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What happens when private equity buys your competitor?

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Re: What happens when private equity buys your competitor?

#21

Post by mwfunk »

ryandrake wrote: post #6

> Founders are special people who somehow glimpse a vision of the future that few others understand, and then go build it. Ughh, more founder-worship. What's more believable is that lots and lots of people can see glimpses of the future all around them. Out of that larger set, the ones that are lucky enough to have access to the capital and connections needed to start up and run a company are the ones that end up as…

Even worse is when someone's founder mythologization (if that's a word :) reaches the point where they always capitalize the word "founder" and talk about founders (sorry, Founders) as if they were some unique species distinct from all other humans for their vision and bravery.

I'm convinced this comes from a combination of extremely stressed-out people psyching themselves up, plus VCs wanting to psych up the fresh meat. If you're going to give someone a bunch of money on the off chance that they might turn it into more money, it helps if you can convince the people you're giving money to that they are courageous superhuman visionaries creating the future, rather than people who are about to ruin their lives for a few years in exchange for a small chance at a big payout.

Re: What happens when private equity buys your competitor?

#22

Post by dmix »

bigbossman wrote: post #18

If a PE shop buys your competitor, you should rejoice. PE firms primarily generate returns through (1) debt repayment from free cash flow, (2) multiple expansion, and (3) operating improvements. Because of #1, PE firms like annuity-like businesses with predictable cash flow. A ventured-backed startup doesn't need to worry about #1, and therefore can focus all their internal efforts on #3. (If multiples expand, then t…

Why is "(1) debt repayment from free cash flow" appealing vs VC growth? I'm not familiar with that term. A quick search only gave me pages filled with even more finance jargon.

Re: What happens when private equity buys your competitor?

#23

Post by galistoca »

ryandrake wrote: post #6

> Founders are special people who somehow glimpse a vision of the future that few others understand, and then go build it. Ughh, more founder-worship. What's more believable is that lots and lots of people can see glimpses of the future all around them. Out of that larger set, the ones that are lucky enough to have access to the capital and connections needed to start up and run a company are the ones that end up as…

So it sounds like you think you have the "glimpse of the future". Well, nothing is stopping you from doing it RIGHT NOW, instead of posting on HN about how you need money to do anything.

When you think you have a good idea but not working on it, it probably means either: 1. you don't think the idea is good enough to risk your stable life; 2. you are too lazy to do it; 3. you don't want to risk regardless of how great of an idea you think it is.

In every one of these cases, you're not cut out to be a founder--you just can't do the most important part--"then go build it". That's what makes "founders" special, they just do it instead of complaining how it can't be done.

Re: What happens when private equity buys your competitor?

#24

Post by jldugger »

dmix wrote: post #22
bigbossman wrote: post #18

If a PE shop buys your competitor, you should rejoice. PE firms primarily generate returns through (1) debt repayment from free cash flow, (2) multiple expansion, and (3) operating improvements. Because of #1, PE firms like annuity-like businesses with predictable cash flow. A ventured-backed startup doesn't need to worry about #1, and therefore can focus all their internal efforts on #3. (If multiples expand, then t…

Why is "(1) debt repayment from free cash flow" appealing vs VC growth? I'm not familiar with that term. A quick search only gave me pages filled with even more finance jargon.

Leveraged buyouts: you borrow a bunch of money, buy the company with it, use any stored cash to pay that down, and saddle the company with the debt you used to buy the company in the first place. Then you repeat this a couple of times to buy up portfolio of related companies that might be better together than competing, reshape them and put them back on the public market at a profit.

Debt repayment from free cash flow is appealing because it's comparatively less risky. Startups building products have no free cash flow to speak of and require regular VC cash infusions to balance the books.

Re: What happens when private equity buys your competitor?

#25

Post by ataussig »

spullara wrote: post #20
zellyn wrote: post #15

"Ping Identity, for instance, disclosed a 40% annual growth rate in its acquisition announcement. That’s below the average growth rate for a 9 year old public SaaS company" Wow. It's crazy that 40% annual growth can be considered too low.

in that same paragraph the author says 15% quarter over quarter growth is slower but it is in fact 75% annualized growth.

OP here. I should have been more clear. 15% is the most recent quarter vs the same quarter in the prior year. So it's an annualized number.

Re: What happens when private equity buys your competitor?

#26

Post by foxylad »

ryandrake wrote: post #6

> Founders are special people who somehow glimpse a vision of the future that few others understand, and then go build it. Ughh, more founder-worship. What's more believable is that lots and lots of people can see glimpses of the future all around them. Out of that larger set, the ones that are lucky enough to have access to the capital and connections needed to start up and run a company are the ones that end up as…

This. I suppose I am a successful founder, but it sure wasn't some mystical "vision of the future" - I have about ten of those a day, and I'm sure everyone else does too.

We succeeded due to blind luck - right place, right time. And a lot of hard work of course, but there are multitudes working just as hard who don't succeed because their thing isn't quite compelling enough, or a large competitor suddenly appears out of nowhere, or even the stock photo they used is also used by a popular gambling website and turns people off.

I guess the whole VC thing is predicated on the idea that you can pick winners, and therefore those winners (founders) must be something special. We're not - we're just dice that came up six.

Re: What happens when private equity buys your competitor?

#27

Post by jessaustin »

dmix wrote: post #22
bigbossman wrote: post #18

If a PE shop buys your competitor, you should rejoice. PE firms primarily generate returns through (1) debt repayment from free cash flow, (2) multiple expansion, and (3) operating improvements. Because of #1, PE firms like annuity-like businesses with predictable cash flow. A ventured-backed startup doesn't need to worry about #1, and therefore can focus all their internal efforts on #3. (If multiples expand, then t…

Why is "(1) debt repayment from free cash flow" appealing vs VC growth? I'm not familiar with that term. A quick search only gave me pages filled with even more finance jargon.

Before the buyout, the firm didn't have that debt! This scenario is a way of converting equity (which costs the firm nothing) to debt (which must be repaid). Of course VC deals can have debt too, but their goal is some sort of equity event, whereas this is almost the opposite of an IPO. The theory is that a PE will buy a firm with the revenue to support such debt payments, or that will have that revenue once the PE partners give it their special kind of love.

Anecdotally, I must disagree with TFA's "...they rarely lose capital..." since the only company I ever worked for that got bought by PE ended up a giant loss.

Re: What happens when private equity buys your competitor?

#28

Post by Sacho »

padseeker wrote: post #8

So relevant info - I used to work at a Vista Equity owned company, one that was eventually sold to Oracle. Vista was run by a bunch of MBAs that believed that had the best insight on how a to run a software company, including what technology to use. We were evaluating better tools for version control as we had been using Subversion. We were seriously considering Git, Jira, and Github. Then Vista decided they knew wha…

> We were seriously considering Git, Jira, and Github.

You were evaluating Git, Not VCS and Git? Looks like your decision was already made.

It seems like you were looking for a project management tool as well, and TFS is both similar to subversion(easy transfer of knowledge) and fills that need. Why Vista's decision was obviously bad is not clear to me.

Re: What happens when private equity buys your competitor?

#29

Post by dzink »

One aspect missed is that the government is getting juiced by leveraged PE deals, so a good chunk of PE returns are the tax deductions from the interest on the debt that gets split between debt issuers and PE firms. Why isn't everyone becoming a PE firm then? They did at some point in the 80s (re-watch Pretty Woman), when there was a plethora of private companies with lots of "fat" cash reserves on them and management that would rather spend that on private jets than return them to shareholders.

Well-off corporate executives inspired PE activity. Well-off PE managers drained the market of cash cows and tightened corporate rules. The funny thing is in the real world, if you advertise how successful you are, you attract competitors, which is why I find it quite puzzling that the first thing startup founders do is advertise on TechCrunch when they've raised a big round. It's like saying "Look how much money is in that pot of gold over there, we are running for it." Does the value of the signalling increase the risks/damage from it? Would love to get your thoughts.

Re: What happens when private equity buys your competitor?

#30

Post by NegativeLatency »

Sacho wrote: post #28
padseeker wrote: post #8

So relevant info - I used to work at a Vista Equity owned company, one that was eventually sold to Oracle. Vista was run by a bunch of MBAs that believed that had the best insight on how a to run a software company, including what technology to use. We were evaluating better tools for version control as we had been using Subversion. We were seriously considering Git, Jira, and Github. Then Vista decided they knew wha…

> We were seriously considering Git, Jira, and Github. You were evaluating Git, Not VCS and Git? Looks like your decision was already made. It seems like you were looking for a project management tool as well, and TFS is both similar to subversion(easy transfer of knowledge) and fills that need. Why Vista's decision was obviously bad is not clear to me.

Have you used TFS?
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