Prof G Markets
00:14:58 · Ed Elson
[00:14:58] S1: One of the cliches, but it's also true about the private equity strategy is that you buy a company and then you dramatically cut the costs of the company, which usually comes in the form of layoffs. And that is something that you guys have demonstrated as well. This is a pattern that is pretty consistent across the companies that you acquire. It's also something I think that peep... Some people criticize you guys for rightly or wrongly. But when you look at some of the the strategic decisions you've made, like we transfer staff, for example, two months after you bought it, 75 of the of of the employees had been cut. I mean, how central is headcount reduction to the strategy? And what do you make of, one, the fact that that does sound very... Also very similar to the private equity model, and two, the criticisms that people might have that, well, you're cutting head count.
00:15:53 · Luca Ferrari
[00:15:53] S2: If it's a moral moral judgment, if if someone thinks that trying to make a business as successful as possible is bad. I I don't have any defense against that. It's a completely valid point of view. I disagree obviously, or I wouldn't do it. I think in general, the world tends to work better. The economic pie tends to grow larger if businesses are run at excellent level. But, you know, it's a perfectly, I respect the fact that someone would disagree with me on that point. We definitely, we have done it almost every single time. So it's definitely been a pattern. I would say that in general, cost efficiencies have been approximately 50% of our value creation of all. And within that 50%, probably the org part, it's probably roughly a little over half. So maybe I would say of 100% of of our value creation, I'd say maybe 30, 35% has been about optimizing organizations. One thing we do that's I believe misunderstood is people tend to think that we end up reducing headcount simply because we wanna cut costs. And while optimizing cost is obviously a significant driver, we actually try, I'd say just as important for us is that we make that org far better positioned to kick ass for a long time. The, in my view, flawed assumption some people have is that the number of people you have in a company is almost, you know, definitively gonna determine whether the company produces great product, it innovates quickly. We are of the opinion that if there is a correlation between headcount and say innovation or the ability to optimize customer experience monetization, that's a weak correlation at best, and that what drives those virtuous outcomes for the most part is talent density, whether people use powerful tools, whether the culture is one of, you know, rationality, high performance, whether or not you have a lot of red tape or you actually give people plenty of space. So what we try to do is bring these companies back to what I would call startup mode, small teams of supremely talented people. We'd get out of the way, give them plenty of, you know, very wide mandate, very powerful technologies. I mentioned them quickly earlier.
00:18:10 · Luca Ferrari
And what we see consistently is that magic happens despite going down in headcount maybe 80%, sometimes more demonstrably, and we we publish a lot of this stuff on the various blogs or brands, but demonstrably the rate of which we fix bugs, reduce say technical incidents, or launch new features goes up sometimes dramatically. So yes, we we have absolutely consistently cut headcount, no doubt about it, sometimes dramatically. So we do so also, no doubt about it, for for cost efficiency, but equally we have been able through the same means to make these businesses a lot more competitive from the point of view of product quality and a pace of innovation. So for us, it's really a win win, but I understand that it's painful for those involved, we try to mitigate the unavoidable, I think, pain of being laid off, which sucks. I mean, it's a very tough thing to go through, by being transparent, offering top of market separation packages, by being empathetic and flexible, but that doesn't make that transition painless. It makes it a little bit less painful. And we... If we could do what we do without that objectively bad element, we will certainly be very happy to to avoid it. None of us enjoys that part of our jobs for sure.
00:19:29 · Ed Elson
[00:19:29] S1: My understanding is also that you are you are specifically finding companies that are struggling, struggling on basically every metric, struggling with their profitability, struggling with their business model, and these are companies that otherwise would have been stagnating and perhaps would have done the layoffs anyway. I guess this gets to the the next question, which is how do you identify what company is the right company for your business model, for integration with your software products and your software team? What makes a company acquirable?
00:20:07 · Luca Ferrari
[00:20:07] S2: I think you're right in many ways. Would say a big percentage of our acquisitions have been struggling companies. Not all, we have acquired several companies that were growing nicely, I'm thinking Commute Airtable recently we shared the growth rate. But yes, we have a bigger percentage of companies in our acquisition portfolio, let's say, that were struggling than say most acquirers. That's I think broadly speaking a valid characterization. And sometimes, yes, the team, the detective teams themselves tell us that, look, if I say I need to take difficult decisions, you know, in a way, let's, I'd rather you do it. So it's happened. I wouldn't say it's happened often, but sometimes it's happened. So what we look for is on a qualitative level, three things. We like to acquire large businesses relative to our current size. And the reason is, I described how we conduct these extremely deep transformations and integrations, those take a massive amount of time and effort. The good news is we found that we don't need, like the number of people, the amount of time we need to complete those transformations does not seem to scale really, at least not linearly the scale of the business. And so we're better off acquiring fewer companies and deploying those resources toward transformations that move the needle as opposed to acquiring a 100 companies, but not then not having the time to do anything really well. So we like to buy, say, five companies a year, give or take, that that are large. The second thing is we wanna feel confident we can predict their performance at least, you know, five or six years out with confidence. And that's an entire whole discussion of science, but on a high level, that's the answer we need before we decide to pull the trigger. And the third big criterion is we need to believe we can we can greatly improve those businesses. Hopefully, the product, tech, the org, monetization marketing, ultimately revenue and cost. You know, it's an it's an earnings game at the end of the day. So those are the three, you know, kind of big criteria, then how we get to those answers that's, you know, a lot of many steps and it's got complex. Well, other than the scale, the scale is very obvious. And once those are, you know, three checks, then then it boils down to the math of returns.
00:22:21 · Luca Ferrari, Ed Elson, S0
You know, among the companies that check check all three boxes, then we look for investments that will yield the highest returns so we we can compound as fast as we can. [00:22:32] S1: We'll be right back. [00:22:42] S0: Support for the show comes from Engine. The companies winning right now aren't cutting travel. They're booking smarter. Here's the reality. The average business traveler spends forty five minutes booking a single trip on a legacy platform. With Engine, that booking time drops to as little as two and a half minutes. And its AI powered personalization gets faster the more you use it. Multiply that across your team every trip every year. That's not a perk. That's a competitive advantage. Last year, Engine customers saved more than $300,000,000 on travel. And with the Engine X card, get up to 10% back on any hotel booking. 33,000 businesses have joined. Now it's your turn. Get $500 when your business signs up and starts traveling at engine.com/founders. Engine X Visa commercial cards are issued by Fifth Third Bank NA member FDIC. Earn up to 10% back end points on eligible engine travel purchases. Actual reward rates vary by purchase category and may change. Points have no cash value and are redeemable for rewards through our program. See full rewards terms. For details, go to engine.com/x/rewards-terms.