20VC: Thoma Bravo's Orlando Bravo on Why Now is The New Normal, Why Every Company in the World is Worth its Future Cashflows, The Three Core Elements Thoma Bravo Need to See in Any Potential Deal & Orlando's Relationship to Risk, Wealth and Parenting

Orlando Bravo is a Founder and Managing Partner of Thoma Bravo. He led Thoma Bravo’s early entry into software buyouts and built the firm into one of the top private equity firms in the world. Today, Orlando directs the firm’s strategy and investment decisions. Orlando has overseen over 420 software acquisitions conducted by the firm, representing more than $235 billion in transaction value. Forbes named him "Wall Street’s best dealmaker" in 2019, and he was dubbed "Private equity’s king of SaaS" by the Financial Times in 2021. In Today's Episode with Orlando Bravo We Discuss: 1.) From Puerto Rico Roots to Wall Street's Best Dealmaker: How did Orlando come to co-found Thoma Bravo? What was that a-ha moment for him? Orlando mentioned 2 mentors that shaped how he thinks, who were they? What are his single biggest lessons from those mentors? What does Orlando know now that he wishes he had known when he started his career? Why does Orlando disagree with setting timelines in life? Why does it not help? 2.) The Secret to Success in Value Investing: What is good value investing today? What is it not? What three things does Orlando look for when doing a deal and acquiring a company? Why is every company in the world worth its future cash flows? How important is price today? How does Orlando reflect on his own price sensitivity? Many suggest Coupa and Anaplan were extremely expensive. How does Orlando respond and defend the prices he paid for companies in 2020-2022? 3.) WTF is Happening In Markets Today: How does Orlando reflect on where the market is today? Is this the new normal? How does Orlando expect the market to change over the next 12 months? Why does Orlando believe that the best companies win in the worst times? Is this the result of quantitative easing on behalf of central banks? Who is to blame? How does Orlando balance the mindset of his team between risk on and taking advantage of lower prices in market but also not catching a falling knife? 4.) Orlando Bravo: The Leader, Father and Husband: What is Orlando's biggest fear in investing? How has this changed over time? How does Orlando reflect on his own relationship to money today? How has that changed? What are Orlando's biggest parenting lessons from his mother? Why does Orlando believe that for most people, their late twenties are their toughest? How does Orlando instill the same drive and ambition in his children that he had, despite very different financial profiles growing up? How does Orlando maintain being at the top of his game in his profession but also being a great husband? What is the secret to a happy marriage? Items Mentioned in Today's Episode: Orlando's Fave Book: The Power of Now: A Guide to Spiritual Enlightenment

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  We believe every company in the world is worth its future cash flows. We don't believe in multiples of revenue. We don't believe in a technology might be worth a trillion dollars or a billion dollars because it might do this. We believe that a business in this capitalist world is worth its future cash flow and those future cash flow prospects.

• 0:20Harry Stebbings?

  Welcome back to 20 VC with me, Harry Stebbings. And episodes like this one state are the reason that I love what I do so much. Our guest has been someone I look up to for a long time. And this discussion is an incredible portrayal of what makes him one of the great firm builders of our generation. And so with that, I'm thrilled to welcome Orlando Bravo, founder and managing partner of Tomo Bravo. He led Tomo Bravo's early entry into software buyouts and built the firm into one of the top private equity firms in the world. Today, Orlando directs the firm's strategy and investment decisions, and he has overseen over 420 software acquisitions conducted by the firm, representing more than $235 billion in transaction value. Forbes named him Wall Street's Best Deal Maker in 2019, and he was dubbed Private Equity's

• 1:04Harry Stebbings?

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• 2:30Harry Stebbings?

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• 3:52Speaker 00

  You have now arrived at your destination.

• 3:55Harry Stebbings?

  Well, Ando, I am so excited for this. So first, thank you so much for joining me. I've been really looking forward to it.

• 4:00Speaker 00

  Harry, I'm fired up. Thank you for having me.

• 4:03Harry Stebbings?

  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?

• 4:15Speaker 00

  It was awesome. I tell you how it was. I started at our predecessor firm in 1997. I'm really dating myself. I really don't think of myself as that old. And 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 I made a lot of mistakes. And he didn't fire me. 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 their 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.

• 4:57Speaker 00

  So Carl Toma 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. 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 private equity firm.

• 5:22Harry Stebbings?

  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. What were some big lessons for you from him when you reflect on that mentorship?

• 5:36Speaker 00

  Oh, everything. And I had two. On the investing side, it was Carl Toma. 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. 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. And it was really just an amazing mentoring experience. I'm so lucky

• 6:19Speaker 00

  that he took the time when I was an associate to teach me all that. And that is something that really drives me today with our younger people in our firm.

• 6:27Harry Stebbings?

  I'm too interested. I interview obviously profoundly VCs who often say on the show that when you like do value investing, it's not a good investment and a good deal is often not a good investment. What does good value investing mean and why?

• 6:40Speaker 00

  Look, we believe every company in the world. Is worth its future cash flows. We just come from that world. We don't believe in multiples of revenue. We don't believe in a technology might be worth a trillion dollars or a billion dollars because it might do this. We believe that a business in this capitalist world is worth its future cash flow and those future cash flow prospects. So we do growth and value, but you have to earn some sort of yield and multiply that by your growth. And that is what I really learned, those fundamentals of what I call value and fundamental investing from Carl.

• 7:14Harry Stebbings?

  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?

• 7:19Speaker 00

  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

• 8:02Speaker 00

  had the same philosophical umbrella over it. There's so many great sayings he used to have, which are very applicable to today. Now, what was interesting is Carl Toma and Marcel Bernard, they didn't know each other. This happened relatively independently 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.

• 8:23Harry Stebbings?

  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?

• 8:34Speaker 00

  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

• 9:18Speaker 00

  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.

• 9:31Harry Stebbings?

  You mentioned that the people behind the business. Before we dive into actual markets, companies, investments, I do just wanna 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 running towards something and we're also running away from something. What are you running from, do you think, first Orlando?

• 9:48Speaker 00

  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 it? 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.

• 10:30Harry Stebbings?

  Can I ask you, just feeling 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 estate, 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?

• 10:48Speaker 00

  I felt that my career was a failure in 1999. I had come out of Stanford Business School and Law School with what I thought was this like, blue chip, pristine education and resume. And I had very high expectations of myself and a timeline for which I needed to quote unquote succeed. None of that worked. I was really close in 99 to being fired, as I said before. So it wasn't plateaued, it was like, I'm gonna have to start over. And I'm a big tennis fan and I used to play tennis. 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 hitting your second serve.

• 11:33Speaker 00

  And in that process, also see if there's enough opportunity to change the game. And then I think it happened and I got lucky. Now, since then, I have not felt a plateau on my career because here's the thing. My job has changed enough over the years. And 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 things have changed enough.

• 12:00Harry Stebbings?

  You mentioned the love of tennis there, Orlando. You were going, this schedule is not what I had all signed up for. But you mentioned the love of tennis there. I spoke to many of your mutual friends and they all cited your skills and ability in tennis. I think winning at tennis is about mind talk. When you're set down, how do you speak to yourself to get yourself out of that? And I think investing is the same. How do you think about your mind talk when it comes to you investing and in tennis? And what do you tell yourself to win?

• 12:28Speaker 00

  I tell myself when working on a competitive investment situation in which there is another suitor for the company or many, the deal isn't over. You could be losing, could be behind on price, could be losing something. Maybe your operating plan is not yet as good. Maybe your relationship with management needs to improve. Maybe there needs to be more buy-in. But there's time for that, it's really not over. So just stay in it and that's what I was alluding to before.

• 12:53Harry Stebbings?

  Final one before we move into markets and actually investing. People will look at you and look at Tomer and see the incredible success and think, he has everything. When I say the word success, what does success mean to you, Orlando?

• 13:05Speaker 00

  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 for the firm, which we have in January because December is extremely busy. We had 400 people at this holiday party. Holden Spade, one of my co-founders, 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 pretty crazy. And I looked at him and I said, yeah, but you know what? We're only getting started. And he nodded. And we've been together, I mean, us partners, we're best friends. It's five of us. We've been together forever. We love what we do. But I tell you what success means. I look at success in many little steps.

• 13:50Speaker 00

  We can talk about family, friends, work, philanthropy, but I'll take work since we're on that. When we buy a company, 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 with the success story. And then 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 could just visualize it, put it on a wall, something. But you walk through all those steps and it's just a thing of beauty. And that's what success in little steps really means to me.

• 14:32Harry Stebbings?

  I love that. And I spoke to Holden before this episode and it was a wonderful conversation. I heard that warmth in the partnership that you have. I do want to move to investing in markets today. It's very disconcerting, obviously, for me, Orlando. I'm seeing this for the first time investing and I'm going, what on earth is going on in the market? From a very high level, how do you assess where we are in the market today at this point? January 2023, with all of the hindsight and perspective you have?

• 14:57Speaker 00

  We seem to be in a reasonable place, actually, considering all of it. The way we look at it is as follows. And I'm going to talk about software, right? That's our core competency. 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.

• 15:26Speaker 00

  Which the industry uses as a levered free cash flow. That compares to the S and P 500 at sixteen and a half forward P. That's a good delta and that's a fair delta for higher growth, better cash flow dynamics and a better business overall. But 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 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.

• 16:11Speaker 00

  The revenue multiples on those have gone from an average of seventeen times forward to three point five today. Where is that going to end? It's hard to tell and it's more business dependent.

• 16:22Harry Stebbings?

  Can I ask, given what you just said and actually very reasonable state of the market state as you articulated, is this the new normal and was the prior three years purely quantitative easing to the extreme by central banks in an artificial environment created by bluntly printing cash?

• 16:37Speaker 00

  Look, I will never claim that I can predict the stock market or the economy. I can tell you now that things look reasonable. So if you really push me, I would say, yes, this is the new normal. Because I don't see investors jumping in en masse to do the same thing that in the last eighteen months lost them eighty percent of their money, at least not in the next few years.

• 17:01Harry Stebbings?

  I totally agree and I'm British, so it's very rare that I would actually push anyone. But I have to ask then, 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.

• 17:16Speaker 00

  I can tell you how we value them. It's never changed. It really has never changed. 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 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.

• 17:59Speaker 00

  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 changed. Now, what we did observe in the market is this 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.

• 18:31Harry Stebbings?

  My question to you is, you mentioned quite a few times, working with management teams to turn those unprofitable companies into very efficient cash flow machines. Respectfully, Orlando, and maybe naively, what do you do to make that transition? I think a lot of people view it as like asset stripping and they see Elon Musk losing a load of workforce. What do you do to turn those machines from unprofitable to highly profitable?

• 18:54Speaker 00

  First, we have a big benefit in private equity that I don't think it's talked about enough, that it's a structural benefit that this industry of buying companies has, which is the catalyst of a deal helps you make peace with the past and set a new way. That is very hard to do when you're just raising capital and you still have your other investors. That's very hard to do as a public company. You just go more linearly and people tend to think linearly. But a deal can allow you to change everything going forward for what is right today and put a set of incentives together for the investor group, along with management, along with the employees, that drives a certain kind of behavior and performance. Think about it, it's like playing a different sport.

• 19:37Speaker 00

  In the public markets, the game that has been played for the last decade is the beaten race game. As long as you beat and you race, then your stock goes up and the multiple of revenue and all that. All of a sudden, you have one owner with one agenda and one management team. And that game is about maximizing your cash flow growth and how you do that and focusing on that. Our industry has that structural benefit. Now, the second thing is Marcel Bernard would always say, remember, everyone always has to learn from somebody else. Nobody's born with innate knowledge. Many of these great billion-dollar ARR companies are young. They've only been in business 12, 15 years. Their founders are unbelievable. Look what they've created. But they may not have been through the old GE School of Management

• 20:21Speaker 00

  or these principles or this mentorship. So if they're open to it and come in with an open heart and an open mind, we can really help them do that. And that's something that in the process of getting to know a company, we really get to the bottom of.

• 20:34Harry Stebbings?

  In the process of getting to know a company, in terms of 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?

• 20:55Speaker 00

  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 the profitability 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. 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,

• 21:38Speaker 00

  by looking at a number of aspects within each functional area or 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 we pay different values 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. If you have a perfectly run business, then it's going to sell for a retail value on that cash flow and we may not have enough delta to create an additional return from our efforts, from our work.

• 22:18Harry Stebbings?

  What are the most common ways inefficiencies, where you can provide efficiencies to gain further profitability in the future?

• 22:25Speaker 00

  As these businesses grow so fast, and it's not their fault, they really end up with too many people, too many processes, too many layers. And all that and that journey not only causes inefficiency, but hampers the future growth of that business. More approval processes, slower decision making, number of issues that in our world, the more efficient you are, the faster you should grow. And it makes sense both from a number standpoint and operationally. To be really direct, it's all over the place. There's no silver bullet of the world is doing something in engineering or product management or distribution or marketing that is consistently inefficient. It's really all over.

• 23:05Harry Stebbings?

  Can I ask a bit of a divisive one, which is again, very non-British of me. Does Elon reducing the size of Twitter's team so much and Twitter's still working? Everyone thought Twitter down, Twitter shut down, Twitter's still performing. My tweets still send, yours still send, we still get likes. Has it shown a new roadmap for actually the radical reduction in workforce needed to actually maintain great and core functionality?

• 23:31Speaker 00

  It's a really interesting case study. I don't know the details enough operationally and process wise. And I don't understand that business enough. We do enterprise software, business to business, it's a consumer, it's a very interesting company. But it is a case study for Silicon Valley. Let's take a look at, and let's see how it ends up in three to four years. It could end up great.

• 23:51Harry Stebbings?

  You mentioned value there. Again, I predominantly interview VCs and early stage VCs very often where 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?

• 24:14Speaker 00

  Oh, price matters.

• 24:17Speaker 00

  Price really matters. 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, of course, than you have in terms of being able to see trend lines and being able to see. But your equity check is small, so you're diversifying the risk. In a buyout, you could be writing a $10 billion equity check with your partners, and you cannot get that wrong. 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 in buyout. The risks that company can take with an investment of that size and the chances they can take on different things,

• 25:01Speaker 00

  I mean, and experimenting a different way are very different than when somebody's invested 10 million and there could be some behind it. And the expectations are different as well.

• 25:10Harry Stebbings?

  How do you think about downside protection and loss ratio? Again, in venture, it's a lot. Great performing funds are made by one breakout company. A very prominent investor in PE funds and just globally said to me the other day. And actually, the poor performing funds in PE are actually ones that just have one loss because it's so much bigger deals. How do you think about downside risk when entering? And then also loss ratio?

• 25:34Speaker 00

  That person is right. You just cannot have a big loss. You really can't. It would be a big hole to deal with. And not only is it, would it be that loss, it's also when things are not going that great in a buyout deal. These are really big companies. You're going to spend seven or eight years of your entire life dealing with that, which stops you or pushes you back from doing many other good things that you could be doing. There's no such thing in buyouts and private equity as triaging your portfolio and deciding what you throw away and when you keep going, which in another way to put it, is actually a big motivator to management teams to partner with you. Because you have no choice but to stay the journey with that business and that entity.

• 26:18Harry Stebbings?

  I often say it's sometimes helpful to burn the boats. It leads to resourcefulness that you never knew you had. You mentioned kind of price matters. Some people said Cooper, Anaplan, they were quite high prices. How do you think about that on reflection? Is it, we didn't pay high prices? How do you respond to that suggestion?

• 26:36Speaker 00

  I really appreciate you asking that. Now you're really showing your British side. Okay.

• 26:41Harry Stebbings?

  I'm so uncomfortable.

• 26:42Speaker 00

  This is very good. This is so good. I love this. Look, we've been doing this in the same way, using the same philosophy that I described for 25 years now, with the same team and the same leadership team. It's grown a lot. We still have the same leaders at our firm. And I almost cannot tell you of a deal where a peer or competitor, an outsider, I cannot almost say one single deal where they haven't criticized us for paying too much. It's truly amazing. Cooper, Anaplan and whatever other investments are no exception. The thing that I find interesting in that comment is that may be true if we were going to leave those businesses exactly the same. But whoever's saying that doesn't know what our business plan is, doesn't know what we're going to do operationally with that business from a cash flow standpoint.

• 27:27Speaker 00

  And that's why an outsider looking in doesn't really have a basis of knowing what our free cash flow is going to be in year one, two, three, four and five. And we have a very credible, proven way, an easy way for us to get there. Because we will change like we do when we buy a company, the way that company is run and we're going to add a lot to it.

• 27:49Harry Stebbings?

  Speaking 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?

• 28:07Speaker 00

  In our history, we have mainly exited to strategics and other financial buyers. 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 cash flow that is needed to fund their investments and 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 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.

• 28:52Speaker 00

  You don't need a hundred, only one is going to 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, in 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 buying quality on the market leaders is really all about the exit potential. Now, we don't sit here too much and worry about the exit because we can't control how

• 29:35Speaker 00

  much a buyer is going to like a company or not from a strategic standpoint. What we can control is having the best run company in that field. And when times get really bad, the best run company always wins. Because then you'll have 40% cash flow margins, you're very well put together, you're budgeting conservatively, you're not missing your numbers all over the place, you have the confidence of your lenders, you have the confidence of your investor group. And when times get tough, the ones that are stumbling, those are the ones that you can go out and buy at more attractive prices. And if times get really good and multiples go from a 25 unlevered free cash flow to 40, then you should have plenty of buyers for that company because you can add value to those public strategic buyers.

• 30:16Harry Stebbings?

  When you sell to these strategic buyers, obviously you make returns and you provide great cash back to your investors. There's a common trait now, we've seen venture firms explode in terms of their fund sizes. And the trope is that with an increase in fund size, you have a reduction in performance. A lot of people will suggest, they ask this, we've seen obviously Tema Bravo increase hugely in terms of the fund size. How do you think about the notion of when you increase fund size, you decrease performance?

• 30:41Speaker 00

  The LP community is 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't, but it's because we really like buying the number one or two player in each of the many markets within B2B software or enterprise software that we're in. We feel there's a big difference in value and it depends on which sector, but 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 I didn't exist.

• 31:21Speaker 00

  So we've been following the industry as we grow because it does, despite all the market turbulence and evaluations, it is compounding at a very aggressive rate.

• 31:30Harry Stebbings?

  And there's a barrier to entry, I imagine, where when you think about it, if you have to buy the top one or two and the price is here, there is an inherent barrier to entry which says my fund has to be that size 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 Buffet's 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?

• 31:58Speaker 00

  On that, I stand with Warren Buffett, surprise. We, per fund, would like to have 12 companies, maybe 15, but think about it, 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 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 operationally impossible to do that. 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.

• 32:42Speaker 00

  We meet with our companies monthly. Our board meetings are monthly from eight to noon on every one of 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 your companies.

• 32:55Harry Stebbings?

  You mentioned earlier not being able to have a miss in your model and in the market itself. Orlando, have you ever had a miss and what did you learn from it? I had a big miss earlier last year, which was painful for me, and I learned a lot. Have you had a miss and what did you learn from it?

• 33:10Speaker 00

  Oh, we've had misses, so many lessons on those. We had a really big deal, a really big company we bought at one point, and I won't name it because management has done a great job and they're doing well and they're going to do great. But in that deal, we bought it because it was a good value, but we ignored some of the trends that we clearly saw in diligence on one of their product lines. And the trends ended up being like we diligence them, but we didn't think they were going to get that bad. It's almost like, why do you do so much diligence if you had this in front of us? And I was on that deal and I thought the other product line would really collapse that and the lines would cross and the value was good enough to get us into a good situation. And ultimately, that did not work.

• 33:51Speaker 00

  We have made mistakes where in transforming a company from a great innovator into a great business, we've made investment mistakes in that company, partly because the companies were too big or big enough that management had become very strategic in nature and they had lost touch with what pulled the train, with the operating realities. So in making trade-offs, they were a bit out of touch with the business. And then by the time we came back and reinvested in some areas, we lost too much time and it was a bit too late. But we've had many mistakes and we try not to repeat them.

• 34:24Harry Stebbings?

  I always believe in our business that our decision-making process is the product that we sell. My question to you is, when we look at an incredible institution like Tema Bravo, what is your decision-making process? How do you coalesce and decide to buy or not to buy?

• 34:38Speaker 00

  We know exactly what we're looking for. We are in B2B software. We know the template that we want to buy and we have our own target list of hundreds of companies that maybe we have tried to partner with them before, maybe one of our portfolio companies has competed with them before, maybe one of our software assets is their partner, and we've known them for a long time. So it's also like when we engage with a company on a deal, it's not like we're doing due diligence on that. For the first time, we could have been watching it for 15 years, quarter over quarter, and known why they missed, why they beat, how management has been changing things. So we know exactly what we want to buy. Now, one of my biggest fears in investing, and this might apply to exactly what you do into venture investing,

• 35:20Speaker 00

  is how far away from the asset does the investment committee get? As I like to say, something happens operationally. They give that, the CFO reports on a backwards-looking basis. Then a representative or investment banker takes those numbers and creates I-don't-know-what from it. And then our deal team gets that, and then our deal team does something, gives it to the investment committee, and you're so far removed from the operating realities. What we try to do is, actually what we do, is we have at least a third of the management committee be involved in that deal day to day. Therefore, you have two leaders and two senior partners that can talk about it and are living that journey while you're analyzing the investment opportunity.

• 35:58Harry Stebbings?

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

• 36:06Speaker 00

  We don't do any controversial deals. 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. 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.

• 36:35Harry Stebbings?

  I spoke to one of the largest institutions in the world before this, and they said, "One of the most challenging things our managers and PE are facing is how do you manage the right mental balance in your team, and especially younger people in your team and investment committee, where you're willing to invest in a bluntly tanking market, as we've seen over the last year, but also not catching a falling knife and pushing them too hard? How do you strike that right mental balance within the team and the investment committee?"

• 37:00Speaker 00

  It goes back to operationally. Are you buying quality, number one? And secondly, with what you're going to add to that, do you have a proven way that you've shown it before, that you've done it many times, where you can have this business at a level of margin that then the price you paid makes a lot of sense relative to where the market is today? We don't depend on, as we used to joke around, buying high in order to sell higher. It's not at all. And you're going to hold these assets for a number of years, usually four, maybe five, in that range. So it all goes back to fundamentals. Now, you don't want to catch a falling knife in terms of the revenue trajectory of that business. So there's where you spend so much time on revenue quality. What's the momentum showing like month to month? Where's it growing? Are they acquiring enough new customers?

• 37:46Speaker 00

  Is something slowing down? Is something going to surprise you? What's the competition doing? That's where you spend so much diligence time in actually seeing it so that you see some positive trends when you enter the journey.

• 37:56Harry Stebbings?

  I wouldn't take a slightly different tact. When you have the success that you have, bluntly, financial profiles change over time. And I've often thought about kind of relationship to money and it's what I've struggled with in my youth. How do you analyze and think about your own relationship to money today, Orlando?

• 38:11Speaker 00

  You mean me personally?

• 38:13Harry Stebbings?

  You personally, I remember I was 21. I made my first million and in my head, we watched Who Wants to be a Millionaire, 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. That was the hardest moment because the thing I thought always mattered, didn't.

• 38:35Speaker 00

  It's so interesting you say that and thanks for being open about that. 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 I would get really fired up when it was a little higher and everything else. 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 hasn't cost me any happiness at all. 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.

• 39:17Speaker 00

  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, it's that you just go on to the next deal or the next opportunity. It's not about that.

• 39:33Harry Stebbings?

  It's not about that, but you also have children and it does impact one's ability in terms of their parenting. How do you think you instill the same values, discipline, hunger in children when they are brought up in very different financial situations to going to your bank and like pleading for a dollar more? How do you think about retaining that ambition and hunger in children when they are brought up in different circumstances?

• 39:57Speaker 00

  Yeah, but kids are great. One thing is, and I also speak for all my partners, we're all like this. Nothing goes to anybody's head. We're normal people. We struggle with personal things and with life and need support just like anybody else. We don't think we're better than anybody because we may have had a given wealth streak here. We really don't and we behave that way with our kids and with our family. For me, my older kids, they are ridiculously hardworking. I was actually talking to my daughter yesterday and I was trying to convince her to work less hard. It's like you're crushing yourself. This is incredible performer, incredible scientist. My son is a college athlete, pushing himself, just doing the training and the incredible

• 40:41Speaker 00

  demands of school and combining that with friendships and relationships. And my younger kids, I could see the same. They're just very dedicated, hardworking. I'm now getting to understand my mom a little better because my mom certainly wanted me to work hard and she really helped me. But now she always asks me, are you happy? Are you happy? Are you happy? And I go, yeah, I'm happy. And at the end, that's what a parent really wants and you have no control over. The thing that you can do, and I have four amazing kids, is always be present and try to support their dreams and not put your background or your dreams into anything. And Harry, going back to what you said as well, sometimes growing in a family that has more wealth and opportunity could be good and bad.

• 41:23Speaker 00

  Because then the individual may have to measure themselves by another individual in that household and they may feel that they may never get there in the same way. Would they be valued in the same way? Their accomplishments could be questioned. Oh, you may have done X, Y and Z because you had another opportunity. You may be in job interviews and people may think that you're not as hungry.

• 41:45Harry Stebbings?

  I wanted to be honest. You said, are you happy? Your mother asked that. I'm never happy, Orlando, and I don't mean to be too open with you, but I'm always failing at something. If you crush it at work, I'm failing at friendships. I'm failing at being a son. My mom's got MS. It's tough. I'm failing at that because I'm giving everything to work. I'm always failing at something and I'm never happy because of that. And it's never enough. Sorry, I don't mean to use this as a counseling session. But what would you say to me if you were my parent? And you said, are you happy? And I said, no, I'm never happy, even though I have everything that I could have dreamed for five years ago and more.

• 42:19Speaker 00

  How old are you?

• 42:20Harry Stebbings?

  Twenty six.

• 42:21Speaker 00

  Yeah, you're in the middle of it. I think that's a really tough for me. Late twenties, early thirties were really tough. You are out there once again trying to crush it at work, but how do you do that? In a way, you have this endless energy, but how do you balance everything else? At that age, I feel like you don't have enough of an established rhythm of life and necessarily who you are. And you're going through the journey of finding that. From a personal standpoint, for me, things got clearer in my mid forties. In terms of who I was, more comfortable with that, with what I wasn't great at and I did less of that. What I needed, what I was doing that I did not need and was not beneficial to my relationship with friends.

• 43:06Speaker 00

  It just became clearer. Now, that was my journey, which necessarily is anybody else's. But in my late twenties, early thirties, it was tough.

• 43:14Harry Stebbings?

  Can I be honest? I think one of life's greatest joys is a wonderful partner and you have a wonderful wife, but you're also at the top of your game and have been for years and years. I'm terrified that I won't have a meaningful relationship just because I give my life and body and soul to what I do and I love it, but then I will be alone and I'll be rich Uncle Harry to my brother's children, which is a sad future I don't want. How do you maintain, you're like, Jesus, Harry, you owe me invoice for this counselling, but like, how do you maintain a great marriage and be the top of your game in such a demanding industry?

• 43:46Speaker 00

  One thing I figured out, you asked me the question, this is not meant to be advice, I'll tell you what I went through. There was a time in my life when I wanted to spend more time cultivating those relationships and the relationship with my kids. And therefore, there's not enough time in the day because you do need a little bit of sleep. And what happened was I was forced, in a way, not through coaching, but just through choices, to delegate a little bit more, to let go of micromanaging things at work, to maybe not be in every single management meeting. I could be in the important ones, I could be in places where I could add value to my colleagues. I focused more on mentoring people and having people be more successful than I was in my organization than trying to do things as

• 44:31Speaker 00

  an individual contributor. And the more time I would spend on what you're fearful that you won't have, the better the business got, by far. It's not even close. And it's very clear that letting go was a very good thing for work and business. And in a way, it's let others do their job, let others do their thing, check in once in a while, play more of a supporting role. And that may apply to your companies as well.

• 44:55Harry Stebbings?

  I think it does. I think it's just about letting go and being willing to. But I want to move into a quick fire before I take you entirely for a counselling session. So I say a short statement, you give me your immediate thoughts. Does that sound okay?

• 45:07Speaker 00

  That sounds great. I hope it is consistent with the themes that we've been talking about.

• 45:12Harry Stebbings?

  Oh, it's totally consistent. So what's the favourite book and why? What are you like, Harry, you should read this. It might have changed, given how fucked up you've heard on it.

• 45:21Speaker 00

  Given the discussion we've just had, you gotta read it. Read The Power of Now.

• 45:25Harry Stebbings?

  What did you love about it?

• 45:26Speaker 00

  I did read it in, I actually read it in my early thirties. It's like a very spiritual book. How can you be present at all times? How could you be this soul that is always, it's much deeper than this, but always in the moment? And not too worried about the past, having no use in a way for the past, which in investing, right? Is a no-no. You learn from all your mistakes. And it doesn't say that you don't, but it really inspires you to be very present.

• 45:53Harry Stebbings?

  What's your biggest fear? My biggest fear is being rich uncle Harry. What's your biggest fear?

• 45:57Speaker 00

  I think it's what I'm running away from. It's stagnating. It's feeling trapped. It's feeling like I'm going nowhere.

• 46:03Harry Stebbings?

  What's your biggest strength and what's your biggest weakness when you reflect on yourself?

• 46:08Speaker 00

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

• 46:50Harry Stebbings?

  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?

• 47:01Speaker 00

  I would tell myself to relax first and foremost, and second, to remember to be real. And I'll 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 go through it. And for me, it was not until I was able to step back, relax and get some perspective. That then things started getting better. And the second one is to be real. And 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,

• 47:45Speaker 00

  which are still leading many of these firms. I loved what they did. They were role models. But in a sense, I wanted to be just like them. I'm gonna take the way they dressed, the way they talked, the way they did things. And it was all until I was really, as somebody said, 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.

• 48:07Harry Stebbings?

  Do you set timelines for yourself? I always said 28 this, 30 this, 32 this. Do you set timelines for yourself?

• 48:14Speaker 00

  I used to, but no longer. That did not serve the intended purpose for me at the time. You know what it served? It served when I would miss it, miss the timeline. It's like missing your budget, it was a disaster. So why do it? Now, don't torture yourself.

• 48:29Harry Stebbings?

  Why is philanthropy so hard? Jeff Bezos has said it's harder than making money. Why is giving money harder than making money?

• 48:36Speaker 00

  So you know, I have the Bravo Family Foundation and we do an inordinate amount of incredible work in Puerto Rico. And also, like Tomo Bravo, we're only getting started. We're gonna change things to the positive. It's a tremendous effort from the team. This is the deal. When I go through the budget of a company, you see this hopefully wonderful earnings coming out from all the work and you have revenue and cost and you can measure that. When you do a budget for your foundation, you only have cost. How do you measure? How do you really measure your impact? And whether that effort and those dollars are producing the desired impact? And what is success? In capitalism, you are ruled by the P and L, by your income statement. And we love that. It's a clear, it's your report card. Are you winning? Are you losing?

• 49:21Speaker 00

  Do you need to change things? In philanthropy, if you can change one community, and we work in many of them, is that enough? We work with rising entrepreneurs. By the end of this year, we would have launched 50 companies. And we've been at it not too long. Is making one of them great enough? Do they all have to succeed? How do you measure success? And what are the measurement points? And that's what is really hard about philanthropy. So before you keep throwing more and more resources at it, you have to come to grips with all that, which is a lot more complicated in the nonprofit world.

• 49:51Harry Stebbings?

  Fascinating. I hadn't thought about the two inputs. There's obviously the incoming and the outgoing. Final one for you, Orlando. I've loved this. Next five years for you. You don't do timelines. You don't do those, but I'm going to ask it anyway. If we do this in 2028, where is Orlando Bravo then?

• 50:05Speaker 00

  Oh, this is where we're going to be. But we know that we, as a team, once again, I'm talking about work, we would have achieved another step function increase in what we do and in our mission. We have had, as an organization, a step function change to the positive on every crisis and every challenging environment. Otherwise, it's been steady state growth. But proving once again, and you were mentioning some big deals, proving once again the value of operations, the value of partnering with management, the value of positive change, the value of ethics in business in doing things right and turning great innovators into great companies and doing it once again in a really challenging environment. That's going to create another positive step for us.

• 50:45Harry Stebbings?

  Well, I really mean this. It shows like this, which make me realize how much I love what I do. I'm so grateful to you for being so open with me, for advising me and for being such a star. So thank you so much for joining me.

• 50:57Speaker 00

  Harry, you were, this was awesome. Thanks for being so open and this was great. Thank you.

• 51:04Harry Stebbings?

  What an incredibly special person. I want to say huge thank you to Orlando for being so open there. Most of the questions were not planned. He was incredible. Makes me so proud to do 20 VC doing shows like this. If you want to see more from us, of course you can on YouTube by searching for 20 VC. But before we leave you today, Secureframe is the leading all in one platform for automated security and privacy compliance. Secureframe simplifies and streamlines the process of getting and staying compliant to the most rigorous global privacy and security standards like SOC 2, ISO 2701, HIPAA, GDPR and others. Secureframe's industry leading compliance automation platform.

• 51:43Harry Stebbings?

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• 52:26Harry Stebbings?

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• 53:09Harry Stebbings?

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• 53:51Harry Stebbings?

  Just get started at retool.com/20vc. That's retool.com/20vc. As always, I so appreciate all your support and we have an incredible episode coming for you with Ariel Cohen at Trip passions on Wednesday.