Interview, Fireside Chat
Orlando Bravo: Raising Kids as a Billionaire; VC vs PE; Is Warren Buffet Wrong? | 20VC #974
- Toma Bravo plans to continue executing a strategy exclusively targeting software buyout candidates capable of generating high margins, profitability, and market leadership, specifically prioritizing number one or two players in their sectors to reduce risk and increase stability.
- The firm expects to value investments based on earnings production over years one through five rather than revenue multiples, anticipating lower multiples on future earnings today due to higher costs of capital and financing compared to two years ago.
- Future exit strategies will primarily involve sales to strategics and other financial buyers rather than IPOs, as public listings may require unnecessary dilution, with successful exits requiring only one interested buyer for a market leader.
- In competitive situations involving other suitors, the firm expects there will be sufficient time to improve operating plans and relationships before a deal is finalized, maintaining that the process is not over until all parties agree.
- Portfolio management will focus on a smaller size of 12 to 15 companies to avoid the operational impossibility of effectively changing companies in funds with 40 to 50 holdings.
- Investment criteria will strictly exclude businesses with negative revenue momentum, requiring positive trends and avoiding "falling knives," while expecting that in severe market downturns, high-quality companies with 40% cash flow margins will acquire struggling targets at attractive prices.
- The firm anticipates that profitable software trades at a 25 forward P/E and S&P 500 at 16.5 represents a reasonable market environment, though unprofitable companies trading on high revenue multiples face uncertainty and a likely correction dependent on business fundamentals.
- Market expectations include a "new normal" where valuations remain at current reasonable levels without returning to the artificial environment of quantitative easing, and investors will not immediately repeat strategies that lost 80% of capital in the prior 18 months for at least the next few years.
- If market multiples for levered free cash flow rise from 25 to 40, the firm expects to have plenty of buyers for its market leader positions, while expecting to add value to public strategic buyers when market multiples expand.
- Operational discipline will require 100% consent from the investment committee for every deal, with dissent treated as a significant warning sign, and decisions will rely on a management committee where at least a third of members are involved day-to-day to maintain proximity to operations.
- Organizational evolution involves delegating micromanagement to improve business outcomes, leveraging a shared philosophy and playbook, and learning from past mistakes where the firm transformed innovators into businesses while ignoring certain diligence trends.
- Rising entrepreneur initiatives are expected to have launched 50 companies by the end of the current year, with a step function increase in operations and mission scope anticipated by 2028.
- The organization expects to achieve a step function change for the positive in every crisis and challenging environment over the next five years, with operations, partnering, and ethics continuing to be proven in difficult markets.
- The Bravo Family Foundation and the firm expect to continue making positive changes, acknowledging that philanthropy lacks a direct earnings report or clear "report card," with a specific focus on the inordinate work already done in Puerto Rico.
- Leadership philosophy emphasizes continuous evolution rather than static success, viewing career progression as a process of small steps rather than finite goals, with a conscious shift away from setting specific age-based timelines.
- Personal and professional risks include the fear of stagnation, isolation, or becoming a "rich uncle Harry" lacking meaningful relationships, with success measured through many small steps rather than single deal exits.
- The firm expects that market leaders in B2B software are now significantly larger than 20 years ago, creating barriers to entry that necessitate larger fund sizes for meaningful diversification, though the firm prefers smaller portfolios to maintain operational control.