Cici Zheng, ParkerGale Capital | Private Equity Advice on Pricing, Human Capital and More

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We're very excited to have C C on, so C C. Thank you so much for joining us.

So she's going to come across as much more professional and polished than I am. And so we appreciate C C being on the other side of the mic for once.

I think people come from all sorts of different paths and routes and journeys into the industry. What was yours?

I thought I was going to go down this investigative journalism path. But I happened to take my first business class in 10 and my first Econ class. I thought this sounded pretty interesting, happened to be surrounded by a lot of other pre-professional students in college. And before you knew it, I graduated as an investment banker, so I always feel like, you know, I went to college, wanted to be a journalist.

I joked that maybe I sold my soul and I did investment banking instead. But I really loved learning and I thought that that was a great starting path in my career to learn as much as I can. I always joke that I felt like I had four years of work experience in two years, given the rigors of an analyst program. But, you know, I went from being an analyst in investment banking to not really sure what I wanted to do next. I just knew I wanted to change from investment banking.

And so I interviewed for everything Under the Sun, private equity, hedge fund, venture capital, sales and trading, investor relations, you name it. Like, I really, I wasn't sure. I just figured I wanted something that I could continue to learn and I'd probably go to business school at some point.

So something for two or three years, and that's when I got my first stint in private equity. I joined a healthcare-focused private equity fund in Connecticut at the time. And so as an associate on the investment team. That really taught me how to think critically, which is a little bit different mindset than investment. Banking taught me a lot of the Excel and Powerpoint and financial modeling skills, but private equity, as an associate, taught me how to put on my thinking cap, how to assess risk.

And so that was my first foray into it. Post-business school, I decided to take a detour into consulting because I still wasn't really sure what I wanted to be. When I grew up and I wanted to try different industries, I'd started out my career doing healthcare investment banking and healthcare private equity, so I ended up joining Bain Company in Chicago.

And at Bain, I was able to do a variety of industries projects. I still rotate through our private equity diligence group, which was my favorite rotation. I think I had always liked deals, I'd always loved commercial due diligence, which we do a lot of work together on. And was happily at. Bain. Thought I would stay there for a while.

And I happened to get a headhunter LinkedIn email and talking about the opportunity at Parker Gale. And so this was over six years ago, and at the time I hadn't heard of Parker Gale. I wasn't actually sure what it would be like to join the op side of private equity. I had a lot of questions about it.

But I met the team, really liked what I saw, it seemed like it was a really fun time to and a fun chance to build something new. Since, Parker, Gale at the time was still in Fund one and so decided to take the leap from Bain back into private equity. On the operating side. And that's where I've been for the past almost six years.

I wanted to work with good people, and the opportunities just happened to present themselves that way.

But you got there in a way that was very organic.

I don't even know if it was on my radar in college at the time, so I think I was always just open-minded, curious. And I felt very lucky and fortunate to be able to meet people and have opportunities presented in a way. And then, when the opportunity presented itself, not be afraid to take a leap and try something new.

My mantra is, why use one word when two will suffice one? That's a skill, two that must have helped a lot. When you were writing Sims as an investment banker, I'm sure you were the go-to.

Because a lot of times, at the end of the day, whether you're doing a SIM or an investment memo, you are also telling a story of why this investment makes sense.

And within those, we're often looking at, what are the actual growth drivers of this business? So I'm asking myself, is this market growing? what's driving that growth? is it because the underlying market is growing? The volume of people that could, or companies that could use this product or service has increased.

Is it because the penetration of this type of software is being adopted more for the first time, or does everyone already have one and you're having to rip and replace? So we're asking ourselves these market questions, and then within the company itself, we're asking, like, well, where do we think the growth from the company will come from? Is it from their existing customer base, or are you gaining share from your competitors? Because you are ripping and replacing, and what's the likelihood of that?

Are you getting able to get price increases? So we're building what we call like a growth driver table for each of our diligences. And that helps us assess. Where do we think high, medium, low the buckets of growth are coming from, and some areas of growth we have no control over, right?

We can't control the market growth and from where we sit, we have to be able to be comfortable with whatever those dynamics are. But the company's growth, that's the parts that we can have more control over. And so when you end up looking at a lot of the companies that we invest in, some of the common traits that they have are they usually are. These founders have built great products, very sticky, high NPS scores, great customer retention. The founders have typically come from the industry.

And so they've built a product that has just grown through word of mouth, and it's usually combined with a pretty immature go-to-market function. I'd say very little marketing, very little professional sales, very little professional product management. But when we see this combination of low awareness that we frequently hear, we're the best kept secret in the industry. But then when you talk to their customers, they say, we love this company.

We love this product. To us, that's actually a really fun and exciting combination because we see a lot of opportunity. If you have a really great base product, then we think we can drive some of that growth by investing strategically in the go-to-market functions. To make sure that they're no longer a best kept secret by the end of our whole period.

I also really like how you're talking about these businesses that are successful in spite of themselves. And that was something I coined when I was in PE. At. Our firm is like, we wanted businesses that were doing a few things really, really right and haven't even gotten to the other.

So I was like, I got to change that little moniker now.

But in order to make sure to the symphony that you're talking about. For me, the biggest lessons learned over the past six years have been making sure that there's alignment between operating partner, CEO of the portfolio companies and the deal team themselves. Like, without this alignment between these three buckets, I think it's really hard to get anything done. So I'll tell you a funny story. When I first started at Parkergill, in my first two weeks, they asked me to go visit one of our portfolio companies. And I was this very eager consultant, fresh out of Bain, slides in my backpack, talking about value creation.

I was very excited to meet the CEO, and when I went to go meet the CEO, I got grilled, chewed up for 30 minutes straight. He was just like, Who are you? what are you doing here? what's your background?

What's your qualification? Why do you want to see my product roadmap? Like? He was questioning why I was there, I was worried, was I a spy from the private equity firm and things like that?

And I learned very quickly at that point in time that the relationship building, building that trust with the CEO and the management teams was one of the most important things that had to be done. From the beginning, I had assumed, or I thought, I was like, Well, we own these companies that are majority companies, we can force them to do whatever we want them to do. Like, I'm like, this should be easier than consulting where you had to influence without direct authority and try to do all these other things.

But I realized you needed that same elements of you're still influencing without direct authority. Because if we didn't have alignment with the CEO, then it didn't matter how hard we pushed at the other levels of the organization. And if the CEO and the deal partner were also not aligned, then it also didn't matter how hard we pushed on these other initiatives. So for me, I have a great relationship with that CEO now. But I realized it took a lot to say I am here to help you. I am a free resource to you based on how we're set up, and no one else wants you to be more successful than I do. Because I'm not unlike in consulting. I'm not pumped based on the per week rate or per month rate, or how many times I come and see you.

Like, I, just no one wants this company to succeed more than I do. And so I'm here to help as much as I can on whatever it is that you need help. And so that trust building, that alignment was really critical. And one of the things that I think we spent a lot more time investing in upfront than I realized that we needed to in the beginning.

But I think it's one of the things that helps us make sure we're really collaborative and in sync with our teams.

Sometimes we joke we're a change management consulting firm with a little bit of capital behind us. Like that takes time, that takes trust, that takes relationship building, and, if anything, there might be a level of distrust because of the reputation private equity sometimes has.

So you mentioned this whole idea of building alignment and trust. How earlier? At what point in the process do you get involved with the management team to start forging those relationships?

So we're trying to make sure we're balancing the time between the time we could spend with our portfolio companies versus a company that might not make it that far in our investment process. But we get really involved from the LOI stage, and as I mentioned, it's all hands on deck. When I'm looking at commercial diligence. I'm working with our deal teams hand in hand to make sure we're finding the right partner. That the scope of work is answering what we need to do, what the key questions we have for the investment, but it's not just for the sake of investment committee.

It's to make sure that we are simultaneously building out our value creation plan. Pre-close while we're doing this diligence. Because we want to know as much as possible, what are we stepping into, what are the risks, what are the opportunities? And so we're riding very closely alongside with our deal teams pre-close to make sure we have as much information as possible.

And then post-close, we're able to hit the ground running, not even within the first hundred days, but within the first week or two. We'll do a management onboarding, CEO onboarding to make sure that we're off to a running start. Because of the information that we had from diligence, because hopefully we've also met the team during diligence and started building that relationship as well. That helps us make sure we can execute a lot faster and start that transformation journey.

And I would probably go in this in probably arguably a passive aggressive way and say, Well, that was really your plan, right? And they would look kind of awkwardly and go, Yeah, that was our plan. And then you would just wait and kind of watch them squirm for like, the first three months, and then you finally say, Okay, let's do a real plan. So just doing the right thing in the beginning, I think, is absolutely the spot on way you should do it.

So I 100 appreciate that. As we think about now, you're in the process where you're working together to build this business. And we're in this really, really kind of scary, tension filled, anxious economic period in history. Right now, where it's real easy to kind of like, circle the wagons and kind of get afraid and try to wait it out. How are you all kind of thematically interacting with your portfolio companies? To not only say here, we need to be safe, and let's do Maslow's hierarchy of business needs and food, water, shelter, let's get it right. But also, how do you find opportunity like, how do you say, well, everyone else is circling the wagon?

Let's figure out a way where we can continue to go forward.

One area is in pricing, so I think if you think about how much the input costs have gone up, even if you just ask for a while. It was so competitive and still is to get software engineering talent and developer talents. And we think about how much have we had to increase those salaries, or even our vendor costs and things like that have all gone up. And we're going and improving the products and updating the modules and features and all these things. Are we, on the flip side, also making sure we're getting that value-based pricing from our customers? And a lot of times, I think our portfolio companies might be hesitant to think about price increases or think about value-based pricing.

But if you think about the amount of investment that we're putting in in an ideal world, the customer your best fit. Customers are also valuing what that is, and you're able to get a value-based price for it. And so we're thinking a lot more intentionally about pricing and making sure that we're not just staying flat, we're looking at what's going on in the market. And I'd say the last piece is that no matter what. But especially during these kind of challenging times, we always still want to make sure we have the right people in the right seats. I think that's more critical than ever in an environment like this.

And so we've always had a really strong focus on talent within Parkergale. And I would just say that, especially in this environment when there's a lot of uncertainty. We want to make sure that we have the right people in the right seats at the leadership level. And that they're actually communicating and cascading that information down to the rest of the employees as well. Because we want everyone to be rowing in the same direction and understanding the larger purpose.

There was just other things that were getting more attention. And then I look at the data today. In terms of all the projects come in this last quarter, one, two and three. Top use cases in value creation were all people. And it's kind of staggering. And it shows that I think this whole idea, no matter how much the robots are being talked about, it takes people.

The other point that you talked about is pricing. I think that as I look at all the areas that we kind of support within PE, pricing is the number one area that's underutilized. In part because it gets the most resistance from the portfolio companies, particularly from sales leadership.

And so, especially when we're selling enterprise software, these are mission critical tools and products. They're not looking, the customer is not looking for the cheapest one. And so if we have this information that we know that key purchase criteria, pricing is not usually one of them. We have NPS scores and retention data that shows that we have a very solid product and a history of being a solid product. And by the way, it's not like.

These products are static, like what are our product managers and heads of engineering and engineering talent doing? They're continuing to invest in that product. Hopefully we're able to convey this to the sales team, who are able to have to be at the front line to convey it to the customer. Of like, these are not price increases for the sake of price increases, these are value-based pricing that justifies what we think this product actually provides to you.

And if you were really looking for the cheapest price, then yeah. We wouldn't be having this conversation because that's usually not the positioning that we have. So it takes time, I think it takes training, it takes education, and then I think it takes data. Because a lot of times you'd say, well, we're losing on price, we're like, what percent of the time are we losing on price?

I would argue if you're never losing on price and your price too low, like you should be losing a certain percentage of your deals on price. And then. But if you can collect the data on the other side, if you're doing win-loss analysis and calls like that, then you should be able to say okay. We are hearing now that, like, we have enough actual data, not anecdata, to say, you know, we're actually losing on price too much, and so therefore we need to adjust.

So there's a lot of different ways you can pull price as a lover.

In terms of maybe wrapping up here, I think what I'd love to hear is I always enjoy the business that we have here. Because I get to work with all these great people like you and I get to learn things every day. And my whole life has been kind of like the Walmart form of innovation, where I just see what other people do and kind of custom package it in my own life. And so I always wish I could go back to my former self with all these things that I wish I knew. Then what would be one of the things that you would share with yourself if you could go into the wayback machine and see 22-year-old Cece?

And then 20-something-year-old Cece is going through all these stresses that at the time feels like the biggest thing in the world. And then, at this point, 30-something-year-old Cece can say to 20-something-year-old Cece, everything will be okay. So hopefully that gives me confidence that no matter what is going on right now, because at every point there's always different stresses. I hope that 10 years down the line, I can continue to say to myself, looking back on it, things will be okay. I think the other thing I would say to my 22-year-old self. And a piece of advice that I'm really passionate about, getting more women into private equity, more women in finance. And a piece of advice I always give to young women is, and young people in their career in general, is always take the call.

And by take the call, I mean, take the headhunter call. Because I think a lot of times I wasn't looking to leave my role at the time, but I took the call. And then I learned something new. And I was able to either compare it to what I was doing and saying actually, like, I'm very happy where I am. And so I was deliberate and intentional about staying where I am and I feel good about that. Versus it's just inertia. Or in the case of Parker Gale, I took the call. I wasn't looking to leave, but I met an amazing group of people that I've loved working with and has been so much fun.

And I wouldn't have had that opportunity had I not responded to the headhunter message, and so I always say, take the headhunter call. Because you'll learn something about a new company or how you feel about that. And one way or another, it helps you make a more informed decision about exploring something new or being intentional about your choice to stay.

To be able to see that progression. And it goes back to kind of the things that we were talking about at the beginning of the podcast is like, if you have the audacity to listen to the universe, it will take you where you need to go. And I remember that was when I was going through my whole, you know, I worked my whole life to become a partner at a PE firm. And then I get to this point where I just felt like something was missing. And that was like, I had this ratatouille moment where I was like, Oh, I thought I was gonna be like, dad and build a company one day.

And then I had this idea for the company and I was going through this existential crisis. And I talked to my brother, who's the most in touch with humanity of all my siblings. I'm one of six kids, and so Tim, my brother, really kind of gets the way that humanity works versus my more linear, logical self. And he just kind of said, Hey, you know, if you listen to the universe, it'll tell you where to go.

And my first reaction was like, that sounds a little huggy.

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