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- [00:00]
A
You said that investors are narrative driven animals.
- [00:03]
B
We're trying to find and build a story around who is this company in its market, why are they well positioned and how do I build conviction that they are going to execute.
- [00:16]
A
Do you find you need to have more conviction in the company itself or the market the company plays in?
- [00:21]
B
I think the answer is both. Like it's hard to disaggregate in terms of like order of importance. Market and product then execution are probably the order in which I would put those.
- [00:31]
A
You want to keep it stupid simple it sounds like. Now can you just speak to how your philosophy around forecasting models has changed throughout your career?
- [00:39]
B
The seductive trap that people fall into is assuming that complexity in a model equals sophistication or equals accuracy. I just have never found that to be true.
- [00:49]
A
What separates a useful board meeting from a useless one?
- [00:52]
B
I think the mistake I see a lot of people make is reading us the news. The board meetings that are the best are the ones where somebody comes in with these are the three topics we need to discuss. This is what I want to get out of it. Whether that's decisions or it's just perspective.
- [01:05]
A
Is this thing on Yesterday's Price is not Today's Price. Welcome back to Run the Numbers, the show where we talk with the world's top CFOs, investors and operators. I'm CJ, a tech CFO, and my goal is to unpack the frameworks and operating principles that make you better at allocating capital and leading teams. On today's show, I'm joined by Chris Nesbit. Chris is a managing director at psg, a leading growth equity firm that's grown from a small team doing scrappy vertical SaaS deals into a platform with tens of billions in assets under management. In this episode, we go deep on how great deals are actually found, from early treasure hunting in vertical SaaS to how sourcing evolves as your brand scales, how investors really make decisions, why investing is more narrative driven than most people admit, and the risk of letting the story drive the strategy and what actually matters in the boardroom, how to avoid performative meetings and why authenticity creates an edge. We also get into why simple models often beat complex ones, how to think about forecasting when the future is inherently unknowable and Chris's perspective on the roles of market, product and leadership in driving outcomes. Not all of those are created equal. If you like the show, please remember to like and subscribe. It helps us with the algorithmic overlords. And if you're looking to hire the best finance and accounting talent. I'd love to help. I run a recruiting service that pairs you with thoughtful, high signal candidates from our community of finance leaders. People who, for better or worse, voluntarily research renewal rate calculations on weekends. If that's of interest, shoot me an email@talentoslymetrics.com and we can talk on to today's episode with Chris. Chris, thanks for joining me on the podcast, man.
- [02:47]
B
Happy to be here. Thanks for having me.
- [02:49]
A
Usually I'm getting to meet people for the very first time when I do this podcast, and I'm trying to figure out how much I can joke around with them without, like, having any alcohol involved or anything like that. So you, you're one of my longtime friends. I appreciate, I appreciate you meeting me in this semi professional recorded setting.
- [03:07]
B
Yeah, well, it's only going to be semi professional. I appreciate you having me on. This is going to be fun.
- [03:11]
A
So I want to give people some context because me and you met back when I was at Providence Equity Partners for a couple of thousand cups of coffee. You were at psg, which was just starting out back then. How long have you been at PSG now?
- [03:26]
B
I started in the summer of 2015 and there were a grand total of three people on the team. Chris Andrews and I started at the same time. I'm not sure that we actually had a fund at that point. I always joke with people that I had the easiest interview process in private equity history because the team was two partners. And then my buddy John, who was the first junior hire at psg. And so I met our CEO, Mark Hastings, and Marco Ferrari, the first partner, for half an hour a piece. That was the whole interview process. So I lucked my way in here pretty early.
- [03:55]
A
A lot of people listening right now have probably heard of PSG over the last 10 years. So you said back then it was like three people. Is it roughly like 30 billion in AUM and like 300 people?
- [04:06]
B
Yeah, roughly 280 people. Offices in the US here in Boston and in Kansas City. And then we've got offices in London and Tel Aviv. I don't know the exact number, but we're over 30 billion of AUM at this point. The place has changed a lot and in some ways not at all.
- [04:20]
A
That is a wild ride. Just the sheer amount of capital you've been able to invest at a level that people are really happy with. When you look back, does it feel like a linear journey? Because you see a lot of funds where they'll take in, you know, they'll do a 500 million fund, they'll do 600 million fund, they'll kind of hover at a certain level. You upscaled the game consistently.
- [04:42]
B
I would say in some ways it has felt very linear and in some ways it's a classic compound growth story. Right. Those are really the two core strategies is basically a US and a Europe fund focused on doing the same kinds of deals. And, and I would say the feeling of linearity to me of PSG and its growth is really related to like our, our strategy and the kind of deals that we'd like to do has evolved over time, but it's always been sort of the same size and stage. It's always been that 10 to $50 million of ARR scale, typically founder, founder owned and founder led, lightly capitalized or bootstrapped. And we just have always kind of gravitated toward like we like to find large markets that are highly fragmented, both from a customer perspective and then from a software provider perspective in markets where there's some sort of fundamental tailwind that's driving growth and adoption, you know, we like to help our businesses grow and scale within those markets. So in that sense it really hasn't changed. The core group of people, I think at PSG has been remarkably similar over a long period of time and we've all kind of honestly just sort of grown together.
- [05:45]
A
I want to talk about your strategy and how that's evolved because me and you used to joke in between squash matches that you were on this treasure hunt for vertical SaaS arbitrage. Are you still focused on a lot of industry and sector specific companies?
- [05:58]
B
We've called our strategy basically small software at scale. And the idea was to be the best resourced firm that anybody was talking to at our size and scale of company in which we enter. And so like, what does that mean practically? Well, one is we love to do follow on investing and part of the reason we've now raised a $6 billion fund to, to effectively do the same kind of deal that we did when we were a $300 million fund is I can support those great businesses over a longer period of time and in a bigger way if I have follow on capital. Historically, we've sort of averaged across the portfolio, investing a dollar of follow on capital for every dollar of upfront deployment. The other big piece of it is it's allowed us to build an operations team that basically is a captive consulting organization that just focuses on helping our portfolio companies with the operational challenges that growth stage software businesses run into. So yeah, I think in terms of like profile, it's remained the same. We, we've gone through our own evolutions. We've kind of now moved to a sector specialized model where everybody was a generalist historically. So like I lead fintech and office of the CFO investing. For us we have sector team leads across all the relevant sort of verticals or sectors that we're really interested in. I think that's going to allow us to be more thematic over time in the way that we're investing, the goal and like what we like and where we want to enter and how we want to support and be partners to our business really hasn't changed very much.
- [07:28]
A
So early PSG was famous for finding vertical software companies before everyone else. Wasn't there a funeral home technology business that did really well?
- [07:37]
B
There was. We are still investors in that business. Yes. Company called Tribute Technology. Great investment, great business. We've either had or we've seen a bunch of funny ones. When I started a psg, we had done four platform investments. One of those was a company called Ministry Brands.
- [07:53]
A
Yeah, Churches, right? Yeah.
- [07:54]
B
Church software and payments. I've done a lot of payments investing in my time at psg. We as an organization have done a bunch. A lot of that has been investing in vertically focused software businesses that are monetizing payments and other fintech products. A lot of that has been investing in actual payments infrastructure itself. But Ministry Brands is really where all that started. We kind of fell backwards into this trend of like, hey, this is just an exceptional business in a really fragmented market that could do a lot of M and A and did a lot of M and A very quickly, was able to aggregate a lot of payments volume and knew how to monetize it better than anybody else. And we sort of looked at all this and went, hey, like this is a pretty cool and powerful combination of how software and payments can converge. And we just sort of backed up the truck on that strategy ever since. And I think it's been a great sort of macro wave for us to ride just the convergence of software and payments.
- [08:47]
A
What are some other sleepy industries you found yourself poking around in?
- [08:50]
B
I've done a bunch of property management. I've seen stuff in like Porta Potty. Erps.
- [08:56]
A
No way that's a thing.
- [08:58]
B
Yeah. There are some funny things that you would never think of that just are like, they're just absolutely exceptional businesses. And ministry was a great example of that. Right. Like you think about that from a defensibility perspective. Like one, the payment volumes associated with it were massive and two, they were recession resistant, right? Like if there was a downturn, people still gave and there's there was sort of a general macro trend of offline to online that a company like Ministry was able to to facilitate.
- [09:29]
A
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- [13:11]
B
Didn't look at it, we bought it.
- [13:12]
A
You bought that one. Wow.
- [13:13]
B
One of the questions was around how's the job changed? And like the early just job description. I was an associate at the time. So like structurally the role is just different. But also in that timeframe, like that 2015-2020 timeframe, M& A strategies were particularly popular. You know the market from a buyer perspective, right? That's how I think about my market. They loved these like vertically focused consolidation strategies where somebody was able to kind of bring together an industry. And so I spent a ton of time just executing sort of add on M and A for portfolio companies. All of 2016. All I did was one portfolio company, a company called Blue Star Sports that now has Stack Sports. We did eight deals and sold it on the one year anniversary of our initial investment. And one of those was Was Racewire. Ryan Henry is, is still somebody that I check in with every once in a while. Cool little company. Another good example of something that's like, yeah, there's a really valuable, you know, little niche business here.
- [14:11]
A
So I want to dig into Bluestar just as an example of how some of these deals can work. Is that called a platform strategy? Is that called a buy and build strategy? Is it called a rollup?
- [14:21]
B
What do you call that colloquially? It's called all of the above. I refer to the business itself as the platform. Depends what euphemism you want to use. I think rollup has a bit of a negative connotation at this point. So I'd probably call them consolidation strategies. That market has changed a lot and I think the buyer universe's interest in those kinds of businesses is different than it was. Less, you know, less exciting probably to the buyer universe now than it was. And so like PSG's, M&A volumes. I do think a lot of people think of us basically as an M and A shop. They think of us as, as we do software roll ups. And I think that's changed a lot. Our add on M and A volumes probably peaked in 2021. Maybe it was 2022. I'm a little loose on the stats, but as a reaction to what the, what the market is demanding, which is, you know, you have to consolidate the businesses, you have to, you have to deliver a great product. A lot of the time the consolidation plays. The issue that people would have with them is they get caught up in tech debt. And so we've learned a lot along the way. I'd say today, in reaction to what we've learned over time, but also in reaction to what the market is interested in, we're far more surgical about what we're going to buy, why we're going to buy it, what the integration plan is going to be, et cetera, than we were at the time. But you know, that was what, that was what the market was demanding at the time.
- [15:48]
A
So I want to reflect back maybe five years and compared to today. Chris, would you say that sourcing is more competitive than it used to be?
- [15:56]
B
I think it'd be hard to say that it's not. I certainly think that the lower middle market is more intermediated or better covered by investment banks and advisors than it was. I think sellers are probably more founders and sellers are probably more sophisticated than they were. You've seen a lot of firms build really great businesses by pursuing a sourcing model, which isn't new. Right like you've seen people continue to invest in a sourcing model as a result. And yeah, I think the market is better covered than it was when I started.
- [16:29]
A
We were talking to Larry Contrella, who's in a similar role as you, but at jmi, and he was saying that when he first started he would physically look through like the Charlotte Business Journal for companies that were out there. And he said it's way easier to find companies now that everybody's online. And there's also, like you mentioned, investment bankers who are stepping in to help to make these connections. So in some ways it's easier to find, but that also makes it easier to find for everybody else to get in front of them and also try to make a deal.
- [16:58]
B
I listened to Larry's episode as a, as a prep for this. If he's the fastest guy to ever be on this podcast, I think I might be the swellest. I think you have to find a different edge and I think it's a relationship ideally it's a relationship driven game, right? Where like ideally you're building a relationship over a long period of time. Where we want to meet great companies very early in their life cycle. We want to be as helpful as we can to them. But it's pretty rare that you're going to get a bilateral call where a founder is just going to say, hey, like I want you to take a look at this. The goal for me at least isn't necessarily that I'm not expecting that I'm going to be able to achieve. Like I'm going to get a bilateral call. Like they just think I'm the best partner. I love that. And for the things that we're really interested in, will try to make things happen on that basis. My goal would basically be a hundred percent coverage of when somebody is ready to think about a transaction. I want to be the one of the top three calls because I've built that relationship with them. I've added value. They understand that we, that we know the space, that we have a thesis that we're going to have thoughts and that we can be value add partners to them. That's really the goal. And we've invested a lot in trying to find those businesses as, as kind of scalably as we can. Larry referred to like, hey, when LinkedIn started putting trending headcount growth statistics, that made it really easy to identify the companies that were doing really well. Think of that as a perfect example of a smoke signal where we just have attempted to build some structure around that and really automate, how do we keep track of the best performing businesses and how do we make sure that we're seeing those and we're getting in front of them and we're spending time with the right leads?
- [18:29]
A
What are some other smoke signals? What do your spidey senses tell you?
- [18:32]
B
This is less like scalably trackable. But I absolutely love to find businesses where the market and the reputation sort of speaks for itself. Right. Like businesses that have achieved an exceptional degree of like customer love or partner love I always think are just absolutely outstanding. We invested in a business last year called Savvy Money that I'm extremely excited about and that's an example one where like I've never seen more positive market signals or more positive chatter than I have seen and heard around that business. They basically embed a credit score module into the digital banking platform. So if you're logging into your bank's, your bank's portal and they're a savvy customer, you can see your credit score right there on the portal. The digital banking platforms love it, the customers love it. It's really kind of filling. A need like that to me is a, is a great sign of both product market fit and strong execution against, against a thesis and meeting a need.
- [19:31]
A
When I was at Parts Tech, you'd be shocked or maybe not shocked at how many investors approached us because they'd be talking to a shop management system. So someone we partnered with who was the core module for like storing everything the shop does, they were the system of record and we were the procurement application within it and they'd be doing the due diligence and that. And they're like, oh, what's that app you keep going into over there to buy Partsuit? And they're like, oh, that's part sec. We love them, we work with them. They're like, can you maybe introduce me to them? Chris, I want to talk about any crazy stories you've had from sourcing. Have there been any unexpected places you've either flown to or rocks that you've had to turn over in order to try to make a connection?
- [20:10]
B
I've done meetings in, you know, Lafayette, Indiana, which is not exactly where you'd expect to find a software business or you know, middle winter in Halifax, Nova Scotia, Very, you know, very glamorous stuff. One of the funny interactions that actually did result in an investment and a successful investment for us was a company called Pineapple Payments that we started with Brian Shanahan, one of the co founders of CardConnect and with John Halpern. We met Brian because he was a board member of a little software business in the church space based in Pittsburgh. And Marco and I flew out to Pittsburgh early on. I mean I was a month into the job or something of the sort. Brian came to the meeting to sort of help the company evaluate the situation, drove me and Marco to the airport and we just kind of kept in touch and, and eventually when he was thinking about doing something next, that was a easy conversation and like good example both of, of sort of relationship driven sourcing. But it was also a good example of like that's a business that we started with a $5 million check just because we wanted to back Brian and John ended up being a 40 or $50 million check.
- [21:12]
A
How much do you think brand equity value gets you in the room? Now we covered earlier the come up that the firm has had from three guys in a garage to almost 300 people and 30 billion in AUM. Now do you think that the PSG name helps you get into meetings?
- [21:27]
B
I think being known and understood as somebody who's active in a market that has a thesis or has experience really matters. I think being relevant to bankers and like we've heard this a lot from companies where they're like yeah, we, we talked to three or four or five bankers and had them pitch and like you were on the short list of the, of the kind of buyer universe. Like I think all of that matters to getting into the room. But the follow through on that is where it really comes through, right? Like nobody's going to do a deal with PSG because we have a great brand. They're going to do a deal with PSG because they meet Chris Nesbitt and they meet Chris Collins or they meet Marco Ferrari or anybody else at PSG and they think these people can be great partners. To me they can be value add. We were kind of exchanging notes on, on sort of the value of authenticity and vulnerability. I find that to be a massive edge in that sort of sourcing motion. Right. Like the ability to kind of build trust and like human connection to make it clear to people very quickly that you're going to be a great partner, that you're going to be level headed, that you're going to approach things from a perspective of compromise, that you're going to see multiple angles or multiple perspectives. That is the core of like the follow through on hey brand can get you in the door but it's, it's really up to me to follow through on what they might have heard and convince somebody that I can be a great partner for their business.
- [22:52]
A
Hey, thanks for listening. We'll be right back after a word from our sponsors. Being a cfo, you know how much I love tools that actually make the lives of accounting and finance folks easier. One of my favorite tools right now is really the AI native ERP Going head to head with netsuite. Yes, someone is finally doing it. I met Rylit two years ago when they were still in stealth. Since then, they've absolutely taken the finance world by storm. Their mission is to make the zero day close a reality. And they're actually doing it. Customers are literally closing their books at 1:35pm on the first day of the month. They've got everything you need to scale your business. Complex revenue recognition, native integrations, customer porting, multi entity close management, and much more. They're only a few years in and are already supporting NASDAQ Publicly listed companies. Yes, seriously, if you want to scale your business on an ERP that wasn't built in the 90s, you need to check out Rilit. Book a demo@rillet.com CJ oh cool, that's me. That's R I l l e t.com CJ R I I l l e t.com CJ Tell him I sent you there. Scalia Tech Company is thrilling. It's also really, really messy. Just ask anyone who's done it or anyone who's tried. Better yet, ask ey. They've seen startups at their best and in their most fragile moments. EY knows you don't start a company to burn cycles on regulatory hoops, discounted cash flows, or the fine print of SEC Form S1. Although you probably do know I love myself a good S1. If you've listened to or read my stuff well enough, you can't ignore these things. That's how risk compounds kind of like negative interest. What you can do is work with EY from day one. They'll help you get it right early and often so you can stay in builder mode and keep the trains running on time. Shape the future with confidence. Learn more@ey.com tech startups that is ey.com tech startups. One more thing about Spendhound Teams using Spendhound, reduce software spend by up to 30%. Here's how that actually happens. First, you get the data. Real pricing benchmarks from over 1,000 companies across 10,000 SaaS and AI vendors. When a renewal comes up, you know what fair pricing is and what you should be pushing for. But knowing the Number and getting the number are two different things. Spendhound also includes on demand procurement specialists who help with negotiation strategy, contract review and renewal emails. You stop overpaying for the tools you need, you cut redundant tools before they renew, and you negotiate from a position of strength now that you have both the market data and expert support behind you. Spendhound is built by the team behind Yipit Data. It's rated number one on G2 in SaaS spend management and did we mention it's free forever for SMB? When we say free, we actually mean it. You can like keep all the savings. Plus it's only $10,000 per year for enterprise with $150,000 in savings guarantee. There's a reason we're growing more than 100% year over year. Do you want to stop overspending on SaaS and go to spendhound.com/cj zero risk guaranteed savings that spendhound.com/cj something I debate with CFOs all the time on the show, Chris, is what matters more, the brand name of the investor or the deal partner from that firm that you're, you're doing the deal with? Do you have a perspective on that and how it's evolved over time?
- [26:24]
B
I think to some degree it depends on the market that you're talking about. I think that in venture capital focused situations, which is a little different than growth equity, private equity, which is more the angle that, that we come from, brand matters tremendously because it is a sort of external validation that contributes to their, their ability over the longer term to continue raising more capital. My personal perspective for your audience would just be like there's, I don't think there's any competition really between like brand of the firm or deal partner and which one matters more? Obviously it's a combination of both. But I think it like if you think about your experience as a portfolio company and what kind of value you're going to get out of that partnership, it's like it, it's going to be very uniquely driven by the relationship that you have with that deal partner and their ability and orientation around being helpful. It doesn't seem like much of a competition to me that like I would, I would kind of value deal partner over over firm brand. But like our goal is to have the combination of both, right? Like our goal is to have a great brand, but also to follow through on that kind of brand promise in every interaction that we have with, with our portfolio companies or with the market.
- [27:37]
A
I want to talk about buying the Narrative because you said something interesting preparing for this. Chris, you said that investors are narrative driven animals. What does that mean in practice?
- [27:46]
B
I think a lot of investing is a confidence and a conviction game. What I'm trying to build in the diligence process is my confidence and my conviction that the forecast that we have for the business is realistic, that this company is going to hit numbers. And you're trying to kind of aggregate this mosaic of information that you're getting from a bunch of different channels and a bunch of different diligence motions that you're taking and aggregate all of that into hey, your own personal conviction that this is a deal that I want to do and this is a business that I want to be invested in. This is a team that I want to be partnered with. But also, you know, your, the conviction that you have to build with your investment committee, et cetera. What I really meant by narrative driven animals, right is is we only have the ability to see so much and to gather so much in the diligence process. And so all of those pieces of information that kind of contribute to this narrative that helps us build conviction of hey, like what does this company provide to its customers, what's its value proposition, how strong is that value proposition, how well positioned is it within its market and how strong a market is it? All of that is part of the narrative that we need to be buying into in order to get to conviction on a deal. And then you also need to believe that that team is going to hit numbers. We're trying to find and build a story around who is this company in its market, why are they well positioned and how do I build conviction that they're going to execute?
- [29:15]
A
Do you find you need to have more conviction in the company itself or the market the company plays in?
- [29:20]
B
It's a great question. I, I mean I think the answer is both like it's hard to disaggregate in terms of like order of importance. Market and product than execution are probably the order in which I would put those. And I say that only because I've seen examples of great markets or great products lead to great outcomes despite execution that wasn't in line with forecast. Hey, we found a business that's in a great market. It's in a very strategically interesting position. Within that market a strategic decides that they need to own it despite the fact that the company has, you know, hasn't sort of achieved its all C case or hasn't gotten to to like the level of scale that we were originally underwriting yet. Nirvana for us is all three, right? Like I want a great. I want a great market with fundamental growth tailwinds. I want to find a product that sits at a really interesting strategic position within that market and I want to find a team that's just going to go and execute to perfection. But I tend to think that great products and great markets can overcome execution even if it's less than perfect.
- [30:30]
A
And I come at this from the operator angle, Chris, where I've seen amazing teams with A plus player talent and they're just pushing a boulder uphill. The market won't take what they're trying to sell. And I've also seen it the other way where it's like you guys don't even know what day of the week it is, but you can trip seven times and still end up on the one yard line. That's why I think even like when if I was to pick a job, let's say I'm evaluating CFO roles, I would over index on the market that the company plays in.
- [30:57]
B
I think if you're in a great market and you have a great product, you have more room for error on execution is probably the way that I would put it. And I don't mean that to take anything away from the importance of great management teams. It allows you the room for error, for sort of less than perfect execution.
- [31:11]
A
Back on the narrative point, is there a danger ever that an investor falls in love with the narrative first and then they go hunting for this mystical company that they think can fit that narrative in their head?
- [31:21]
B
In our position, you have to be really, really sober and realistic about what it is you're buying. The danger is kind of convincing yourself that what you're investing in is something that it's not. To be a growth investor, you have to believe that a business is going to look different and be different and be much larger than it is today? That's inherent in the models, right? Because like we're not running LBOs where something needs to grow at GDP and basically make money off of great margins and cash flow. And so inherently I have to believe the company is going to look different and be different and be much larger than it is today. But that's a very different thing than convincing myself that, that a business is going to be fundamentally different than it is. And so like as an example, when we, when we talk about conviction, we talk about narrative, sometimes it works and sometimes it doesn't. But you see businesses that'll come to market that are looking for new investment, you'll Kind of look at it and it's like, okay, they have a base business that's growing, whatever call it, they're growing 10%. The way that they're going to sort of ratchet up the growth of it is basically with a new product that has just come out that has no material traction today. And they're asking the investor universe basically to value them as if that new product is established. Like that to me is a narrative and a conviction gap of I want to believe that. But I also have to diligence where the business is today and make a risk adjusted assessment of where it needs to go in the future and how well positioned it is to do that. Like that's where valuation gaps can come into play. I'm asking you to pay a number that implies that I need to grow X and today I'm growing 20 points less than X. But I have this new product that I'm just rolling out that's going to get me there. An inherent part of my job is that I have to be optimistic, but I also have to try to be sober and realistic about what are you today versus what I need you, I need to believe that you will be in the future.
- [33:13]
A
I want to give you the flip side of that equation. Right, because operators can do this whole switcheroo too. Do you ever find companies that are leaning into narratives that they think are doing well to get funding and you're like, dude, just do what you're already doing and what you know well, that that's actually more credible.
- [33:28]
B
I absolutely have seen that. I remember meeting with a business, it's probably three years ago, shortly post call it chatgpt moment. So AI was a hot topic. It's still a hot topic today. But I, I remember this business, this was in the GRC space. They had a compliance product that I thought was really interesting. Like I thought the value proposition was of it was extremely compelling. Instead of talking about that for an hour, we talked about an AI product that like basically was going to take all the comms of everything going on inside of a company and turn it into actionable intelligence. And it all sounded great. None of it was like currently existing. There was a massive gap in terms of like what I would be willing to pay for a business that I thought was legitimately interesting.
- [34:13]
A
I'm so glad we got here in the conversation because something that we talk about on the show all the time is how do you bridge this credibility gap? I'm here, I'm saying I'm going to do these things to get me to there. You have dots along the way that eventually turn into lines. And this comes all, this all comes back to forecasting. And one lesson that you mentioned in the lead up to this is that the way that you think about forecasting models has, has changed over time. You want to keep it stupid simple, it sounds like. Now can you just speak to how your philosophy around forecasting models has changed throughout your career.
- [34:44]
B
The seductive trap that people fall into is assuming that complexity in a model equals sophistication or equals accuracy. I just have never found that to be true. And so I kind of have gone from when I was early in my time at PSG when I was really the person building the models, like building these very kind of complicated forecasting models with a bunch of, of assumptions that were built into them that all in aggregate can build up to a really heavy impact on the, on the output of the model. You're talking about layering 30 assumptions. I've come to a point philosophically, I'd much rather build a, a very simple model, right? Like I'd much rather have a one tab model that has five key inputs and we've spent all of our time thinking about what are the right five inputs that are going to help me forecast this business. And two, we've spent all of our time diligencing those assumptions so that we can have the most thoughtful and most informed assumption built into the model possible.
- [35:44]
A
I often say that there's an art and there's a science to forecasting. I think the science is the P times Q. It's a deterministic model of, okay, just multiply this thing out. But I think the art is figuring out what shit matters, what are the five most sensitive parts of this business model. And then you have to go deep enough on each one. But it's very tempting to put 25 of those on the table and look like you get style points for it.
- [36:08]
B
This is just a practical consideration for us, right? But like, if I'm jumping into a model that somebody else has built, like, wouldn't I rather have a one tab that I can actually audit and make sure there's not a bust in that thing? I think that AI capabilities will end up making a lot of the sort of modeling exercises relatively commoditized. And actually, I think in a great way it'll end up freeing up time to think about the right key assumptions and then whether I have done the right diligence to get to inputs that are informed and thoughtful into, you know, those five key things that need to
- [36:40]
A
be true, it's somewhat related to what I often tell people about the annual planning process, that the process itself is more important than the plan. It's going through the exercise to think critically about something. But at the end of the day, if you can't also draw out is this a good idea or a dog shit idea on the back of an envelope, like, you probably shouldn't be trying to build this complicated model anyway. So there is this level of rigor that you should go through. But there's also this, hey, we're pretty smart people here. We know the market. Is this something that we think is a big enough opportunity that we can calculate pretty quickly?
- [37:16]
B
Here you had the conversation with Paul Stanzak where you were talking about simplifiers and complicators. That would be a good example to me of, hey, like, if you can't logically build the case for why this could be interesting and do that arithmetically, like, you know, just do some really basic math. You have to question whether it's a really good idea. But like, I've always found those people to be amazingly effective. That can very simple, very high level. Like, hey, let's zoom all the way out and then let's think about this analytically, right? Like, you don't necessarily need to be good at math to be, to be analytical. You just kind of need to break it down into its component parts and then think about those, make some relatively informed assumptions and like, pretty quickly you can come to a swag on a bunch of these things, at least for an investor, can help you triage pretty quickly. Is this something that I'm really interested in? Is it not? Similarly, I think in the CFO seat, is this something that we want to invest resources in next year? Is it not? Like, I think a lot of the investor mindset that can be applied to the, to the CFO seat is really around making things as analytically and as ROI driven as possible. The questions that I'm going to ask typically in a board meeting about a new growth initiative are like, are pretty simple and they're, they're almost uniformly going to be, what are your assumptions? Why do you feel good about those assumptions and what does it say about roi? And that again is where like, you know, sort of narrative and conviction track record then comes in. Because like, if I have been invested in that company for a couple years, I know these guys are number hitters. So I feel very solid about when they tell me something and they believe it to be true, then I know that has a reasonable A reasonable chance of being the case. It's a lot easier for us to say, yes, absolutely, let's go do it.
- [38:58]
A
How do you think about analytical rigor in forecasting anything past a year, year and a half?
- [39:03]
B
I mean, I'd be curious if you would disagree with this, right? But like I think when you were forecasting parts tech, like would you actually feel great about a forecast model beyond call it 12 to 18 months, let's call it assumptions that aren't ill informed, less driven by, I guess by the reality of the business today. Part of the reason I think you can forecast a business with reasonable certainty over 12 to 18 months is because depending on the sales cycles, et cetera, like the pipe probably already exists. Like you've largely identified the growth drivers. You actually have things you could point at and go, I'm the cfo, I know exactly what my leading indicators are and I know how good or not good I feel about this forecast. But your ability to say that with any confidence, I think gets pretty limited when you can no longer point at defined pipe and you have to go, okay, well like how much do I need to create in the future? Where is that going to come from?
- [39:55]
A
I do think you can very quickly get into this compounding assumptions. So the assumptions build on top of other assumptions and suddenly you're three derivatives out from the original plan you were on. The math isn't wrong, but how credible is the management team behind it? And that's probably what I would tie it to because I don't think anybody truly knows what's going to happen a year from now in any interest rate environment, in any tariff environment. If Claude wakes up tomorrow and drops a plug in on everybody's ass, you just don't know what's going to happen then. But then you just got to tie it back to what's the say to do ratio of the management team you do have in those seats who you, you think will also be in that seat more than a year out.
- [40:37]
B
I think it's that and then it's thinking about what the tailwinds that the business kind of naturally has. Right? Like to give an extreme or hyperbolic example, if someone were asking me to pay a price, that implies the business needs to grow 15% per annum over a five year period and they're sitting in a market that I believe is going to grow 25 to 30% a year over that period. Like makes it pretty easy for me to believe that this company is going to be able to grow 15% a year. Does that ever happen? Right, like that delta or that mismatch? Like, typically you're being asked to believe that the company's going to grow faster than the market. Okay, so like they're taking share. That's where I kind of come back to like, hey, I don't think I can forecast, or I don't think anybody can reasonably forecast a business with, with a very high confidence interval beyond 12 to 18 months. And that's where I want to spend my time thinking about how good is the market, how fast is that going to grow, how well positioned is this business strategically within that market? And to your point, like, what's my confidence and conviction in that management team and the execution engine that they deliver?
- [41:35]
A
We brought up the management team there, and you sit on a lot of boards. Something that I had discussed with Paul Stanzik of Parker Gale on the POD was how board meetings can easily become this performative theater. Right? You're not actually acting like how you usually act. What separates a useful board meeting from a useless one in, in your view?
- [41:53]
B
I think the mistake I see a lot of people make is reading us the news. What I really like to see, I think the most effective and the best uses of time are the situations where the team comes in and they basically say, hey, like we've given you the materials with enough time in advance. We probably have monthly reporting calls where we have a reasonable cadence and you're pretty well informed on what's going on with the business based on that. If you have anything you want to talk about, great. But these are the three big topics that I want your input on, that I need perspective on, or the decisions that we need to make between the board and the management team about future direction. I think a focused list basically can't be more than three things. The board meetings that are the best are the ones where somebody comes in with, these are the three topics we need to discuss. And this is what I want to get out of it. Whether that's decisions or it's just perspective, that's super helpful.
- [42:45]
A
And I tend to agree. If you show up and you're doing this dissertation, I'll admit I've been in a couple of board meetings where we truly said before we went in, like, we're just trying to dribble out the clock on this one. Ideally that should not be the case. You should be going in a couple of pointed things that you want feedback on, less so about what you did in the past and, and giving them the numbers you can send that ahead of time. It's what would be useful to get direction on. And just picking a couple, that's where
- [43:11]
B
your board composition matters. I've spent 10 plus years at PSG and before that I worked for an investment bank. I've never been in an operator seat. I've learned a lot along the way. I like to think that I can ask good questions and kind of, kind of drill into the heart of the issue, but the reality is I've never actually sat in that seat. And so the approach that I always try to take is, okay, well, what's the perspective that I can bring to the board that the management team isn't going to inherently have or just naturally know based on their position and experience? That gets back to the conversation we were having around narrative. Right? Like, how do we construct an equity story that's going to be compelling to the market? How is the buyer universe going to look at this business? What are the questions they're going to ask, what are the things that are going to make them really excited and what are the things that are going to make them nervous? And then let's try to translate that into, okay, what's the conversation we should be having today based on our timeline, you know, we could be five years away from an exit. We could be 12 or 18 months. And those have different implications for what we're going to be able to accomplish realistically. Let's try to translate how's our equity story going to play, what's the buyer universe going to be looking for into what we need to be doing today. That's a perspective where like, yeah, I can't add the operator's perspective. And we like to bring it independent board members, senior advisors of ours, or folks from our operations team who can add that in more depth than I'm able to. But that's the perspective that I try to bring to the board because that is something that I think is. It's not a knowledge gap, but it's an experience gap and it's a proximity gap. Right. Like, I'm very close to the buyer universe, relatively. I kind of know what's going on in the heads of private equity firms or strategic buyers that might be interested in these companies. That's kind of my job is to help gather that market intel and then translate it back to, okay, what does it mean for what we should be doing strategically with this business?
- [44:59]
A
You know, I was in a scenario once where we were debating, and this is something that you help companies with, adding payments to our product. And we'd researched it at length. But we also knew that in order to be really good at this, we were going to have to hire probably like 12 more heads, many of which would be specialized. And I knew my R and D in my forecast over the next 12 months. We talked about is this near term, term or longer term, it was going to go up like at least 10% more percentage of revenue wise. And so one of the conversations we were having with the board was, look, we could do this, but you know how we should package this for some sort of exit event in the future? Is this better as a future idea for someone else to kind of scaffold in their head and say, this is where the extra value is? Or is it something that we should actually put money down on now, not see a return for minimally 18 months on it? If we're going to go to this dance, we need to know what the date is and what we should wear to it. Because I don't want to go deep into the red to build this. We're also trying to have some sort
- [45:57]
B
of liquidity discussion to give you a very lawyerly answer. Like, my answer to that would be, it depends. But I'd be looking at it going like, hey, how do I think this business is going to trade? Is it going to trade off of ebitda? Is it going to trade off revenue? What are the multiples associated with it? What's the sort of quantum of the investment? The crux of that question kind of gets back to what we were talking about earlier, right? Like, if you're saying, I want to get paid on this as a product that exists in a growth lever. Well, the way to build as much conviction as possible for the buyer universe around it is to show them as much as you can in data that this is actually working, right? Like, that's the way I'm going to build. Conviction is like, hey, this is an idea. It's something that's actually happening. It's something that's actually happening in the company today. It is successfully working. And I can look at the attach rates as an example, or I could look at the take rates and then I can make a value judgment about, okay, well, how much am I willing to value that, that new strategy or that new growth lever? Again, depends on the timeline and how you're looking at it. That would be an argument for like, yeah, go for it. As long as you think the ROI is going to be quick enough that people are going to have something to diligence. The worst of all worlds is like, hey, we're going to depress EBITDA to invest in a payments product that's not going to have anything to show for it when we would take it out to market. And oh, by the way, somebody's going to be paying an EBITDA multiple for this business. And so I basically have just backed off 15 or 20 times whatever I invested in this and I'm not going to get any incremental value for it. That's not a good situation. But if you were to say, I think this is going to be more ARR based than EBITDA based and I think we can get, we can get to some relatively quick proof points that allow us to build a case analytically that can help get investors comfortable with this new growth lever that's a great use of time and capital.
- [47:40]
A
How do you read the tea leaves in the market to figure out if something's going to trade off of revenue versus ebitda?
- [47:46]
B
I mean growth rate is a massive input into that and I think retention is a massive input into that. If you're sub 90% gross dollar retention, including Downsell, you're unlikely to see an ARR multiple. I'd say really strong growth and really strong gross dollar retention are, are two things that may allow you to, to trade on an ARR multiple as opposed to an EBITDA multiple. I do think that's a misconception sometimes that, that I run into when talking to founders or management teams. Right. Like the basic principle behind everything that we do and the basic principle behind value for any business at the end of the day is cash flow. And so the only reason that people pay ARR multiples for businesses that don't generate any cash flow is because you believe that company is going to have really strong margins eventually when it stops making sense to invest as much as you are in the growth engine that you're going to be able to generate really strong margins and cash flow. It's the only reason I would pay an ARR multiple for a business. It doesn't make any sense otherwise. And I definitely have had that like disconnect in the past where somebody's looking at something and they kind of act as if they think that ARR multiples exist just because that's what people do. It's like, well no, we'll pay that. Because I think this business is going to be dig because it's growing really fast and because I think eventually if and when I thought it made sense to make the capital allocation decision that I'd rather optimize for Profitability than for growth. I can generate a lot of cash flow out of this thing.
- [49:12]
A
People often forget that ARR or revenue multiples are meant to be a shorthand or a stand in for profitability multiples, whether that be free cash flow, ebitda, net income, whatever you want to call it. They were invented because companies were growing so fast and not profitable yet. It's not, it's not like an either or, it's a substitution.
- [49:31]
B
I had a company today, small business that said, hey, like we would need at least 10 times revenue in order to trade. They also were saying, hey, we have 75% EBITDA margins or something of the sort. And so like you look at that and you go, okay, well like the delta between 10 times ARR or 10 times revenue and the multiple of EBITDA in that context is not very much. No, I think you're talking about 10 times revenue or 12 and a half times EBITDA.
- [49:56]
A
That's a very profitable business by the way.
- [49:57]
B
And then you get into questions of, okay, pro forma profitability. I'm like, all right, practically if I were to buy this business or make it an add on to one of my existing companies, how much would I need to invest in it to actually run it properly? Are those the right, you know, run rate, long term margins? That's a different set of questions. It's a good illustration, right? Like the way that he positioned was, oh, at least 10 times revenue. It's like, well, your revenue and your EBITDA multiples at that point are interchangeable because those numbers are so close. Like it doesn't really make any difference.
- [50:25]
A
If you like 10 times revenue, man, you're going to love 14 times EBITDA.
- [50:29]
B
Exactly.
- [50:30]
A
I'm going to take you into what we call our long ass lightning round. How far in advance should the board materials be sent out, Chris?
- [50:36]
B
I think three days. It's hard, right, because I know the teams are putting a ton of prep into that. I've started trying to block out time the day before any board meeting so that I have a couple hours to sit down and read through and be thoughtful about the materials. I think a couple business days is a reasonable expectation and I try to anticipate that they're going to be coming. So I, I, I have time set aside.
- [50:57]
A
What's a metric whose definition gets hung up on a lot in board meetings?
- [51:02]
B
I mean, I think LTV to CAC is one that's kind of thorny.
- [51:05]
A
Ooh, yeah.
- [51:06]
B
Just like there are enough variables in that to make It a little bit difficult. Another one I see a lot where like it's actually an easy presentation fix. EBITDA or EBITDA less cap software. The presentation on that can really matter. And I, I find that's a clarification that we often run into either to board meetings or, or most often in diligence. Right. Like how much are you shoving below the line as cap software spend that I have to figure out whether I agree with or I don't agree with.
- [51:30]
A
Do you remember the first deal you ever did?
- [51:32]
B
I think the first platform that I ever worked on at PSG was Abacus Data Systems, which is now Carrot. That was a funny one. I think Marco and I spoke to the CEO of that business on like a Thursday or a Friday and I think we flew out on a Monday. I remember drafting a term sheet on the plane as we were getting ready to take off from San Diego back to Boston. So things don't move that quickly anymore from kind of first meeting to loi at that pace. Yeah, I think that was the first one I worked on.
- [51:59]
A
Is there a company out there that you passed on that still haunts you?
- [52:02]
B
I was thinking about this question. I don't know that I have one. It's never good to like have the ones that got away. But I also think like it's really hard. You have to, you have to make the best decisions that you can with the information that's available at the time. At the end of the day you have to make a judgment call about like, like what's the conviction that I have in the growth story here? And you're absolutely going to miss on something. You're going to have deals that you do that haunt you as well.
- [52:24]
A
Yeah, I just like to have this vision of investors sitting in a mahogany desk drinking whiskey in the middle of the night just thinking about their anti portfolio. Last one I got for you. What's something young investors believe that is completely wrong?
- [52:36]
B
We talked about one of them which is just kind of like there's a massive difference between what's true in a spreadsheet and what's true in reality. And it takes a while of like watching businesses and making mistakes and sort of believing that things were true or things were possible because of. Of what you were kind of able to put on paper. This sort of delta between what you thought and what played out. I'd say the other big one like that I've come to understand. A really seductive trap that people fall into is that price can make up for a bad market or A bad product. This is kind of that Charlie Munger idea that he likes. Eventually convinced Warren Buffett, right, that you'd rather buy great businesses at fair prices than you would, okay, businesses at great prices. I think it's. It's that same kind of principle, right? Like, it's never as black and white as, oh, yeah, this is a bad market. I just have seen and fallen into myself that trap of, I can rationalize this. I can paint a picture and come up with a story as to why, okay, like, if we were able to do it at this price, then this is a good deal. And, you know, theoretically, everything has a price, right? But, like, that's a common trap that, like, and a common mistake that every investor kind of makes on their, like on their career journey of thinking, like, oh, well, if I could just get it cheap enough, then there's something to do here. Or there's a thesis, and I'd rather pay fair prices for absolutely great businesses or even overpay, because those tend to be the ones that work out.
- [53:59]
A
Chris, it's an awesome place to end. I love hanging out with you, buddy. Thanks for joining me on the show.
- [54:04]
B
Of course. Happy to do it.
- [54:05]
A
Run the Numbers is a mostly media production. Yelling an intro by Fat Joe. Artwork by Meg d'. Alessandro. Show is executive produced by Ben Hillman. Nothing said on this podcast is intended to be business or investment advice. It's the sole opinion of me, a guy who feeds his dog way too much ice cream and has a history of net operating losses, lol. If you like this podcast, hit subscribe and give us five stars. It will take like two seconds and our algorithm overlords love it. Drink water, call your mom and have a great day.
- [54:33]
B
Peace.