Pod Insights Summation with Auren Hoffman Insight Partners Deven Parekh - navigating global markets in uncertain times About this episode Deven Parekh is Managing Director at Insight Partners, a global software investment firm with over $90B in assets under management. Since joining in 2000, he has led investments in companies including Twitter, DocuSign, Alibaba, and JD.com. In this episode of World of DaaS, Deven and Auren discuss: Why gross retention beats net retentionAI adoption vs previous tech cyclesEuropean tech's struggle to match USBoard decks that actually work Looking for more tech, data and venture capital intel? ...
Transcript 0:02 Speaker 00 Hello, fellow data nerds. Welcome to World of DAS. I'm your host, Orin Hoffman, CEO of Incubate and GP of Flex Capital. Discover more episodes, get weekly data as a service news, original content, articles on data and more at worldofdas.com. That's worldofdas.com. Hello, fellow data nerds. My guest today is Devin Parekh. Devin is the Managing Director at Insight Partners, a global venture capital and PE firm with over 80 billion assets under management. Since joining Insight in the year 2000, he's made more than 140 investments in enterprise software, data and consumer internet businesses globally. Devin, welcome to World of DAS. Orin, glad to be here.
0:46 Speaker 00 Very excited. Now, Insight Partners was founded as Insight Venture Partners back in like 95, and kind of evolved into this global firm that does private equity and venture investing. That's pretty rare. Very few venture capital firms make that jump. Why do you think it's so rare for venture capital to expand to PE, but some PE kind of go the other way into venture capital? Well, first, interesting story. When I joined Insight at the end of January of 2000, it was Insight Capital Partners, but our law firm at the time had not done a good job. And it turned out there was another firm in Texas that had the same name that did not do what we did. But it actually required us to change our name. So we changed our name to Insight Venture
1:29 Speaker 00 Partners. Over time, as we had a strategy that went all the way from venture to buyout, we figured Insight Partners reflects broader spectrum of what we do. We're currently investing out of Fund 12 in the process of raising for Fund 13 and starting to invest out of that. We've had buyouts of one form or another since Fund 2. So you're already work thinking that way? Yeah, it wasn't as evolved as it is today. As an RIA back then. No, it wasn't at the time SCC registration wasn't a thing for private equity funds. That changed over time, but think about the structure of the market, really, because from the beginning, we were focused only on software.
2:11 Speaker 00 If you go back to 95 to 2000, 2002, 2003, you had a lot of software companies. You didn't really have a lot of profitable software companies. So most of those companies were raising capital to kind of invest for further growth with invest in sales, invest in marketing, invest in product, maybe to do M and A, but generally not. So the universe of companies that were called buyout candidates or private equity candidates were pretty small. And it's interesting how much that market evolved. But at the time lenders were not really that interested in lending to software companies because they were like, well, we don't have any assets. Business models were much more license and maintenance. You didn't have the same level of recurring revenues you had today. And then over time, the market changed.
2:54 Speaker 00 A you ended up with a much larger number of companies that were break even or profitable. The lender view of software companies changed pretty dramatically. So your ability to actually put leverage on those companies changed. When did that because around that time we started to see Francisco, Tomo Bravo, Vista, all these competitors that you guys have, they all kind of started right around then. Yeah, but it's interesting. We used to be investment in a company called AMS. It's since been renamed Berta Four and it's been through three or four private equity owners, which was a company that sold, it's one of the two dominant providers of software insurance brokers. And it's an oligopoly. Both companies are owned by private equity.
3:36 Speaker 00 And I remember this is going back to probably 2002, 2003, somewhere in that range. We put debt on that company of two times EBITDA. I remember being at the board meeting and how excited we were that lenders were willing to put two times EBITDA. On a software company. What year was that? Two thousand two, two thousand three, somewhere in that timeframe. Even then, it was hard to do. It was hard, but it changed quickly because I think what people figured out is actually that, and if you talk to lenders today and you ask them, where have they had the least amount of credit losses, software for most lenders would be the answer. Because you do have very high recurring revenue and that recurring revenue can be run very profitably. And I say can because it's not always run profitably.
4:21 Speaker 00 So then, as you think about insight, some of that just happened organically. But then, as the opportunities that became bigger, we also added people from lots of different firms over time. We have DNA from Summit, you have DNA from Vista. We've hired people from lots of different backgrounds and I think that's been very positive for us as every firm has a different kind of mindset about how they look at businesses. And we've got two things, we've got some of the capabilities, some of the private equity capabilities, how to raise debt, structuring, all that stuff. But we also kind of got different perspectives on how to look at those businesses. So over time, we've kind of built out the team such that, obviously, we've always had the capabilities to do the earlier stage,
5:03 Speaker 00 but we've kind of built out the capabilities to do the later stage as well. And now we have a structured equity fund, we have a public fund. I always joke that we're cradled grave, it's not really a grave, can't really think about the public markets of grave, but we're able to take them from an early stage company all the way to go private, if that's what they ended up needing to do. Why do so few venture capital firms make the jump to be like more ambitious? It seems like very few of them actually make that jump, they stay in their lane. I think it depends on how you define ambition. If you look at a lot of the early stage funds that had, call it four or five hundred million dollar early stage funds and that was it. There's one firm that's continued to do that extraordinarily successfully, Benchmark.
5:47 Speaker 00 Yeah, Benchmark, they kind of have the same model. You guys were starting, you know, in the nineties, Klein and Perkins of the world, they've kind of really stayed as. A very succinct thing. But then if you look at other firms, say, take Sequoia, they expanded globally. Now, of course, I know that they expanded globally and then they went back to basics geographically, but they went into growth, they built heritage, they built a public business. There are firms, the question is, how do they do it? We kind of started with the growth stage, went back a little bit to earlier stage, and then also moved forward to kind of being able to do private equity. Other people did more geographic expansion or built a bigger growth business. I think one thing you'd say, the
6:28 Speaker 00 mentality of being a minority investor is very different than the mentality of being a majority investor. And not everybody wants control. When you have control, you have to exercise it. It's a different model and it's a different way you drive a board. You're taking more financing risk when you own 80% of a company than when you own 10% of the company. For the same reason that a buyout investor has a really hard time turning into the mentality of a minority investor, where the way you get influence is not because people have to do what you're telling them to do, but it's because they want to do what you're telling them to do because you're advising them in a way that makes them feel like that's good advice. It does require a very different management style.
7:09 Speaker 00 Since you guys are kind of in between half VC, half PE, VCs are often run as like a loose partnership in a way, not necessarily like a team, it's kind of a collection of individuals. And sometimes PE firms often have like a CEO or co-CEO, and they're a little bit more run like a company. How does Insight navigate that? I think we're much more like a closely coordinated partnership. I think we take something from both. And by that, I just mean that we don't have a CEO. We have a management company, and there's four of us that are in the management company, but then we have a much bigger investment committee. Each one of those investment committee members has a team. But then we meet very regularly to talk about what we're all looking at and what we're all doing. Each IC member is
7:53 Speaker 00 kind of a mini CEO of their group, and then we all come together and talk and collaborate. The thing that I think is the most important is we really work across the firm on deals. When we're taking a company private, we're talking to the early-stage team to talk about what are the disruptive companies that are coming. When we're looking at something like the Databricks, Deal that just got announced yesterday. It's everybody from the early stage team to the public team. Working together to both win and understand the business. I think we try really hard to take advantage of the fact that we have all these capabilities. Well, how do we bring those capabilities together? When we're looking at any stage deal. I think your partnership is too loose.
8:38 Speaker 00 It's kind of hard to do that. That is different than many of these large private equity firms, whether it's like Carlyle or Vista or K K R or Blackstone. There's usually either a CEO or sometimes there's like a co CEO from like a co founder type of thing. And a lot of them are actually public companies. If you think like they actually went public eventually. And can you see a scenario where you guys go public at some point or? I don't think there's anybody at Insight who necessarily has that aspiration. Once you go down that path and no criticism for people who are going down that path. There are advantages, but then you really have to focus on scaling and growth and revenue growth.
9:22 Speaker 00 And you're a public company and your responsibility is to shareholder as it should be. I think we have the flexibility to kind of focus on, of course, we want to grow the firm because we want a bigger pie for everybody. But it's not motivated by, oh, I need to get to a certain level of revenue or I need to get to a certain free cash flow yield. And then you have to publicly disclose a lot more information, including about your portfolio. And we don't really see a lot of benefits for our strategy in being public. Most venture firms, if you think of like the classic benchmark, Bill Gurley kind of advice, it would be have a single CEO. Go public as soon as possible, raise money and give up equity. None of the venture firms take that advice.
10:06 Speaker 00 They don't do any of those types of things. I would joke internally, if we gave the same advice to ourselves that we sometimes give our companies, we might do things differently. One of the benefits of being private is you can choose to do things differently if you choose to. You guys have invested really through all the different tech cycles that we've seen. People would say like this time is different. You guys invested through SaaS and through mobile and through cloud. And now we're in this AI cycle. Is the same and what is different. Well, the same is you always have a hype cycle on the investment side. And you've seen that in the valuations on the AI side, right? And that happened in prior cycles. Early, people get very excited about the growth.
10:49 Speaker 00 And that has a dramatic inflationary impact on valuations. That's the same. You can debate whether it's more or less than some other cycle, but they all had that. The thing that's different is in some of these prior cycles, if you look at going from client server to SaaS or sat to mobile. The amount of people in the world who are touching the new trend quickly. It's never happened as quickly as this. If I went to my mom and dad and say, hey, what's your view on SaaS? They wouldn't really have had an opinion. They might still not have an opinion, but even if they were in that world, they would have some strong opinion on it. I think my kids were subscribers to ChatGPT before I was. I remember my son calling me from college and saying, Dad, are you a premium subscriber on ChatGPT?
11:32 Speaker 00 And I said, no, but I have it on my app. He's like, well, that's a huge mistake. You should have the premium version. And I was like, okay, wow, my son is this focused. It had just come out and they just had launched the premium version. He was a subscriber right away. The infusion of AI into everyone's life as quickly as it happened is probably different than prior cycles. So it's, I think, going to impact people's lives much, much faster than cycles. What I'd also say is, like in prior cycles, the short term predictions of the impact will probably be overstated. And the long term impact will probably be understated. That also happens in hype cycles, like everything's going to change and everyone's going to lose their job in the next 18 months. I don't think that's going to happen.
12:17 Speaker 00 You've got lots of interesting companies, for example, focusing on software development, agent based models for software development, just to use one example. Do I think that means that there's going to be no software developers in two years? No, over the last 40 years, if you go to the average software developer and say, is it easier to develop software today than it was 40 years ago? I think almost everyone would say yes, because there have been lots of tools prior to agent based software development, AI, that made software development more efficient. We've been. In that cycle, both software developers have continued to grow during that period of time, even though their productivity has increased. Now, there's some natural limiter, but also if you go to the average software company and you invest in software,
12:57 Speaker 00 you say to the CEO, if you could develop software twice as fast, would you cut your developers in half or would you develop more software? Almost every single one of them, unless it's a legacy software company that's not growing at all, is going to say, I'd develop more software. And so I think the first impact is going to be more throughput and people are going to be actually able to do things faster and in more volume than they could do before. But where you'll see, I think the initial impact is sure, if you're a legacy company and you're not growing and you're just trying to deal with disruption from an emerging company, sure, then you're going to start using these type of tools to kind of reduce cost. It goes back to what I was saying, which is that I think people's assumptions around the short-term impact are probably too high, too overestimated.
13:43 Speaker 00 I have seen most of our companies, especially the ones that are a little bit more mature, the offshore software contractors that they've been using have gone down pretty dramatically over the last year. So maybe it's not the super high-end MIT grad or something, there may not be cutting that person yet, but that forty to fifty grand a year offshore developer is going away often at pretty high pace. I don't know if you've seen the same thing. One of the areas we definitely see is, say, customer support. I think the fascinating thing there is if you look at the last cycle of offshoring, we didn't use to offshore. You go back fifteen, twenty years, not every software company was offshoring, now it's become much more common.
14:24 Speaker 00 But in customer support, people offshored and they reduced costs, but they probably reduced customer satisfaction. Calling the Citibank and you're talking to an Indian call center was not as good an experience as talking to a call center in the US, but per unit cost of the call was lower. Fascinating thing about AI is not only is the cost dramatically lower, the NPS is higher, much, much higher. People are having a better experience. And you're reducing cost. Now, I don't think that's going to be true in every functional area. I think it's clearly true in customer support. But is it true across all the areas of the organization? Probably not. The other interesting thing where it is going to be, where does the value capture happen? That's right, I was with a managing partner of a law firm and we're talking and I'm like, well, how are you thinking about AI?
15:09 Speaker 00 For your business? And he was like, I don't know, how should I be thinking about it? And I said, well, what I would say to you is like, I'm probably not going to be willing to pay you a lot for your associates anymore. You have this model, we have this huge team of people underneath you. That are doing work and then charging me a thousand dollars an hour for that I think are going to be able to be automated. That's pretty disruptive. It's your model. And he was like, well, what do you suggest I do? I was kind of being extreme, but I was like, I think you should figure out a way to charge me twenty five thousand dollars an hour for you. And he said, well, what do you mean? I'm like, well, you're a litigator. And if I'm on a really important business litigation, I'm not going to have AI run it for me. I need somebody to run it. Somebody's going to go to court and actually make my case. I'll pay a lot of money for that, for success.
15:52 Speaker 00 I'm just not going to pay money for everything else. So I think you need to rethink your pricing model. Otherwise, you have a problem. A lot of your margin is coming from taking really low price relative talent and charging me a lot for it as opposed to me paying a lot of money. Part of the problem is that guy or that gal that you're talking to, they started as a junior lawyer and was able to work their way up. It is possible that there is going to be less need for that first, second, third year person right out of law school. And then we're not going to be training as many experts. And that's where the conversation went. He said, I hear you, but the challenge is I was one of those people. And I built my skills by actually doing that work.
16:36 Speaker 00 And like, what's going to happen if all of a sudden buyout models and private equity models are just done by AI? And nobody ever has to do those models. I don't build those models anymore, but the fact that I was at Blackstone, working eighteen hours doing those models means that. When I get one, I can find the mistake because I've done it. But if I'd never done it, I might not. So I don't have an answer for that question. And that will all have to play out over time. But the point really was more around what happens, particularly in services industries, around where the value goes. You can reduce costs, but does the customer capture it? Or does the law firm have way more margin because they charge the same fee, but with a lot less labor cost? I don't know the answer. It'll probably vary by industry.
17:20 Speaker 00 How do you think it affects these economies like India, Philippines? So much of it is coming from outsourcing, a lot of it from customer service right now. Do you think those economies are at risk? They have other offsetting forces that are probably going to help them. If you look at India, two things have happened. One, they had a lot of growth here. Where they didn't historically have growth is building indigenous intellectual property because people were worried about the IP laws. They're making progress on those issues. You're actually seeing software companies get created in India, serving global markets. Two, unrelated to tech, but they have a huge initiative in manufacturing. And the geopolitical dynamic between the US and China
18:04 Speaker 00 is creating a massive need for increase in manufacturing investment in a lot of those other Southeast Asian markets. They're going to need industrial policy to kind of develop those markets in a much, much different way so they can diversify their economy away from just these types of things. So I think they're thinking about that. I don't think they don't know that this is a risk. Now, the problem is developing those things takes a lot longer than it does to shut down a call center. But those governments are going to have to think about pro-growth policies that aren't fully dependent on these types of jobs. And they do have the benefit of this geopolitical dynamic that's going to drive more investments into those regions. The more mature companies that I have been involved with, in the last year, all the different AI investments they've made
18:49 Speaker 00 have massively reduced their costs and they've become way more profitable. And they have not yet, as you kind of said, with the law firm, pass that on to their customer. But at some point, you just can imagine that someone is trying to win more business and they start lowering price to win more business. And then there's kind of a race. You would assume at some point, the profitability from before AI will be the Profitability post AI or something. The only person who benefits in that world is a monopolist and that's why we have antitrust policy. Or all the customers are going to benefit because their costs are going to go down and potentially quality will go up.
19:28 Speaker 00 But I do think a lot of this also depends on what industry is it, what's the end market, what's the value to the customer, how commoditized is the service? There's so many things that kind of interplay into where the value chain ends up being. Insight is globally invested all over the world, Israel, Europe, India, China, Latin America. I mentioned just doing the diligence is very different as you're going globally. The trust is different in each country, the amount you have to dive into, the information available. How did you guys think about that as you're expanding? We haven't done China in 15 years now. So the one thing it's important for us to figure out as we think about where we are open to investing is can we actually have any edge?
20:13 Speaker 00 Is there something that differentiates our ability to win a deal in a place where we don't have local team? So even Israel, where we now have some local team, we probably had 60 investments in Israel before we had a local team. But our model is very different than other firms, like drop in an office and then figure it out. Ours is like, no, you had to prove that the market exists, that there's liquidity to get in that market. And one of the reasons for that is we want the bar to be high. If you want to do a deal in India, you have to be convinced enough to want to fly to India because we don't have an office there. Spend time, do the diligence and then come to the IC and say, this is a globally attractive opportunity for these reasons. And I'm willing to go to board meetings.
20:59 Speaker 00 It's a pretty high bar. Then you end up with enough deals in a place. I think we came to the conclusion on China, this is pre the geopolitical stuff. It just had no edge. The deals we were seeing were frankly. That other people there were not doing. It's not true in most of the other parts that we're investing in. We're not that active in Latin America, haven't been for a while. We're looking and you might see some deals, but it's not the most active place for us. But Europe, and it's all of Europe, and India is new for us over the last few years. There are still holes in that market. I say holes, there's places in the market where the capital availability is kind of not what it might be. Not as competitive, it's not as commoditized. But your view as it relates to diligence is different. And just even things like governance standards are different. The accounting standards are different.
21:45 Speaker 00 The regulatory environment is different. Some of these things you unfortunately learn by doing the hard way. India's changed their regulatory view on fintech multiple times. The way we think about it is the result of that is in certain markets. It's not good enough to earn the same return. If our targeted return is X. If you're going to go into a market that's perceived to have more diligence or regulatory risk, you better get a higher return. You need a premium. Yeah, you need a premium. The tougher the market is from a diligence or governance standard, the higher the premium is. And then the other thing is really it's the other side. It's liquidity. India's got lots of really interesting dynamics in terms of economic growth, in terms of rising middle class.
22:29 Speaker 00 English speaking, increasingly ability to build intellectual property there. But there's not a long track record of liquidity. Public markets there are not as robust for the types of assets. They have been in a very short period of time, but not over a long period of time. You'd be hard pressed to find tons of firms that have had lots of money out of that market. So what we try to do is take smaller bets, invest in a market, learn, build a portfolio. And by doing it at a small scale, learn the pitfalls. And then decide whether it's a market that we want to continue to double down on or. One where we feel like the risk return doesn't work. Because it's becoming so much easier to start a US company on Stripe, you could literally just go and do it.
23:12 Speaker 00 We have found that so many companies are Delaware C corps, even though 100% of the team is outside the US. And the team actually could sometimes be in many different countries around, but they start the Delaware C because investors are familiar with it. It's easy. Everyone understands it. Capital's there. There's obviously a lot of debate about regulatory overreach in this country, and there's a lot of regulatory burden in this country. But I think what people also know globally is that when you look at rule of law, when you look at your ability to know what you own. The US is still a pretty good place in the world to do those things.
23:54 Speaker 00 So it is interesting to see people in lots of these other countries want to come to this country that has all this regulatory burden, which maybe is going to change in a new administration. I think it's one of the great things about the US is that people do feel comfortable coming here. And while there's problems here, it's like there's problems everywhere else. People feel like they understand the rules of the road. You might not like every rule, but there are rules and the rules get enforced by and large. I'm talking about in the corporate context right now. That gives people confidence to want to build a business here, even if they're offshore. Some places, maybe they have rules like a Germany or something. We have rules, but the TDM, if ever had like an exit in Germany,
24:37 Speaker 00 the amount of paperwork that one has to fill out. Well, the amount of paperwork in certain countries in Europe, you have to initial every page in ink. There's no docket sign for these documents. One time I gave my money out of Germany, it was like a nightmare. I couldn't believe it. What is going on? We complain about the US. It's not so bad relative to some other places. Exactly. Now, you guys, as you mentioned, you've done a ton of investing in Israel. Because Israel's a small market, they kind of have to go international from day one. What else? Interesting about the Israeli market. Well, my partners, Jeff, Horning and Teddy, probably spend the most time and have done an amazing job in our Israeli strategy.
25:18 Speaker 00 You hit the big point. They're forced because of a small population and a small market to have to go outside. But the second is the proportion of technical talent relative to the size of the population is incredible because of the requirement to go to the military. You look at our cyber portfolio as an example, almost every founding team has come out of the military. Every founding team met their co-founder in the military. They work together largely on things that they can't talk about. But the result of that is an incredible amount of technical talent relative to a very small population. And then a need to basically have to go outside of the US. Third is, and I think you're seeing this over the last year, I mean, it's an incredibly resilient place.
26:02 Speaker 00 I was surprised after the events of the last year, and I'm not saying there's no effect on the economy, but when you look at our companies there, it held up remarkably well. Even with tons of disruptions, with people getting called in and having to serve. Tons of disruptions, people getting called in to go into the reserve. Yeah, imagine 40% of your people constantly getting called in. And yet they made it work. So when you combine this incredible technical talent with this incredible will to win and resilience, and then a forced need to have to go outside your economy in order to build a big business, it's kind of like two great things. And the thing that used to be true was if you go back 10 years with the book Startup Nation and all that,
26:45 Speaker 00 what you'd see is that these companies tend to exit early, build a market, sell, and that's changed radically. And I mean, I think insight's been a part of that as have others. It's been shown that you can build a company in Israel and get to Decacorn status. And so I think that people are more motivated to actually go build a big company, not just build a company. To go exit M and A quickly. We're about to start with a new administration and there likely will be some like trade policy changes and other types of changes. How do you think about that as an investor? If you look at the history of Donald Trump, but if it's something that he's been talking about for a long time,
27:27 Speaker 00 it tends to be something that he takes seriously and talking about trade and the unfairness, the balance of trade long before he ever ran for president, if you go back and look. Since the eighties for forty years. Since the eighties he's been talking about this. So it's an issue that I think he feels strongly about. And if you talk to people who are in that orbit, which I have, which I'm sure you have, they are going to take action on trade. What we don't know is some of this, I think, is a negotiating strategy. And you've already seen that with Mexico and Canada, they come running. And I don't necessarily know that we're going to end up with a forty percent tariff on every country globally. I think it's going to end up being different than that, but the possibility of that level of tariff
28:08 Speaker 00 is probably going to lead to some negotiations that'll lead to probably a better place. I was at dinner with the CEO of a large money center bank last week. And their economist's view was that they thought that the tariffs would end up for most countries between like ten and twenty percent. They believe that when you couple this with some of the regulatory reform and other things that were likely going to come as well, that companies would be able to absorb that without having massive price increases to consumers. The big question is what happens with China and the tariffs to China? Because obviously we still import a massive amount of goods. Most people buy TVs today for less than they bought them twenty years ago.
28:52 Speaker 00 And you can rail against China, but I don't think people want to pay three times the price for their TV. I'm not sitting in the meetings, but I think in our business, Mexico and China, I think are probably have got amongst the higher risks on how these tariffs play out. Those are quarters that dramatically affect our investing. More likely what affects our investing is was the stock market. Look like, what do rates look like? And what does general economic growth look like? And I think in a less regulatory intense environment with rates generally on the way down. I think we have risk of higher inflation for sure, some trade, just some because of other reasons. But I think we're probably going to be in a pretty constructive environment for business. And that's not a political comment.
29:36 Speaker 00 We put less of a focus on antitrust as well. So I think you're going to see more M and A. I think you're going to see a business environment where people are going to be more open to investing. So I think as an investor, putting my investor hat on, I kind of expect it to be a pretty good environment to do what we're doing. If you go back 15 years, the US and Europe had almost the exact same GDP. Now, the US is just massively outshined the European GDP. 15 years later, we've seen a massive divergence. What explains that? You talked about it earlier. You talked about how hard it is to get money out of Germany. You didn't talk about the work rules. You didn't talk about the lack of flexible labor. You kind of know that if you hire people in some of these countries, it's very hard to make changes.
30:21 Speaker 00 Those economies have regulatory dynamics and in many ways are much, much worse than the US to operate in. And then you've got, I think, this is going to change over time. I mean, we still, for all of the concerns we have, are still the innovation center of the world. We can lose that, but we haven't yet. I think we should always remember that and work hard to make sure we don't. So I think that combination of lack of flexible economies, and look, Europe doesn't know what it wants. Look at what happened with Brexit. Look at how the EU is operating. They don't all want to follow what Brussels is saying. So you've got this divergence in those economies. You saw, it's interesting to see that they're already talking about increasing defense spending.
31:03 Speaker 00 I think the view that there could actually be a war in Europe that affects them, that they're not really well prepared to deal with without us and not knowing exactly where we will be necessarily, is causing them to have to make real investments as well. So they're not in the easiest place right now. We still have really interesting companies in Europe. Most of the economies, they never could recover from the 2008 financial crisis. That just hit them at a pace way more than it hit the United States. Maybe we got hit more right away, but we were able to come out of it. Much quicker than these other countries. And there's some effect for us in that. We used a pretty big bazooka gun in order to make sure that we did come out of that.
31:47 Speaker 00 Now that's put us in a fiscal situation, which probably isn't sustainable in the long term. In the short term, it has sustained, but in the long term, I think we're going to have to figure out how we bend the curve to start bringing down the deficit. I'm not stating anything that others haven't stated, but it's probably not long term sustainable. So that bazooka from 2008, the bazooka from COVID, which I think there was a lot of support for at the time, has a cost that we'll have to address as well. Going back to your companies, what are some non-obvious indicators that something is not going well at the company? And it's like, oh, all hands, we should start really diving in.
32:28 Speaker 00 What are the, for someone who's been in this industry for 25 years would know, but like somebody like me wouldn't understand. It is reasonable to think about what the impact of AI could have on a company, a software company. And are we being proactive enough in order to do that? The first sign of that is in gross retention. That's the metric. When I start seeing degradation in retention, I really want to understand it and I want to understand it right away. Even if the net ARR is going up, if there's enough churn, then there's a problem. I think what the biggest mistake is getting seduced by net retention. I'm not saying that retention is bad and one should look at it, but as a leading indicator. Cause you're looking at gross, really you're looking at which customers are churning.
33:11 Speaker 00 Or are we down selling? It was a hundred grand a year and now we're only charging them 50 grand a year. What's going on there? What definitely happened, particularly during COVID is IT spend went up a lot. Lots of companies just bought enterprise licenses, receipts for everybody. Turns out not everybody at Flex Capital uses all the software that you might have bought through that for a time or Insight Partners. And so some of that is rationalization. You had it when the Facebooks of the world and the Microsofts of all the world decided they need to show more free cash flow growth and laid off. I mean, the funny thing is when they did those layoffs and you went back and looked at the numbers, it was like one or two quarters of people growth. The number seemed massive, like 10,000 and 15,000, but when you went. Back, they added that in a quarter.
33:54 Speaker 00 They did the layoff in two thousand twenty-two and they went back to the numbers of two thousand twenty-one or something like that. Right. And my guess is if you went back and looked at all those companies today, they're way above that again. So I think gross retention is a big one. So many companies, two thousand, two thousand one, they were selling stuff like hotcakes and sometimes they're selling it to people who had a reason to down sell. Sometimes they're selling people who really didn't need it, but they're selling it anyway. And then a lot of that churned in twenty-three and twenty-four. How do you know that's a trend that it's going to keep going down or that was this cohort of customers that churned? This is the one thing you really have to dig into. I mean, I was at a board meeting yesterday where churn had kicked up.
34:34 Speaker 00 I kind of got the, well, this is what happened. And I'm like, I kind of want to see it by customer because I want to understand. If this is a customer that's been there for ten years, that suddenly down sold like fifty percent, it's different. Than a customer that bought during COVID, that product market fit wasn't perfect and then realized they didn't really need it. Fortunately, with this one, there's not a worrying trend, but if there's a worrying trend, I think you actually have to peel the onion back on it. And I do think people, us included, sometimes got seduced by net retention. And I think twenty-one, twenty-two taught me, don't get too seduced by net retention. You really do have to look at gross retention. Gross retention numbers, what starts to be concerning?
35:15 Speaker 00 In a new deal today that we're looking at, we're really not doing anything that's a sub ninety percent gross retention. And I would say the vast majority of the companies are ninety-three and above. Wow. Ninety-three and above is excellent on gross retention. If it's below ninety-three, what we're generally seeing, we're breaking it out and saying, okay, you got an enterprise business that's ninety-five. You got an SMB business that's eighty and. SMB businesses should be lower in general. Of course, then you're blending and in an SMB business, if your retention, I'm going to make up a number here, but let's just say your retention is eighty. I would argue that an enterprise company, the retention of eighty, you just can never make money. In an SMB business, you can with one caveat, your CAC's got to be really, really low. If you have high CAC.
35:59 Speaker 00 It just doesn't work. The math just doesn't work. And even most of these enterprise businesses, their CACs are way higher probably than they should be. Or if you have even at eighty five or whatever, you have to figure out a way to start reducing your CACs. Correct. And people always say, oh, well, yeah, I have ninety three percent retention, but I upsold and to upsell, I need to have the cost. The second is, and this probably doesn't apply as much in a series A company, but it's CAC. If all of a sudden you see your CAC move up, you kind of want to know why, because it can be, sometimes it's a competitor is being a little bit more aggressive and you want to meet the competition. But sometimes it's product market fit is not what I thought it was.
36:41 Speaker 00 And it's actually costing me a lot more to reach a customer than I thought. There could be some underlying trend that's not just my Facebook cost went up. Or this one strategy you had before has run out and there's no new customers to get out of that one strategy. And the new strategy you have to do is much more expensive. And so the early stage converse of that would also be a little bit like, think of an early stage company where the CAC looks really attractive. But it's because you had this great product market fit. But maybe you got the early adopters because it was easy. But then as soon as you get the early adopters, all of a sudden your addressable market, not your TAM, but your addressable TAM, maybe it's smaller than you think.
37:24 Speaker 00 Because as soon as you got through the early adopters, it got expensive. And I was having a conversation with a different CEO this morning. I was like, look, your board deck's a hundred and twenty pages. It's got thousands of statistics in it. You got to distill this down to like the five or six things that matter. And look, sometimes people do that because if there's a hundred and twenty pages, it's kind of hard to focus on anything. Sometimes they do it because they think that's what the board wants. And it's amazing to me how many boards, some of which I'm on, everybody thinks it's the wrong board deck, but nobody wants to be the one to say it. You go on for years doing it where in a majority deal, I can just say, hey, guys, like this is not the right format. When you say almost the definition of any truly great business is that their CACs decline over time.
38:06 Speaker 00 There's probably examples of businesses that are great that their CAC didn't decline as much.
38:13 Speaker 00 They started, nobody knew Monday was. Yet now people know who Monday was and they're gonna get web traffic and they're gonna get free traffic that they would never have gotten in the beginning. Amazon would be a great example. Nobody knew Amazon was. You spend a huge amount of money to acquire an Amazon customer. I was thinking the other day as I was at a doctor's appointment, it was raining, went to click Uber to go 1.6 miles. It was $82. You know that moment where like you're stuck and you have to get the doctor's appointment? You have no choice. You gotta pay the 82 bucks. You have to pay the 82 bucks. I'm like, wow, talk about LTV. I looked at my last AMEX statement at the end of the year where it gives you your thing. I couldn't believe the family Uber spend.
38:55 Speaker 00 Lifetime value to CAC, Uber probably takes it in my family. Absolutely. Now, you mentioned boards. I'm sure you've been part of boards that have been extremely effective and work really well and maybe part of boards that aren't as effective. If you're advising a CEO to run a great board, how do you advise that person? It's a few things. I think what happens in boards is that you can have a situation where you kind of want to be able to have a balanced conversation and not have one or two people dominated because then it kind of makes it hard for others to jump in. I assume there's a size thing too. Like, once it gets beyond a certain number, it's hard to have a productive meeting. And my number is gonna be smaller than other people's number. I don't like even numbers for obvious reasons.
39:37 Speaker 00 I'd be five. I think that's the right number. By the way, I'm aware lots of boards are way more than five. You're not getting incremental benefit out of the next three. Pick five. Unfortunately, what's happened in venture world is some of these companies did Series As through H's that in order to get those rounds done, you need to keep adding board members. And now all of a sudden, you're sitting there with six venture investors on the board, all of whom came in at a different price. That's a challenging dynamic. This is gonna sound like motherhood and apple pie, and I don't mean it to. Be thoughtful about the board materials. If I was starting a company fresh, I'd sit with the board before the board meeting and say, what's most important to you? How do you like to consume materials?
40:18 Speaker 00 And I've said this to a lot of CEOs. I don't think anyone's ever done this. The ideal board deck would be a board deck that CEO is actually using to run the company. It's maybe a slightly PowerPointed version of things that you're using. I have one CEO who uses the board deck is their quarterly operating review. Put some executive summary on top. If the board deck is not useful to you as an operator, it probably is not the right document. Too many times, the board deck is a sales document to the board as opposed to here's the things I'm struggling with. I have a personal investment in something that's not software, like a friend's thing. And I texted him, he was like, things are great. And I said, look, just tell me the two best things and two worst things.
40:59 Speaker 00 I learned something by asking him that simple question, which I learned a thing that was going well that I didn't expect. And I'd learned something that wasn't going well that I wouldn't have expected, but it had not forced that construct. So to me, the most important thing in a board deck is highlights and lowlights. That should be the first page. Just like with your kids, roses and thorns. And then a little bit of pre-conversation with board members before the board meeting is helpful. And the last thing is your job is to come up with a board deck that's relevant and tight. But then you got to have the expectation that Boris read it. And I don't think board meetings should be like college classes. Okay, like you've all read it. Now let's talk about the four or five big issues. I'm going to refer to pages in the board deck as helping guide the conversation.
41:44 Speaker 00 And how do you like shame that one board member that didn't read it or something? It becomes obvious over time. Out of the boards I'm on, I think one gets run like that. Interesting. Hopefully they'll all listen to this podcast and all change.
41:59 Speaker 00 Now, a few personal questions. Why is the International Development Finance Corporation so important? The DFC used to be called OPEC, not OPEC, O P E Z, but OPEC, O P I C. And I first got on it during the Obama administration. And then I served on it during the Trump administration. And then I served on during the Biden administration. And it's really kind of really important tool of US foreign policy in the developing world. When we have a policy, for example, having more alternatives. Of energy in Africa. Well, it's hard for US companies to go into these countries and build solar plants, get them financed, get risk insurance because they have risks in those countries.
42:42 Speaker 00 They don't have sovereign risks. And the DFC is the organization that the US government does to do that. I don't mean just climate. I'm using that as an example. We do it through direct equity investments now. We do it through loan guarantees. We do it through political risk insurance. And it is one of the very, very few parts of the federal government, export, import bank being the other, that are net profitable. So we charge for all of that. And we actually send money back to the treasury every year. What's been gratifying for me to see is across every administration, it's worked really well. There might be slight shifts in priorities, but the team is great. It's a team that could work in the private sector if they decided to not do that.
43:27 Speaker 00 Well, at least the new incarnation of the DFC started in the first Trump administration, and then continued and Biden and almost continued very similarly, I think. So we were the only DFI, development finance institution, that did not have equity authority. And so we could only invest in debt. Even if we're investing in, say, a fund in a new market, we had to use a debt security. And that's a pretty big competitive disadvantage. And in the first Trump administration, it was called the Build Act, where OPIC turned into DFC and kind of got a slightly broader mandate. They also got equity authority. DFC now has that. So it's been a pleasure to be involved in that. They do incredibly impactful work on a global basis and developing economies in areas that I think have huge strategic foreign policy
44:10 Speaker 00 importance. And it's been a fun way for me to give back. Cool. Two other questions we ask all of our guests. What is a conspiracy theory that you believe? RFK has gotten a ton of bad press, mostly RFK has been nominated for HHS. There's the vaccine piece of it, which some of it feels a little out of the mainstream. But it's interesting to me that I think the vast majority of what RFK RFK has been talking about is there a food supply? I a hundred percent agree with him on it. And I'm excited for there to be a focus on this. I think that the government and FDA and all has actually been very, very infiltrated by the food industry.
44:54 Speaker 00 And most nutrition studies are funded by the people who are selling us snacks. The fact that we actually have the potential to change that. And for example, maybe not have food stamps get used to buy Coke and then increase benefits for Ozempic. We're not making our country healthier. Maybe that's not a full on conspiracy theory, but I think RFK gets thrown into like everything he says is crazy. And I actually think a lot around the make America healthy again is something that I actually think is a really important initiative. It shouldn't really matter that it's under what administration it happens. How excited are you or concerned are you about these GLP drugs like Ozempic? Do you think they're gonna make a huge difference in American health?
45:39 Speaker 00 Or do you think they're cause for concern? It's interesting to me that there's all these studies that say, oh, well, Ozempic helps people have less heart attacks. No, actually, losing weight helps you have less heart attacks. It just Ozempic helps you have it. I think what happens is these drugs were originally developed to treat people who had diabetes or had conditions that really every other thing wasn't working. And what I worry about, and it's led to a very large market gap of NOVA, is that it's now being prescribed before people even try to make a lifestyle difference. I think that's a mistake and we don't know what the long term side effects of these drugs are. We know what some of the short term side effects are. And we know that if you don't actually do, for example, resistance exercise and other things, it actually leads to muscle degradation, which causes other problems.
46:23 Speaker 00 It's not that I don't think it's a really powerful drug. I think it is. It says that we've taken a TAM, which is everybody who might be overweight and said, that's the addressable market. Where the addressable market really should be a smaller subset of people who can't get to where they need to get to through conventional means. That's my concern. That makes sense. Last question we ask all of our guests, what conventional wisdom or? Advice you think is generally bad advice? My kids are right now twenty one and twenty four. It's the time they go to college, graduating from college. You tend to get in the mode of giving a lot of advice. And I think the biggest thing I see now, and maybe this is more relevant because you can give people advice earlier in their life. Is I feel like this is this world where the advice is you need to figure out what you want to do.
47:08 Speaker 00 But you need to figure out what you want to do by the time you're like ten. And I'm exaggerating. If you're going to be in soccer, you have to start when you're five. If you're going to want to be a coder, you got to go to coding camp when you're in seventh grade. If you're going to be an investment banker, well, we start recruiting freshman year. I was a total science nerd in high school. I thought I was going to be an M D Ph D. I thought I was going to be a researcher. One of the things that I ended up doing freshman year, I went to go volunteer for college Democrats. And my roommate went to go work for the D P, the Daily Pennsylvania, which is a newspaper at the University of Pennsylvania. Second semester, we both suggested, Devin, why don't you come to the newspaper?
47:49 Speaker 00 And the crazy thing was that by senior year, I was president of college Democrats. And my roommate ended up being editor in chief of the newspaper. And we recruited each other to the other thing. Sometimes you just have to expose yourself to things. He's still a journalist. I'm still involved in politics. You have to experience life and life might take you in like this weird way. But you kind of have to go with it. And my point is it's hard to give that advice these days. Because it feels like you're somehow shortchanging your son or daughter by telling them that they need to know. Because that's what everybody else is doing. While I was always really motivated. I didn't end up doing much of what I thought I was going to do when I was in high school.
48:29 Speaker 00 People find their own paths. And even later in life, I mean, I find even fifty year olds are changing. This is great. I think having the permission, I guess, to feel like you can do that and not know where you're going to be in twenty years or feel like you have to know, that would be the point I'd make. All right. This has been awesome. Thank you, Devin, for joining us on World with Dass. I follow you at DJ Peric on X. I definitely encourage our listeners to engage with you there. This has been a ton of fun and I really appreciate it. It was great to see you.
49:05 Speaker 00 Thanks for listening. If you haven't already done so, please subscribe to World of DAS wherever you consume your podcasts, YouTube, Apple, Spotify, and more. And please help us get discovered by leaving a review and check out worldofdas.com. That's worldofdas, D-A-A-S, dot com. And of course, connect with me on Twitter, at Auren, that's A-U-R-E-N. Would absolutely love to hear from you.
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