Feb 6, 2023, 2:12 PM ETInterview, Fireside Chat

Orlando Bravo: Raising Kids as a Billionaire; VC vs PE; Is Warren Buffet Wrong? | 20VC #974

Toma Bravo was founded in 2008 as a software-only private equity firm after identifying a pattern of success in buying unprofitable software companies with high gross margins (90-80%) and turning them profitable.
The firm's valuation methodology is strictly based on future cash flows and yield, rejecting revenue multiples or speculative technology valuations common in the venture sector.
Toma Bravo operates on a "value plus growth" model, aiming to multiply the underlying yield by the company's growth rate rather than relying on multiple expansion alone.
The firm requires consensus from the entire investment committee; if a single member objects, the deal is abandoned to prevent operational friction and ensure collective buy-in.
Orlando Bravo emphasizes that price matters significantly in buyouts, noting that a $10 billion equity check carries fatal risks if the investment thesis is flawed, unlike early-stage venture deals where small checks allow for diversification.

The firm's core value-add involves transforming "great innovators" into "great companies" by shifting management focus from pure growth to 40% cash flow margins.
Operational improvements are achieved by measuring, prioritizing, and solving specific efficiency bottlenecks, often addressing issues like over-staffing, excessive approval layers, and lack of process discipline.
Toma Bravo invests in B2B software market leaders (typically the #1 or #2 player) to minimize risk and ensure stable, compounding growth.
The firm maintains monthly board meetings with portfolio companies to ensure rigorous oversight and active partnership with management teams.
Orlando Bravo states that the firm avoids "catching falling knives" by conducting deep diligence on revenue quality, momentum, and customer acquisition trends before entering a deal.
The firm primarily exits via strategic sales to large technology buyers rather than IPOs, arguing that market leaders command better premiums and that IPOs often require unnecessary capital dilution.

As of January 2023, the market for profitable software companies trading at ~25x forward P/E is considered "reasonable" compared to the S&P 500 at 16.5x, while unprofitable companies have seen revenue multiples collapse from 17x to 3.5x.
Orlando Bravo asserts that the current market environment, characterized by higher interest rates and disciplined valuation, represents the "new normal," as investors are unlikely to repeat the quantitative easing-fueled valuations of the past three years.
The firm expects that high-quality, profitable businesses will outperform in downturns, providing opportunities to acquire stumbling competitors at attractive prices.
Despite criticism for paying high prices on deals like Coupa and Anaplan, the firm defends its valuation by pointing to the predictable, operational value-add that drives future cash flow, which outsiders often fail to account for.
Fund size increases are driven by the market's consolidation, where acquiring top-tier software leaders requires larger capital checks; the firm rejects excessive diversification (40-50 companies) as operationally impossible for a value-add model.

Orlando Bravo reveals that his primary fear is stagnation, isolation, and being "trapped," a sentiment linked to his upbringing in Puerto Rico where leaving the island was necessary for opportunity.
He reflects on a career "failure" in 1999 where he nearly was fired, viewing that period as a necessary reset that led to his current success through patience and adaptability.
Bravo admits to a personal miss in the previous year resulting in a $28 million loss, attributing the error to ignoring negative product line trends despite having the data during due diligence.
He describes his relationship with money as non-existent now that financial needs are met, finding satisfaction in the collaborative "art" of building companies rather than the monetary payout itself.
In response to the challenge of balancing extreme career success with personal life, Bravo advises delegation and letting go of micromanagement, noting that stepping back to support others actually improved business performance.
He identifies his biggest weakness as a short attention span, which necessitates working on multiple projects simultaneously, while his greatest strength is bringing diverse people together to collaborate toward a shared objective.

Over the next five years (leading to 2028), the firm aims to achieve a "step function increase" in mission impact, continuing to prove the value of operating expertise and ethical business practices even during challenging environments.
The Bravo Family Foundation faces unique measurement challenges compared to commercial operations, as success involves qualitative impact and varying rates of entrepreneurial success rather than a clear P&L.
Toma Bravo continues to launch new initiatives, such as supporting rising entrepreneurs, with a goal of launching 50 companies by the end of the current year.