"The Cognitive Revolution"
00:28:06 · Marc Bhargava
Then the third piece is to actually build out the AI enabled software and the product to get pilot clients, to get customers, and to prove the automation percent. And then from there, both grow organically, but also buy kind of smaller midsize platforms and targets and be able to show the margin improvement, the free cash flow expansion through growth. And then from there, continue to wash, repeat, and become these compounders that are growing organically and inorganically that have this data moat from the companies they own and have a really deep understanding of what the customer wants, ultimately giving both services and software offerings to their customers. So that is our underlying thesis. We've placed, you know, eight or so bets now. Many of them are kind of off to the races, much larger, better well known companies like Crescendo or Long Lake or Yudia or others that we've more publicly announced. And we're seeing a lot of traction in those companies, but then also with founders and others who wanna go in on the strategy as well as they see every three to six months the model's getting better, the level of automation getting better.
00:29:09 · Nathan Labenz
[00:29:09] S0: The vision that you articulate for this sort of empowered human with AI as, you know, complimentary tool is a vision of the future I would like to believe in. I think I'm gonna come back in a few minutes and challenge how sustainable I think that is over, you know, the medium term. But just to dig in a little bit more on the playbook first, What's the sort of happy story for the relationship between a software business and the the service customer? Like, presumably, you don't just show up one day and say, hey, I'd like to buy your company and transform it with AI. Right? So what is the... What are the sort of steps, the milestones, the kind of points of buy in, the points where you kind of determine that, like, yes, this local services business actually might be a good target for us to really, you know, not just try to sell into, but actually, you know, marry for lack of a better term, you know, bring into the bring into the part of the the compounding story.
00:30:12 · Marc Bhargava
[00:30:12] S1: You know, Crescendo, the call center roll up is a good example where they got to 10, 15 different clients. They had a smaller sort of revenue base, but they were selling in and had a high degree of automation. And that's when we said, we should actually buy a call center that does, you know, more meaningful amount of revenue. And so a lot of the times, it's existing clients or pilot clients are very open to testing software. And then once they're starting to see the results, it's hard for them to fully implement it because they might not have the engineering team, they might not have the CTO. So you actually see a lot of the pilot clients or customers say, hey, this is the writing on the wall. We're seeing this automation, but we might not necessarily be able to fully implement it. We would like to sell to you. We get to cash out, but we also get to roll over. So if they're rolling over 30% of their equity and they think there's a 10 x from here because they've seen the power of the automation and the potential of the story, they're more likely to sell to us than, for example, to private equity because we'll let them roll over 30% and get another 10 or 15 x on that amount. So the more classic version of it is, you know, we go out, we get customers, we get pilots, we start working with folks. We also get a sense of which of these companies want the technology transformation, which of them get it. And we put a premium on that and we try to buy those style companies cause our goal is really revenue increasing. So as opposed to private equity that might buy a company, cut costs, improve margin that way, obviously find it, have debt financing. Our view is a little bit different of if we find some of these pilot customers, they can end up being the targets and especially if they're aligned with us on the idea of bringing in technology and wanting to grow revenue. And you'll see that alignment a lot of times in the amount that they're willing to roll over in these transactions, and that's always a really good signal.
00:31:53 · Marc Bhargava, Nathan Labenz
So we've been seeing this now across many of the different industries we're in where we're buying companies that are quite proprietary because we've built that relationship and we've proven to them the technology and they've been really impressed and they understand that for it to really be embedded in their company, we have to buy the company and it's a major shift. [00:32:13] S0: I would assume that's, like, required as part of these deals. Like, you're not letting people roll over nothing. Right? Or or, like Right. Leadership has this. I assume you wanna retain leadership and they have to, like, have skin in the game.
00:32:13 · Nathan Labenz, Marc Bhargava
[00:32:13] S0: I would assume that's, like, required as part of these deals. Like, you're not letting people roll over nothing. Right? Or or, like Right. Leadership has this. I assume you wanna retain leadership and they have to, like, have skin in the game. [00:32:23] S1: Exactly. But it's been a really it's been really great to see two things. One, folks who said, yeah, lots of private equity firms have tried to buy this asset we didn't really wanna sell, but now we really like your team. We like the growth approach. We like your venture back. We like you're not using debt. We think this tech transformation is real. We want to sell to you and we want to stay on board. We want to AI enable our workforce. We want do all these things we really couldn't do alone and we buy into the upside and we want to have the second part. We want to have this larger percent rollover than you traditionally see in private equity And so folks are, you know, really pushing for that. So it's been... I think our secret sauce, one, is in these hybrid teams of technologists and industry experts. And then two, is proprietary deals and the assets we're going after. We're building these relationships through trust, through tech transformation, and we're getting to do proprietary deals. And so that combination of people arbitrage and deal arbitrage, I think, is a a really special alpha for us.
00:33:18 · Nathan Labenz
[00:33:18] S0: Hey. We'll continue our interview in a moment after a word from our sponsors. Can you tell me about the process of working with early, like, design partner customers? And I specifically have a couple things in mind here. One is, like, how do you think about the faster horse problem? You know, there's always this debate, and it maybe can be, you know, answered with a sequence. But there's always, like, what does the customer want? Oh, I'd love to have this go faster or not have to do this task or whatever. And then there's the... Maybe this whole thing could be transformed. Like, maybe it could be structurally different. I often use a customer service. I have a a talk on AI automation, and the example that I always go to there is just taking customer service ticket. In many organizations, the first thing that might have to happen with a customer service ticket is prioritize the customer service ticket. And so that's something that you could probably automate. You can, you know, think about what are the criteria and you can, you know, talk to the people that are on the ground doing it. And you can... Through interviewing and, you know, looking at a bunch of examples, you can kinda draw out of them, like, how are they actually doing this? I find that that's often one of the stumbling points actually, especially if if people have to... You know, if if these services businesses are trying to do it on their own, like, they don't necessarily know why they're doing what they're doing in many cases. So it it needs to be kind of drawn out of them. Like, literally eliciting the chain of thought from the human is like a, you know, a key step in the process. But then there's also the idea that like, well, geez, what if AI could respond to these customer service tickets? Like, we might not have to prioritize them at all because we could just respond to them all immediately. Then this whole prioritization step becomes, you know, kind of a moot point. So how do you think about that as you're, you know, really getting just off the ground and trying to figure out, you know, is this is this a business that we wanna keep the bones of and kind of find these, like, you know, these automation opportunities within versus like when does something need to be kind of reimagined? And again, you know, that might be a sequence thing, tell me how you think about it.