Pros and Cons for a Growth Company to Take PE Capital

The lack of operating experience

One of the aspects that makes people successful in an investing role is being self-aware about their strengths and weaknesses. You highlight that I may not have traditional operating experience. The part of my introduction that I probably left out is that I had to help pay for college by running a cell phone refurbishing business where I was buying and reselling GSM technology in the early days of the cell phone boom. 

I was a telemarketer for the New York Times, a waiter at TGI Fridays, and a summer camp counselor. It's true, I didn't have the unique opportunity of working in a place that was operationally intensive, but all of these experiences prior to joining an investment banking shop or a private equity firm really contribute to my experiences today.

When we talk about being self-aware about our weaknesses, I really try to complement our teams with people who are operationally intensive. Perhaps they've come from a company that was a six sigma guru or come from a background that lends themselves to be a really great team member. 

I'm a strong believer in the portfolio approach to team management and bringing in people who have pricing experience or tech integration experience can be really valuable when I may not have had that direct experience myself.

Pros of taking money from a private equity firm

There are a myriad of reasons why people ultimately take money from a private equity firm. The most important ones include de-risking a person's individual investment.

One thing we've found, which is a bit counterintuitive, is that entrepreneurs who own 100 percent of their business may be more hesitant to take on real risk. This hesitancy can limit the growth opportunities and market expansion because so much of their net worth is tied up in the company.

I do think there is some mental capacity and stress that comes from being the primary owner of a business. Partnering with a private equity firm can help diversify and alleviate this. 

Depending on the partner, there can be tremendous resources and value in having diversity of thought across the boardroom. What I mean is that whether it's prior experience or learning from mistakes made with other portfolio companies, there's real value in having people with a variety of experiences. Executives and entrepreneurs we work with draw on this experience and leverage our network.

It's not just about the individual investor from TA or another representative. It's about bringing our portfolio of 550-plus companies and 55-plus years of experience, both positive and negative, and using those learning experiences to amplify the value of a company over time.

What's been really neat for me to see over the last 12 years is executives partnering with us, not just professionally but emotionally too, and drawing off of those resources. So much of what we do involves taking the lessons learned in other companies and applying them to the pattern recognition we see in the companies we partner with.

You find that we're better together, and high-functioning teams have representation across a variety of backgrounds, helping these companies continue to succeed.

The metrics are one step deeper than that. When you work with a company, you understand the metrics that drive success and the critical aspects of making an investment decision. Also, having a comparable set of companies that you've looked at over time helps you know what great can look like.

We know what best-in-class sales enablement metrics look like, how to roll out technology as an enabler of growth and efficiency, and what a cost basis should look like. We're often bringing that data together to help companies operate on all cylinders, ensuring they move towards a successful outcome.

It's not just about any one individual. That's the beauty of partnering with a firm as large and established as TA or others, where you have a breadth of experience across a variety of end markets. Some of it involves making introductions, calling potential customers, and extending the reach of the business far beyond what any one individual can do.

A lot of it also involves helping craft best-in-class metrics across various outcomes and giving entrepreneurs access to people, resources, and independent board members, which can be invaluable as a company is in growth mode.

Other factors to take money from PE firms

I'd say there's another piece of this we haven't unpacked yet, which is the idea that doing anything alone is not that fun. Partnering with someone who has skin in the game and is motivated by the individual success of the business is important.

One thing we often discuss here is that a lead investor at TA will make a material personal investment alongside TA in that investment. This helps align our incentives with that of the founder. We're often shoulder to shoulder, thinking about the next chapter of the business, which aligns the cultural idea of growth between the two parties.

There's something special about the partnership that this creates with entrepreneurs and executives. At the end of the day, we're all in the boat rowing in the same direction. We may have fundamental disagreements on strategy or a specific decision, but the health of the partnership helps drive the emotional success of the team as well. 

Having someone you can relate to, talk honestly about the things happening inside the business, is a really healthy dynamic. I'm fortunate to have that in my marriage and personal life with my family. It's something that many of our executives and entrepreneurs would tell you is a great part of partnering with TA.

Cons of taking money from private equity

They’re not necessarily disadvantages. What I'd say is, when you embark on a partnership, it can take a lot of different shapes and you have to be open about what that's going to look like. In many cases, a private equity firm invests on behalf of limited partners who are sizable institutions trying to return capital to their members meaningfully.

There is a desire to be helpful, and many executives and entrepreneurs who have been doing it alone for a while need a transitional period to adapt to working with another sponsor who has a vested interest in the business. This cadence often takes time to iron out.

The first few months are like the early portion of any relationship, where we're getting to know each other personally and professionally and hashing through problems. They're seeing how we think about the business. 

Part of why TA does so many proprietary investments alongside founders we've known for many years is that it shortens the period in which we're getting to know each other. You've gotten to know me over five or ten years versus a three-month, arduous investment banker process. Much of our edge is about the relationships we've built with these executives and entrepreneurs.

The disadvantages, if you're used to going it alone and being a solo soldier, involve a transition period that takes getting used to. However, the benefit is having a lot of people around the table who've had various experiences. One aspect we've discussed is the value of independent board members, which is about bringing in outside views that can be additive to the business over time.

Most of the growing pains come from just the early relationship-building aspect of partnering with a sponsor.

One of the things we often say around TA is that we treat our portfolio companies and partners as if we are invited guests. We don't have a key to the office, we don't let ourselves in, and we don't have a login to the QuickBooks account. 

We genuinely treat this as a partnership, similar to many of the relationships in our lives. The command and control model, successfully instituted by other private equity firms, isn't the model we follow here.

I'm proud to say that in most of our partnerships, we compel change through logic and the numerical analysis we conduct. The goal is not to force people into discomfort, but rather to show them your perspective. This goes back to the alignment point I made earlier.

If we can make a compelling case for why we need five more or five less salespeople on a given team, we can have a logical debate about that because we're all aligned on the goal of making a great investment and growing the company over time. While being a majority shareholder in a business gives you the final say, it's not a productive muscle to flex.

Growing businesses and their entrepreneurs have an unlimited amount of choices. I'd be foolish to think TA is the only private equity firm vying for the hearts and minds of these executives. As a competitive angle and good business practice, we try to work in concert and collaboration with these folks to reach the right decision.

Focusing on IRR

I want to push back on that a little bit. Let's start with point two and then move to point one.

Being a customer-centric or employee-centric company is not at odds with being an IRR or return-centric company. In developing a great business, you need terrific employees treated with respect. 

In a growing company that's expanding and dominating their market, we find that management teams treat their employees well, and there's no reason for us as a sponsor to change that. So, I don't think these two aspects are at odds.

The hope is that by doing good, we can continue to do well, which is very much the strategy we apply to many of our businesses. The second notion I'll push back on is that most of what we do isn't bootstrap companies. In fact, a majority of the partnerships I've initiated at TA have been with bootstrap founder-owned businesses.

These companies offer tremendous upside. This executive has been operating the business for a long time without the benefit of a team around them, bringing new ideas, resources, and thought patterns.

It's not about telling people what to do, but offering alternative views on managing the business. What makes me proud is that we are adding thousands of jobs to the American and global economy every year in most of the segments where we spend time.

As for reporting to a board, it's all about perspective. I learn from our entrepreneur partners every day. There isn't a monopoly on good ideas or business thinking here at TA or in general. Our best partnerships involve learning from each other. At the beginning of our partnership, we are open about the metrics we're looking for, the goals of our investment, and what we'll be monitoring over our hold period.

It's interesting when executives and entrepreneurs tell us what metrics we should be looking at. This allows us to refine reporting and avoid the burden of assembling lengthy board decks. This collaborative view of learning and growth differentiates TA. We're not charging management fees, nor am I attending board meetings to be hailed as a genius.

Fundamentally, I'm learning every day. If we collaborate on agreed metrics and evaluate based on those in meetings, it can be a healthy partnership. I encourage entrepreneurs to think about what they're solving for. At the end of the day, you've been running your business and know more about it than I will ever know.

Culture of focusing on numbers

A couple of things to note. I can't speak to Airtable as we're not an investor in the business and I'm not familiar with the company. However, one of the things we do upfront is hold what we call a 180-day planning session. 

We sit down with the management team of the company and discuss our ideal plans. We talk about hiring more salespeople, considering price adjustments, expanding internationally, and recruiting for specific positions. Before signing any paperwork, we ensure we're on the same page regarding the business's forward strategy.

It's not uncommon for the margin profile of a company to decrease post-investment because we're investing in these areas. The beauty of investing behind growth is that it creates massive opportunities for expansion in people, systems, and existing strategies and teams. 

This is where the excitement lies for me. These companies are creating market opportunities for themselves, blazing a path in their vertical or subsegment. That's what excites me about the future of these companies in our partnership.

Secondly, our approach to growth is very tempered. Growth does not come in all flavors. We've seen a zero percent interest rate run in the past decade, where companies that were unprofitable but growing top line became popular among many investors.

For us, we focus on companies that are profitably growing, have great margin profiles, and expansion opportunities in their individual segments. Our goal is to help bring that forward, showing them comparables with learning opportunities for us and management teams.

Lastly, on the topic of control, I am not an operator. I see my background as a positive because I'm not going to step in and run these businesses if the opportunity arises.

That's what I'm trying to express: you have to surround yourself with people who have relevant experience and can bring value to the table. There are areas where I have relevant experience, either through prior portfolio companies, other roles, or sector-specific knowledge where I can assist a company, but I don't want to overstate that. This is about self-awareness. 

You've got to bring in people who can help with discrete tasks and business problems. Whether it's our strategic resource group focusing on data science, marketing, sales, and recruiting, or independent board members who are luminaries and industry visionaries, you've got to involve these people.

Regarding control, I'm not sitting in the captain's chair. As a board member, I am an advisor to an independent business. I have a view, informed by data and experience, but ultimately, we depend on the management team to realize the business's potential.

We back many existing A-plus management teams in all the segments we work in because they can identify and seize opportunities, fostering healthy partnerships. Yes, owning a majority of a business gives you the final vote, but the practical application is about finding a management team you are aligned with and marching forward together.

Parenting and being a good partner share similarities. You have to listen, be there when needed, be present, and adopt a data-driven approach, explaining your actions. These are the foundations of a healthy partnership. Whether it's a marriage, parenting, or a business partnership, total transparency about your intentions and actions is key.

Working with unhappy CEO

Part of doing this job is having a passionate point of view in various areas. Sometimes, when you fight for that point of view, others will disagree. This could be in how we at TA approach the idea of partnership in our entrepreneur-backed businesses or a specific decision on pricing or customers.

At the end of the day, we are all individuals and must live with the trust and relationships we've built over time. I spend a significant amount of my time building that trust because it is the most important aspect of my position. I've been fortunate that the companies I've partnered with chose us because we showed up early, kept knocking on the door, and did what we said we were going to do.

That's an important part of any good partnership. Are there disagreements? Absolutely, on fundamental concepts from recruiting to strategy to sales. But treating people with respect fosters healthy relationships. I spend a lot of my personal and professional time forging these relationships because, in the end, that's all there is.

At TA, we're not here forever. We are a firm owned by partners and managing directors and have transitioned through various generations, which has differentiated us. This differentiation and the legacy we aim to build institutionally have kept us in business for many years.

It's about respecting the people who are actually controlling the business, the CEOs, and management teams on the ground of the companies we are a part of.

Board control 

Let's talk about the concept of board control. This is always an interesting idea. I've been doing this job for a long time, and in my entire career, I have not had a contentious board vote in the traditional sense.

The board meeting is about getting together, discussing what's happening in the underlying business, and getting updates from sector leaders. A contentious decision is less common in businesses where we are a minority shareholder, which is often the case, and where we have a team that we are enthusiastic about.

You can argue for a perspective and point of view, but ultimately, people need to be on board to put their hearts into it. The companies that do the best are the ones where the management team shares the vision for the future. 

This is why we spend so much time understanding this upfront, and our pre-investment conversations often focus on the goals for the next five to seven years. Once we're committed to this partnership, we march in lockstep towards a successful outcome.

Even in situations where TA owns a majority of the business, we usually have no more than one or two people from TA on the board. You get most of the utility from the first board member and an incremental benefit from the second, who I am usually. The aim is to find people who can develop business relationships for the company. 

This approach was evident with Henry at ZoomInfo, inviting board members with a history in big financial services and data businesses who could open doors and share their experiences from having been part of rapidly scaling organizations.

Henry himself is a prime example of the executives I've worked with. He's young, driven, intelligent, and believes in the success of his business. He's been generous to the community, the employees, and continues to support them. We were supportive of all his actions, both in the greater Vancouver Washington community and in Boston, which are integral to their core culture.

Henry is an incredible example of successful leadership, partially because he's at a public company now and in the public eye. We have countless examples like him across our portfolio.

If you look at the names behind you, there’s a long list of successful executives of various ages and backgrounds in their specific sub-verticals. I encourage entrepreneurs to continue pursuing their ideas.

In the life cycle of private equity, where early-stage venture capital and seed capital are on one end and mature late-stage buyout on the other, TA sits in the center. We invest in growing businesses that still have a significant market opportunity ahead of them, many of which have been bootstrapped, as Henry did.

He exemplifies the many executives we work with who possess off-the-charts IQ, EQ, market awareness, connections, smarts, and grit. What's so enjoyable about this job is being in the room with people who've built these businesses from the ground up. I approach with awe and admiration. 

We bring a data-driven perspective and have ideas of where we can add value given our institutional experience, smart staff, and our partners on independent boards worldwide. But at the end of the day, we stand with the management team as they dominate their segment. That’s where our investments are most successful.

It's about the idea of partnership, not the disadvantages of taking on an outside sponsor.

Expectation for the board structure

It’s a collaborative discussion. The approach to investing isn't one-size-fits-all. I'm on boards that range from four to fifteen people, reflecting the individual needs of each executive. We can tailor the board size to your preference. Having no board, however, somewhat defeats the purpose of bringing on outside capital. It's part of the model.

Admitting I'm wrong frequently, I'm not bashful about it. The trick is to surround yourself with people who are right a significant portion of the time. The power and diversity you invite to these boards can bring immense value to the organization. 

It's not about any one individual, but about all the individuals you bring together, plus the management team, creating magic by drawing on each other's experiences. I believe that infinite diversity breeds infinite opportunities and ideas.

Diversity isn’t just a good idea in the traditional sense; it's about having people with different backgrounds to draw on varied experience sets. This emboldens everyone to be open and honest about the opportunities available to the company.

The goal is to reach the right answer with a collaborative, high-functioning board. We at TA spend a lot of time thinking about the creation and development of a high-quality board.

In response to specific needs, if you need someone with business development experience or someone who's built and sold a bulge bracket investment bank, we draw on someone from our network. We also incentivize many of these folks with equity alongside the management team and us, so they are vested in the positive outcome of the eventual sale of the business.

The idea is, we make money, our partners make money, when our executives and entrepreneurs make money. And that is the perfect and beautiful alignment of bringing on a sponsor.

Dilution for founders

Most of what we do at TA is not primary capital. The traditional venture capital model involves adding capital to the balance sheet for investing in sales and marketing or undertaking M&A activities.

However, we predominantly provide secondary capital, meaning we are buying secondary shares from shareholders. The companies we partner with are typically growing profitable businesses. Therefore, there isn't necessary dilution from our investment. 

Certainly, there are friction costs, as we're creating option pools to incentivize management teams to continue growing their businesses. But this doesn't result in the same kind of dilution as adding cash to the balance sheet.

For us, it's more about minimum equity check sizes and being judicious with our time, which is our most limited resource at TA. For our 12.5 billion fund that we're currently investing out of, our minimum equity check size is 125 million.

We're agnostic about what we want to own. This is about ensuring our investments are sizable enough to meaningfully return capital to our LPs and justify the time commitment. However, it’s also important when investing in growing profitable businesses that dominate a market niche with awesome entrepreneurs to be flexible in certain areas.

For us, it's about the proportion of the business we own. Often, it involves a direct secondary sale where the liquidity goes to the shareholders of the business rather than capital being added to the balance sheet

If the valuation is a hundred million and we agree I get 20 percent, that's 20 million that I would pay. That 20 million goes directly to the seller and the owner of the shares. This represents the idea of purchasing shares directly from individual shareholders in a business. Since these companies are profitable on their own, that capital will go to the people selling their shares.

Often, we work with third-party lenders who provide some leverage on the business. The best parallel to this is like mortgaging a house. There will be some form of debt and some form of equity. The benefit of the debt, for those following along, is that it limits the equity value and thus the dilution you mentioned earlier from adding incremental equity into the business.

The idea is that this lack of dilution benefits both the original shareholders in the company and the new money, which in this case is likely us.

How to build and preserve wealth

Let's differentiate between the life cycle of capital. When you have a great idea and raise venture capital, there's significant dilution associated with it. Venture capital firms would argue that their ideas, network, and ability to scale businesses justify this. However, there is a considerable overhang after taking on capital when you need money.

TA invests in companies that don't require outside capital. They are fundamentally profitable. In many cases, the executives we work with, especially founders who've been around a long time and bootstrapped their businesses like Henry did with DiscoverOrg and ZoomInfo, are taking dividends out of the business annually.

The key is growing a business to a point where it is profitable, as the valuation gains from doing a secondary transaction with a firm like TA are significant. You retain a considerable portion of the business because when TA buys secondary shares from the founders, it's more capital efficient than continuously adding large sums to the balance sheet.

Take Michael Dell, for example, who bootstrapped to a certain point in his company's evolution. There are thousands of examples, high-profile executives and those less known, who dominate individual industries. 

I've seen portfolio companies where the executive waited until the company reached 10 million in EBITDA, generating cash and taking distributions yearly. This approach can create significant individual wealth because a profitable, growing business can command a premium valuation.

The answer to your question is, if you can grow a company to be nicely profitable and choose to bring on a partner to scale it, the upside is dramatic. The 'second bite at the apple,' as we call it at TA, is not just the first liquidity event but also the second, when you're either going public, selling to a strategic, or raising additional private equity money. This can be as lucrative as the first in magnitude.

In situations where we partner, this is your chance at institutional wealth. In my opinion, multi-generational wealth comes from waiting to take on outside capital until you're at a point of scale.

Approach on partnership

You highlight an interesting dynamic in the private equity industry, and it's one of the reasons I love working at TA. Our individual bespoke approach with potential portfolio companies stands out.

TA has been consistent since 1968, investing in growing, profitable businesses across various end markets like consumer, healthcare, tech-enabled services, and technology worldwide. We focus on building relationships with executives, management teams, and founders.

Everyone at TA, from associates to managing directors, is involved in gleaning intelligence, building relationships, and getting to know people over long periods. We have legacy investments where we've known the management team for over 20 years. This provides a valuable opportunity to build partnerships early and demonstrate how we can be helpful.

The best way to prove we can be a helpful partner is by being one. Whether it's an introduction to one of our portfolio companies or a business development opportunity, we actively engage. Our team reaches out to founders daily, and these relationships occur at all levels within TA. It's crucial for our partnership group to understand the underlying businesses of potential partners.

What differentiates us is our reverence for founders, the respect for what they've built, and our healthy partnership dynamics. The longer we know people, the better partners we can be.

Much of what we've done has been proprietary, as winning over founders is key in a market with unlimited capital sources. Unlike 30 or 40 years ago, when a handful of private equity firms dominated the market, we now need to demonstrate our potential as a partner.

I'm proud to say that we've been helpful to hundreds, if not thousands, of companies this year alone by creating revenue optimization opportunities, opening business development doors, introducing them to our network, and more. That's how you win people over in a market where people must choose their partners wisely.

Handling inbound contacts

You have to first ask yourself when you want to start thinking about liquidity. There are several decision points within a business. Venture capital plays a crucial role in the American economy, especially for capital-intensive businesses like Uber or Lyft that need expansionary liquidity. However, they may not fit the profitability profile for traditional private equity.

The first decision is whether to raise primary or secondary capital. Do you want to put cash on the balance sheet for sales and marketing, or wait for the business to become profitable and sell shares to a secondary investor like us?

The second decision is how much you want to sell and what you are solving for. Are you looking for a specific valuation, a magic number in your head, or just maximizing it? And at what point do you think bringing in a partner will be productive for you at the board level, in terms of goals, metrics, M&A opportunities, and expansion?

Our portfolio has completed over 900 acquisitions, including ZoomInfo. There are numerous opportunities similar to ZoomInfo where we have originated and executed M&A with a founder inexperienced in acquisitions. This can be a critical growth strategy for companies dominating their market.

It's a bit about personal preference. My general rule of thumb is to start having individual conversations with people and be a business owner for several years before deciding to raise outside capital, be it venture or private equity money.

Deciding what you're solving for is critical. Do you want a great partner? Someone with geographic expansion opportunities, product expertise, or experience in pure M&A growth?

It comes in different flavors. Like any business decision, you have to decide what you want from your partner. Getting to know identified individuals over a five-year period is a great way to gather ideas for the business, ask questions, and have repeat conversations to see if they become a customer and how they've helped you along the way to prove their worth.

If you're operating a growing profitable business, you'll have the chance to test those waters and make it competitive at some point, which I think is perfectly fine.

Vetting out the initial list is really important. 

First, you want to understand the institutional history of the firm. Who have they invested in? Do they understand the industry? Have they had experiences here? This is a simple question you can ask even the associate level folks who are calling you regularly.

Second, what are their ideas? What would they want to do with the sector or segment? What's their general thesis around what they're doing? 

Third, who is in their network that can be helpful to you? Are there introductions they can make to potential buyers of your product or services?

You should also ask specifically nuanced questions about your business, which is a mix of product and services, and find out where their experiences lie in these four categories.

The Fourth step is doing your own diligence. Most private equity firms, including TA, have their companies listed on their website. You can contact people who are part of that portfolio to find out who the right person is and what sectors they spend time in. Just as sponsors conduct due diligence on companies, companies should do the same with sponsors.

Talk to people who've lived through the experience. Did the firms do what they said they were going to do? Were they good partners? You can't do this with everyone, so you need a smaller list of folks. But if they've demonstrated they understand the sector and are good, consistent callers and decent human beings, then consider them.

Cultural fit is incredibly important. Spending time with people is the best way to determine this, like any dating process. You need to get to know people before sitting down at the table, and the best way to do that is to ask them tough questions.

Creating value before partnership starts

First, it's about helping to generate revenue, either through introducing potential customers, becoming a customer ourselves, or having someone in our portfolio become a customer. This is also a great way to conduct due diligence on the product and category.

Second is M&A. When there's an industry consolidation opportunity, there might be a way to broker acquisitions or mergers in a specific space to generate a need for third-party liquidity.

The third aspect is being helpful around strategy and growth opportunities. This could include exploring new sectors, use cases, partnerships, business development, or geographic expansion. A significant portion of our investments are outside of the United States, so for companies with a great product, this can be valuable in our Hong Kong, London, or Austin, Texas offices as we consider expansion.

Fourth is sharing our experience with things like a desktop to SaaS conversion, an on-prem to SaaS conversion, or a QuickBooks integration and transition to a more robust financial system. We often provide insights based on prior experiences.

Additionally, we frequently conduct customer calls to gather feedback. We present NPS scores, market segment size, and what customers say about the business. Demonstrating interest in a business goes beyond just expressing intent; it's about being relevant. Part of my approach at TA is to stay in front of people and try to be additive.

I'll give you a good example. There's a company I've covered for a long time among the hundreds of companies one may cover. It's a business I really love, and I had the opportunity to follow the founder at their customer event. He told people I was doing a story on him and learning more about the business and asked them to be transparent with me about the nature of the product and the use case.

After hearing what customers had to say, I fell even more in love with the business model. Sometimes, we take the initiative ourselves, talking to people and asking what they think of the product. 

Recently, we reached out to a company we've been covering for many years and asked how they think about their pricing strategy and their opinion on price increases over the last few years. People told us they were massively underpaying for the value the product provided, indicating a high return on investment.

Often, executives and founders, owning 100 percent of the business, are nervous about increasing prices over time because they're fond of their customer base and don't want to disrupt their partnership or limit their distributions.

Part of our approach is to take a scientific view on pricing, especially if customers are generating significant value from the product. We advise being thoughtful about future pricing.

We also gather product feedback. For example, customers might love a particular portal or conduit for the product and wish for more integration into Salesforce or their CRM system. Getting candid feedback is crucial, and being a good partner involves both learning in our diligence process and sharing insights with management teams.

For companies that we find really interesting, part of my job, especially in growth-focused private equity like TA, is to stand out in a field with many competitors. My role isn't just to join an undifferentiated auction and offer the highest price. 

It's about spending five or ten years delving deep into our sub-verticals, getting to know the companies and their executives, and proving that we can be an additive partner. Yes, we often pay top dollar for terrific assets, as we invest only in high-quality business models. But at the end of the day, it's about providing a good partnership and showing our ability to be a valuable board member and partner.

A significant part of my role involves building personal relationships. It's about engaging on a personal level, asking about their families, dining together, and being a confidant during challenging times. 

As an executive or entrepreneur, much of this job is emotional. We should embrace that aspect, being good partners and listening when people are facing challenges. At TA, many of us strive to be that confidant, thought partner, and emotional colleague when needed. 

I believe this approach sets us apart from many of our competitors and is more effective than competing in large, undifferentiated auctions where the goal is to sell 100 percent of a business.

Working with the founder

It's a sign of a really healthy partnership. My partner, Todd Crockett, who led that investment, was critical in consummating those transactions both on the M&A side and the go-public plan and was super engaged with Henry every step of the way. It's not something that either person could do alone.

So it was the beauty of that partnership that I keep going back to. A couple of things: value creation takes a lot of different shapes and there's no one-size-fits-all approach to value creation across the portfolio. At TA specifically, we have invested heavily behind our strategic resource group.

We have ex-consultants, technology specialists, accountants, folks who are focused on internal systems and engineering and Six Sigma, data scientists, and recruiting folks. We do not charge our portfolio companies a single cent for the usage. Henry would tell you that ZoomInfo was a prolific consumer of those resources and was a really great partner.

Our best companies are the ones that utilize those resources that are available. We were so glad that Henry and team took advantage of those. After we did those acquisitions, it wasn't about necessarily getting the transaction done.

It was about figuring out the right place to peg pricing, or to think about where the expansion opportunities were in the product category, or how to onboard customers, or how to get people on the same payroll system.

Most of this is not glamorous. You know, this is not standing up in front of a big room and necessarily compelling people to make changes.

It's about the little things: making sure people are on good health care programs, making sure there's a logical pricing card, making sure everybody's batting and looking at leads the same way, making sure there isn't unfairness structured into the system, making sure we compensate people appropriately, making sure the benefits line up.

I mean, there's a thousand different things. And what I would say is our strategic resource group, not just at ZoomInfo but within TA Associates, has touched thousands of companies over the years in their ability to roll out strategic outcomes for all of these businesses. Because at the end of the day, there's pattern recognition, there's experience, there's connections, and there's just grunt work that needs to get done.

And I'm so grateful that I work for an organization that has this strategic resource group because it has created a tremendous amount of value across our portfolio.

Pushing M&A to portcos

Henry is an exceptional human being and an exceptional leader. M&A isn't always as obvious to the people with whom we work.

Part of this idea of pushing is about making a logical, coherent case for value creation. The beauty of this partnership is that we are a shareholder in your business. Fundamentally, we own 20, 40, 60, 80 percent of the business, but you still have a meaningful stake, whether that's equity, rolled equity, RSUs, or stock options in a business. You are incentivized by the same upside we are.

We are strong believers in aligning incentives. One thing I've learned over my time in this industry is to align incentives wherever possible because it keeps people looking out for the broader organization and the team.

What I have found over the years, and many of my partners would agree, is that if you can make the case for creative acquisitions that allow us to offer more products and better opportunities to the customer base, we are often very compelled to pursue those acquisitions.

You may have four products today; why not have eight where you're cross-selling them to companies like Flexera and Bill.com, who are using the deal room product today.

It's incumbent upon us as sponsors to explain that plainly to people, not in uncomfortable business jargon with consulting slides and two-by-twos – that's not effective. We need to speak plainly to each other about where the value creation will lie, and I believe we've been able to do that with some success.

All of our partners and portfolio companies are off the charts. They may not speak the same language we do or have the same educational views, but they can see value wherever it lies. It's incumbent upon us to create that value and make a compelling case for it.

Because nobody in this business, nobody strong enough to be a great entrepreneur, has been pushed into anything. The trick is to make a good case, and people will see the light.

Founder exit

I mean, again, there is no one strategy for this. The idea of liquidity is an important one. We are not infinite capital in terms of timeline. We guide our investors to five to seven year hold periods, sometimes shorter, sometimes longer.

What I have found over the last 12 years is that it doesn't have to be all or nothing. So just like everything else, you want to have an understanding up front of what our financial goals and thresholds are, what we think is a reasonable return over what timeframe, and how we think about getting that return.

An IPO is certainly less common today than it was 25 years ago. In many cases, there may be another sponsor or a strategic at the other side who's going to purchase part of or the whole company.

In most cases, what's happening is some form of partial liquidity over time. Maybe another sponsor will see a really compelling opportunity, and you've grown it two to three times the size, so they're going to buy a portion of your stake.

Or sometimes a strategic will need a part of our product category and want to own the whole business, so they'll purchase it that way. What I find is total transparency is crucial. I may have a view of what liquidity should look like, but I can't force a management team to have meetings with people they don't want to spend time with.

I can recall at least one circumstance where a competitor was very disrespectful to our team, and that wasn't going to be a successful outcome for the sale of the business. For me, it's about sitting down, talking about the strategy, and often hiring an M&A advisor who can help us look at the universe and stand in between.

I'm a strong believer that having a third-party management process can be really healthy for both the company and the sponsor. You spend 18 months really trying to unravel that and say, 'Hey, we got to pull materials together and identify a buyer universe. We want to talk to a bunch of people.'

We treat it with the same respect that we treat the investment process. But so much of that is discussed and iterated on. It's not like we're going to show up one day and say, 'It's time to sell the company.' It really is a collaborative process.

Timeline of investment

The thing about timeline and investments is there's really no rule because so much of what I've worked on has been direct engagement with a specific owner or sponsor. These have ranged from a year to five years to two months.

It really depends on the specific outcome of how you've gotten to know a business. They usually take shape in a certain form. The conversation starts, you get to know the company. In most cases, I've gotten to know that company for years. We understand their growth trajectory. We've proven we can be helpful.

Finally, we get the phone call that kicks everything off. That says we're thinking about selling a portion of the business, selling the whole business, or taking the company to the next level. We respond that we're really excited and ask how they're thinking about a transaction and what we can do to be most helpful. 

Once we get to an understanding of what that looks like, the diligence phase begins, looking at everything from the company's financials to the management team, to the sales pipeline. We get to know the business over time and get a perspective on where we can be helpful and where we think we can add potential value as a sponsor partner.

That can last from weeks to months, depending on the nature of the business. We're not usually the bottleneck in that process. Many founder-owned businesses are still using legacy systems or may not have the reporting. We work closely with them to try to get the answers to those questions over time.

We can work really quickly and donate all of our resources to the company to help them figure it out. It's not like we're coming in requesting things we're not going to help pull together.

Then there is the transaction negotiation piece, getting through the legal documents, agreeing on governance terms, locking down the price, thinking about the exact liquidity, trying to figure out what the strategy is going to be. The shortest this happens in is 30 days, and I've had transactions that have gone on for many years.

It's not uncommon for founders to have second thoughts as you go through that process. Every good transaction dies at least once in that process, and that's totally natural.

If someone is willing to say they want to be done with this lock, stock, and barrel, that's a difficult pitch for the person who's investing in the position. Second thoughts, honest questions, a heart to heart, these are all really important. Some of our best transactions and partnerships come from people who rethought them over time.

I can think of one in particular where we got to the altar three or four times before the transaction was finally consummated. That's okay. That's the job. You can go in and buy a company from another sponsor, which can also be equally lucrative. 

But at the end of the day, if you want to work in the founder-owned company space, you have to be prepared for emotions and within those emotions, there are returns. You have to be patient, loving, and understanding because this is the reputation you build for yourself within the industry.

And it's not always up and to the right. These things take a cadence to themselves and that's okay too. I would encourage all the entrepreneurs out there to spend real time vetting their sponsor partner. Pick up the phone and call their portfolio companies and ask them what it's like to work with them.

That is the best advice I can possibly give because our partners in these businesses get to know us very intimately over the five to seven year time horizon. They can tell you where we've been great or where we need to improve. We spend a lot of time focusing on those improvement areas too.

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