Private Equity Spotlight: Shaping the Future of Software with Carl Press from Thoma Bravo

I'm very excited to be here today with Karl Press, partner with Toma Bravo. Karl, thanks for joining us.

One of the ways I really like to start these things is to get to know more of the story of you, Karl. It'd be really helpful if you could tell us a little bit about how you came up, how you eventually got into this private equity industry, et cetera.

All the interesting things were happening there. All the smart people were going there. I had no clue what that meant and did a couple internships in engineering and then stumbled into finance, did an internship in banking, and felt like this makes sense. If I can maybe do this there, then I'm in really good shape. I was able to land a banking job on the West Coast and translated that into investing in private equity and investing in software companies, and I never looked back.

I really stumbled into this career. I'm extraordinarily grateful that I did.

. Both. my parents were from Cleveland, and I grew up in Austin, Texas, so I could have been rooting for the Cowboys during their heyday, when they won. I think that's part of what made me resilient and tenacious and helped me during my career in private equity. And so that's one of the grit, and maybe it's the same with you.

It's like you're born with grit.

It's always a 10-year cycle.

But we love it. We love this phase. It's a lot of fun, but it's a lot of work. So that, yeah.

even, I think I blocked it from my memory.

And I made some lifelong friends doing that. And I got to exercise a part of my brain that I love to use, but sometimes don't get to in our job. And so that was just a ton of fun that, you know, something that people don't necessarily know that I did. And that sort of was really important to me.

And I was right. And it ended up being, I don't know, more than half my time was spent working on that show, but it was awesome. It was a lot of fun.

Yeah. And it's kind of like in our business, where you see a lot of deals, you see a lot of velocity and you make quick decisions and you learn to be decisive and you learn not to dwell on maybe mistakes or chasing something that isn't there, so to speak.

We have a group of funds that focus on control, investing or buyouts, and within that we have kind of small, medium, large, which is our flagship funds, our latest being $25 billion. Small is our explore funds. I started the explore effort in 2020 as a way to get Toma Bravo really back to that middle market, which is where we started and where we feel like. there's so many of what we call the emerging category leaders in software that are under $100 million of revenue, that are looking to scale, that are hitting an inflection point, are looking to do M&A. So the latest explore fund is $1.9 billion, and the companies and the underwriting and the approach and the diligence is all identical to what we do in the flagship fund, just scaled down.

And so, as the co-lead of explore, I'm actively looking for those emerging category leaders in software.

But there were some first principles, there were some themes that I look for in companies. And I'm curious to understand and know more about. what do you look for when you're looking at a company as a potential investment opportunity in terms of what a company is, but probably more importantly, what it could or should be in the days ahead?

And it sounds so simple, but it remains true. It's been true forever. As long as we've been doing this, one is just having a really strong leader at the top. Having a CEO that you can partner with, that is like-minded, that will challenge you, that you can challenge, and that you can grow together with on this journey. That is so, so, so important.

If you don't have that, you will not succeed, period. And so that's number one. I think. second is, is this company a category leader? In whatever category it's in, and however big or small you want to define that subset, are they the best at what they are doing at their core?

or a close number two? And if the answer is yes, then we know we're on the right track. And if you look across our portfolio of the 100-odd-plus platforms we've done in enterprise software, virtually every single one of those fits that category of being a category leader. And so that's super important. And then the third is just really, really high quality revenue.

That's defined in a lot of ways. It can be the renewal rates, the quality of the customers that they're serving, the ability to upsell those customers over time, and how that revenue grows on an effortless basis within your base. But fundamentally, is the revenue high quality? If you've got high quality revenue with a strong leader in a category-leading platform, we'll take it. And then we'll go and try and make that company as great a business as it can be over time.

But those are unassailable qualities of a business that we want to see.

And maybe that's a topic for another day. But when you say you're looking for a strong leader, can you unpack that a little bit? What are the attributes and characteristics, kind of a level further down?

And yes, they're economic animals. And yes, they want to make money. But they are absolutely committed to making that company special. And they are tireless towards that end. That's one type of CEO we meet.

The other is more of the mercenary. You come in two or three years, you do what you need to, and you get out. And that doesn't work for us. We almost never succeed in that setting with that type of partner. And as a result, we tend not to look for opportunities with those types of folks.

I think two is, is this person aligned with our vision of how to build a great company? And I think in the absence of that alignment, you're going to have friction for the next many, many years. They may think more about growth at all costs. We may not. They may think only about organic opportunities.

We want to pursue M&A or vice versa. They may only want to do deals. And we think there are opportunities to grow our margins organically just by being thoughtful and more efficient in sales and so forth. So having somebody that's like-minded, I think, is really, really important. And then, more than maybe both of those, is just a CEO sets the tone of the organization.

Are we going to be focused and resolute in our goals for the year? Or are we going to chase shiny objects? Are we going to be measured in how we hire and promote from within? Or are we going to grow at all costs and grow too fast and as a result, take on too much and have responsibility? diffusion across the organization?

And so setting that tone at the top is just so important. And so, as a result, you can't overvalue a great leader. You just cannot. And we have so many examples of that.

you're entering into a marriage with your partner and you're going to have to work together. You're going to have to be better together than apart. You're going to go on this marriage. Maybe this is a three to seven year marriage, but it's still going to be something where it's so important to get all of that right and spending time on those preconditions. And if you do that, magic can happen.

But sometimes, when you compromise your principles or your standards, things can go off track. And I think we've all experienced that in probably a whole variety of aspects of our lives and work. And so the way that you framed it there, I thought, was really nicely done in terms of not only for people who are aspiring to be future private equity investors, but also executives of companies who are hoping to work with private equity firms to understand what's important in terms of how to be successful and kind of this transformational type of investing that takes place in private equity, which has historically been highly successful, more so than almost every other asset class, if not all others.

That's time burned. That's time that could be spent building new products, doing acquisitions, getting into new markets, cross-selling customers, et cetera. So we tend to want to say, let's go find those great businesses that happen to have the leaders that we can work with. And they may not have all of the weapons that we want them to have, but if we're aligned and they're mission-driven and they set the right tone, we'll work with them. We'll figure it out from there.

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Visit bluewave at B-L-U-W-A-V-E dot net to learn more and start a project today. Next, I'm curious to maybe go a little bit further. You've brought in a company, you're working together, you've made the investment. And I think, as we all know, that's when the real work starts. In some ways, the easier part is kind of closing the transaction and getting started.

The hard part, in some ways, the fun part, is when you get to business building. And with that in mind, I'm curious how you and Toma Bravo think about value creation and the resources that you bring to bear to help support the success of your portfolio companies and your teams.

We then shake hands with the CEO on that plan before we sign on a deal. And as soon as we sign, then it's off to the races to go and try and hit that plan, right? And it's brick by brick, it's step by step for four years or more sometimes. And so then right away, what we do is we engage our operating team, if we haven't already, which is a group of ex-executives, typically our ex-executives from Toma Bravo that work with our companies across our different funds. And we typically assign two to every investment.

Usually we're including them in the diligence process. So they're up to speed by the time we sign a deal as to the quality of the business, the strengths of the company, where the management needs help, et cetera. And usually that pairing is one former CEO that typically serves as a chairperson, and then one kind of finance-oriented former CFO that serves as a driver and keeper of metrics and sales, ops and rev, ops and reporting and so forth. And that pairing, we started that in the mid-2000s when we started investing in software, and we haven't moved away from it because it's just been so powerful. And so we install that pairing at the board level, and then off we go.

For the first 12 months, we do monthly board meetings, four hours each meeting. And every meeting has the same cadence. We start with the CEO's letter, which is typically the three or five things on the CEO's mind. What are the big rocks that we're trying to get around? We're trying to move through.

We then move into the traditional board session. We'll do the governance. We'll go through the numbers. We'll do the quarter-over-quarter, year-over-year compares. And then the meat of it is really a full, deep dive, function-by-function operating review, where the CEO brings in the deputies, each of the functional heads.

So product, engineering, sales, marketing, and so forth, customer success. And we just go deep on each of those. And each of those senior executives is empowered and has their own P&L and has their own set of metrics that they're being measured against. And so they're all little CEOs in a way. And we give them the opportunity to present on their business and then offer them feedback and guidance, and making connections between the challenges that they're having and the challenges we see in our portfolio.

Because chances are, whatever challenges our companies are facing, at this point, we've seen some flavor of it. We may not have seen it exactly that way, but we've seen some flavor of it where we can offer some insight. Like, hey, we actually ran into that with XYZ Company three years ago. Let us connect you with that head of customer success or with that product lead, and we can figure out how their learnings apply here. That sort of thing.

So that's our board cadence. That's our operating partners. I should say we have a group of what we call operating advisors as well that help with all the onboarding and the reporting that goes into our portfolio. There's a lot of reporting that we put in place right from the jump, right when we do an investment. And it allows us to keep score in the right way.

Our view is, if we're not keeping score, we're not going to see problems early enough. We're going to see them too late. So we want to see the leading indicators. And we have a pretty good sense now, having done this for years and years, on, what those indicators are. We look at the full corpus of reporting that exists.

We scale it down for the company in question. And then we go and apply that. Our operating partners and advisors really drive a lot of that. So I give them a ton of credit for the value that they create in that effort, which is sort of ongoing, right? We always say the reporting is never perfect.

Even the day we sell the company, there's still things that, ah, we wish we'd been reporting on it a little bit differently. But it's an ongoing journey. We also do functional summits for each of our functional leaders within our portfolio. So once a year, all of our chief marketing officers, our chief product officers, our heads of engineering all get together for one day in a conference room somewhere in Vegas or wherever. And they talk about their problems and their challenges.

And they'll find that a lot of the issues that they're facing are the ones that other companies are facing. And that the challenges that our $2 billion P&Ls companies are facing are the ones that our $35 million P&Ls are facing, just in slightly different flavors. So we do those. And those are a big effort that we're now expanding over time to add more functions to that effort. And then lastly, I'd say, M&A is an ongoing effort at every one of our companies.

For our very large companies, they have dedicated CorpDev folks at the company that work with our deal teams. For the fund that I lead, our middle market fund, our companies tend not to have those functions internally. And so our team, my deal team, including myself, we act as an outsourced CorpDev. So we're scouring the universe for really great acquisitions. that could be a million dollars of revenue.

It could be equal to the revenue of the company in question and go and try and chase those. Of course, those have a funnel to them that we have to... Just like a sales team would, we do bi-weekly calls on those, and we work those funnels. And each of us have responsibility over different names, but that's a big function. That's a big part of what we do after we sign a deal.

So hopefully that sheds some light on our approach. There's so much more that goes into it, but at a high level, those are the key initiatives that get kicked off when we sign a deal.

But if you take that time and you're intentional as you are, it's got to profoundly help the success of kicking things off.

So that first year is so important.

And then, waiting for this first board meeting. And then B, you're just wasting all of this opportunity and time to get things going fast, in the right direction versus like if you apply that rudder and that intention and everyone's kind of going out of the gate strong together, you're setting things on the right track. And then that velocity just picks on itself and the flywheel gets spinning right away. So I really appreciate how you frame that. And the other thing that I think was really important that you shared was the intentionality with the data.

And I think a lot of companies, particularly middle market businesses, they don't quite fully appreciate, A, what they're getting into with the data, but B, the power of it. And I think, as the larger cap firms, they've been through several cycles. They get it. They have the full blown teams, but lower middle market teams, it's such a huge value creator for them because it shows you exactly how the business is working in real time. And if you can figure out where to look at the right times, not only does it show you how you did, but it helps you predict the future, where you can bend space and time to your will versus being a victim or a reactor to it.

And anytime I developed this philosophy, anytime there's rotation and force in a process, it wants to lose calibration. And then you get a recall from Ford. And so which was like heart attack. But it's the same way with technology and software and data. There's also a big investment that's required to keep your data kind of useful to you.

But we always tell our companies a few things that I think are universal. One is if something isn't right, fix it immediately. Address it immediately. If we feel like we don't have the right leader in a certain seat, if we feel like we're spending time on an initiative that isn't yielding enough, if we feel like we're losing out on opportunity because we lack focus in a certain area, go fix those issues immediately. But don't wait for tomorrow.

Don't wait for the quarter to end and for us to hit the bookings number that we think we can achieve, and for the stars and moon to align. It's better to address those issues quickly and not wait for things to be totally, 100%, fully buttoned up. Sometimes, done is better than perfect, as they say, and that absolutely applies to our companies. And so we encourage our CEOs to move quickly. That's good advice.

in every market, I think. In some of the more challenging markets, like we had in, say, 2022, like we had during the great financial crisis, where we do have to pull back on costs, and those don't happen often, but they do happen, those windows of time, those moments. We always tell our leaders, if we do need to make a cost adjustment to our employee base, do it quickly, do it swiftly, do it once, and do it deeply. But by doing it quickly and deep, you avoid this cadence of every year, the GE-style bottom 10%. We fundamentally reject that approach, and we believe that when the company feels settled and when people at the company feel empowered to then get back to their work and not worry or look behind their back, we get the best results.

And so in those moments, we've tended to go deep with our cost initiatives, and that's tended to work. And without fail, every time we've had to do that, when the market turns back and we're healthy, we've got good cashflow, we hire back. And we end up with more heads on the back end than we did at the beginning, before we ever took any action. So that's a piece of advice we give, and I think that's worked pretty well for us. And sometimes, when we're debating an investment decision, I'm just going through this right now, in fact, with one of my companies, one of my newer companies, is you're trying to make an investment decision, whether it's an organic investment, a new product, something with respect to your IT infrastructure, or M&A, for that matter.

And it's a tough one. There are puts and takes on both sides as to whether you make the investment. The tiebreaker is what's best for our customers. What will empower our customers to want to spend more and renew at higher rates over the medium to long term? If we use that as our North Star, we tend to make the right decisions for the business and, in turn, for the investment.

And so that's an important lesson that I personally have learned more recently. when you're wrestling with these tough decisions. It could go either way. What's best for the customers? Lean into that direction.

And I think about 20 years in PE, every time I encounter those situations in retrospect, as I analyze to try to get kind of continuously better. on the next one, I don't think. once I said, whoa, I really wish I waited six months more. It just never happened. It's the scarier thing to do to take that action earlier, but almost invariably it's the better thing.

And there's a lot of tribal knowledge that's with that person. And that's a really hard decision to move on from them or to bite the bullet and replatform your product. Well, this is the product that you've been selling to your customers for 10 years. And this is the 98% of our revenue today. How can we start to replatform that and move away from that and migrate customers away from that?

It sounds obvious, but sometimes it's really, really scary. And this is where having a really strong mission-driven leader is so, so important to be able to say, no, this is the right decision. We've weighed the risks. We know what the opportunities are. We're going to go execute on that and we're never going to look back.

And so I really also appreciated that people, I'm sure, are going through that and have been going through that over the last several years and over periods of their lives over the last several decades. And so just that same consistency of thought of be decisive, be assertive and have a bias towards action versus. maybe it's easier to think and posture over things. And perhaps, as I look at my former self and I'd kind of wring my hands. And then lastly, just to kind of put a bow on this, this whole idea of your North Star being what's good for your customers.

Inevitably, what's good for them is, and there's going to be ties. sometimes, you got to kind of work them there to get them in the right place. But at the end of the day, if you do what they want and what's good for them, you're going to be in the right place. And even as I think about when I was, after nearly 20 years, in P, I started Blue Wave and I thought I knew exactly what all these P firms wanted. And I'm going to show you.

And then I went out and immediately we were like, tumbled out of the gates. And I almost shut the thing down. like three times, like this is the craziest, dumbest thing I've ever done in my life. And then we had the audacity to ask our customers what they wanted. And the surprising thing to me was they told us.

And so I think that, once again, the three things that you shared are just so foundational to business. And even beyond.

Sometimes you need to unbundle and upsell your customer. Well, those don't seem like the right decisions for your customers. And yet, in the long run, sometimes they can be because you use some of that incremental profit to invest back into the platform, to build the solutions and the features and the capabilities that those customers want. Some of our best companies, when you go to their user conferences and the customers, it's like it's evangelical. You get a room full of people or a convention center full of people.

All they do every day is live inside this software. And now they're all together. And it's so wonderful to hear the stories about how our software makes their jobs so much easier and makes their lives so much easier. And that the new features and the capabilities that we've delivered have really met the promises that we've made. Those are the best conferences and meetings you can take as a private equity investor.

And we love going to those user conferences. And in each one of those cases, we raise prices, we unbundle, we charge for new features. We do all the things that make sense for the business, but that ultimately also makes sense for our customers. And so there is a healthy balance there. And we always try to strike it.

To your point, sometimes this sounds easier than it is in practice, but we mostly get it right, I think.

That is so cliche, but it is so true. And it's so much easier to say when you're in your late 30s than when you're in your early 20s. So I would probably tell that kid that, along with many other pieces of feedback, like listen a little bit more, talk a little bit less.

I mean, you don't know why, but you've done a lot of work, both overtly and subconsciously, to know it and to have that trust in kind of what you're concluding, you know, not only in the top of your mind, but also behind the mind.

I can't be right. And that person is wrong. That can't be possible. Well, as it turns out, if you've done the work and you're the deepest in the numbers and you spent all night analyzing it, you might be. So, speak up.

And it's an asymmetrical trade, as we would say, in investing. The benefit of being right and speaking your mind and trusting your intuition is a lot better than being wrong. If you're wrong. OK, that's OK. Move on.

Right. It's not a big deal. It didn't feel like that at the time, but that's probably the advice I would give myself or anybody in that position.

And I'd love to hear what are some of the things, some of the maybe books that have had an impact on you?

I'll give you one kind of professional and one sort of non-investing related. My favorite investing book is The Most Important Thing, by Howard Marks. So Howard is the founder and chairman of Oaktree Capital, which is where I started my investment career. So back in 2009..

And around the time that I was leaving in 2011 is when he released this book. And if anybody knows about Howard and about Oaktree, they may know about his memos that he releases every so often. Well, the book is kind of a compilation of all the philosophy and insights that he kind of pours into his memos. And it's just a fantastic book. It's not a technical book.

It's not a business school guide, but it's more about the philosophy of markets and second order thinking and market inefficiency and bubbles and the psychology of bubbles and the psychology of pricing assets. And it's just a wonderful book. I revisit my notes on that over and over. I encourage all my team to pick it up if they have a chance. And, in the spirit of Warren Buffett, it's kind of a no-nonsense, very clearly written set of philosophies around how to think about investing that you can then apply to whatever markets, you're in, public, private, credit, distress, equity, whatever it is.

I absolutely love that book. And then something more fun, I, you know, we talked about, I'm a little bit of a comedy nerd. We talked about that. I loved Born Standing Up by Steve Martin. It's kind of one of those books where, if you have enough, people tell you to read it, it's like, okay, what am I missing here?

I got to go read that book. And so I finally read it about three, four years ago. And it's just a phenomenal book. First of all, I just, I love Steve Martin and I love comedy. And so the book is in part about his journey through show business and becoming the biggest comedian in America in the 1970s and 80s.

But it's a book about resilience and believing in yourself, and kind of one of those books that shows, hey, if I can do it, you can do it. It's exactly that. And he has so many awesome little pieces and nuggets of information and wisdom in there about his journey to the top. And one of the ones that I absolutely love. this advice is be so good that they can't ignore you.

Be so good that people cannot ignore you. I think that is such good advice. And so highly recommend that book.

And it's called The Memo. And it's a great lesson. And for someone who is kind of a legend in his own time. So what an amazing experience, particularly during the 2008, 09 time period, to see kind of a maestro at work and work with people who I'm sure have got common philosophies. And then Steve Martin, when you said that my face lit up.

and as a child of the 80s, where we were in some ways raised by movies. And it's probably the only way I know how to communicate with our team is through movie quotes from movies they haven't seen. But it's like, if you looked at, like what was on our reel at our house, it was plane strains and automobiles and Father of the Bride and Dirty Rotten Scoundrels. Hugely underrated movie. If people haven't seen that.

Three Amigos, Roxanne, My Blue Heaven. And then a circuit of his Saturday Night Live hosting shows over time. And so I love that you had that. And somehow I haven't read that book either. So I've got two more.

that will be one click Amazon right after this. And hopefully I'll be able to cut through. And my wife is getting more and more, not putting up with my habits as much with these piles of books that are stepping up. So this has been an amazing conversation, Carl. I've learned all sorts of things I wish I knew before.

So thank you, thank you, thank you for joining us and sharing really some pearls of wisdom here.

And that's absolutely true.

If you like what you hear, please follow, rate, review and share. It really helps us when you do this. So thank you in advance. In the meantime, if you wanna be connected with the world's best in class, private equity grade, professional service providers, independent consultants, interim executives that are deployed by the best business builders in the world, give us a call or visit our website at bluewave.net. That's B-L-U-W-A-V-E, and we'll support your success.

Onward.