likelihood that that initiative is going to be successful and you increase the time to the speed to market as well. And so that again is - that's a more generalized example but it's something we see all the time where you can improve both growth and margin just by driving that focus.
Shiv: And I think a big part of that is just focus, right? Where if you have 10 initiatives, how can you do any of them well? And we see companies spread way too thin and they don't even have the fundamentals organized where sales efficiency is not in order, their payback periods are way too high, or maybe their pricing is not in order, like you mentioned. And so by picking a handful of those areas and really driving that forward, you can make a pretty big impact on lifetime value or your gross margin per customer. And that changes all your entire unit economics or your financial metrics.
Adam: You're 100% right. And that's what's funny is sometimes - again, this is an overgeneralization, but we'll see those 10 initiatives and five of them don't make sense at all. They sound great, but if you actually say, all right, what's the business case against this? How much is it going to cost? What's the incremental revenue? What's the impact on the business? It kind of just sounds good in theory, but there's actually no real sustainable business case to support it. And so to your point again, we see that frequently.
Shiv: Do you find this in your companies? What we've seen is that either companies are not tracking the right data or even if they are tracking the right data, they're not looking at the data often enough to make adjustments. So they're kind of just like an autopilot and they never end up actually making improvements. And then over time, like, mistakes can compound and you can wake up at like a $10 million business that's wasting half a million dollars on an initiative that's not really driving enough value.
Adam: 110%. So we are very, very attuned to that because I think it's a very real dynamic. The way that we, again, go to market or conduct business a little bit differently is we insist on those metrics being very, very well defined. Whenever we buy a new company, there's an onboarding process where we just make sure that we're measuring the right things. And if there is a specific initiative, we agree on what is that initiative, what metrics is that initiative going to impact and how and by how much and by when. And so we - and we demand on kind of - very demanding and making sure that we're getting the right numbers. And then we have monthly board meetings for at least the first year of our ownership to make sure that there's not a surprise to us or the management team where you're three weeks, you're three months in rather, you've spent a bunch of time, bunch of money and totally missed on the opportunity, right? So we try to be really kind of hands -on and really kind of all over it to make sure that exactly what you described doesn't happen.
Shiv: Can you give an example of that? The reason I ask is that we've seen companies where they might identify something during the due diligence phase or in the first 100 days. And then over time, they lose sight of that objective or something else comes up and you get distracted. And before you know it, like three quarters of board meetings have gone by and that core initiative actually hasn't made progress. So how have you kept your portfolio companies accountable and on track with some of those initiatives?
Adam: One of the big things that - I mentioned this or alluded to this a little bit - is having somebody on the ELT be just responsible for that. Not to the exclusion of their other responsibilities, but where there's one person where that initiative lives with that person. And because we all know we're gonna look at progress every month, we're gonna assess how things are going every month, we've agreed on the metrics that matter. And so we're gonna see how it's stacking up every month. And having one person being responsible for that and one senior person being responsible for that kind of creates a lot of just good collaborative, constructive behavior where it tends not to slip through the cracks.
Shiv: And what are the most common areas that you've seen inside these businesses where in terms of generating value and where the focus areas should be where if you actually really focus on that out of everything else as a top two or three initiative, they can move the enterprise value of the business significantly.
Adam: It's a good question and honestly - I don't mean to be coy or to cop it - I think it's all over the place. I think if you look across our portfolio and our history, a lot of times the most important thing has been a pricing and packaging concept. A lot of times it's been new product development and kind of picking which products are most strategic to go build, prioritizing building those, and then how do you actually commercialize and go to market with those. Sometimes it's been improving the go to market motion and making sure that the right incentives and the right, you know - very complex to set up a go-to-market motion. You're dealing with channel and direct and territories and quotas and all this kind of stuff. There's a lot of complexity, a lot of moving parts, and if you get that right, that can unlock a huge amount of value. So it really is kind of all - sometimes it's M&A, right? Which obviously isn't an operational, strictly operational thing. But we've really seen it kind of all over the place.
Shiv: How frequently do you find it that - and I'm glad you mentioned those three - but how frequently do you find it that, like for example, pricing and packaging, you know, increasing prices is the quickest way to find more margin and more cash, but at the same time, increasing pricing without justification or actually having additional value to customers can be problematic. Same thing with go-to-market, like you can try to pour more leads at the top of the funnel, but if your sales efficiency isn't great or you don't have tighter ICP definitions, you're not really getting the right kinds of customers in the funnel. So how often do you actually have to do some of that fundamental work of like TAM and segmentation and where the company sits or the product sits within a particular marketplace and really figuring out the competitor landscape and all those other areas before we jump to some of these value creation initiatives?
Adam: Yeah, and you're spot on that you have to have that fundamental understanding first. And we really do get to that before we sign the deal. We want to make sure with it, because that's - so much of that also does get to business quality, right? If you think you're the number one player in the market, but there's - your tech is old and it's a bunch of folks who are coming up from the bottom and it's easy to pull you out and you get disrupted, that's actually not a very high quality business, right? So you need to, if you - you say you're the number one player in the market and you've got $50 million of ARR and you think the market's $3 billion, well, then you're probably not the leading player at $50 million of ARR unless the market is almost zero penetrated, right? And so we make sure that we've got our arms pretty good around TAM, competitive dynamics, segmenting that TAM, who's ICP, who's not, and we'll want to look at retention by who's ICP, who's not. And we want to have that done - at least our view of it done before we would sign a deal just gets so fundamental to our thesis that we're getting that right. And what we do quickly off the bat is we’ll work with the team to, you know - and even really a lot of this is pre-signed to make sure that we and the management team are seeing things the same way. Because I totally agree. If you don't have that fundamental understanding of where really do you play in the market, you're flying blind when you're making those operational decisions.
Shiv: Yeah, I was talking to somebody from Alpine about this and you know, with this concept of that, the value creation plan, the implementation of that in the first 100 days really begins in diligence. And that's kind of when you can kind of hit the ground running. So talk a little bit about your diligence process and how deep you're getting with these companies. I know you touched on it a little bit there, but just trying to understand more in-depth, like what are all the areas that you're covering and where are you going above and beyond?
Adam: Yeah, so I'll say a couple things. First of all, we have a very concentrated portfolio, typically, you know, call it 10 or 12 investments per fund. And so each one of those we view as, you know, really needs to be a winner. Right. And so we're very, very focused on that. So that means that we do a very, very thorough amount of diligence before buying a company.
What we benefit from - cause there's always a balance here. Cause you, you, you also can never sacrifice speed, right? If you're not moving fast, you're going to lose the - you're going to lose the deal.
Shiv: You're gonna lose the deal, yeah.
Adam: And you, and you also have to focus on what matters, right? Because the worst thing you can do is spend a bunch of time on something that doesn't matter, cause you're going to irritate the management team. You're going to, you're going to waste time. It's going to be terrible. That's really where our, we know exactly what we're looking for.
So this is where our experience, but also just the cleanliness of our strategy comes into play, right? We know we're looking - everything we're about is how high quality is this business? Can we work with it? Can we kind of collaborate with the team or not? And where are the opportunities for the value creation plan? And we are maniacally focused on just that. So for each company or each opportunity that we look at, where we focus on diligence or where we spend the most time might vary. Sometimes, if we know we're taking on a bit of an older tech stack, we'll go really, really deep on technical diligence. Sometimes if it's a more nascent market where this is the leading player, but the competitive dynamics are less well set, we'll spend a lot more time there. What we always spend time on is the micro to make sure that we've really got the - we really have our arms around the revenue quality, the P&L, et cetera.
Shiv: Yeah, I think one of the advantages that you have as being Thoma Bravo and all these different funds and different scale of companies that you're investing in is you're almost like a big data company that has access to all this internal benchmarking data. So you can kind of speed through some parts of diligence and also know which companies are for real in a particular market versus others. And I think smaller PE firms don't have that benefit because they just don't have a big enough portfolio.
Adam: That's really well said and it's exactly right. And that is why we are so focused on benchmarking every single company and getting that reporting to be comparable apples to apples so that we can look across the whole portfolio and see where is there opportunities with any given company.
The other thing that I should mention that is also beneficial to having just that bigger portfolio and that the small companies up to big companies is just the amount of pattern recognition we have beyond just the benchmarking, beyond just the numbers. But, you know, if there - if there is an operational initiative at a company, we've seen it. We've probably seen it many times. And that's what our operating partners and the deal teams are there for is to say, look management team, you know, we've - this is how we dealt with this on this company. Here's how we dealt with it in that company. You can go talk to that company CEO, here are the pitfalls, here are the mistakes we made. Here's what we learned from that, and just the pattern recognition is, across the portfolio is so, so powerful.
Shiv: You can almost template out your value creation plans to some degree and be able to mix and match.
Adam: Totally, that's right. And the thing is we certainly can, but we also can and always do keep in mind that every company really is different in its own way. And that's why I think it's valuable to have a playbook, but it's more valuable to look at that playbook as kind of a book of plays. Rather than going in and telling the team, here's what you're going to do, you can say, here's what has worked in the past, here's what might work here, and let's kind of solve the problem together.
Shiv: Yeah, and we've - as I'm hearing you speak, we've actually experienced something similar at our business, we work with different private equity firms at different stages. When we work with like a larger investor versus smaller investor, you start to, over time, get this pattern recognition. And as you build those benchmarks internally, it's a huge advantage. So, great insight there. Have you ever come across a company where maybe the fundamentals are not as strong, but you like - let's say, gross retention is not above 90 % or not at the level that you'd want to see that. But there's this path to, if you fix that, there's a large enough market to kind of go after and making decisions against that, or try to stay away from that being the types of investors that you are.
Adam: Yeah, really good question. I would say that the question we would ask is how improvable is it? And as you think about the key metrics that we look at, I think some are more improvable than others. So sales efficiency is a great example of it depends. Sometimes a poor sales efficiency is just reflective of a very competitive market or mediocre product. Sometimes it's reflective of just a poorly built go-to-market organization. Poorly built, poorly incentivized, and you can actually meaningfully improve sales efficiency.
Gross margin is one where, again, we kind of know where it should be. And oftentimes, you can meaningfully improve non-recurring gross margin, as an example, or just by rationalizing hosting costs, or whatever, improve recurring gross margin. Gross retention is the one that's probably the toughest. It's harder. Because sometimes that's due to kind of poor customer support or a poor renewals function. I think it's definitely possible to see some sort of improvement in that as you kind of make sure you've got best practices in those orgs, in the customer support and customer success orgs. But more often than not, it's pretty reflective of the quality of the company. And so I think to answer, it's a long-winded way of saying that we absolutely look at how can you improve those key metrics. But on gross retention, it's probably the hardest to get a big improvement.
Shiv: Yeah, it's like a direct indicator of product market fit and that's hard to fix.
Adam: Exactly. Or competitive dynamics or product quality, but yes exactly right. And again I'm not - that's not to say that you can't improve gross margin because we have - gross retention, I'm sorry - we have, many, many times, but it's typically more incremental than big step
Shiv: Yeah, I guess I'm also thinking about things like rule of 40 and EBITDA margins. And you could have a company that historically has not been as efficient with its go-to-market and be losing money on a unit economics basis or the CAC payback period is 18 months. And if you actually look at the data and you optimize it, you can bring that under 12 and on all the metrics on the financial side change. So I think things like that, I feel like there can be winners that can be found there.
Adam: Yeah, totally agreed. And also that's, you know, there - we do have to, we are in an environment where as a private equity investor, we do have to make money the old fashioned way where we have to transform the businesses we own. We have to really drive a lot of operational improvement. And that's what I was saying earlier, it's not enough for it to be little teeny tiny things on the margin. It's gotta be a pretty, pretty substantial change in the business that you can do with high conviction. And again, the way we do it is in partnership with the management team, but if - honestly, if a company is already perfect across the board and you're running at rule of 60 and everything looks perfect, that's a little tougher, right? We want those situations where we can help drive real change.
Shiv: Right. And has that changed in the last like 18 to 24 months? Because just from our side, we were working with investors two years ago and it was all about driving more top line revenue growth and they were willing to sacrifice CAC payback periods because there was enough pipeline to build on top of. And the last, I'd say 12 to 18 months, we've seen a shift to just profitable growth, you know, being more meticulous with how we're looking at the metrics and how we're focused, which initiatives we're kind of focused on. So just trying to understand how you're approaching that.
Adam: Yeah, I think that's totally right in terms of where the market has gone. It's gone from growth at all costs to balanced maybe or maybe even profitable growth or certainly got to be a break-even. We've been for ages, I mean, since the beginning, have been all about profitable growth, right? And what we've tried to be innovating as time goes on is just how much can you push that envelope, right? And to the point where a rule of 40 for a long time has been the standard. Our portfolio, in my fund, is in aggregate close to rule of 60. And we think that if you're buying great companies, you really can continue to innovate in terms of what best practices are and drive that higher and higher and higher. And that's a little bit where the market certainly has moved away from growth at all costs. But it's done so kind of in reaction to the broader market kind of repudiating that in terms of where valuations are.
That's very, very different than kind of a fundamental mindset shift, which is where we are, which is profitable growth is just the right way to run a durable business. And then it's certainly a long - to move towards that, away from growth at all costs is also very different than knowing how to run a company profitably while still having really good growth.
Shiv: Yeah, I've actually been a fractional CMO for a few companies in the last couple of years where their revenue is north of 300 million and their CAC payback periods are like three to five years. And so when you start looking at the data, you're like, you are burning cash like crazy in the millions of dollars and then now your debt service rates have increased. And meanwhile, like your EBITDA has come down significantly, right? So just changing that dynamic to be more focused on profitable growth, I think is a big culture change for a lot of these companies that were raising capital when it was easier to find.
Adam: It is. And you make it touch on a great point there, which is we all always oftentimes get asked like, why are we so focused on making sure that companies are profitable and generating EBITDA and all that? One of the biggest reasons is we want to obviously build a very valuable company, but also a company that's durable and that's valuable in any market environment. And if you look at kind of where the non-profit high growth companies have traded, that's all over the place. It's kind of boom-bust a little bit. Profitable companies have been pretty darn consistent. Obviously, there's some movement, but they're pretty darn consistent. And just as importantly, they can weather the storm, right? Because what we want to be doing is making sure that we're building companies that are durable, that are going to stand the test of time. And in order to really have high conviction in that, you've got to be not just profitable, right? Not just breakeven or not burning, but you've got to be comfortably profitable to be that really durable business model.
Shiv: 100%. And so can you touch on that? You mentioned that, hey, where most of our companies are closer to rule of 60. Talk about the driving of top line revenue growth in an environment like that, because obviously revenue is not free, right? You usually have to pay something to acquire revenue in some form. And so how are you managing to do that while still expanding your margins? Would love to understand the process there.
Adam: Yeah, part of it is just the beauty of a super high quality software business, right? Where if you've got 95, 96, 97% gross retention before pricing, by the way, it just doesn't take as much in the way of new bookings to really to grow at 20%, 25%, 30 % a year. So part of it is just not having the leaky bucket. And that helps so much because many of our companies will be 100 % plus gross retention with pricing. So you could not sell a single new product and the company would be flat to slightly growing.
And on top of that - this is where we are so focused on product ROI and product quality and the competitive dynamics, where if you are selling a product that is a great modern clean product that actually saves your customers money and does so in a way that's differentiated than other ways of doing it or differentiated from your customers, that's in demand throughout economic cycles and it's an easier sale to make because there's that hard dollar ROI against it. And then once you have that happy customer, being able to go drive more product into that base and get your net retention into good shape just gets a lot easier. And so this is where it all does come back to quality, is, I don't think that rule of 60 is doable for most medium quality businesses. You've got to have that business model that enables you to grow 20% or higher while also generating best in class margins.
Shiv: Yeah, it's actually not like a tactical thing. It's like in real estate, they say like, you make your money when you buy, not when you sell because the buy price is what kind of sets it. I think it's from what I'm hearing from what you're saying, it's the selection of the asset that enables all of this to be possible.
Adam: It works. Exactly. It works hand in hand is that the - we've got to meet, make sure making, we got to be sure that we're, we're buying really high quality assets and the best software companies in the world really is what we're looking for is the absolute best software companies in the world. And that then - and that's hard, right? It's really hard to get that diligence, right? This is where you got to - we got to leverage the pattern recognition and the rest of the portfolio and the history and all that. That's hard, but you got to get that right. And then that enables all of the operational work, which is also really hard. But you really do need them both.
Shiv: Doesn't that - just, more of a meta question - doesn't that dramatically shrink the number of potential targets for Thoma Bravo? Because there are only so many markets and only so many market leaders and some markets are not immune to market shocks. Like MarTech is an example of that where one of the easiest things to cut is an extra marketing tool that you don't really need, right? So how do you navigate that? Because your TAM would be much smaller than a lot of other private equity firms.
Adam: Yeah, well, this is what never ceases to amaze is just how big our market opportunity is at TB and just how - I mean, you look at the market cap of publicly traded SaaS companies is - continues to be up into the right is materially bigger than it was 10, 5-10 years ago. The number of companies in kind of the lower mid market where I play, you - it's amazing how many companies we've just never heard of, right, that we - that we're actively sourcing or trying to find. They’re founder run and part of that is - it's obviously, there have been cheaper to - or easier - probably shouldn’t say easier - cheaper to start and scale a software company and the second thing is - again, this never ceases to amaze - just how early innings we are in software adoption, where there are major industries that have core workflows that are manual or are really kind of internally built systems. And it's so frequent that we will look at a new company or we look at our portfolio and think, what are they replacing? And they're not replacing other software vendors, it's totally greenfield. And so it feels - because it's been, software has been doing great obviously for quite some time. It feels sometimes that we are in kind of later innings and that's just not the case. We are so early, and particularly when you think about SaaS penetration, we're just so early in that.
Shiv: Yeah, I think that's a great point. Even SaaS is really early and even the private equity boom, I think is way, way early because just - I think in the last five years is when private equity has really been starting to go after software. So I can totally see how from that perspective, there's just so many more assets and with AI and other industries emerging, the trend is going to continue. There's going to be way more companies being founded and get to that scale.
Adam: Yep, that's right. And so to your point, we are definitely focused on a sliver of the software world because we are unwilling to compromise on quality. But that world is so big and so fast-growing that we've got plenty of opportunity.
Shiv: That's great. And I want to touch on one last thing, which is you mentioned the management team and the people and your approach with founders and the companies that you work with. So talk a little bit about that and what separates the Thoma Bravo approach there.
Adam: Yeah, so I think what makes our approach maybe not unique, but certainly characterizes it, is our conviction in our ability to work with a management team that is already there and particularly a founding management team. I think a lot of times the talk track will go, gee, this is a great business. Imagine what it could be if we brought in, you know, quote unquote, professional management team. And our view is that the best person to run this company is the person who kind of brought it to where it's at, and that those people, as long as they are collaborative and open-minded and self-aware, that they can scale really efficiently and really effectively, as long as, again, we're providing them the transparency and the collaboration that we're committing to, and that we're putting real resources in the form of our operating partners around them, and that we're hands-on, and we're not just waiting for the monthly board meeting to talk, that we're talking every day, every week, that those, folks can scale and become absolutely phenomenal CEOs. And just because they're a great innovator doesn't mean they can't also be a great operator. And we've seen that over and over and over and over again, to the point where it's given us the conviction where that is our default approach.
Shiv: I actually think that's one of the most underrated approaches is that the founder in general has so much market expertise and market knowledge and even the founding team in general and there's all this institutional knowledge. And I see private equity firms replace those people almost like it's a swap in swap out, but you might gain let's say executive presence by bringing one person in, but lose all this market knowledge and expertise and that trade almost never makes sense. If that founder is coachable and willing to stay with the business, that's a huge win.
Adam: You said it, and not only is it the market - I think a big part of it is exactly what you said, the market knowledge and expertise and customer relationships and all that. It's also the culture is a huge part of it where those people who are working for that founder are working for that founder just as much as they're working for the company And it's also part of that culture is just no one cares more about the success and the reputation of a business as a founder and to have that just grittiness and resilience and determination is something that you can't always get from the outside. So I totally agree with you, yeah.
Shiv: Even if it's like a professional CEO, they may not necessarily have that. Yeah. It's not their baby. Yeah, exactly. Yeah. And from your side, like, how are you - because when a founder exits, you know, it's a pretty significant liquidity event for them. So how are you incentivizing founders or motivating them after that event? Now that you've invested to stick around for that second go with the business and, and how are you supporting them on that journey?
Adam: Yeah, great question. So for the most part, the founders will roll over a significant stake alongside us. You know, we have got majority control, but they'll roll a significant economic stake. We are very transparent with them upfront around what we're - where the direction, our vision for the business. And we make sure that's aligned with their vision so that they're excited to be working with us. And probably most importantly is - I think we've found this again over and over again that obviously the money matters a lot, but what matters a lot more is liking what you do every day and seeing your company be successful and that the motivation is much more in that than it is in the money. So it's not like the check hits the bank account and they check out, right? They don't care anymore. They care just as much as they did before, just that they've got a new partner. And so that's why that upfront transparency matters so much is we want to make sure that before we sign a deal before we commit to collaborating with the management team that our visions are aligned and our expectations are aligned.
Shiv: Right. And are you setting up equity structures accordingly to make sure that those incentives - you mentioned the money, but obviously just from a motivational standpoint, still feeling like it's their business in some way, post investment, I think would be a big component of keeping them.
Adam: Absolutely, yeah, there's rollover, incentive equity plan, all that kind of stuff that, exactly.
Shiv: And then in terms of the management team, you know, oftentimes founders are very loyal to the people that help them build up the business. But sometimes the people that are helping you build a business may not be necessarily the people that help you take it to the next level. So how are you figuring that piece out and, and are you, how are you coaching those folks up, getting them access to additional resources or potentially replacing them with maybe better-fit individuals as well, if that's required.
Adam: Yeah, so this is - again, this is something where we are totally collaborative with the management team, right? And really with the CEO, where we would never say, you've got to get rid of X, Y or Z, or you've got to upgrade here or there. And our operating partners are deeply involved in all the functional reviews. They spend time with each ELT member as the investment team is in every monthly board meeting actively participating. So we're in every - and those board meetings go through the numbers and they go through the functions, right? And so we know what each leader is doing and where they're succeeding, where they're not. And we provide them, just as the same, we provide the CEO kind of all that guidance and pattern recognition to improve. And then at some point, as with any business, if the right decision is that there needs to be a change, then we work with the CEO to effectuate that. But we really - we take the same approach to kind of working with the CEOs with the rest of the team, right? It's much better to have, to not have to replace anybody. It's much more effective and efficient if you don't. But obviously to your point, oftentimes there is a need for an upgrade somewhere else.
Shiv: And in general, a lot of these people require support and Thoma Brava obviously has one of the larger operations teams out of other PE firms. So just talk about that team in particular and beyond just evaluating talent, how they go about supporting management teams to grow those companies.
Adam: Yeah, so for each of our companies, we'll have two of our operating partners join the board. They have a huge amount of experience across numerous Thoma Bravo companies. They kind of know where to make the right intro, how to access all that institutional knowledge. And in terms of the actual cadence, it a little bit does depend on what that specific CEO or that specific team needs. A lot of times, particularly if it's a founder, it's a - effectively a first time CEO and they need a lot more kind of day to day tactical coaching guidance, a lot more basic questions. Sometimes it'll be a more seasoned, experienced CEO who really needs kind of a sounding board and, and, you know, it's a very, can be a very lonely job. And so how they actually handle that cadence really is tailored to that specific team, that specific CEO. But the idea is the same, which is to be in, in very frequent contact - you know, daily, weekly, whatever it is - to be really hands-on to understand the business as opposed to just, you know, opining from the cheap seats to really understand the business to really understand the operational decisions that are getting made and then to provide input based on our pattern recognition in a really kind of highly targeted highly levered way.
Shiv: That's awesome. And I know we're coming up on time here. So as we wrap up, just what if founders are listening and they want to learn more about Thoma 'Bravo or what the Explore Fund is doing, what's the best way to get in touch or learn more about the business?
Adam: Yeah, so we've got a website, thomabravo.com. We've got a great podcast called Behind the Deal that kind of is, typically is a deal partner talking to a founder or a CEO of a business around just the history of deals. You can get some touch and feel for how it all came together and you can find all of us on the website to reach out directly.
Shiv: Awesome Adam, we'll be sure to include that in the show notes and just on behalf of the audience, thanks for coming on and sharing your expertise. I thought there was some awesome content in here that everybody can learn a lot from. So thanks for doing this.
Adam: Awesome, and I appreciate you having me on. This is a lot of fun.
Shiv: Thanks.
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