The Exchanges

Q I love that. We're going to dig into it more. Tell me, you mentioned a second mentor. I'm too intrigued. Who was that?

A So my second mentor, and this happened simultaneously, is Marcel Bernard, who became chairman of our operating committee really quickly. He was the one who taught our whole organization, including me, How to turn a great innovator into a great company. How to work with existing management to take these high growth market leaders that have great fundamentals, but are not making money today and work with the existing people to also turn them into 40% cash flow businesses. Every single board meeting, and we do monthly board meetings, for 20 years that I would go to with Marcel, I would learn something new. And it was all consistent. Every tactic that he had and that he tried to talk to people about had the same philosophical umbrella over it. There's so many great sayings he, he used to have, which are very applicable to today. Now, what was interesting is Carl Thoma and Marcel Bernard, they didn't know each other. This happened relatively independently until, until Marcel started working with our firm, but they had the same philosophy. One was an investing philosophy and the other one was an operating philosophy, and that was really cool.

AI assessment note: “So my second mentor, and this happened simultaneously, is Marcel Bernard”

Q You mentioned that the people behind the business. Before we dive into actual markets, companies, investments, I do just want to actually learn a little bit more about you, if that's okay. I believe we're all a function of our histories, which means we're, we're running towards something, and we're also running away from something. What are you running from, do you think, first, Orlando?

A You know, I'm always on the go. I never liked to stay in the same place for too long. Sometimes my family looks at that and says, what, what is he can't stay still? And, and I really think I'm running from the fear of being trapped, the fear of being isolated. And I, I think about that and part of it is I grew up in an island. I grew up in Puerto Rico, a relatively small island, and to pursue things and to get better opportunities, you always have to leave. Not necessarily for everyone, but that was for me. And maybe that's why also private equity, which is a deal business where you go from one deal to another, from one country to another, from one state to another, maybe that's why it fits me, uh, really well. But I, yeah, I have this, this fear of stagnating and feeling and feeling trapped and isolated.

AI assessment note: “I really think I'm running from the fear of being trapped, the fear of being isolated.”

Q like stagnating, isolated. Was there ever a time when you felt like your career was plateauing? And was there ever anything that you did to get out of that? I think often, especially today, people feel like, am I actually going anywhere? Am I going where I want to go? Have you ever felt like it was maybe plateauing? And what did you do to get out of that plateau?

A I felt that my career was a failure, um, in 1999. I had come out of Stanford Business School and Law School. Uh, with what I thought was this like blue chip, pristine, right? Education and, and resume. And I had very high expectations of myself and a timeline for which I needed to quote unquote succeed. And none of that worked. I was really close in, in 99 to being fired, as I said before. So it wasn't plateaued. It was like, I'm going to have to start over. And, you know, I'm a big tennis fan, and I used to play tennis, and maybe it helped me fight to stay in the game. Just stay in that match. Maybe take your time in the changeover. Maybe take your time getting, hitting your second serve. And, and in that process also see if there's enough opportunity to change the game. And, um, and then I think it happened, and I got lucky. Now, since then, I, I have not felt, uh, a plateau on, on my career, because here's the thing. My job has changed enough over the years, and the, the industry that we target has changed enough as well. So if I was doing the same deal that I worked on in, The year 2000, I probably would be pretty bored, feel isolated and plateaued, but, but things have changed enough.

AI assessment note: “It wasn't plateaued. It was like, I'm going to have to start over.”

Q if I'm going to have any form of meaningful Diversification at all. Do you think diversification is a complete BS myth in investing, by the way? I've seen this so many times where, you know, even your Warren Buffetts of the world have said diversification, poof, overrated, and then in venture it's the central thesis of our whole business. How do you feel when you hear the importance of diversification?

A On that, I stand with Warren Buffett. Surprise, surprise. Per fund, we'd like to have 12 companies, maybe 15. But think about it, right? If you have an investor, private equity or venture firm, that claims that they make a big difference in their companies, that they're there with those companies operationally, that they, they change them in a positive way. And you have 40 or 50, there is no way you have the time to do that. It is, it is operationally impossible to do that. So, if you really focus on having three new platforms a year, maybe four, And you have enough leaders at the firm with enough experience that are mentoring the next generation. You can handle those assets and really pay attention to them on a weekly and monthly basis. We meet with our companies monthly. Our board meetings are monthly from eight to noon on every one of these, these entities. So it does take a lot of time. And that's where if you diversify too much, you begin to hurt the operating performance of, of, of your companies.

AI assessment note: “On that, I stand with Warren Buffett. Surprise, surprise. Per fund, we'd like to have 12 companies”

Q I love that. We're going to dig into it more. Tell me, you mentioned a second mentor. I'm too intrigued. Who was that?

A So my second mentor, and this happened simultaneously, is Marcel Bernard, who became chairman of our operating committee really quickly. He was the one who taught our whole organization, including me, How to turn a great innovator into a great company. How to work with existing management to take these high growth market leaders that have great fundamentals, but are not making money today and work with the existing people to also turn them into 40% cash flow businesses. Every single board meeting, and we do monthly board meetings, for 20 years that I would go to with Marcel, I would learn something new. And it was all consistent. Every tactic that he had and that he tried to talk to people about had the same philosophical umbrella over it. There's so many great sayings he, he used to have, which are very applicable to today. Now, what was interesting is Carl Thoma and Marcel Bernard, they didn't know each other. This happened relatively independently until, until Marcel started working with our firm, but they had the same philosophy. One was an investing philosophy and the other one was an operating philosophy, and that was really cool.

AI assessment note: “So my second mentor, and this happened simultaneously, is Marcel Bernard”

Q to investing in markets today. You know, it's very disconcerting, obviously, for me, Orlando. I'm seeing this for the first time investing in my life, and I'm going, what on earth is going on in the market? And so from a very high level, how do you assess where we are in the market today at this point, January, 20, 23, with all of the hindsight and perspective you have?

A We seem to be in a reasonable place actually considering all of it. And the way we look at it is as follows. And I'm going to talk about software, right? That's our core competency. That's what we focus on, and it's becoming a bigger, bigger piece of even private equity. It's a huge piece of venture, of course. But if you look at the public market as a benchmark for the world, and you take an index of the profitable software companies, those companies that have margins in excess of 20%, and you put them all together, on average, They trade for around a 25 forward PE, which the industry uses as a levered free cash flow. That compares to the S&P 500 at 16 and a half forward PE. That's a good delta, and that's a fair delta for higher growth, better cash flow dynamics, and a better business overall. But, but it's, it's, it's fair because if you back into the yield, it seems like it's a reasonable place. It's not ridiculously cheap, but it's not ridiculously expensive either. The big, the big issue and the big confusion in the market is companies That still don't make money, that are great innovators, that maybe will, maybe won't, but that have traded at revenue multiples that are with really the expectation of profitability, because most investors think the same way. The revenue multiples on those have gone from an average of 17 times forward to 3.5 today. Where is that gonna end? …

AI assessment note: “We seem to be in a reasonable place actually considering all of it.”

Q if I'm going to have any form of meaningful Diversification at all. Do you think diversification is a complete BS myth in investing, by the way? I've seen this so many times where, you know, even your Warren Buffetts of the world have said diversification, poof, overrated, and then in venture it's the central thesis of our whole business. How do you feel when you hear the importance of diversification?

A On that, I stand with Warren Buffett. Surprise, surprise. Per fund, we'd like to have 12 companies, maybe 15. But think about it, right? If you have an investor, private equity or venture firm, that claims that they make a big difference in their companies, that they're there with those companies operationally, that they, they change them in a positive way. And you have 40 or 50, there is no way you have the time to do that. It is, it is operationally impossible to do that. So, if you really focus on having three new platforms a year, maybe four, And you have enough leaders at the firm with enough experience that are mentoring the next generation. You can handle those assets and really pay attention to them on a weekly and monthly basis. We meet with our companies monthly. Our board meetings are monthly from eight to noon on every one of these, these entities. So it does take a lot of time. And that's where if you diversify too much, you begin to hurt the operating performance of, of, of your companies.

AI assessment note: “On that, I stand with Warren Buffett. Surprise, surprise. Per fund, we'd like”

Q Does everyone have to approve the deal? Do you agree with consensus decision making or does some dissent actually breed better decision making?

A We don't do any controversial deals. We are. 100%. Everybody consents. If somebody really has a problem with that deal, there's something really wrong. Once again, we've worked together, all of us, for almost 20 years. We're looking at the same industry. We have the same philosophy for that industry. We have the same operating playbook for each company. We have the same way to add value. So if there is a dissent, there's something very strange going on. For what we do, I 100% agree with consensus and that's the way we've always done it. Now, if you're a firm and you have healthcare, you have tech, you have manufacturing, you have many, then you're chasing, then you have a different environment and maybe the, the job of the investment committee is different in, in that, in that case.

AI assessment note: “For what we do, I 100% agree with consensus and that's the way we've always done it.”

Q Now we're going to kick off the show today with Orlando Bravo, co-founder at Toma Bravo, on what is he running from?

A I'm always on the go. I never like to stay in the same place for too long. Sometimes my family looks at that and says, what is he, can't stay still? And I really think I'm running from the fear of being trapped, the fear of being isolated. I think about that and part of it is I grew up in an island. I grew up in Puerto Rico, relatively small island, and To pursue things and to get better opportunities, you always have to leave. Not necessarily for everyone, but that was for me. And maybe that's why also private equity, which is a deal business, where you go from one deal to another, from one country to another, from one state to another, maybe that's why it fits me really well. But I have this fear of stagnating and feeling trapped and isolated.

AI assessment note: “I really think I'm running from the fear of being trapped”

Q Now we're going to kick off the show today with Orlando Bravo, co-founder at Toma Bravo, on what is he running from?

A I'm always on the go. I never like to stay in the same place for too long. Sometimes my family looks at that and says, what is he, can't stay still? And I really think I'm running from the fear of being trapped, the fear of being isolated. I think about that and part of it is I grew up in an island. I grew up in Puerto Rico, relatively small island, and To pursue things and to get better opportunities, you always have to leave. Not necessarily for everyone, but that was for me. And maybe that's why also private equity, which is a deal business, where you go from one deal to another, from one country to another, from one state to another, maybe that's why it fits me really well. But I have this fear of stagnating and feeling trapped and isolated.

AI assessment note: “I really think I'm running from the fear of being trapped”

Q Ah, listen, the joy is all mine, but I want to start with a little bit on you. So we see Toma Bravo today in all of its glory, but take me back. How did you come to found Toma? And what was that aha moment for you with the opportunity in front of you?

A It was awesome. I tell you how it was. Um, I started at our predecessor firm in. And now I'm, I'm really dating myself. I really don't think of myself as that old. And, and, and my, my mentor, Carl Toma gave me a lot of authority and responsibility. And I always wanted to do tech for some reason. I was in the San Francisco office, and, and I made a lot of mistakes, and he didn't fire me. And, and something happened, which is when the dot-com bubble burst, 99, 2000, we saw that we could buy software really cheap. The more we studied these companies, the more we realized the recurring revenues are really strong, but none of them were making money. So we developed an approach that said, no, with 90, 80% gross margins, like today, these companies can be buyout candidates and can be really profitable. So Carl Thoma gave us another chance. We did one deal and it worked. We did a second deal and it worked. We did a third deal and a fourth and a fifth, and they all worked. And close to seven or eight years after that, we said, look, these deals are working. We seem to have a theme here. Let's just do this. Let's do software only. And that is when in 2008, we founded Toma Bravo and we became a software only, uh, private equity firm.

AI assessment note: “that is when in 2008, we founded Toma Bravo and we became a software only”

Q Now Orlando, I sent you a schedule beforehand, but I always go off schedule and you gave me a couple there. I've been very fortunate to learn from great mentors. You mentioned that your early mentor in Toma, uh, what were some big lessons for you from him when you reflect on that mentorship?

A Oh, everything. And I had two. On the investing side, it was Carl Thoma. And Carl taught me the values of investing, what a value investment really is and why. He taught me a lot about leadership. What kind of people we partner with and what kind of people are not for us. They may be great for others. Carl really taught me how to do a deal. Which I love, which is a big aspect of private equity, right? Because you're buying the whole company. You may have to convince a number of constituencies. You have to value it based on your operating plan, which affects the lender. So all those pieces that come together, he really taught me what I call the art of that. Um, and, and it was really, uh, just an amazing, amazing mentoring experience. I am so lucky That he took the time when I was an associate to teach me all that. And, and that is something that really drives me today with our younger people in, in our firm.

AI assessment note: “Carl taught me the values of investing, what a value investment really is”

Q I, I totally agree, and I'm British, so it's very rare that I would actually push anyone. But I have to ask them, when we look back at the prior few years, how did you and how did the industry approach how to value the companies in the boom time? I'd just love to understand that.

A I can tell you how we value them. It's never changed. It really has never changed is we then, and I really want your audience to understand this and private equity. When we buy a company in many cases, that company is unprofitable or has very little profitability. And, and we can talk about examples, but the moment we partner with that team and we buy that business, we are going to completely change delegating it to them the way that business is run so that we can combine high profits and high growth. And we value it based on the earnings that we can produce in partnership with that team year one, two, three, and four, and five. And we back into our return based on a multiple of those earnings that we assume for the future. Now today we're assuming a bit lower multiple on those because the cost of capital is higher. And maybe two years ago we were assuming a higher multiple on those earnings because the cost of capital and the financing cost were lower. That has never, never changed. Now what we did observe in the market is this, uh, hunger for growth. And people were making a lot of money by getting into companies that had exponential growth and accelerating growth. And as long as you got in the deal, it seemed like the deal was going to work as long as there was enough market for the company and other people liked it.

AI assessment note: “I can tell you how we value them. It's never changed.”

Q trait now we've seen venture firms explode in terms of their fund sizes. And the kind of trope is that with an increase in fund size, you have a reduction in performance. A lot of people will suggest as I ask this, we've seen obviously Tomo Bravo increase Hugely in terms of fund size. How do you think about the notion of when you increase fund size, you decrease performance?

A The LP community is really, really smart. And there is a direct correlation between that, that we cannot argue with. And it is there. The reason we've increased fund size is not because we can. But it's because we really like buying the number one or two player in each of the many markets within B to B software, enterprise software that we're in. We feel there's a big difference in value. And, and it, it depends on which sector, but in, in many, there's a big difference in value in those. There's also a lot less risk. There's also a lot more stability. So when you look at the world of software, those market leaders are now really big. And 10 years ago they were a lot smaller, and 20 years ago they were non-existent in the world of SaaS because that didn't exist. So we've been following the industry as we grow because it does, despite all the market turbulence and the valuations, it is compounding at a very aggressive rate.

AI assessment note: “there is a direct correlation between that, that we cannot argue with.”

Q Does everyone have to approve the deal? Do you agree with consensus decision making or does some dissent actually breed better decision making?

A We don't do any controversial deals. We are. 100%. Everybody consents. If somebody really has a problem with that deal, there's something really wrong. Once again, we've worked together, all of us, for almost 20 years. We're looking at the same industry. We have the same philosophy for that industry. We have the same operating playbook for each company. We have the same way to add value. So if there is a dissent, there's something very strange going on. For what we do, I 100% agree with consensus and that's the way we've always done it. Now, if you're a firm and you have healthcare, you have tech, you have manufacturing, you have many, then you're chasing, then you have a different environment and maybe the, the job of the investment committee is different in, in that, in that case.

AI assessment note: “For what we do, I 100% agree with consensus”

Q I, I totally get it. Um, can I ask you, what's your biggest strength and what's your biggest weakness when you reflect on yourself?

A I feel I'm very good at bringing people together. This thing that we do requires so much buy-in and collaboration and people are re-rowing towards the same objective. And, and I, I, I think I have, um, The patience, and I like talking to people, and I like mentoring people, and I like, ah, inspiring people to do the right thing. And, and that's, that's why I chose in a way these deals on owning a whole company versus being a public investor where you maybe are making choices without talking to everybody and, and really trying to move an organization together. I think a weakness is I have a pretty short attention span. Right. So I like working on many projects because I'm not the right person to only do one project.

AI assessment note: “I feel I'm very good at bringing people together... weakness is I have a pretty short attention span”

Q this game show? And when you're a millionaire, you're happy. Like that, you've got everything in the world. And I sat there on my balcony at 21, and I was with no friends, and few relationships in my life, and I've never been more depressed. And that was the hardest moment, because it's like, the thing I thought always mattered, didn't. How do you think about the relationship to money?

A It's so interesting you say that, and thanks for being open about that. Um, it's like when I didn't have any, I was, I had a deep relationship with money because I was deeply stressed out about it. I remember starting out, I would go to my bank account every other day to see if it was a little higher or not. And, and, and I would get really fired up when it was a little higher and everything else. And, and it was a very complicated and negative relationship with money. And once I had enough, I really don't have one. But to your point, it doesn't, it hasn't cost me any happiness at all. Like right now, somebody asked me, oh, when you and your team have an exit, And have this great deal, and it's a big home run, and it pays off everybody. What do you do? And you feel good because you proved something, and it's that piece of art that the team painted, and you feel so proud of your colleagues, and of the team, and what you stand for, that it actually worked, that it actually produced something great. But it's not, the money is that you just go on to the next deal, or the next opportunity. It's just, it's very, it's not about that, really. I, yeah.

AI assessment note: “once I had enough, I really don't have one.”

Q If you had the chance to sit down with yourself when you left the resume made educational background that you had, but at the start of your career and you could advise yourself something, what would you tell yourself?

A I would tell myself to relax first and foremost. And second, to remember to be real. And I, I tell you why. On relaxing, I had very clear and finite timelines to achieve things. And that is out of your control. And by doing so, I was putting so much pressure on myself. That the artist in me and that the artist in you was not allowed to do its work and its thing. And for me, it was not, not until I was able to step back, relax and get some perspective that then things started getting better. And, and the second one is to be real. And maybe that's, um, Maybe it's part of my background being Latin American and Puerto Rican. I always looked up to the people that invented the private equity industry, which are still leading many of these firms. I loved what they did. Uh, there were role models, but in a sense, I wanted to be just like them, uh, imitate the way they dress, the way they talk, the way they did things. And it was all, until I was really, somebody said, just, just be yourself, just do it that way, that once again, whatever you have to contribute, both in work and philanthropy and life, it just got better.

AI assessment note: “I would tell myself to relax first and foremost. And second, to remember to be real.”

Q Now Orlando, I sent you a schedule beforehand, but I always go off schedule and you gave me a couple there. I've been very fortunate to learn from great mentors. You mentioned that your early mentor in Toma, uh, what were some big lessons for you from him when you reflect on that mentorship?

A Oh, everything. And I had two. On the investing side, it was Carl Thoma. And Carl taught me the values of investing, what a value investment really is and why. He taught me a lot about leadership. What kind of people we partner with and what kind of people are not for us. They may be great for others. Carl really taught me how to do a deal. Which I love, which is a big aspect of private equity, right? Because you're buying the whole company. You may have to convince a number of constituencies. You have to value it based on your operating plan, which affects the lender. So all those pieces that come together, he really taught me what I call the art of that. Um, and, and it was really, uh, just an amazing, amazing mentoring experience. I am so lucky That he took the time when I was an associate to teach me all that. And, and that is something that really drives me today with our younger people in, in our firm.

AI assessment note: “Carl taught me the values of investing, what a value investment really is”

Q You mentioned value there. Again, I predominantly interview VCs and early stage VCs very often where, you know, price, it doesn't really matter. If you're paying 50 or 75, if it's a generational defining company, it doesn't matter. At your stage, I think it's a very different game. I'm interested, given the many years of very successful investing you have, how do you reflect on your own price sensitivity, Orlando?

A Oh, price matters. Price really matters. It's, it's interesting because many of the principles, even if you're doing a seed stage and you're doing a buyout, many of the investment principles are the same. You may have in the early stage less data, Uh, of course, um, than, than you have in terms of being able to see trend lines and being able to see, but your equity check is, is small, so you're diversifying the risk. In a buyout, you could be writing a ten billion dollar equity check with your partners, and you cannot get that wrong. That, that would be really fatal, making a mistake on something that big, which is an interesting disconnect sometimes between the technology world and technology executives and buyout. The risks that that company can take with an investment of that size, And the chances they can take on different things and experimenting a different way are very different than when somebody's invested ten million and there could be some behind it. And the expectations are different as well.

AI assessment note: “Oh, price matters. Price really matters.”

Q If you had the chance to sit down with yourself when you left the resume made educational background that you had, but at the start of your career and you could advise yourself something, what would you tell yourself?

A I would tell myself to relax first and foremost. And second, to remember to be real. And I, I tell you why. On relaxing, I had very clear and finite timelines to achieve things. And that is out of your control. And by doing so, I was putting so much pressure on myself. That the artist in me and that the artist in you was not allowed to do its work and its thing. And for me, it was not, not until I was able to step back, relax and get some perspective that then things started getting better. And, and the second one is to be real. And maybe that's, um, Maybe it's part of my background being Latin American and Puerto Rican. I always looked up to the people that invented the private equity industry, which are still leading many of these firms. I loved what they did. Uh, there were role models, but in a sense, I wanted to be just like them, uh, imitate the way they dress, the way they talk, the way they did things. And it was all, until I was really, somebody said, just, just be yourself, just do it that way, that once again, whatever you have to contribute, both in work and philanthropy and life, it just got better.

AI assessment note: “I would tell myself to relax first and foremost. And second, to remember to be real.”

Q Can I ask, what does it take to turn a great innovator into a great company, and what is the secret to working with that management team to make it a free cash flow machine when it has the potential to be?

A What we would do, and what he would always tell us to do, is measure. Take a big problem and divide it into many component parts. Prioritize which parts are more important And then within those parts, measure where you are and begin the journey towards improving that. Delegate authority and responsibility to those individuals that are responsible for each component part. We see even today the world of software, which are much better innovators today than they were 10 years ago, than they were 20 years ago, but these businesses mainly have a big bucket of revenue and a big bucket of cost, and they don't really separate their activities and their efficiency in a way that leads to what we call profitable growth. And every time we had a big problem, he would always say, Marcel would say, remember, Any business problem can be solved. Health is another matter, and he would dive in with the team, and as long as that team cared about numbers, knew their business, and wanted to win, everything had a solution to it.

AI assessment note: “Take a big problem and divide it into many component parts. Prioritize”

Q You mentioned that the people behind the business. Before we dive into actual markets, companies, investments, I do just want to actually learn a little bit more about you, if that's okay. I believe we're all a function of our histories, which means we're, we're running towards something, and we're also running away from something. What are you running from, do you think, first, Orlando?

A You know, I'm always on the go. I never liked to stay in the same place for too long. Sometimes my family looks at that and says, what, what is he can't stay still? And, and I really think I'm running from the fear of being trapped, the fear of being isolated. And I, I think about that and part of it is I grew up in an island. I grew up in Puerto Rico, a relatively small island, and to pursue things and to get better opportunities, you always have to leave. Not necessarily for everyone, but that was for me. And maybe that's why also private equity, which is a deal business where you go from one deal to another, from one country to another, from one state to another, maybe that's why it fits me, uh, really well. But I, yeah, I have this, this fear of stagnating and feeling and feeling trapped and isolated.

AI assessment note: “I really think I'm running from the fear of being trapped, the fear of being isolated.”

Q like stagnating, isolated. Was there ever a time when you felt like your career was plateauing? And was there ever anything that you did to get out of that? I think often, especially today, people feel like, am I actually going anywhere? Am I going where I want to go? Have you ever felt like it was maybe plateauing? And what did you do to get out of that plateau?

A I felt that my career was a failure, um, in 1999. I had come out of Stanford Business School and Law School. Uh, with what I thought was this like blue chip, pristine, right? Education and, and resume. And I had very high expectations of myself and a timeline for which I needed to quote unquote succeed. And none of that worked. I was really close in, in 99 to being fired, as I said before. So it wasn't plateaued. It was like, I'm going to have to start over. And, you know, I'm a big tennis fan, and I used to play tennis, and maybe it helped me fight to stay in the game. Just stay in that match. Maybe take your time in the changeover. Maybe take your time getting, hitting your second serve. And, and in that process also see if there's enough opportunity to change the game. And, um, and then I think it happened, and I got lucky. Now, since then, I, I have not felt, uh, a plateau on, on my career, because here's the thing. My job has changed enough over the years, and the, the industry that we target has changed enough as well. So if I was doing the same deal that I worked on in, The year 2000, I probably would be pretty bored, feel isolated and plateaued, but, but things have changed enough.

AI assessment note: “So it wasn't plateaued. It was like, I'm going to have to start over.”

Q I, I totally agree, and I'm British, so it's very rare that I would actually push anyone. But I have to ask them, when we look back at the prior few years, how did you and how did the industry approach how to value the companies in the boom time? I'd just love to understand that.

A I can tell you how we value them. It's never changed. It really has never changed is we then, and I really want your audience to understand this and private equity. When we buy a company in many cases, that company is unprofitable or has very little profitability. And, and we can talk about examples, but the moment we partner with that team and we buy that business, we are going to completely change delegating it to them the way that business is run so that we can combine high profits and high growth. And we value it based on the earnings that we can produce in partnership with that team year one, two, three, and four, and five. And we back into our return based on a multiple of those earnings that we assume for the future. Now today we're assuming a bit lower multiple on those because the cost of capital is higher. And maybe two years ago we were assuming a higher multiple on those earnings because the cost of capital and the financing cost were lower. That has never, never changed. Now what we did observe in the market is this, uh, hunger for growth. And people were making a lot of money by getting into companies that had exponential growth and accelerating growth. And as long as you got in the deal, it seemed like the deal was going to work as long as there was enough market for the company and other people liked it.

AI assessment note: “we value it based on the earnings that we can produce in partnership with that team”

Q getting to know a company, in terms of the, the material, substantive, quantitative elements that you have to work with, this was something that a lot of people suggested we talk about. What do you need to see in terms of margins, in terms of close to profitability, to be excited? What is it about the fabric of the data, of the financials, that makes one interesting and one not?

A The story matches the financials. It has to, for example, if you have a very high quality product and engineering team, you're going to get less support calls. So you, the profitability of, of your support business, if you measure it as such is going to be higher. If you have products that are easier to use and easier to consume, you won't have to spend that much time in implementation or your implementation margins are going to be higher. If you have a product that is so important for your customers, your average selling price is going to be a million dollars or higher, and your retention rate is going to be higher. So everything, you, you can really tell what is going on with the quality of that business through the numbers, and you check that back by looking at the leadership, by looking at the technology, by looking at their processes, by looking at a number of aspects within each functional area or even, even regional area. What we really look for is give us very high quality of revenue. Give us a top line that is very stable and has enough room to grow, and that's where you pay different values for different, for different entities and different companies. Second, give us a management team that we can work with, that is open minded, that wants to win, and that does care about profitability. And then third, give us enough inefficiency so we can earn a differentiated return…

AI assessment note: “The story matches the financials. It has to, for example”

Q Speaking of kind of getting there, you mentioned three, four, five in terms of the years. What matters also is the time that you exit, and when we think about exit environments, how do you think about exits for new deals in terms of strategics, in terms of IPOs, PE trades, now, given where we are?

A I mean, in our history, we have mainly exited to strategics and other financial buyers. And, and there's a reason for that is the IPO for our companies doesn't give us that much in itself because our companies generate the cashflow that is needed to fund their investments on their operations and even to fund acquisitions that they want to do. So in an IPO, you typically have to dilute your ownership to raise cash that you don't need. If you needed the cash because you're a younger company or right now you're not profitable, that could make sense, but typically that there's no value there for us. On the big companies, I actually look at it as a big positive for the ability to exit as follows. First, remember, in order to exit, you just need one buyer. You don't need a hundred. Only one is gonna buy your company. And second, do you have a better odds of exiting to these giant tech companies that are still growing by leaps and bounds by selling them a market leader with a given core competency with two billion in revenues that is by far, once again, the market leader in a given vertical, in a given application, horizontal in cybersecurity and identity, or do you have a better chance of selling them a company that's number 10 in that field? You may get more comfort in saying, ah, there are more buyers that can cobble up the money to buy the small company, but you just need one. And…

AI assessment note: “we have mainly exited to strategics and other financial buyers. And, and there's a reason”

Q trait now we've seen venture firms explode in terms of their fund sizes. And the kind of trope is that with an increase in fund size, you have a reduction in performance. A lot of people will suggest as I ask this, we've seen obviously Tomo Bravo increase Hugely in terms of fund size. How do you think about the notion of when you increase fund size, you decrease performance?

A The LP community is really, really smart. And there is a direct correlation between that, that we cannot argue with. And it is there. The reason we've increased fund size is not because we can. But it's because we really like buying the number one or two player in each of the many markets within B to B software, enterprise software that we're in. We feel there's a big difference in value. And, and it, it depends on which sector, but in, in many, there's a big difference in value in those. There's also a lot less risk. There's also a lot more stability. So when you look at the world of software, those market leaders are now really big. And 10 years ago they were a lot smaller, and 20 years ago they were non-existent in the world of SaaS because that didn't exist. So we've been following the industry as we grow because it does, despite all the market turbulence and the valuations, it is compounding at a very aggressive rate.

AI assessment note: “there is a direct correlation between that, that we cannot argue with.”

Q this game show? And when you're a millionaire, you're happy. Like that, you've got everything in the world. And I sat there on my balcony at 21, and I was with no friends, and few relationships in my life, and I've never been more depressed. And that was the hardest moment, because it's like, the thing I thought always mattered, didn't. How do you think about the relationship to money?

A It's so interesting you say that, and thanks for being open about that. Um, it's like when I didn't have any, I was, I had a deep relationship with money because I was deeply stressed out about it. I remember starting out, I would go to my bank account every other day to see if it was a little higher or not. And, and, and I would get really fired up when it was a little higher and everything else. And, and it was a very complicated and negative relationship with money. And once I had enough, I really don't have one. But to your point, it doesn't, it hasn't cost me any happiness at all. Like right now, somebody asked me, oh, when you and your team have an exit, And have this great deal, and it's a big home run, and it pays off everybody. What do you do? And you feel good because you proved something, and it's that piece of art that the team painted, and you feel so proud of your colleagues, and of the team, and what you stand for, that it actually worked, that it actually produced something great. But it's not, the money is that you just go on to the next deal, or the next opportunity. It's just, it's very, it's not about that, really. I, yeah.

AI assessment note: “when I didn't have any, I was, I had a deep relationship with money”

Q Final one before we move into markets and actual investing. You know, people will look at you and look at Toma and see the incredible success and think he has everything. When I say the word success, what does success mean to you, Orlando?

A I don't have a finite, I don't see success for me or for us as this finite, definable ending goal. I'll give you an example. We were just at our holiday party, um, for, for the firm, which we have in January, because December is extremely busy, and we had 400 people at this holiday party, and Holden Spade, one of my co-founders, uh, grabbed me to the side and said, wow, Remember that holiday party we had 17 years ago in San Francisco where we couldn't get a reservation and it was seven of us? This is, this is pretty crazy. And, and I looked at him and I said, yeah, but you know what? You know we're only getting started. And, and he nodded and we've been together. I mean, us partners were best friends. It's five of us. We've been together for ever. Uh, we love what we do, but I tell you what success means. I, I look at success in many little steps. We can talk about family, friends, work, philanthropy, but I'll take work since we're on that. When we buy a company, And we spend a year and a half working to build the trust with all those constituencies. And we actually are able to buy one of these great innovators, these great businesses. And then we all collaborate to produce these great margins and growth, right? The success story. And then we, we exit that business. I look at that and I say, what a beautiful piece of art. In collaboration, the team has produced here. I wish I c…

AI assessment note: “that's what success in little steps really means to me.”