Private equity ruins tech companies
blog.zmh.orgThe title could be generalized to "Private equity firms ruins companies"
I haven't been to the dentist in 4 years and I'm hell-bent on finding one that is not part of PE or any type of corporate ownership. I'm prepared to drive to rural areas or hours away because I will not trust that their incentives are aligned with mine.
Is there an easy way to discover whether or not a given business is owned by PE?
Can you contact ownership? If not, then yes.
Tech seems to accelerate the decline though, without the inertia of physical stores or plants to slow things down.
Some of their argument:
" ... owners focus on aggressive cost-cutting and “streamlining” operations to boost short-term profitability. This is extremely destructive, leading to mass layoffs, reduced benefits, and wholesale outsourcing. "
could just as easily be used to claim "tech companies ruin tech companies."
Paul Virilio has been saying that for years
PE are vultures: vultures feed on dead animals, not healthy ones. You don't sell off a successful, thriving business to be gutted and restructured because you're going to make much more money keeping it going the same way.
"Private equity backed companies are 10 times more likely to go bankrupt than public companies." - is this because they're running successful companies into the ground or because the kind of companies that get eaten up by PE are the ones that are failing anyway?
A lot of PE acquisitions are companies with would have otherwise trundled along not making any money but taking a very long time to go bankrupt, with the PE firm pushing them much faster towards bankruptcy. There is a causal relationship between a PE acquisition and going bankrupt, but nonetheless you’re right; obviously companies which are bought by people who buy failing businesses have worse outcomes than public companies.
> PE firm pushing them much faster towards bankruptcy
the PE firm pushing them to do something drastic, but low chance of success, in the hopes of turning the fortunes around.
And there's nothing wrong with that imho - if it was going down, might as well chance a lottery ticket. The people who lose money are the PE investors, who knew the risk coming in.
I think a more apt comparison is to fungus -- it can be part of a healthy ecosystem, rotting and breaking down old growth. It can also take hold of an otherwise healthy host long before its natural end, and just like with our bodies and food we take steps to mitigate that.
A single example is insufficient, especially when that example is Drupal.
In a former life I evaluated WordPress, Drupal, and some other open source CMSs. Drupal seemed remarkably terrible. Maybe I just wasn't the target user...but UI, UX, and DX all seemed blighted and the ecosystem much less vibrant than WP's. Came away thinking it was a vestige of yesteryear, and not something in which to invest any time, energy, or money.
Maybe that's a harsh take on Drupal, but one already-seemingly-in-decline property from which one PE firm extracted value... if over-extraction and under-investment really is a systemic problem of PE, there must be many more, much better examples.
If you look at the chart, Drupal starts declining immediately upon being purchased. Hard to imagine Vista was able to destroy the community that quickly; seems more likely they bought high on Acquia, or even Acquia was doing something sneaky to juice its sale price.
I've seen firsthand how PE ruins startups. I joined a seed co and our founder went with a PE firm rather than a VC for our next round. The VCs were upfront about job cuts but the PE investors did not say anything until they took over.
Needless to say, the founder got a good paycheck but we were left holding the bag.
It was a bloodbath and they completely ruined the culture, product, morale, and any semblance of growth. It was personally the most stressful period of my working life...
From then on, the moment that I see private equity mentioned anywhere, I know its time to run.
Isn't venture capital merely a kind of private equity?
VC is musical chairs waiting for the greater fool to come along. Still good times. PE is the chop shop, there is no greater fool left except the customers and the employees. End of the road.
A company I worked at got bought by private equity.
The sales started to slump for the product I worked with, and they decided to make up for it by raising prices. They figured they would make more money than they lost by alienating customers. The other thing they did was drastically ramp up license compliance shakedowns (one of the shadiest practices I have seen in the industry).
The product and company are still around because bits got sliced up, spun off or sold off. PE no longer has its tendrils in it, although I am not sure who does now.
It sounds unusual for a seed-stage company (I assume that’s what you mean) to seek funding from private equity. Did the company already have significant revenue and profitability? Why did the founder go for private equity rather than VC.. was the founder basically looking to sell/exit at that point?
Yeah exactly - it was essentially at the revenue of series B or C at that point. This is in 2021 during the height of ZIRP, so I assume part of it was frothiness but the aftermath was terrible.
This reads like it was written by generative AI. Private equity is often the vulture a company is sold to when the founders can’t take it public or find a symbiotic merger first. In a traditional LBO it loads the company with debt, based on a steady stream of cash flows. The cash flows are key. It’s akin to having a wild stallion which grew up fast and beautiful and then putting a saddle on its back and an ore behind it. In public companies that looks like going from a growth stock to a dividend stock to a high dividend stock that people only buy for tax purposes because the dividend is less than the devaluation in stock price over time. You can look at the financial statements of companies or the details in any stock app and you can see where they are at in this maturation curve. Then invest your time and money accordingly.
It seems like none of the issues with wpengine have anything to do with private equity. The article just said private equity sucks, which sure i will grant, but that doesn't say anything about this particular conflict. Private equity isn't responsible for literally every sin in the world.
I feel like this article is essentially a smear piece - wpengine is associated with private equity therefor is not deserving of sympathy. Or something like that.
This is an aspect of the Wordpress vs WPEngine I hadn’t considered. Does anyone who’s more familiar with WPEngine than me know if the VC ownership has affected its behavior?
Silver Lake (the owner of WPEngine) is a PE, not a VC.
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PEs tend to target investments in mature companies instead of early stage to growth stages companies.
It's just another form of capital for companies that have decided to stay private, or wish to return to private ownership.
Oftentimes, if leadership makes the choice to do one or the other, that means the company isn't doing as hot, because until recently, listing publicly and raising capital on a strong listing was fairly doable.
That said, imo this does lead to a bit of a bias about the outcomes of PE ownership, because if you are choosing PE ownership, that often means investors and potentially even leadership just want an exit and don't care as much about the underlying product anymore.
This is not really news. The question is, what there is to do? I think that it is logical to sell your company to highest bidder when you want to exit, and often the highest bidder ends up being a PE firm.
Be a founder that wants to build a long-term business that employs people that want to create a good product. Be an employee that will only work for companies founded by those people.
This. Also, importantly, you need ownership and governance mechanisms as a founder so employees are partners.
> I think that it is logical to sell your company to highest bidder when you want to exit
Some founders are more than happy to sell at a lower price if they think the lower bidder will be a good custodian of the company.
“Good custodian” is relative, but often means things like treating existing employees well, trying to maintain the best parts of the company culture, keeping clients happy, keeping the quality of the product or service of a company at a high level, etc.
Sometimes founders realize that an extra bag of money on top of the multiple bags they are already getting won’t buy them self-respect.
Fiduciary responsibility can make this murky sometimes, but that’s a cop out more often than not, imho.
Even if that's true, that's even less reason to attack them and make yourself look terrible. Just wait and they'll destroy themselves.
Sure, but the blast radius still has to be considered. Working to reduce that is certainly a worthwhile endeavor even if the end state is the same.
Working to reduce what? The risk of wpengine over extending and going bankrupt? So we try and bankrupt them earlier? This makes no sense.
Campaign to stop PE takeovers, stop investing in/consuming from PE-backed firms, refuse to work for them (a highly privileged option, but more likely to be available for tech), etc. Basically a boycott.
Private Equity ruins nursing homes.
It would be good to explain the difference between PE funding and VC funding.
VC relies on you growing enough to attract bigger investors in the future at a higher valuation, including going public. PE bets on you having a really reliable cash flow that they could strap a bunch of debt on to extract the cash in a tax-favored government-subsidized fashion.
They’re sort of the inverse in the stereotypical PE acquisition. VCs inject money into the business in the hopes of future growth. PEs then extract that money by maximizing short term profits at the cost of the company shrinking.
Hmm, why was this removed from a homepage?
Reading this makes me change my view on PE a little. Beforehand I would have just been in the "PE is bad" camp. But if you look into how a PE company like Silver Lake works and their prior purchases, it's not asset stripping. It seems much more like taking a bet they can turn an underperforming public company into a well performing private one and cash in the difference, usually with a partner who has a plan on how to do the turnaround.
That's not to say it's good. It's just another investor tool like VC money. And it's probably also a simplification to say it's all about short term profit when they talk about being able to take companies on longer term strategies than the public market would allow for.
Also, Water Wet
Is there a company out there that has survived a gutting by PE?
Last I heard Barnes and Noble was doing pretty good:
https://www.theverge.com/23642104/barnes-and-noble-amazon-bo...
B&N is also probably the only example I can think of that has gotten somewhat better since. But I also wonder if its an outlier even worth considering. I don't work at B&N, so this is me making a guess. They don't have any kind of patents (software or otherwise), so no real valuable IP, its just a straight forward business. Not a disruptor of tech. No manufacturing, or at least manufacturing it is highly dependent on. There is nothing really in their line of business that makes it worth it for a brain drain to reduce cost and sell it higher than what you bought it for. But I'd also guess there are few to no people who want to enter the book selling business. So if your a PE firm that is gonna acquire it, your only option is to actually run it halfway decently? I guess maybe they could have slimmed it down to virtually nothing and tried to sell it to Amazon, but I wonder if that merger would be allowed to go through?
Most of B&N's competition is dead -- Amazon ate them. There is still a niche for actual books bought in person, and there is still a demand from consumers to go to a bookstore and do the bookstore thing, drink coffee, peruse, etc.
That niche is probably just in big, educated markets. Like the B&N in Northern VA I used to go to in college is still there. But at a mall in rural Idaho, probably not so much.
For sure, I agree with a lot here. I am still a regular customer of B&N. Even got a paid membership this year and switched from the Kindle to the Nook. I image there is some customer base like me who are using B&N just to avoid Amazon also.
Yes. The specific equity firm that owns WP Engine has multiple notable successes, including Skype, GoDaddy, and Dell. (https://en.wikipedia.org/wiki/Silver_Lake_(investment_firm))
Have these companies actually improved since being acquired, or just not collapsed?
It depends entirely on the strategy. Sometimes PE invests to help a business acquire other businesses
Dell seems to be doing OK.