The Exchanges

Q Yeah. And I love those examples because you're touching so many different industries. And maybe if we zoom out just a little bit and think about maybe like a framework for disruption, how do you think about where maybe this could be applied?

A The way to kind of just zoom out and think about this opportunity is like, where are there a bunch of humans that are basically dealing with whether it's voice or, um, paper processes, where there's a bunch of unstructured data that they need to basically synthesize and then make sense of, and then generate some sort of output. Like obviously that's what LLMs are super good at. And so like the very common way of thinking about that might be like, Hey, there's a call center somewhere. Right. That's like the healthcare or the insurance example or the sales example. Um, or maybe you have some sort of, you know, we call it the messy inbox problem here where there's a bunch of different pieces of paper that are coming in and you need to synthesize them and put them into some database. But oftentimes that's like an internal team. Um, but then also you could look for wherever there might be BPO spend, like business process outsourcing spend, um, where maybe a consulting firm is doing this for you. So those are kind of the hot buttons of bits, not Adam's industry. Like you're dealing with paper. Um, not physical world things, um, and something that is conducive to be automated by all alums.

AI assessment note: “where there's a bunch of unstructured data that they need to basically synthesize”

Q So you're saying, basically, in purchasing the business, it gives you the leeway to actually shift things fundamentally, which is really what this is articulating. Um, maybe another question is just, You seem to think this is a really big opportunity. PE itself is a huge industry. So why do you think this is actually maybe a bigger opportunity than traditional private equity?

A Yeah. So I think that this all comes down to capital efficiency. Um, and so for example, like, you know, buying one of these small companies that I just described, like isn't actually like that expensive of an endeavor. And if you can do what I'm talking about, you impact earnings and all of a sudden, like the first one, two or three, maybe you don't immediately pay back, um, using cash. But after like the first few of these transactions, You start to throw off cash and that cash can then be used to acquire more and more of these small businesses. And so there becomes this beautiful, um, like flywheel effect to the acquisitions that you can make. And then that new business is that you acquire. And so unlike traditional private equity, where you're constantly raising debt, maybe you need more equity. Um, and again, it's much more financial engineering.

AI assessment note: “unlike traditional private equity, where you're constantly raising debt”

Q Well, tell me more about that. So as you think through the challenges, like what is most stark, what's most clear as the thing that someone pursuing this would need to solve?

A Yeah. I think the biggest one is just understanding that like, there's going to be a bunch of human problems when it comes to this, since you have to be like eyes wide open, you have to be a great operator and you have to deal with like scaling a human, a human driven business. So I think that's the first one and like all the implementation problems around that. Um, right. So there's gonna be a bunch of hairy legacy systems. You're gonna need to navigate like all the process mining and figuring out like, what do I need to build here to actually drive incremental, uh, incremental value? So that's the second piece. It's like human, human level issues. Once you get through those, then you can start to do the process mapping, which is, uh, which is also exciting. Um, and then the third piece is actually like, it's kind of, I've talked about this a little bit before, but A lot of these legacy services businesses, while they may be bits oriented, like at some point there's like an atom involved, someone has to like go do the business development. Like it's not like you can just fully automate these companies.

AI assessment note: “I think the biggest one is just understanding that like, there's going to be”

Q What are you looking out for in particular? Is it a certain type of founder? Is it, A certain motion that you see someone doing that you think is really intriguing and you think, okay, they're on the right track here. What are you really looking for?

A First things first, I'm looking for an entrepreneur or entrepreneurs that like have like bottoms up understanding rather than the tops down understanding. It's like, what does that mean? It's like, I want to find entrepreneurs that have like earned secrets in these end markets, right? So somebody who has maybe sold to the, the staff's insurance agency or someone who has run staff's insurance agency or whatever the corollary is for each one of these markets. It's very hard to come in and like know the shorthand. Like you have to trust me that I'm going to come in and help you bring your business and take your business to the next level if I'm going to be that acquirer. Um, and so I think you need to be like a very special person on that, on that front. The second piece is like an understanding of like, Hey, can this industry like be like automated?

AI assessment note: “I'm looking for an entrepreneur or entrepreneurs that like have like bottoms up understanding”

Q So convince me otherwise, how is this different from traditional private equity?

A First, like, what is private equity? Like, I think that's important to, like, just talk about. Um, to oversimplify, like, private equity is a buyer purchases a company using some combination of equity and debt, um, traditionally, like, a good deal of debt, uh, and then basically tries to improve earnings in the relatively short term, Right. Normally private equity has like a three to five year hold period. Um, and then sell it to the next buyer. Uh, private equity firms typically are optimizing for IRR, internal return. Um, and they're less focused on like ultimately like a, a multiple on money, basically saying like they're not focused on the biggest possible version of the company that they can build. Rather they're focused on making incremental improvements in this time period. Cause that's like how they think about liquidity and that's how the model works. The problem with that is it creates like a little bit of a perverse incentive structure where typically they're focused on like one of two ways of making money. First is like the most obvious, like when people hear like private equity, it's like, oh no, people are gonna get fired. Um, but obviously what they're trying to say is, hey, this hasn't been run in the most lean and efficient way maybe it possibly could have. And so, you know, hey, the accounting department doesn't need to be this big, or maybe we can consolidate…

AI assessment note: “First, like, what is private equity? Like, I think that's important”

Q So convince me otherwise, how is this different from traditional private equity?

A First, like, what is private equity? Like, I think that's important to, like, just talk about. Um, to oversimplify, like, private equity is a buyer purchases a company using some combination of equity and debt, um, traditionally, like, a good deal of debt, uh, and then basically tries to improve earnings in the relatively short term, Right. Normally private equity has like a three to five year hold period. Um, and then sell it to the next buyer. Uh, private equity firms typically are optimizing for IRR, internal return. Um, and they're less focused on like ultimately like a, a multiple on money, basically saying like they're not focused on the biggest possible version of the company that they can build. Rather they're focused on making incremental improvements in this time period. Cause that's like how they think about liquidity and that's how the model works. The problem with that is it creates like a little bit of a perverse incentive structure where typically they're focused on like one of two ways of making money. First is like the most obvious, like when people hear like private equity, it's like, oh no, people are gonna get fired. Um, but obviously what they're trying to say is, hey, this hasn't been run in the most lean and efficient way maybe it possibly could have. And so, you know, hey, the accounting department doesn't need to be this big, or maybe we can consolidate…

AI assessment note: “First, like, what is private equity? Like, I think that's important to, like, just talk about.”

Q Yeah. Because basically what you're saying is that what you, what you put into the technology can be replicated for insert other business here. Tell me a little bit more about why you need to buy the company though. Could I not create a tool that just sells into John's insurance company, Steph's insurance company?

A You actually made a really good point at the end of what you just said, which is like, Hey, this can be applied to the next business. And if you build this software, I think in the right way, in the right, in the right industry vertical, once you've built those like core integrations in the example that we were just doing, it's into like the applied Epic system or whatever core system of records exists across the small business you're thinking about. Um, those systems are in many cases in these legacy industry are pretty ubiquitous. And so you can kind of repurpose this technology across each one of these small businesses I'm not saying it's gonna be simple or easy. It'll require implementation, but that's the opportunity here is to stay vertical specific and build this like deep kind of understanding of the, of the, of the systems. Um, but that's, it's a great question on like, why not just sell software to these companies?

AI assessment note: “it's a great question on like, why not just sell software to these companies?”