What happens when private equity buys your competitor?

So relevant info - I used to work at a Vista Equity owned company, one that was eventually sold to Oracle. Vista was run by a bunch of MBAs that believed that had the best insight on how a to run a software company, including what technology to use.<p>We were evaluating better tools for version control as we had been using Subversion. We were seriously considering Git, Jira, and Github. Then Vista decided they knew what was best for all of their companies and decided it was Microsoft Team Foundation and Foundation Server. :&#x2F;<p>I know Vista has had a lot of success but it certainly is not related to their ability to make technical decisions for the companies they own. They are succeeding in spite of this kind of decision making, not because of it.

If a PE shop buys your competitor, you should rejoice. PE firms primarily generate returns through (1) debt repayment from free cash flow, (2) multiple expansion, and (3) operating improvements.<p>Because of #1, PE firms like annuity-like businesses with predictable cash flow. A ventured-backed startup doesn&#x27;t need to worry about #1, and therefore can focus all their internal efforts on #3. (If multiples expand, then that&#x27;s even better.)<p>Here&#x27;s an analogy. Venture-backed companies are busy building rockets, and rockets either take off or blow up. When PE takes over, your competitor has decided...&quot;F this, let&#x27;s go build a train instead.&quot;

One aspect missed is that the government is getting juiced by leveraged PE deals, so a good chunk of PE returns are the tax deductions from the interest on the debt that gets split between debt issuers and PE firms. Why isn&#x27;t everyone becoming a PE firm then? They did at some point in the 80s (re-watch Pretty Woman), when there was a plethora of private companies with lots of &quot;fat&quot; cash reserves on them and management that would rather spend that on private jets than return them to shareholders.<p>Well-off corporate executives inspired PE activity. Well-off PE managers drained the market of cash cows and tightened corporate rules. The funny thing is in the real world, if you advertise how successful you are, you attract competitors, which is why I find it quite puzzling that the first thing startup founders do is advertise on TechCrunch when they&#x27;ve raised a big round. It&#x27;s like saying &quot;Look how much money is in that pot of gold over there, we are running for it.&quot; Does the value of the signalling increase the risks&#x2F;damage from it? Would love to get your thoughts.

&quot;Ping Identity, for instance, disclosed a 40% annual growth rate in its acquisition announcement. That’s below the average growth rate for a 9 year old public SaaS company&quot;<p>Wow. It&#x27;s crazy that 40% annual growth can be considered too low.

It&#x27;s definitely true to an extent that when the founders doesn&#x27;t have any control or motivation, the outcome tend to be subpar. Also, the post highlights the obvious difference between PE and VC that PE mostly looks for min guarantee return and companies which are predictable to get them returns through either a sellout or IPO. What i wonder though is, why would founders in general go for this buyout(apart from the obvious reasons like money). Is there any reason companies are sold to PE investors in general?

I think this is more about distributions than it is about expected values. If VC and PE generate roughly the same returns to their investors (say 20% to 25% IRR), what does this mean for the companies they invest in? Fred Wilson notes (<a href="http:&#x2F;&#x2F;avc.com&#x2F;2009&#x2F;03&#x2F;what-is-a-good-venture-return&#x2F;" rel="nofollow">http:&#x2F;&#x2F;avc.com&#x2F;2009&#x2F;03&#x2F;what-is-a-good-venture-return&#x2F;</a>) that with a five year average horizon, he expects roughly three buckets of outcomes:<p>1. 1&#x2F;3 of investments go to zero, i.e. blow up and lose substantially all of investors&#x27; money.<p>2. 1&#x2F;3 return 1.0x to 1.5x (on average across the bucket).<p>3. 1&#x2F;3 return 7.5x (on average across the bucket).<p>That is wide distribution of outcomes. In PE, on the other hand, you&#x27;d get a much tighter distribution of outcomes around 2.7x returns. A single investment (much less 1&#x2F;3) going to zero would destroy the fund, so PE funds want to prevent that from happening. The conclusion is that Vista is pretty sure it can get a 2.7x outcome or better, and it&#x27;s also pretty sure it wont zero its investment.<p>So should Ping&#x27;s competitors rejoice after the Vista buyout? It really depends on how quickly they&#x27;re growing and how much market share they think they can win. Do they believe that either [1] Vista will fail in 2.7x-ing Ping, or [2] they can succeed even in this 2.7x world? If they believe either of these things, then the buyout is probably good news for them; if they don&#x27;t, then it&#x27;s probably bad news for them.

I read this as &quot;when PE buys your computer&quot; made more sense the second time I read it.

&gt; Founders are special people who somehow glimpse a vision of the future that few others understand, and then go build it.<p>Ughh, more founder-worship. What&#x27;s more believable is that lots and lots of people can see glimpses of the future all around them. Out of that larger set, the ones that are lucky enough to have access to the capital and connections needed to start up and run a company are the ones that end up as &quot;founders&quot;.