WEBVTT - Thoma Bravo LLC Co-Founder Orlando Bravo Talks Tech Dealmaking

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Good morning, John, Thank you so much. And that is

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<v Speaker 2>exactly part of the mood here at super Return. What

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<v Speaker 2>does this industry do with AI? Do they care about AI?

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<v Speaker 2>We have the perfect man for that, as you say,

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<v Speaker 2>it's Orlando Bravo of Toma.

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<v Speaker 1>Bravo, Orlando, thank you so much for joining this morning, Daddy,

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<v Speaker 1>great to see you.

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<v Speaker 2>So if you look at these public markets, it used

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<v Speaker 2>to be a frenzy over all of AI. If you

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<v Speaker 2>mentioned AI and earnings call, your stock goes to the moon.

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<v Speaker 1>Lately, something has changed. It's now in.

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<v Speaker 2>Videos the winner and we're more skeptical about other companies'

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<v Speaker 2>abilities to monetize AI. So did we get over our

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<v Speaker 2>skis in the promise of AI right here and right now?

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<v Speaker 3>Well, Daddy, I can give you the enterprise view of

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<v Speaker 3>AI right the business view, not the consumer view. Now,

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<v Speaker 3>if you look at the software landscape, cent trillion dollars

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<v Speaker 3>of marketcap in software publicly traded companies today, about one

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<v Speaker 3>thousand companies. Some of those software companies of the providing

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<v Speaker 3>AI solutions to their customers for decades. In fact, some

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<v Speaker 3>of those companies are pure AI companies now let's differentiate

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<v Speaker 3>that when you talk about genai, right, the new form

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<v Speaker 3>of technology in ai.

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<v Speaker 1>This is what's going on today.

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<v Speaker 3>Many software companies have produced and delivered and introduced genai

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<v Speaker 3>solutions to their customers, but they're not charging for them.

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<v Speaker 1>They're including that in the bundle of their products. Is

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<v Speaker 1>that a problem?

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<v Speaker 2>We saw that in salesforce that stock sold off because

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<v Speaker 2>margins on that essentially zero to companies need to get

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<v Speaker 2>better about finding a way to monetize this.

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<v Speaker 3>Yes, they do, but at the same time, the software

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<v Speaker 3>business has become you have to continuously add value to

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<v Speaker 3>your product, not only to fend off competition, but to

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<v Speaker 3>upsell your customers.

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<v Speaker 1>So this is a good development. Overall.

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<v Speaker 3>Today we have twenty five billion dollars of revenue coming

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<v Speaker 3>from our software companies, and seventy five percent of those

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<v Speaker 3>companies have released GENI solutions to those enterprise customers.

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<v Speaker 2>Are talking about it's not necessarily extra profit because they're

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<v Speaker 2>not charging for it. So that promise of huge outsized profit.

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<v Speaker 2>Is that a little bit misguided because it sounds like

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<v Speaker 2>you're saying it's just a continuation of value offering, but

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<v Speaker 2>you should be able to monetize it later.

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<v Speaker 3>The key is if you if you really run an

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<v Speaker 3>efficient operation, you take all your engineering talents and your

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<v Speaker 3>product management vision for that engineering talent, you do have

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<v Speaker 3>to move resources around.

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<v Speaker 1>How patient should we be for that?

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<v Speaker 2>Because these public markets aren't being patient? What should be

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<v Speaker 2>the timeline we give companies to figure this out?

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<v Speaker 3>The investors and we, as a big investor in software,

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<v Speaker 3>are a private investor in software. We always look at

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<v Speaker 3>the P and L and is the company achieving the

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<v Speaker 3>level of earnings that we set out to achieve? And

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<v Speaker 3>if we are within that, the company can create and

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<v Speaker 3>innovate and move around resources to fit what they need.

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<v Speaker 2>Okay, and software in general, Orlando I mentioned salesforce having

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<v Speaker 2>a bit of a tough time, not just the issues

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<v Speaker 2>with AI, but some concerns there that maybe sales weren't

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<v Speaker 2>as good workday had something similar in the private markets.

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<v Speaker 2>You see Visa taking a huge down three and a

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<v Speaker 2>half billion dollars on of their online learning platforms. It's

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<v Speaker 2>these pockets of software stress. What's going on?

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<v Speaker 3>What happened was you know when this happened Q two

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<v Speaker 3>of twenty twenty two, that's when we first saw a

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<v Speaker 3>big drop in new business generation by these companies a

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<v Speaker 3>drop in bookings. Now, always, as an owner, you think

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<v Speaker 3>about what can you do about it? What we do

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<v Speaker 3>about it is we protect the P and L. We

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<v Speaker 3>have to come in and cut cost again to protect

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<v Speaker 3>the level of earnings that we set out to achieve.

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<v Speaker 1>In these companies.

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<v Speaker 3>Now, those pockets of weakness are also related to the

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<v Speaker 3>business model of these companies. You look at JENNYI, and

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<v Speaker 3>you look at a technological shift in the enterprise software world,

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<v Speaker 3>but also a business model transition. And people don't talk

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<v Speaker 3>enough about that. Companies that charge by the user are

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<v Speaker 3>going to be more challenged that companies that use other

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<v Speaker 3>forms of price.

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<v Speaker 1>Are you still in cost cutting mode?

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<v Speaker 2>Now?

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<v Speaker 1>We always are protecting the P and L. Not right now.

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<v Speaker 3>We have to do that again in twenty twenty two one.

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<v Speaker 3>It's much better to be early so you don't have

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<v Speaker 3>to chase your earnings. That way, if the environment improves,

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<v Speaker 3>you can come back and invest and in them.

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<v Speaker 1>If the environment stays the same.

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<v Speaker 3>You can basically run your business profitably.

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<v Speaker 2>I have to be honest, Orlando. When I've talked to

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<v Speaker 2>a lot of folks here about AI, A lot of

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<v Speaker 2>people have said it's not as big of a topic

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<v Speaker 2>this year, maybe it was last year. We're not really.

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<v Speaker 1>Thinking about it that much.

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<v Speaker 2>Is this industry behind and having an AI game plan?

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<v Speaker 2>Do you think all of these various private equity companies

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<v Speaker 2>with portfolio companies, do they need to have a plan

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<v Speaker 2>for all of them?

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<v Speaker 3>You need to have an AI game plan. In fact,

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<v Speaker 3>in the SaaS era, which really got started in twenty ten,

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<v Speaker 3>a bit before that, we used to say that every

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<v Speaker 3>company needs to think about becoming a software company or

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<v Speaker 3>their digital side of their business.

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<v Speaker 1>Now we say that.

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<v Speaker 3>Every company needs to become an intelligent software company. And

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<v Speaker 3>if you look at the buyers of our companies, all

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<v Speaker 3>the exits we've had over the last eighteen months, many

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<v Speaker 3>of them are industry buyers that are looking to transform

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<v Speaker 3>their companies through software.

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<v Speaker 1>Isn't there some of it that's okay?

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<v Speaker 2>Mack or Landa like I don't need my refrigerator, for example,

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<v Speaker 2>to have AI?

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<v Speaker 1>Do I?

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<v Speaker 2>I mean, isn't some of this we're selling a dream

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<v Speaker 2>that's not really there.

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<v Speaker 1>Sometimes you are.

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<v Speaker 3>That's where see, that's where there's so much value in

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<v Speaker 3>the software incumbents.

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<v Speaker 1>There are two reasons for that.

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<v Speaker 3>The software incumbents are working with their customers thousands of them,

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<v Speaker 3>sometimes the entire fortune five hundred customers on solving an

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<v Speaker 3>important business problem today that they have in a given

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<v Speaker 3>use case, in a given horizontal in cybersecurity, or in

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<v Speaker 3>a vertical.

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<v Speaker 1>Those are the companies.

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<v Speaker 3>That are in the cole position as a trusted advisor

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<v Speaker 3>to develop GENI solutions that actually have value to those customers.

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<v Speaker 3>And secondly, and really important, something became very valuable in

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<v Speaker 3>software enterprise, and that is data, proprietary data. Many of

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<v Speaker 3>the companies you mentioned are sitting on proprietary data that

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<v Speaker 3>they can use from their customers that can be used

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<v Speaker 3>to develop GENEI solutions and train these models.

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<v Speaker 2>Huge vast treasure troph of data.

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<v Speaker 1>It's no secret.

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<v Speaker 2>It's something that regulators have looked at with consolidation in

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<v Speaker 2>this industry. An investigation is opening up now. We heard

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<v Speaker 2>this today with Microsoft and open Ai.

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<v Speaker 1>It's been a.

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<v Speaker 2>Lot of concern about anti trust.

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<v Speaker 1>How big of a headwind is it to you?

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<v Speaker 3>Have?

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<v Speaker 2>You had to approach investing differently given what's happening down.

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<v Speaker 3>In DC, very differently, and we take a practical view

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<v Speaker 3>towards antitrust and the regulatory environment. This is the thing,

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<v Speaker 3>it's a fact based approach. If you're a center and

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<v Speaker 3>you believe you can add a lot of value by

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<v Speaker 3>setting that company on the right price, and if you're

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<v Speaker 3>a buyer and you think you can add a lot

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<v Speaker 3>of value by buying that company, you just have to

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<v Speaker 3>appreciate that there is a public policy underpainning environment sowards

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<v Speaker 3>this and you have to live with it.

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<v Speaker 2>So are there deals you haven't done because of this?

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<v Speaker 3>Most of the time, no, because if your facts are right,

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<v Speaker 3>you have to go forward with and being willing to

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<v Speaker 3>be creative collaborative with the regulators. And the regulators are

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<v Speaker 3>smart and now they may look at your deal. It

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<v Speaker 3>may take nine months to close the deal instead of

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<v Speaker 3>three months. It may take a year to close the deal.

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<v Speaker 3>But for something that adds value, you have to just

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<v Speaker 3>look forward to that and put out the facts on

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<v Speaker 3>Do you.

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<v Speaker 2>Think this regulatory environment is a problem that is problematic,

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<v Speaker 2>that it's gotten this much more scrutiny, this many more

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<v Speaker 2>deals want.

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<v Speaker 3>I don't think the regulatory environment in software is actually

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<v Speaker 3>a problem because software is a highly highly competitive industry

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<v Speaker 3>and the regulators are experience in doing deals. Is the

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<v Speaker 3>regulators actually understand this industry really well. So in our

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<v Speaker 3>field of enterprise software is not a problem. The problem

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<v Speaker 3>is when buyers and centers want to completely shy away

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<v Speaker 3>from doing the work that it takes to explain it

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<v Speaker 3>so they can move forward to with their transactions. We

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<v Speaker 3>know of a number of very large strategic buyers that

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<v Speaker 3>from a management perspective, just don't want to deal.

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<v Speaker 1>With that environment. You want to give us a nature land,

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<v Speaker 1>I can't.

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<v Speaker 3>You know, I can't because many of those are partners

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<v Speaker 3>and buyers.

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<v Speaker 1>Of our companies. But look, once again, we get paid to.

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<v Speaker 3>Undergo these processes and to adapt to these processes, and

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<v Speaker 3>it's really important that buyers and centers do that.

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<v Speaker 2>Okay, Orlando, we're going to have to leave it there.

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<v Speaker 2>Thank you so much for joining today. Really appreciate your time. John.

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<v Speaker 1>That is Orlando.

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<v Speaker 2>Bravo, the co founder of Tomo Bravo, talking about this

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<v Speaker 2>regulatory environment. It's changed things, but he says those that

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<v Speaker 2>are struggling are not doing the work.