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

Summary Notes


In a candid conversation on the 20vc podcast, host Harry Stebbings interviews Orlando Bravo, the founder and managing partner of Thoma Bravo, renowned for pioneering software buyouts and transforming Thoma Bravo into a leading private equity firm. Bravo shares his investment philosophy, emphasizing the valuation of companies based on future cash flows rather than revenue multiples or speculative technology worth. He recounts his journey from an uncertain start post-education to founding Thoma Bravo in 2008, focusing on software-only equity, and discusses his approach to transforming innovative companies into profitable entities. Bravo also touches on the challenges of philanthropy, his personal growth, and the importance of being present and authentic. The podcast includes discussions on Secureframe, a platform for automated security and privacy compliance, and Deel, an HR platform for global teams, highlighting the significance of compliance and efficient team management in today's global work environment.

Summary Notes

Company Valuation

  • Orlando Bravo emphasizes the importance of future cash flows in determining a company's worth.
  • He rejects the notion of valuing companies based on multiples of revenue or speculative technological potential.
  • The capitalist framework is underscored as the basis for valuing businesses through their future cash flow prospects.

"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."

The quote reinforces the idea that a company's valuation should be grounded in its ability to generate cash in the future, rather than on current revenue or speculative future technology valuations.

Toma Bravo's Origins and Focus on Software Buyouts

  • Orlando Bravo recounts his experience beginning at a predecessor firm in 1997 and being given significant authority by his mentor, Carl Toma.
  • The .com bubble burst presented an opportunity to buy software companies at low prices, leading to the realization of their strong recurring revenues and potential profitability.
  • Toma Bravo was founded in 2008 as a software-only private equity firm after a series of successful software buyout deals.

"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."

Orlando Bravo describes the successful trajectory of early software deals that led to the specialized focus and eventual founding of Toma Bravo as a software-centric private equity firm.

Mentorship and Lessons Learned

  • Orlando Bravo credits Carl Toma with teaching him the values of investing and the art of deal-making in private equity.
  • Leadership and partnering with the right people were key lessons imparted by Carl Toma.
  • Marcel Bernard, another mentor, taught Orlando how to transform great innovators into profitable companies.
  • Bernard's operating philosophy complemented Toma's investing philosophy, focusing on profitable growth and efficiency.

"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."

This quote highlights the comprehensive nature of deal-making in private equity, from valuing the company to managing various stakeholders involved in a buyout.

Value and Fundamental Investing

  • Orlando Bravo reiterates his belief in fundamental investing based on future cash flows.
  • He describes the approach of combining growth and value by earning a yield and multiplying it by growth, a principle learned from Carl Toma.

"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."

The quote explains Toma Bravo's investment strategy, which focuses on a company's growth potential and its ability to generate a return on investment through future cash flows.

Turning Innovators into Profitable Companies

  • Orlando Bravo learned from Marcel Bernard the importance of breaking down complex problems, prioritizing, measuring progress, and delegating responsibility.
  • The goal is to work with existing management teams to improve efficiency and drive profitable growth.
  • Bernard's philosophy was that any business problem could be solved with the right focus on numbers, knowledge of the business, and a desire to succeed.

"Every time we had a big problem, he would always say, marcel would say, remember, any business problem can be solved. Health is another matter."

Orlando Bravo conveys Marcel Bernard's belief that business challenges are surmountable with the right approach and mindset, distinguishing them from health issues which are inherently more difficult to control.

Personal Drive and Avoiding Stagnation

  • Orlando Bravo shares his fear of being trapped and isolated, possibly stemming from his upbringing in Puerto Rico.
  • His career in private equity aligns with his desire for constant movement and avoiding stagnation, as the industry and job responsibilities have evolved over time.

"I have this fear of stagnating and feeling trapped and isolated."

Orlando Bravo expresses his personal motivation to continuously progress and avoid feeling stagnant in his career and life.

Overcoming Career Failures

  • In 1999, Orlando Bravo felt his career was failing and was close to being fired.
  • He relates to the mentality of staying in the game and fighting to remain competitive, drawing parallels to his experience playing tennis.
  • Since overcoming that period, he has not felt his career plateau due to the changing nature of his job and the industry.

"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 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."

This quote reveals a time when Orlando Bravo faced significant self-doubt and the pressure of living up to his own expectations, which he eventually overcame by adapting and persevering.

Mindset in Tennis and Investing

  • Orlando Bravo discusses the importance of mindset in both tennis and investing.
  • He emphasizes the need to remain focused and persistent, even when facing setbacks or trailing in a competitive situation.

"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."

Orlando Bravo's quote illustrates his resilient approach to investment deals, mirroring the mental toughness required in competitive sports like tennis.

Definition of Success

  • Orlando Bravo does not view success as a finite or definitive goal.
  • He reflects on the growth of Toma Bravo from a small team to a large firm, indicating a journey of continuous progression rather than a single endpoint of success.

"I don't see success for me or for us as this finite, definable ending goal."

This quote encapsulates Orlando Bravo's philosophy on success, which is seen as an ongoing process rather than a final destination.## Success in Business

  • Orlando Bravo views success as a series of small steps across various aspects of life, including family, friends, work, and philanthropy.
  • He emphasizes the importance of building trust with all constituencies when acquiring a company.
  • Collaboration is key to producing great margins and growth, which he likens to a work of art.
  • Success is seen in the meticulous process and the final outcome of improving a business and exiting it.

"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, the success story."

This quote illustrates Orlando's belief in the importance of trust-building and collaboration in the process of transforming a company into a successful venture.

Market Assessment

  • Orlando Bravo assesses the current market, as of January 2023, to be in a reasonable state.
  • He uses the public market as a benchmark, focusing on profitable software companies with margins over 20%.
  • The average forward P/E ratio for these companies is compared to the S&P 500 to gauge reasonableness.
  • There is confusion in the market regarding unprofitable innovators and their fluctuating revenue multiples.

"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 expectations of profitability, because most investors think the same way."

Orlando explains the current confusion in the market, which stems from the valuation of unprofitable companies that are nonetheless considered great innovators.

The 'New Normal' in Markets

  • Orlando is cautious about predicting the stock market or economy but considers the current market conditions reasonable.
  • He suggests that the recent market state could be the new normal, given the reluctance of investors to repeat the actions that led to significant losses in the past 18 months.

"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 18 months lost them 80% of their money, at least not in the next few years."

The quote indicates Orlando's view that the current market conditions might persist because investors are likely to be more cautious following recent losses.

Private Equity Valuation

  • Orlando explains that his firm's valuation approach has never changed, focusing on transforming companies to achieve high profits and growth.
  • They value companies based on projected earnings and adjust the assumed future multiples according to the cost of capital.
  • The firm observed a market trend where growth was heavily sought after, and investments in high-growth companies were profitable as long as the market demand continued.

"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."

Orlando emphasizes that their valuation approach is consistent and focuses on the potential earnings a company can generate with their partnership and strategic changes.

Transforming Companies

  • Orlando discusses the structural benefit of private equity, which allows for a fresh start and setting new directions for a company.
  • He mentions the importance of incentives that align investors, management, and employees towards performance.
  • Orlando also highlights the value of learning and mentorship for young companies, especially those that have grown rapidly but may lack experience in certain management principles.

"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."

This quote explains the advantage of private equity in facilitating significant changes in a company's direction through the act of acquisition and restructuring.

Financial Indicators of Interest

  • Orlando stresses the importance of the story matching the financials, where qualitative aspects of a company should be reflected in its numbers.
  • High-quality products and teams lead to better profitability in areas like support and implementation.
  • Orlando looks for high-quality revenue, a management team open to profitability, and enough inefficiency to allow for a differentiated return.

"The story matches the financials it has to."

This succinct quote emphasizes the need for consistency between a company's narrative and its financial performance.

Common Inefficiencies

  • Orlando notes that rapidly growing companies often accumulate excessive staff, processes, and layers, leading to inefficiency.
  • He believes that greater efficiency should naturally lead to faster growth.
  • There is no single area of consistent inefficiency across companies; it varies widely.

"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."

Orlando identifies a common problem of overgrowth within companies, which can hinder future growth and efficiency.

Twitter as a Case Study

  • Orlando sees the recent downsizing at Twitter as an interesting case study for Silicon Valley.
  • He refrains from making a judgment on Twitter's strategy as his expertise lies in enterprise software rather than consumer-focused businesses.

"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."

Orlando acknowledges the significance of Twitter's workforce reduction as a case for analysis but admits his lack of detailed knowledge about the company's operations.

Price Sensitivity in Investments

  • Orlando asserts that price is a crucial factor in investments, regardless of the stage.
  • In buyouts, where large sums are invested, it is particularly important to avoid losses, as a single big loss can be detrimental.
  • The investment principles are similar across stages, but the scale of the investment and the associated risks differ.

"Oh, price matters. Price really matters."

This quote underscores Orlando's belief that the price paid for an investment has a significant impact on its potential success.

Downside Protection and Loss Ratio

  • Avoiding big losses in private equity is critical due to the large scale of investments and the commitment required to manage them.
  • In private equity, unlike venture capital, there is no option to triage the portfolio; firms must stay committed to their investments.

"You just cannot have a big loss. You really can't."

Orlando stresses the importance of avoiding substantial losses in private equity due to the long-term commitment and the size of the investments involved.

Reflection on Past Investments

  • Orlando defends his firm's investment decisions, indicating that criticism for paying high prices is common, but outsiders are not privy to the firm's business plans.
  • He believes that the firm's consistent investment philosophy and strategy have been successful over the years.

"It's truly amazing. Koopa, Annaplan 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."

Orlando responds to criticism about paying high prices by highlighting that critics are not aware of the transformative business plans his firm implements post-acquisition.## Operational Strategies and Cash Flow

  • Thoma Bravo changes the operational strategies of acquired companies to improve cash flow.
  • Free cash flow projections for years 1-5 are uncertain to outsiders.
  • The firm has credible and proven methods to enhance cash flow.

"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 1234 and five."

This quote emphasizes the difficulty for outsiders to predict Thoma Bravo's cash flow improvements post-acquisition due to operational changes they implement.

Exit Strategies

  • Thoma Bravo primarily exits to strategics and financial buyers.
  • IPOs are less favored due to unnecessary dilution when companies already generate sufficient cash.
  • Quality and market leadership are key to attracting a single, decisive buyer.
  • The focus is on running the best company, not on exit scenarios.

"First, remember, in order to exit, you just need one buyer. You don't need 100."

Orlando Bravo stresses the importance of having a single committed buyer for a successful exit, highlighting the strategy of selling market leaders to major tech companies.

Fund Size and Performance

  • Thoma Bravo's fund size increase is aligned with purchasing leading companies in B2B software.
  • Market leaders in software have grown significantly in size, necessitating larger funds.
  • There is an acknowledged correlation between larger fund sizes and reduced performance, but Thoma Bravo focuses on value and stability.

"The reason we've increased fund size is not because we can, but it's because we really like buying the number one or two player in each of the many markets within b, two B software or enterprise software that we're in."

Orlando Bravo explains that the increase in fund size is strategic, aiming to acquire top players in the B2B software market, which have grown in size over time.

Diversification in Investment

  • Thoma Bravo aligns with Warren Buffett's view on diversification, preferring a focused portfolio.
  • The firm aims for 12-15 companies per fund to ensure operational involvement and value addition.
  • Excessive diversification can hinder the operational performance of portfolio companies.

"If you have an investor, private equity or venture firm that claims that they make a big difference in their companies... and you have 40 or 50, there is no way you have the time to do that."

Orlando Bravo argues against excessive diversification, emphasizing the firm's hands-on approach to managing a limited number of portfolio companies effectively.

Learning from Investment Mistakes

  • Thoma Bravo has experienced investment misses and learned from them.
  • Misses have occurred due to underestimating negative trends and losing touch with operational realities.
  • The firm aims to avoid repeating mistakes and focuses on transforming companies positively.

"We had a really big deal, a really big company... But on 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..."

Orlando Bravo shares a past investment mistake where they underestimated negative trends in diligence, leading to a learning experience about the importance of thorough analysis.

Decision-Making Process

  • Thoma Bravo has a clear understanding of target companies within B2B software.
  • The firm maintains a target list and often has long-term familiarity with potential acquisitions.
  • The investment committee includes senior partners involved in day-to-day deal aspects to stay close to operations.

"We know exactly what we want to buy. Now, one of my biggest fears in investing... is how far away from the asset does the investment committee get."

Orlando Bravo describes Thoma Bravo's decision-making process, emphasizing the importance of the investment committee's close involvement with operational aspects of potential deals.

Consensus in Decision Making

  • Thoma Bravo requires 100% consensus for deal approval.
  • Dissent is seen as an indicator of a significant issue, given the team's shared industry perspective and operating playbook.
  • The firm avoids controversial deals and believes in unanimous agreement.

"If somebody really has a problem with that deal, there's something really wrong."

Orlando Bravo explains the firm's approach to decision making, where any significant dissent is taken seriously, reflecting the importance of consensus within the team.

Market Conditions and Investment Strategy

  • Thoma Bravo focuses on buying quality companies and adding value through proven strategies.
  • The firm avoids dependency on market conditions for success and avoids catching a falling knife.
  • Diligence on revenue quality and market trends is crucial before investing.

"We don't depend on, as we used to joke around, buying high in order to sell higher."

Orlando Bravo discusses the firm's investment strategy, which is grounded in fundamentals and operational improvements rather than relying on favorable market conditions.

Personal Relationship with Money

  • Orlando Bravo reflects on the change in his relationship with money as wealth increased.
  • He emphasizes the non-monetary aspects of success, such as team achievements and proving the firm's strategies.
  • Wealth has not compromised happiness or values for Bravo.

"It's like when I didn't have any, I had a deep relationship with money because I was deeply stressed out about it... And once I had enough, I really don't have one."

Orlando Bravo shares his personal evolution regarding money, noting how financial security has shifted his focus away from monetary concerns to professional fulfillment.

Parenting and Wealth

  • Orlando Bravo and his partners maintain humility and normalcy despite financial success.
  • They strive to instill hard work and discipline in their children, regardless of the family's wealth.
  • The aim is to prevent wealth from affecting their children's ambition and values.

"We're normal people. We struggle with personal things and with life and need support just like anybody else."

Orlando Bravo discusses the approach to parenting amidst wealth, highlighting the importance of keeping a grounded perspective and instilling strong values in children.## Work-Life Balance and Personal Happiness

  • Orlando Bravo observes the hardworking nature of his family and relates it to his own upbringing, emphasizing the importance of happiness over relentless hard work.
  • Orlando advises being present and supportive of children's dreams without imposing one's own ambitions upon them.
  • He discusses the complexity of growing up in a wealthy family, where individuals may face unique pressures and expectations.

"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."

Orlando stresses the importance of supporting children's dreams without projecting one's own aspirations onto them.

"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..."

Orlando acknowledges that wealth can bring its own set of challenges for individuals, especially regarding expectations and self-worth.

The Struggle of Never Feeling Satisfied

  • Harry Stebbings expresses his constant feeling of failure and dissatisfaction despite professional success.
  • Harry's struggle highlights the difficulty of balancing work success with personal relationships and responsibilities.

"I'm always failing at something, and I'm never happy because of that. And it's never enough."

Harry reveals his perpetual dissatisfaction and the sense that he is constantly falling short in some aspect of life.

Finding Balance and Identity in Adulthood

  • Orlando reflects on the difficulties he faced in his late 20s and early 30s, noting the challenge of balancing work with personal development.
  • He shares that with age, he gained clarity on his strengths, weaknesses, and what was truly important to him.

"I think that's a really tough for me. Late 20s, early 30s were really tough."

Orlando empathizes with Harry's current struggles and recalls his own challenges during that stage of life.

Maintaining Relationships While Achieving Professional Success

  • Orlando discusses the adjustments he made to better balance his work and personal life, such as delegating more and focusing on mentoring.
  • He found that letting go of micromanaging and being less involved in every detail at work actually benefited his business and personal relationships.

"And the more time I would spend on what you're fearful that you won't have, the better the business got."

Orlando explains that dedicating time to personal relationships and less to micromanaging at work led to improved business outcomes.

The Importance of Being Present and the Influence of "The Power of Now"

  • Orlando recommends the book "The Power of Now" to Harry, emphasizing the importance of living in the present moment.
  • The book's message resonated with Orlando, especially regarding the balance between learning from the past and not being consumed by it.

"You got to read the power of now."

Orlando suggests that Harry read "The Power of Now" to help him focus on being present and not overly concerned with the past or future.

Personal Fears and Strengths

  • Orlando shares his biggest fear of stagnation and feeling trapped.
  • He considers his ability to bring people together and inspire collaboration as his greatest strength.
  • Orlando identifies his short attention span as a weakness, preferring to work on multiple projects.

"I think it's what I'm running away from. It's stagnating. It's feeling trapped."

Orlando describes his fear of not progressing or feeling confined in his life or career.

Advice to Younger Self and the Role of Timelines

  • Orlando would advise his younger self to relax and be authentic, rather than trying to emulate others.
  • He reflects on the pressure he put on himself by setting strict timelines for achievements and now believes such timelines are unhelpful.

"I would tell myself to relax, first and foremost, and second, to remember to be real."

Orlando would encourage his younger self to ease the pressure and embrace his true identity.

The Challenge of Philanthropy

  • Orlando discusses the complexities of philanthropy, comparing it to business where success is more easily measured by profit and loss.
  • He questions how to measure the impact of philanthropic efforts and what defines success in the nonprofit world.

"How do you really measure your impact and whether that effort and those dollars are producing the desired impact?"

Orlando highlights the difficulty in assessing the effectiveness and impact of philanthropic work.

Future Goals and Growth

  • Orlando envisions continued growth and positive change for his team and organization, especially during challenging times.
  • He believes in the value of operations, partnering with management, and ethical business practices.

"We would have achieved another step function increase in what we do and in our mission."

Orlando anticipates significant advancements in his work and contributions to his field in the coming years.

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