Private Equity’s AI Shift: Bob Morse on SaaS, Pricing, and Alignment

[00:00:00] Sean Mooney: Welcome to the Karma School of Business, a podcast about the private equity industry, business best practices, and real-time trends. I'm Sean Mooney, BluWave founder and CEO. In this episode, we have an awesome conversation with Bob Morse, co-founder and managing partner with Strattam Capital. Enjoy.

[00:00:33] I'm super excited to be here, Bob Morse. Bob, thanks for joining.

[00:00:38] Bob Morse: Sean, it's a pleasure to be here. Thanks for having me on the show.

[00:00:40] Sean Mooney: Yeah, I've been looking forward to this for a long time. Bob is, I think our listeners will hear, has had kind of a fabled career as a business builder, and there's a lot of interesting chapters to it, and I think we're all gonna benefit for it.

[00:00:51] So at the risk of uncomfortably flattering, Bob, before we jump in, I think this is gonna be a really awesome conversation.

[00:00:59] Bob Morse: Well, thanks. I'm excited to share some of those stories and then talk about some of those lessons from the past, I think are maybe relevant to your listeners today. Dealing with what.

[00:01:07] Is a pretty wild environment in the technology world out there.

[00:01:10] Sean Mooney: A hundred thousand percent. I made it multiple times more than my normal. A hundred percent. So, so let's jump in. Bob and I always like to start these with the story of you. So can you tell us a little bit about kind of how you grew up college, first job outta college, how you got into pe?

[00:01:26] Bob Morse: Absolutely. I grew up in New Hampshire. My father was an engineer at Bell Labs. Mom was a teacher, and I was interested in how systems came together. I got an engineering degree C in operations research, thought about academia, looked down a few roads, and had a friend who had gone into private equity on Wall Street.

[00:01:47] And this idea of putting all the pieces together to change an outcome for a company was something I felt like I just had to see for myself. I went to Wall Street and worked at Morgan Stanley for their leverage equity fund in what was then called the Merchant Banking Division. And we spent a lot of time on the right hand side of the balance sheet.

[00:02:05] A lot of debt issuance, a lot of focus on capital structure. It was an incredible education for me, and yet it felt like I'd only seen a piece of the investing world. And so when that wrapped up as a little personal note, using my Motorola pager, pitching that into the Hudson after the two years, that

[00:02:23] Sean Mooney: was one of the best days of my life.

[00:02:25] I can't really, yeah,

[00:02:26] Bob Morse: this sort of sense of freedom. I went to Boston and worked for a terrific family owned group of companies. Owned by the Besson family. Jimmy Besson, who runs that now, is still a close friend and mentor, and that was all about growth investing into operating businesses. And we spent a lot of time on the income statement, I'll say the left hand side of the balance sheet, what's the product market fit?

[00:02:47] If we can grow this business, maybe the capital structure will take care of itself, spend a lot of time on business models, and even then was interested in these recurring revenue business models. Looked into the payments world. Was able to get a meeting with a founder of a business in the gas cards world called Fleet Core, a little business out of New Orleans.

[00:03:07] We put $11 million into that for a third of the business. This is almost 30 years ago. Oh, fleet Core has a $22 billion market cap.

[00:03:15] Sean Mooney: Oh my goodness.

[00:03:18] Bob Morse: I got the tech bug and I was hooked without taking through every step. When the opportunity came up. Head out to the West coast and go to Stanford at the beginning of the.com craziness.

[00:03:30] My wife and I decided, you know what? We're gonna be people who move for opportunity. And so showed up there, got a chance to be part of it and see it. Went to work for a business school professor of mine named Mark Wolfson, who was also part of a family office under the Oak Hill brand that was just raising its first outside fund and got to be part of business building and the tech practice, which is sort of a newer area of focus for them.

[00:03:54] During an incredible time and was there for a dozen years.

[00:03:58] Sean Mooney: It's a great story and there's a couple things that strike me, Bob, as I was listening to our conversation here, and it was one, so many of the people that we talk with within private equity kind of have this almost multi Perry background where there's a teacher, maybe two teachers, or there's an engineer.

[00:04:18] It's just surprisingly prevalent in this industry. You'd think every kid grew up on Park Avenue in Manhattan, but it's just like, no. As you grow up in New Hampshire with a dad who is at Bell Labs, which is super cool, and then a mom is a teacher in many ways, you can see how that leads to it. It's because you have this like lifelong learner kind of DNA, and then you have this build and figure stuff out.

[00:04:41] DNA kind of combined into one.

[00:04:43] Bob Morse: And I think that that systems thinking and that problem solving is what stayed constant in the private equity industry and allowed it to change. And it's one of the reasons I'm so optimistic for the industry today as we go through another period of technological change.

[00:04:59] Even back then, I remember as an analyst at Morgan Stanley, people complaining that there was too much capital chasing too few deals. And that's sort of laughable today given how mature the market is. But this idea of. Using the tools that are available and how do I think about the whole system and how do I optimize it?

[00:05:17] And as we'll talk about the industry has gone through and I've seen firsthand this maturation where the innovation and what you did to generate a return has really changed in character a lot over that period of time. And that ties into the story of the founding of Strattam and really, I would say the last 10 years, how things have been in many ways different from what came before.

[00:05:38] Sean Mooney: It's interesting. So as we kind of move forward in your story, and I want to get to the Strattam part. The other thing that kind of struck me as I, as I think about the history of PE as I explain it to new folks who are younger and joining here, some ways, private equity has been around for tens of thousands of years, right?

[00:05:53] It's kind of wealthy benefactors supporting someone with an idea, and for that they share the economics. And as you think about the early chapters of pe, like some of the Mount Rushmores were really these kind of family offices. People who had built businesses and then they started and using their own capital to support others.

[00:06:12] One of the stops along your journey was Oak Hill, and I always thought about them with the Bass family as like one of these kind of like Mountain Rushmore families that got it really early as well.

[00:06:23] Bob Morse: I was just so fortunate to be part of a terrific team and to learn in a place that had a lot of history and a lot of the lessons that I've taken forward about.

[00:06:33] Volatility is your friend about the benefit even throughout its whole history of sort of thinking entrepreneurially about the investing business itself. That's a franchise that has spawned multiple asset managers across multiple asset classes over a very long period of time with great talent, and it, in my view, has never sort of lost that innovative thinking and spirit.

[00:06:58] And so those are things that I am just very grateful to have been exposed to.

[00:07:02] Sean Mooney: With that in mind, that kind of entrepreneurial spirit. Share a little bit more about how you've been in Oak Hill, you've shared like more than 10 years. What then led you to kind of take that proverbial leap and lead and form Strattam?

[00:07:15] Bob Morse: I'm a questioning person and even 10 years ago, it was clear to me that we needed to think about doing things differently to generate tremendous alpha, particularly in the technology world. Technology, private equity is particularly young. Many of the first funds were raised just in the sort of late nineties, two thousands, and that was a frontier market.

[00:07:39] It was a fringe part of the private equity world that is now the largest or second largest piece of it by industry sector. The other thing that changed over time is moving from identifying assets that the market mis prices to in this now more mature market. Yes, I have to have a no for value, but I can't make all my return just on the buy and the sell.

[00:08:01] Not that that's what we're doing, but how do I do things differently with the business while I own it? And that means maybe a little bit different team structure. It means a little bit different investment process, and it means a much higher degree of specialization and focus. And when it became clear that tech needed its own dedicated fund, we talked about doing that as part of a larger span.

[00:08:26] It just became clear it needed to have its own dedicated focus. And really that was the genesis for Strattam and that's what we've been doing for the last now 11 years.

[00:08:35] Sean Mooney: I love that progression and you've seen so much of it in certain degree. It resonates with the experience I had. So I started in PE in the late nineties, in kind of the very late nineties, and it was those early days where it was an at-bats game, the firm we were at, somewhat differentiated 'cause we could do any kind of mezzanine to equity security.

[00:08:56] Across virtually all types of companies. And so we could wrap the structure to incorporate the risk and then we would give a business owner multiple term sheets until they picked one. Because like part of the deal is you're going direct to business owners is your biggest enemy, was nothing happens.

[00:09:12] 'cause they would like, oh, I want this or that, or I'm not sure. And we could give them like three term sheets until they finally relented and picked one. And so that would really work. But then as we all know, capital's agile. And then even that firm has since kind of focused and specialized, and that was my big thing is like, oh, I'm gonna go to another specialized firm.

[00:09:29] And that's where I ended up, before founding BluWave was like information data analytics, and that was their jam. They kind of did that, and in some ways then in those next chapters, we suffered from knowing too much. Yes, because you're, you can't, sometimes it's hard to win. 'cause like we knew it was under the hood and then this next generation we'll get into is then it's like, it's not what the company was, it's what it can and should and will be.

[00:09:54] Bob Morse: How do I change what's under the hood?

[00:09:55] Sean Mooney: Yeah, exactly. And we'll get into some of that is like, what's the art of the transformation versus the standard operating procedure of optimization? Right. Hey, as a quick interlude, this is Sean here. Wanted to address one quick question that we regularly get. We often get people who show up at our website, call our account executives that say, Hey, I'm not private equity.

[00:10:17] Can I still use BluWave to get connected with resources? And the short answer is yes. Even though we're mostly and largely used by hundreds of private equity firms, thousands of their portfolio company leaders, every day we get calls from everyday top proactive business leaders at public companies, independent companies, family companies.

[00:10:36] So absolutely you can use this as well if you want to use the exact same resources that are trusted in being deployed and perfectly calibrated for your business needs. Give us a call, visit our website@BluWave.net. Thanks. Back to the episode.

[00:10:54] And so, but before we get to that, I want to kind of just learn a little bit more about you and the story of you. And my standard question is, what would be one thing we would know better if we knew this about you?

[00:11:06] Bob Morse: In business people sometimes talk about you like rowing in the same direction or pulling together.

[00:11:11] I'm a rower. I have actually out there pull it on the ore. I walked on back in the days when you could do that and picked it up for the first time in college when you could still do that at the division one in a national championship level, and it's been part of my life ever since I met my wife at the Boathouse.

[00:11:28] I've had two daughters go through that in high school. One is now varsity coxswain for the Navy Women's Crew in Annapolis among the US Rowing Foundation Board, and so trying to give back and help expand the sport. You could still see me out there from time to time on Lady Bird Lake trying to put a bend on the or.

[00:11:45] It's been a through line and I think there are a lot of read across to what we're trying to achieve in business, but that's a little bit about me.

[00:11:53] Sean Mooney: I mean, what a great sport. It requires discipline. You're up in the early in the morning, you gotta be able to deal with pain because it's like when you're hustling, I can't imagine anything more difficult than the amount of pressure you're putting on your lungs and your muscles.

[00:12:09] And it's also a team sport, right? You gotta get a bunch of people working together

[00:12:12] Bob Morse: and yet you can have those moments. You've seen the recent F1 movie where it says that just every once in a while there's that moment where I feel like I'm flying. Every once in a while you can have that moment where you feel like you're flying.

[00:12:23] Sean Mooney: Let's jump in to kind of more of our conversation around some of like your core foundations and like how you see the world of business. And one of the things that I, I'd love to ask when I get the opportunity to speak with folks like you, Bob, is. What do you look for in a company? What are some of these traits that you think are elements of good to great, great to even greater?

[00:12:45] Bob Morse: Let me start with talking about the investment process itself. I wanna talk about a problem that I'd had earlier in my career. I think a lot of people have had this problem and we probably don't talk about it as much as we should, and I will call it the first board meeting. Surprise problem. You negotiate the deal, you're closed.

[00:13:03] You show up at the first board meeting and people do some reveals on stuff they just weren't quite comfortable talking about during the deal process, maybe the operating partner's showing up for the first time. Maybe you reveal the diligence for the first time. Maybe there's a merger partner you wanted to talk about, and you realize with your management team that you've got a disagreement that you're just not gonna talk through.

[00:13:22] It's happened to me. I think it happens to a lot of people and. We were committed to solving that problem when we founded Strattam because the nature of the value creation, as we just talked about, was changing. In the old days of private equity, when I was trying to get a good deal and buy a little bit cheap on this mispriced asset, I very rationally didn't want to share my cards so that the person could see how much this was worth to me.

[00:13:48] But in today's market, which is much more efficient, and yes, I have to have a nose for value, but it's really about what are we gonna do together after closing. That reason for that secrecy, I think has gone away. It's sort of an emotional jump because it feels comfortable to be like, we're gonna sign the deal and then reveal.

[00:14:06] I don't wanna share with you things I think you may not like, like changes to a management team or to talk about hard topics like succession or to share things that you could do yourself and probably should, like price rises or other things. And we decided. We're gonna share our diligence before signing.

[00:14:22] We're gonna talk about those hard topics, and if we can't agree on the action plan and we lose the deal, that's okay. Let's see if we can build a firm where we don't have to do that deal. Let's see if there's enough interest from the founder community who wants to hash through those things so that on the day the deal closes, they stand up and say, we have many choices of who to work with.

[00:14:42] We've chosen to work with firm X, like Strattam capital, and here's what we're gonna do with the money. Like go. I would say 50 founder led deals in, we've found there really is a market for those founders who want to work in that way. I've been advocating this for 10 years. We begin to see other people sort of continue to move this way and do more of it, and I think that's very positive for the industry.

[00:15:03] I will still say in general, this is and feels different to those founders and that is one of the first things that we look for in this engagement and sort of what becomes the next platform or add-on in the portfolio.

[00:15:16] Sean Mooney: I love that approach. As I'm listening to you kind of share that, it makes me think back to my earlier days that were, life's a journey, not a destination.

[00:15:24] So it's like, let's refined and, uh, this whole idea of like what I used to do is like that first board meeting you're talking about what's coming up. And we would always almost like passive aggressively go. So that projection that you gave us in the management meetings up until the acquisition was really your projection, right.

[00:15:42] They'd kind of looking very awkwardly, like nervously say, yeah, we both knew it wasn't a real projection. It was like it was the investment banker projection, but we would like go through like this period of like multiple quarters of like almost like torturing 'em, just to kind of like prove a point. And then by like the third quarter we're like, all right, what's your real projection?

[00:16:03] Because we both knew that was, there's a purpose. We were discounting their projection. They were amplifying it. The truth lied somewhere in the middle. And so your approach of like, let's just put all our cards face up because it's so important. Today's game, like speed is important as anything like getting off to a fast start, but it also sets like this idea that like you're entering into a marriage of sorts, setting it up for success in the very beginning versus maybe some of the more childish games I would play that I sense learned not to, but it was like in those earlier days you just couldn't help but like needle a little bit.

[00:16:35] Bob Morse: I totally agree, and I was doing that back in those days and I felt it. And today the founders with the businesses that we wanna invest in have great choices. We wanna work with people who have great choices. You can work with people who don't have great choices. That's a different business. And we have lost a few deals where we can't come to agreement on those things.

[00:16:55] Oftentimes, those are people who don't wanna make this change or that change. And if you don't wanna make a lot of change, we may be a terrible partner. You own this business. It's growing, it's profitable, take it forward yourself. If you look at some of the industry research that's been done on CEO tenure at private equity backed companies, that's another statistic people don't like to talk about.

[00:17:17] There was a study a few years ago that showed that just over 40% of the day, one CEOs don't make it to the two year anniversary on bio deals. And when you look at why and what the frictions are between private equity firm and the sponsors, they're, they're two, they're lack of alignment on goals.

[00:17:36] Frustration with communication pattern. And so if we can solve that upfront and take a few of those deals out of the portfolio that you would've done, it's not just a better return for investors. It's also a better deal for founders who know what they're getting and therefore you get their best energies as you go into it.

[00:17:53] Sean Mooney: You're hitting a pulse on this, not only incumbent upon the PE firm to turn their carts face up, it's also incumbent upon the management team. To do the same, right? Because there's so much orchestrated theatrics as part of a modern m and a process to really get it to work for both, there's a a reality where both have to kind of say, here's what's really gonna happen.

[00:18:14] How do we play to win together? Hi, this is Sean. Wanted to take a quick moment to tell you a little bit why BluWave exists. It's based on this whole notion that assessing opportunities and building businesses is really hard. We all know third party expert service providers can dramatically help, but at the same time, it's hard to know who's good, usually leaving you like I would do and call friends and ask, do you know someone who does this?

[00:18:42] Or just go the square peg, round hole route. So after nearly 20 years in PE, I decided to solve my own problem and create a BluWave. Today many hundreds of PE firms, thousands of portco's leading public companies, private companies, all call BluWave, to instantly get connected with the exact third party service provider that they want.

[00:19:02] That's pre credentialed by BluWave imp, perfectly calibrated for their need. Really good. You too can give us a call or visit our website@BluWave.net. We're free to use and you can benefit the same way other top P firms do act the show. Once you've kind of done that process, are you building out some of your plan in advance or what are some of the things, or at least the core pillars, what are you doing next?

[00:19:26] Bob Morse: Yeah, so let's talk about that. The companies we're sourcing have quite similar frameworks. These are founders who've come out of industry who understand a customer problem who've used some of those modern tools. I worked at Kraft. I had this problem. I wrote a piece of software that now Kraft uses and Nestle and ConAgra inch all the way down the line.

[00:19:45] Our founders tend therefore to be where industries are and not where the technology tools are. So of those 50 plus deals, only two are in the state of California. These are people who understand a customer problem, who built something with product market fit, and they've gotten to 50 employees and 10 million of revenue, and it should be five or 10 times that.

[00:20:06] And so how do we get it out? So distribution is always a key piece of it. Team building and really, succession planning is often a key piece of it. These are founders if they would like to take it all the way through and have the energy and expertise. Great. Many times we hear in five years, I don't want to have to do for the business what I have to do today, and I don't have a successor sitting here.

[00:20:31] How do I go through that journey? And then the last piece is that five point plan that's on company letterhead that's not on Strattam letterhead. This is sort of my plan and my words, what's gonna change, what's not gonna change. And that provides a framework for our engagement because afterwards we have.

[00:20:48] Partner resources. We have a value creation team. Like I could talk about the capabilities we have to support the companies. Look, if you can do it yourself, great. If you need help, we're here. If you're not doing it and you're not asking for help, then we need to have a so-called serious conversation because we both agreed right before we went into this of our own free will that the company was going to build this kind of a go to market organization.

[00:21:13] And you can't just say, well, I've decided they don't wanna do that. That framework for what they're signing up to before they sign the deal had been very comfortable way to sort of have accountability for the leadership teams.

[00:21:28] Sean Mooney: I really appreciate that. So as I kind of go back to our original part of the conversation here, you're flipping your cards up.

[00:21:34] Here's what we're seeing in diligence. You're coming up with a multifaceted kind of five pillar or five part plan, and then you're stacking hands and at the end of the day then. You get going together, you kind of know what you're getting into beforehand, and you're aligned on that versus the guesswork that you talked about on the first board meeting problem.

[00:21:53] That would usually be a three board meeting problem for me when I was in your seats by the fourth. We're like, okay, now we're, we're mutually upset with each other, but we're at least aligned. So then the next thing is you're giving them resources to be successful. It's up to them to take advantage of them.

[00:22:10] You're not gonna nanny state them.

[00:22:12] Bob Morse: It is more of an opt-in. Yes, there are a few rules. We're gonna have this kind of governance and audit comp. We're gonna have this kind of reporting and transparency. Look, the secret to the lower middle market is building businesses that other people want to buy from you.

[00:22:26] And what we have seen over and over again is the businesses that get attention and from the strategic buyers are those that keep that innovative spark. And so if we dictate too much and we just focus on professionalism where each person is sort of. Starring in their own movie, in each of the functional areas, you lose or you can lose that ownership mindset.

[00:22:49] Like what is the whole problem we're trying to solve? What is that innovative spark? What is that sort of special, crazy thing that caused us to sort of create this company and decided that the world needed it in the first place? And keeping that spark intact through our ownership period creates businesses that are thought leaders with growing products and.

[00:23:10] That the next stage of private equity or strategic owner says, look, I can now take that 50 or a hundred million dollars revenue company and take it the next distribution lap around the track.

[00:23:21] Sean Mooney: I think that makes a lot of sense. And, and one of the things, Bob, that you kind of shared that also struck a chord with me is that you're often investing in founders who came out of industry to solve their own problem.

[00:23:32] And I think today. There's a couple ways to do it and, and I don't know that one necessarily is the only way or the other better or worse, but very often today you'll see people kind of coming out of colleges and they're looking for problems to solve, and then they try to create a problem that often is based on disruption of something that's already working.

[00:23:53] Tell me about kind of the approach that you're often taking, where you're looking for someone who's in an industry and trying to solve on a problem that they intimately experienced. Why is it that that's one of the personas that you're really looking for?

[00:24:05] Bob Morse: Let's talk about the market today. I think AI is a great case study.

[00:24:09] The collection of technologies we will refer to as AI is this incredible invention and it allows you to do amazing new things, but what do I do with it? That's not an innovation until I put a business model around it. And so I need to know what customer problem with what value prop I can really apply that to.a

[00:24:29] And the best moments for us in all this disruption with AI have been when that founder or product leader at one of the companies looks at the capabilities of AI, says, technology's finally caught up to this problem that I've had for a long time. I know exactly what I do with that. That is a great feeling and that's something we want the companies to come with.

[00:24:49] I think there are people out there who are like, well. I don't exactly know the end market for this incredible technology and capability, but I'm gonna find that during my ownership period. And they also can be very successful investors. I think a little more growthy inventory, that's not our competency.

[00:25:07] We're looking to back those people who've proven the ability to take those tools and say, I know what I would do with that.

[00:25:13] Sean Mooney: That's spot on. And it doesn't mean that one can't work more than others. As I often explain the difference between private equity and venture capital. For those baseball fans out there.

[00:25:24] Venture capital is more your, your home run hitters. You're swinging for fences and it works because you only have to be right two out of 10 times. Private equity is for people who have seen the movie or read the book, Moneyball, this is the Oakland A's, like getting on base, get singles and doubles. And to be right, you only need to get singles and doubles, but you have to be right more often it, right?

[00:25:43] And if you're on the right, more often, it's just a bigger risk if you're looking to solve a problem that you not understand versus when you grow up in that industry and you know the pain, the suffering. And that was kind of what spurred me to, in a fit of like entrepreneurial inspiration meets insanity, did BluWave right?

[00:26:01] It was the problem I had every day when I was in pe and then I just took someone crazy enough to leave a job he worked his whole life to to earn, to, to do a startup. But what you're saying, I think really resonates in that the people who are solving those problems, they just kind of know it better and they already know it's a problem versus looking to see if it is later.

[00:26:21] Bob Morse: In some of your other discussions, and I, I'm sure the business you're in as well, the private equity business is increasingly becoming an insights business, not just a capital business. By specializing in understanding a particular kind of problem and a particular class of companies where you can really bring a set of insights, privileged insights to improve, offer power, to improve distribution, to improve efficiency, that's something you can build a franchise around.

[00:26:47] Sean Mooney: Let's talk about. One of the things that I think was a really interesting point, let's talk more about where you're seeing ai. What I'm curious about is, this is obviously a big trend today. Let's build upon what you're talking about, kind of AI as a invention, innovation, et cetera, and how does that maybe factor into how you're working with your businesses around arguably, one of the biggest moments in human and commercial history since the wheel was

[00:27:14] Bob Morse: created.

[00:27:15] I'm right with you. My analogy is not the mobile phone. It's not the internet. It might be the rise of the knowledge worker. This is like it might be the wheel. It is an incredible new tool and we are in the very early stages. That invention, innovation framework is an old framework from guy named Joseph Schumpeter, who was the initial author of Creative Destruction and Early Economist writing about the innovation economy.

[00:27:42] Sometimes those old frameworks are really helpful in understanding the new thing that's happening in the world. And so just to hit that again, like an invention means I can do it. Innovation is, I have a business model around it. I've generated the steam engine. I'm delivering stuff up and down the seaboard, more cost-effectively.

[00:28:00] 'cause I've got my steam ship and not my sailing ship. We're just in that move from invention. Like, here are a lot of free tools and I'll make 'em available and let's see what people do with them. To innovation. I really know what my business model is around this. There are a million experiments being run right now to figure out what is that sustainable business model.

[00:28:21] There are some early consensus over places to use that, and we can touch on that a little bit. I would say at the highest level though, this is a very disruptive trend to the SaaS business. We'll start with the bad news on that threat and then talk about the good news about where it can go.

[00:28:40] Sean Mooney: I couldn't agree more on where you're going on this and to date ourselves in this conversation.

[00:28:46] It's like, it reminds me so much of kind of mid 1990s when the internet came out and it was, everyone's like, the internet's a strategy. All it's just like, use it everywhere, blah, blah, blah. Like value company based on eyeballs looking at a company and it was just spaghetti against wall. And then eventually people realized it's a tactic and service of a strategy.

[00:29:08] And then really great companies came out of that using it in service of what they were trying to create.

[00:29:14] Bob Morse: A lot of those analogies, having been in Silicon Valley in that.com moment, the promise is great, and yet there's a lot of things that aren't true. There's a lot of things that are misperceptions. The cocktail party chatter and the reality on the ground are often quite different.

[00:29:30] Like it's a very noisy environment. That's what it feels like when you have one of these waves. That's all. Okay. We're in that early phase.

[00:29:39] Sean Mooney: So if you think about, we're in this early phase, the way I felt then and the way I feel now with both of these, and I think this is gonna be bigger than the internet, it's 80% excited, 20% terrified, and so, so how do you think about the impact that AI is going to have on SaaS, which rose from the primordial soup of the internet and now is coming through its own impact?

[00:30:04] It was the impactor for all these years and now it is going to be impacted

[00:30:09] Bob Morse: SaaS over the last 15 or 20 years took what was an upfront payment license model into something that had a bond-like stream of payments and a high margin over time because the delivery model was much more efficient and with that bond, like stream of revenue payments, you had an entire debt capital market financing against that.

[00:30:30] The private equity industry, by my count on capital deployed, has over a trillion dollars of equity invested in the B2B SaaS world that is now leveraged materially. It is mostly behind this subscription model, and the subscription model is mostly seat based licenses in the SaaS world. We're sitting at our terminal, we're using a SaaS application, and we're doing our job.

[00:30:55] Increasingly with the capabilities of ai, we first moved to the ability to be conversational with that ai, which means not just the chat bot, but if I give an example, I can log into my inventory management system and it doesn't just say, what would you like to do? It's like, Bob, you have ordered too many of the size 12 blue shoes.

[00:31:15] You should cancel or delay this order and save seven grand. We have a business that does that and introduce that kind of functionality, and people love that. I love to show up and have a suggestion given to me if I want to check it. By doing the analysis myself, I can where that is going and what we are piloting now is the opportunity to log in and the system says, Bob, you ordered too many of the size 14 blue shoes and I canceled the order, right?

[00:31:41] This ability to delegate some of the work to the system itself. And you see that starting to happen in a couple of areas, we're still very new. But if I begin to use this to sort of take decisions for me, it's less about me having it as a tool and more about me not having, for instance, a thousand people in the call center, but now I have 800.

[00:32:02] And so the value prop is no longer really a seat based license model. It's based on some outcome that you're achieving. The end of seat based licensing as a economic pillar, which we're not at the end, I'm not even sure it will ever end, but it's at risk in many cases. Boy, that is a huge change to how we value and finance the B2B SaaS world.

[00:32:27] We're in the very early stages of that, but that is a existential threat to this business model that we've all gotten to know and love that takes seats times per month times 12 times margin, times leverage.

[00:32:41] Sean Mooney: That's really, really interesting. As you're sharing this, it's kind of, you think about it was licensed maintenance where you're gonna have a big upfront payment and then we're gonna get a little bit of support fee.

[00:32:51] Then you're gonna do this per seat model, and now it's moving towards value-based pricing. Like you would sell almost a piece of equipment again, and then probably back towards maintenance or something like that, or a consumption model. And maybe it's like what old is new and what's new is old and the pendulum of life and business swings.

[00:33:09] So.

[00:33:10] Bob Morse: I completely agree, and it requires you to kind of go back to what is the solution I'm selling to the customer again. And then inventory management. They don't want to buy software. They already have 200 other software applications. They don't want more software. What they want is their inventory to be managed effectively.

[00:33:29] And the best way to do that had been someone using a software program to do it. But if I can do that more cost effectively. And have a 10 person team, not a 20 person team managing my inventory. I am gonna buy basically more from my technology partners, not less. I see businesses using more and more of these advanced technologies and relying on the more and more to improve.

[00:33:54] So I think the overall trend in spending with the tech software world will be up. But the way in which people pay will be quite different. And as always in these transitions, some of the leaders will make that leap and yet some will not. And there'll be some new entrants.

[00:34:11] Sean Mooney: This is really interesting in terms of it's not a value change, it's a pricing strategy change that's gonna be huge.

[00:34:18] If you've read the book, who Moved My Cheese, which is one of my favorite books, those who don't kind of go with it, they're gonna get stuck in this legacy. In some ways, and this is a provocative thing to say, it's the same exact challenge the legal industry's going through right now where they're selling by the hour.

[00:34:32] And if you're gonna still try to sell by the hour, it takes a lot fewer hours to get things done than it used to. And the same thing like you don't need nearly as many people with hands on keyboard because it's able to do decision and often increasingly action.

[00:34:46] Bob Morse: I think we're back to a world where, what is the customer problem I'm trying to solve?

[00:34:51] How do I solve it for them in a way that they're comfortable and confident in, and that we will be in an evolution over what's the value of that and how do I price it? And the reason I'm optimistic for the private equity world is the private equity world is very pragmatic. It's very good at running experiments.

[00:35:06] It's very good at thinking about pricing. It's gonna create a lot of disruption. I've talked about being in private equity industry for a long time, for those newer into this industry. It's a great moment. Because the playing field's been leveled a little bit. Like you're at the start of a new wave and there's an opportunity for innovative thinking.

[00:35:23] I'm very excited for people who are just coming into the curve to make a real contribution.

[00:35:30] Sean Mooney: If you think about it, the only constant really is change, and it's really easy to get emotional about it. Like we're just gonna hang on to this and we're still gonna be making vinyl records. And maybe the vinyl record business.

[00:35:42] If you're the last one standing, that's great. But, uh, but everyone else, and it wasn't so great to be in the vinyl record business, if you change with it, you banned the word historically and then you just kind of like, look to the future, there's great opportunity ahead. That was one of the great things that we did at BluWave because when we started, we were supposed to be a self-serve platform with SaaS and that was 'cause that's all I invested in it.

[00:36:07] And what we turned into was a marketplace model that included a human in the loop and put all the technology behind the curtain. And that was terrifying and probably was driving this thing right into the ditch until I just had the audacity to do. What you're saying is like, listen to the customer, see what they attribute value to, and then share those proceeds.

[00:36:31] And you made the leap. And we made the leap. And next thing you know, we were top 3%, I think 5,000. But everything before then was like, oh my God, this is the worst failure of my life. And so I think it's great advice for people that are kind of resisting this kind of tectonic shift right now. Ask your customers where they perceive value and price.

[00:36:48] That we have all these different pricing strategy kind of cohorts within the ecosystem, and some of 'em are much more kind of like unit based or kind of SaaS based. I have a feeling it's the old school value-based pricing. People really who are selling like equipment right now that have the answers.

[00:37:05] Bob Morse: Who are gonna have a new day.

[00:37:06] Yeah. Yeah. And some of this, you talked about making the leap. Some of this does feel like making the leap. Nobody has the answer and they're just not sharing it. And so one of the things that's happening is just a lot of experimentation and for an industry that wants to exactly know what it's doing and document everything, that innovative entrepreneurial spirit to encourage all the companies like you must release.

[00:37:28] A customer facing feature with ai, you must be using this internally so that you get comfortable with these pieces. Like we're gonna be pushing the envelope on adoption here and how do we do that? How do we get the conviction? How do we have the courage and how do we say it's okay? 'cause a lot of these things aren't gonna work and like we gotta run those experiments.

[00:37:48] That's an uncomfortable moment. But that's the moment we're in, in private equity today.

[00:37:53] Sean Mooney: And you are on the tech side, which is more naturally embracing. Of technological innovation and change by virtue of the segments in which they participate. But still, there's a lot of people I think, throughout, even in software, right, where they're like developers, right?

[00:38:08] I gotta have my hands on the keyboard. Windsurf can't be better than me. No way. Even within these organizations, there's people who are gripping. It reminds me. The office, which I think most of us watched, you know, multiple times over during COVID. And there was this great scene when Dwight TR was trying to beat the website that they enforced on everyone and he's feverishly trying to beat it and he kept up selling more paper than the website, but eventually the website just crushed him.

[00:38:32] So, but even in, in these industries that had used kind of tried and true techniques, they're gonna be impacted and are being impacted. So how are you kind of working with your portfolio companies to run towards this versus curl up against it?

[00:38:46] Bob Morse: Your theme in this whole series is humanizing private equity.

[00:38:50] Part of humanizing is making connections, and I have found the connections between the leaders at the companies has been more powerful in the last couple years than ever before. We've gone from doing our CEO summit from once a year to twice a year, and in the last several sessions, the session that has run over longest and gotten the best feedback is one where all the CEOs sit together and all the Strattam people leave the room.

[00:39:13] And they can just talk to each other candidly about what they're working on, problems, what they wish they had as resources, et cetera. I would say there's more connection between the firms and sort of, I tried this. How did you do that than ever before. So I think there's gonna be a little bit of a collective in terms of people talking to each other and networking for what's working.

[00:39:35] And we could, because we're in this fast learning loop,

[00:39:39] Sean Mooney: that's once again, so spot on. As you might imagine, we're really a data business here at Blue Ribbon. It equips everything that we do here. One of the interesting things is that we get to see what the best business builders in the world are doing, where they're doing it, why they're doing it, how it changes in time.

[00:39:56] And if we look at the second quarter of 25, we saw technology adoption grow by more than a hundred percent at PE year

[00:40:04] Bob Morse: over year. Wow.

[00:40:06] Sean Mooney: But guess what? There's still two to one calling for people. So, so, so I don't think we're gonna be replaced anytime soon. You all are such great practitioners of using the word and not, or right.

[00:40:18] It's not this binary universe that you live in. It's you're gonna do things in symphony and harmony with each other to create a greater

[00:40:24] Bob Morse: whole. The people piece is a huge piece of this, and getting people who believe and feel comfortable to experiment and we're all working on it, and it's a little uncomfortable not to know what's coming next quarter.

[00:40:34] We had our A GM earlier this year. I was like, I've gotta really study up on AI so I can chart what we're gonna do for the next few years. And my conclusion is even the thought leaders in the world don't exactly know what's coming next quarter or the quarter after that. In all dimensions, the solution is to be paying attention, to be practicing, to be experimenting, and to be learning, and to just be comfortable with the discomfort of this change and to lean into it and, and not go to sleep on it.

[00:41:01] Sean Mooney: I love that you're just like, lean into what it is. It just don't get emotional about it is what it is, and it's gonna create great benefits for all of us. The only life act I have on that is that in our company, no one is allowed to sign anything more than a one year contract for anything other than our lease.

[00:41:19] So it's like, no, you, it's like it's gotta be the best thing in the world. It better have an out if it's more, we've already put things in this year and already ripped them out because something is better. So I think the agility is really important. Maybe as a segue with life hacks in mind, you know, and a lot of our listeners are like, there's nothing more than like either a personal life hack or a mantra, a gizmo or a gadget, or just how you think about and do things that I think is just so instructful on life.

[00:41:47] And so I'm curious what might be one of those types of things that you add to your day in how you think about things.

[00:41:54] Bob Morse: Sure. For me, it'll be a mantra. This is a life philosophy based on aliens. So I don't know if you have any listeners out there who think they've encountered aliens, and I'll just sort of just say that growing up, it turns out my great aunt and uncle thought that they had, they wrote a book on it called The Interrupted Journey, a TV movie.

[00:42:13] It's part of the UFO folklore. But I'd say when we started Strattam, we thought we would have this wide range of experiences when we founded the firm. Then you actually found the firm and you find yourself like on the other side of the room, like on the other side of the hallway. And different people have different phrases for that.

[00:42:31] And we've decided that aliens landed is the phrase that we're gonna use to say, even if aliens land, it's in the business plan. COVID, ai, all the disruptions we've been through that no one could have predicted that mindset of, yep, that's in the business plan. We're gonna lean into it, sort of continuous improvement.

[00:42:51] My thought for you and the listeners when you can't believe it's happening, aliens landed. It's in the business plan.

[00:42:57] Sean Mooney: I think it's such a great saying. Everything was impossible until it wasn't right. Like the four minute mile, I'm sure there's some threshold in rowing that was always impossible. Right?

[00:43:09] And then suddenly happens, and then suddenly everything's possible.

[00:43:12] Bob Morse: I think people will look back on this moment with the rise of AI in five or 10 years and be like, oh, well of course we all knew it was gonna be blabbity, blah. At this moment, we're setting that future that other people will look back on.

[00:43:26] It's an exciting time.

[00:43:27] Sean Mooney: I was talking with a friend about it and I thought, there's no greater time to be a business builder right now, in part because you're gonna have the big titans like there were in the mid nineties, that we're in these great land races for the foundations that are being set. And what that meant though, at least in the nineties, and what means for all of us, particularly in this SMB category, is.

[00:43:50] They're gonna be giving away these amazing tools in order to try to grab that land. And what we're gonna be able to do that as the business builders who are gonna be applying those tools to our strategies is the application of resource that's gonna be required versus what it was even two years ago, is gonna be so much less if you just have the audacity to use it and put it forward and they're gonna give it to us.

[00:44:13] So like how exciting is that?

[00:44:15] Bob Morse: Like they're kind of counting on this class of companies to be the way that those tools are consumed into the economy.

[00:44:23] Sean Mooney: Yeah. So if you're building stuff, this is awesome. Like, heck yes, I'll take super cheap access to, in the entirety of human knowledge and, and my app on my phone and use it everywhere for almost no cost.

[00:44:35] Bob Morse: Like, that's right. Sign me up.

[00:44:36] Sean Mooney: As you said, like the aliens have landed on this one and it's pretty good, right? It's the positive version of that movie.

[00:44:43] Bob Morse: It's indeed.

[00:44:45] Sean Mooney: Well, Bob, this has been really an awesome conversation. I've learned many, many things that I wish I knew before, and I'm fortunate for that. So I want to thank you for taking the time outta your busy schedule to pull back the curtain and share some of the things that.

[00:44:58] You've observed and learned over time and what you're seeing in the future here.

[00:45:02] Bob Morse: Sean, thanks so much. It was really a pleasure to talk to you.

[00:45:16] Sean Mooney: That's all we have for today. Special thanks to Bob for joining. If you'd like to learn more about Bob Morseon Strattam Capital. Please see the episode notes for links. Please continue to look for the Karma School of Business Podcast anywhere you find your favorite podcast. We truly appreciate your support.

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[00:45:57] And you can do the same whether or not you're in the PE world. Give us a call or visit our website@BluWave.net. That's B-L-U-W-A-V-E and we'll support your success onward. The views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the user positions of any other persons or entities, including those referenced here.

[00:46:18] In no representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.

Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.

BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.