Cost-cutting by outsourcing; slashing R&D (a lot of it is highly unproductive); lowering headcount; slashing S&M by removing low ROI channels, and customers; firing underperforming salespeople (loads of those in every company on the face of the earth); increasing prices on unprofitable customers (if they drop you it's no biggie since you just increased P&L if they pay up you're also increasing P&L); lowering footprint (a lot the tech companies have their HQ in Class A offices in HCOL areas, so lowering footprint can save a lot of money); in more exotic deals I've seen other tech firms try to monetize some IP that the company had no use for. 

All in, you really just have to get creative on the way you do it (and have good data).

 
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My (critical) take having been involved with various Thoma companies (as a potential buyer and a seller on the banking side), they just underinvest in everything, fire people, and optimize their P&L for an exit in 3-4 years.

Most tech companies can underinvest in R&D for a while without major issues, same thing on marketing /sales. Thoma basically just coasts on previous investments and taps future growth. When I was on the sell-side for a TB port co, the story from management was we’ve under invested in tech, under invested in marketing, etc and wanted an investor who would spend for growth. Their playbook is basically buy a company that is growing 30% a year with -10% margins and turn it into a 25% grower with 25% margins, which looks great when you’re selling it. Typically means there are all sorts of issues under the hood, but that’s just my biased opinion.

They’re obviously great at this and have the returns / fundraising track record to show for it, and if it was actually as easy as I describe above every fund would be copying them. Think their strategy of going after these mega-take privates is very smart, as there is little investor competition and tons of room to optimize typically

 

I'd be curious to know how long this strategy will continue to work before breaking down. It seems like slashing R&D and reducing headcount is what all tech funds are doing, but the strategy is just designed to enhance the present valuation at the expense of future earnings. Hypothetically, what would happen once all the $1B+ SaaS companies have been passed around by sponsors who have slashed the legs out from these businesses so that they cannot achieve the same rate of growth in the future? At the rate TB, Vista, WP, and other MF tech funds are raising money it almost seems inevitable

 

I should start caveating I'm based in europe and never crossed them, but: You make it sound very bad, but actually they're just rationalizing a sector which was going wild thanks to the crazy monetary policies. Tech companies (most, not all obv) have been throwing in the toilette billions and billions of investors money pursuing "growth" when with a couple of easy fix could have been self-sustainable. Maybe they will blow up as someone else in this thread says, but any rational investors / manager would take a 25% growth / 25% margin over 30% growth / -10% everyday of the year

 

Anticipate Thoma Bravo slumping real soon and this is ignoring their $150m blow-up FTX investment. They already invested a ton before the steep drop in valuations middle of this year and right now it's just playing the 2-4 year churn game as another poster mentioned. Get in and get the hell out asap, hoping to notch a 2-3x in the process. Orlando is a great salesman and has been able to trick a lot of LPs into piling into his funds over the COVID years in particular. 

 

Sure they've thrown a lot of money at companies with inflated valuations (which will 100% hurt their IRRs) but they've also done a lot of add-on acquisitions at the same time to help bring down the multiple they paid.

 

If they slump, they'll look like every other tech buyout firm and still better than vcs. If it gets really bad, they'll buy back debt on portfolio companies at pennies on the dollar (cue 2008). Realized loss ratios, even during the recession, were still pretty low for buyout firms. Couple this with cov lite lender protections and they won't be turning over the keys of portfolio companies. Despite, in some cases negative operating and ebitda margins, these are still incredibly high quality companies that have the ability to grow revenue in their sleep (net revenue retention >100%) and have pretty high qoe given recurring revenue.

So what's the result? Longer holds, lower IRRs, and likely still achieving reasonable multiples. 

 

Why do technology companies always misallocate their funds and waste money investing in unprofitable growth? Because they have too many poor managers at the helm! But don't worry, there's always a lot of money to be made cleaning up the market and restoring profitable growth. Just remember: if you can't run a tech company, there's always a job waiting for you as a market cleaner!

 

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