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Private equity ruins tech companies

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Re: Private equity ruins tech companies

#21

Post by throwaway9010 »

23david wrote: post #15
throwaway9010 wrote: post #3

I've seen firsthand how PE ruins startups. I joined a seed co and our founder went with a PE firm rather than a VC for our next round. The VCs were upfront about job cuts but the PE investors did not say anything until they took over. Needless to say, the founder got a good paycheck but we were left holding the bag. It was a bloodbath and they completely ruined the culture, product, morale, and any semblance of growt…

It sounds unusual for a seed-stage company (I assume that’s what you mean) to seek funding from private equity. Did the company already have significant revenue and profitability? Why did the founder go for private equity rather than VC.. was the founder basically looking to sell/exit at that point?

Yeah exactly - it was essentially at the revenue of series B or C at that point. This is in 2021 during the height of ZIRP, so I assume part of it was frothiness but the aftermath was terrible.

Re: Private equity ruins tech companies

#22

Post by tcmart14 »

blakesterz wrote: post #10
xyst wrote: post #7

Is there a company out there that has survived a gutting by PE?

Last I heard Barnes and Noble was doing pretty good: https://www.theverge.com/23642104/barnes-and-noble-amazon-bo...

B&N is also probably the only example I can think of that has gotten somewhat better since. But I also wonder if its an outlier even worth considering. I don't work at B&N, so this is me making a guess. They don't have any kind of patents (software or otherwise), so no real valuable IP, its just a straight forward business. Not a disruptor of tech. No manufacturing, or at least manufacturing it is highly dependent on. There is nothing really in their line of business that makes it worth it for a brain drain to reduce cost and sell it higher than what you bought it for. But I'd also guess there are few to no people who want to enter the book selling business. So if your a PE firm that is gonna acquire it, your only option is to actually run it halfway decently? I guess maybe they could have slimmed it down to virtually nothing and tried to sell it to Amazon, but I wonder if that merger would be allowed to go through?

Re: Private equity ruins tech companies

#23

Post by dzink »

This reads like it was written by generative AI. Private equity is often the vulture a company is sold to when the founders can’t take it public or find a symbiotic merger first. In a traditional LBO it loads the company with debt, based on a steady stream of cash flows. The cash flows are key. It’s akin to having a wild stallion which grew up fast and beautiful and then putting a saddle on its back and an ore behind it. In public companies that looks like going from a growth stock to a dividend stock to a high dividend stock that people only buy for tax purposes because the dividend is less than the devaluation in stock price over time. You can look at the financial statements of companies or the details in any stock app and you can see where they are at in this maturation curve. Then invest your time and money accordingly.

Re: Private equity ruins tech companies

#24

Post by toomuchtodo »

jimnotgym wrote: post #12
throwaway9010 wrote: post #3

I've seen firsthand how PE ruins startups. I joined a seed co and our founder went with a PE firm rather than a VC for our next round. The VCs were upfront about job cuts but the PE investors did not say anything until they took over. Needless to say, the founder got a good paycheck but we were left holding the bag. It was a bloodbath and they completely ruined the culture, product, morale, and any semblance of growt…

Isn't venture capital merely a kind of private equity?

VC is musical chairs waiting for the greater fool to come along. Still good times. PE is the chop shop, there is no greater fool left except the customers and the employees. End of the road.

Re: Private equity ruins tech companies

#25

Post by gosub100 »

nick__m wrote: post #2

The title could be generalized to "Private equity firms ruins companies"

I haven't been to the dentist in 4 years and I'm hell-bent on finding one that is not part of PE or any type of corporate ownership. I'm prepared to drive to rural areas or hours away because I will not trust that their incentives are aligned with mine.

Re: Private equity ruins tech companies

#27

Post by csa »

earnesti wrote: post #5

This is not really news. The question is, what there is to do? I think that it is logical to sell your company to highest bidder when you want to exit, and often the highest bidder ends up being a PE firm.

> I think that it is logical to sell your company to highest bidder when you want to exit

Some founders are more than happy to sell at a lower price if they think the lower bidder will be a good custodian of the company.

“Good custodian” is relative, but often means things like treating existing employees well, trying to maintain the best parts of the company culture, keeping clients happy, keeping the quality of the product or service of a company at a high level, etc.

Sometimes founders realize that an extra bag of money on top of the multiple bags they are already getting won’t buy them self-respect.

Fiduciary responsibility can make this murky sometimes, but that’s a cop out more often than not, imho.

Re: Private equity ruins tech companies

#28

Post by jonathaneunice »

A single example is insufficient, especially when that example is Drupal.

In a former life I evaluated WordPress, Drupal, and some other open source CMSs. Drupal seemed remarkably terrible. Maybe I just wasn't the target user...but UI, UX, and DX all seemed blighted and the ecosystem much less vibrant than WP's. Came away thinking it was a vestige of yesteryear, and not something in which to invest any time, energy, or money.

Maybe that's a harsh take on Drupal, but one already-seemingly-in-decline property from which one PE firm extracted value... if over-extraction and under-investment really is a systemic problem of PE, there must be many more, much better examples.

Re: Private equity ruins tech companies

#29

Post by dzink »

skybrian wrote: post #19

It would be good to explain the difference between PE funding and VC funding.

VC relies on you growing enough to attract bigger investors in the future at a higher valuation, including going public. PE bets on you having a really reliable cash flow that they could strap a bunch of debt on to extract the cash in a tax-favored government-subsidized fashion.

Re: Private equity ruins tech companies

#30

Post by antonyt »

gosub100 wrote: post #25
nick__m wrote: post #2

The title could be generalized to "Private equity firms ruins companies"

I haven't been to the dentist in 4 years and I'm hell-bent on finding one that is not part of PE or any type of corporate ownership. I'm prepared to drive to rural areas or hours away because I will not trust that their incentives are aligned with mine.

Is there an easy way to discover whether or not a given business is owned by PE?
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