What does it take to bring technology and data capital to middle-market businesses?
In today’s digital world, there’s an enormous opportunity in helping business owners embrace technology…
In this episode, I’m joined by Vinay Bachireddy, a managing partner at Weave Growth Partners.
Weave Growth Partners is a Silicon Valley firm that backs owners and executives who want to make their businesses more customer-centric using technology and data science.
Vinay is here to discuss M&A with a tech focus, Silicon Valley trends for next year, and more.
Mentioned in this episode:
Transcript
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and founder of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors.
Today, I’m joined by Vinay Bachireddy, managing partner of Weave Growth Partners. Weave is a private investment firm based here in Silicon Valley, where they back owners and executives who want to make their businesses more customer-centric, using technology and data science. Vinay, great to have you. I know it sounds cliche being Silicon Valley and talking to an organization that focuses on technology, but I think you’ve got something that’s very special to offer. So thanks for being here today.
Vinay Bachireddy: Yeah, pleasure to be here, Patrick. Thanks for having me.
Patrick: Now, before we get into Weave Growth Partners, let’s start with you. What brought you to this point in your career?
Vinay: Well, it’s a long story. But I grew up in a small town in East Texas, called Lufkin. Population 30,000. And, you know, from there was, went to the east coast for both college, business school and work. So spent the majority of my career in New York, DC and Philadelphia, primarily working in finance. You know, for me, I come from a family of doctors.
So, you know, breaking free of that mold and, and just found a lot of fascination in both understanding businesses, the economy, as well as just finance and investing, I find it fascinating to meet a business owner, understand how they got started, what makes their business tick, and what the vision for their business that they have. So that’s what really what kind of gets me excited and gets me motivated to do what we do at Weave.
Patrick: And then and then you came together and you met, you met your partners?
Vinay: Yeah. So in 2019, we formed Weave Growth Partners, and there’s three of us, myself, Vishy Venugopalan and Austin Neudecker. And we were all classmates at the Wharton School. So we went to business school together. And Vishy and Austin actually knew each other before that. They were undergrad classmates at MIT, majored in computer science. I pursued the other science. I majored in Political Science.
But, nonetheless, we met at business school and officially formed a Weave in 2019. Really what this thesis of, as you mentioned, in the intro, this thesis of bringing technology and data capital to middle market businesses. My two partners, Vishy and Austin, both of their backgrounds have been largely in Silicon Valley, in technology.
Vishy as an entrepreneur of predictive analytics startup, but also as a venture capitalist, and Austin, both as a venture capitalist, as well as a startup founder and the head of growth at a company called rev.com, which he took from 10 employees when he started to over 200 employees and 100 million in revenue. So there’s, there’s lots of expertise within Weave in how to scale and grow companies, and a deep familiarity with technology and data in general.
And, you know, I think we all know, especially, you know, after COVID how important technology is to every business. You know, we all see firsthand whether as consumers,
investors, or business owners, how digitization has come for the economy. And so, you know, we kind of took a step back understood this and, and really wanted to help business owners embrace technology, embrace this digital transition to the benefit of their business and their employees.
Patrick: Well, we can talk about a little of that with the digitization in a second because it goes a lot of different ways. But just out of curiosity, it wasn’t named Bachireddy Growth Partners, it was Weave. Where did you guys come up with the name? How did that work?
Vinay: Well, you know, that’s a good name. Bachireddy. We may have to reconsider,
Patrick: There you go.
Vinay: So we came up with the name Weave, really, you know, in the sense of, we’re kind of weaving data and technology, you know, into businesses. Data is weaved throughout the operations of every business. Whether folks are capturing that data or not. It is a fundamental part of every business. And so that’s really where the name came from. Obviously, we’re big believers in growth. And that’s, that’s a big part of every conversation that we have with any founder or business owner. So that was that was the genesis of the name.
Patrick: Well, there’s a, there’s a saying here in Silicon Valley, when you talk about what kind of business is this. Every company now is the technology company. And it’s, you know, perfectly set up by McDonald’s, the, you know, the franchise restaurants spending $2 billion for an AI company. And everybody is in some form one way or another. So we understand that technology is ubiquitous everywhere. Talk to us about what you’re dealing with with data, because you’re not taking traditional paper companies and trying to make them online digital. There are nuances to it. Let’s talk about that focus that you have.
Vinay: Yeah, Patrick, it’s a good question. It’s really a journey for every company. Some companies may actually be in that phase of paper and manual processes. So that is the reality, frankly, of many lower middle market companies. But some may be further along in the journey, and they have may even been very thoughtful and intentional about their technology stack.
So we have to meet them where they are, the important thing for us is that the owner and the management team is committed to embracing technology, and kind of moving down this, you know, their own digital journey. And that’s, that’s really the critical thing. And so, so we really take them wherever they are, whether that’s embracing, you know, off-the-shelf technology at the beginning, just to kind of, you know, help them start to capture and analyze the data within their business.
That’s kind of the first step and, and part of that’s not just picking a tech deck, there’s also a cultural change that has to happen, which is often you know, the hardest thing. This journey, you know, human beings are very resistant to any type of change, if you’ve been doing something for decades. And so, you know, educating folks and making them feel comfortable with how technology can improve their daily lives, is a critical part of our job. As technologists and as investors.
Patrick: You know, there’s not one approach to doing this, as you and I spoke about. I mean, what was great about Weave is you guys have a game plan. And depending on what the circumstances are, you can go in a number of directions. But you know, which way you’re going, I think, which is very, very encouraging for organizations out there. Now, when we’re talking about data, are we talking about operational optimization, or is this marketing?
Vinay: Yeah, no, that’s a great question. It is everything. That’s the short answer. But you have
to start somewhere. And you know, you can’t take too much on it once. We take, unless there’s a burning fire within operations, we generally start on the sales and marketing front, just because it’s so much more impactful. From a financial performance and valuation perspective. That’s, where we, that’s where we start.
And every business owner, especially at this size, you know, many of them are founders, you know, there, many of them are natural born salespeople. So they’re very attuned to, you know, kind of pushing forward sales and marketing. So if there’s anywhere that we can help with growing their top line, they get very excited about. So that’s, that’s a very natural place for us to start, you know, as we think about how to apply our playbook.
Patrick: Yeah, I completely agree. And I think that’s another part of your formula that your approach is, when you see businesses, they may have a bunch of things that there’s just scattered, because there are so many things, and they’re aware, there are things they don’t know. And so I like the logic there of approaching the sales and marketing first, because you can make a big dent there.
Now you’re focusing on I mean, your firm hasn’t been around very, very long. But you’re focusing on the middle to lower middle market. Let’s talk about why down there. Because there are probably bigger opportunities with bigger firms with bigger problems. But tell me why you’re focusing in the lower middle market.
Vinay: Yeah. So I think there are a couple of reasons. From a very high-level perspective, the US is the best place in the world to invest. And we also happen to be located here. But yeah, so we love the US and US companies. The lower middle market in particular, we think is kind of just below the radar of a lot of, I would say have lots of institutional capital. You know, such that we think there are more opportunities, not only in terms of the number of businesses, but also kind of the capital relative to the number of businesses.
So we like, we like the lower middle market for that reason. We also think that they frankly need more help in embracing this technology. They may be on average kind of earlier in their digital journey than a company 10 times their size as an example, who may be able to hire very expensive kind of technology firms or consultants who can come in and help them kind of remap all of their processes.
And I would say maybe the final reason is that there is a benefit that they have, which is, it’s easier to make these changes within that are smaller. There is less technology debt. It is, it’s a faster process. Whenever you think about a Fortune 500 company making a change, it’s usually a multi-year process with, you know, kind of these milestones along the way.
Patrick: All those legacy systems, yeah.
Vinay: Exactly, exactly. So there’s less to unwind. So in some ways, that is an advantage. They have the advantage of being much more nimble, as it relates to embracing technology.
Patrick: I think, I think what’s great about having you here today, is you’ve got a lot of owners and founders, they got their company one way or another to a certain size, where they’re too big to be small, but they’re too small to be enterprise. They know they need to bring in some outside expertise. And if they don’t know any better, then they’re going to default to getting a you know, going to an institution, be underserved by having some substantial loan with no expertise, or going to some other place where they’re going to sop up all the resources for an outside vendor. And it’s just not a fit. That’s why it’s great to have Weave Growth Partners here today, because you can help these owners and founders get past that inflection point.
And you’ve got the experience, because you’ve done that before. So I greatly appreciate, you know, having this option out there. Because I think it is, we have to improve sales. Well, how do you do that? Or we have to improve op. How? And I think you have an approach that is, I mean, the biggest of the big are implementing it through technology. But that’s such a big word, and you put an identity to it. So I think that’s very, very powerful. Tell me, Vinay. Give me a profile. What’s your ideal target company that you’re looking to partner with?
Vinay: So yeah, in general, we look for companies that are generating at least 3 million of EBITDA. So anywhere from call it three to 20 million of EBITDA. And there are a couple of industries that we like in particular, not to the exclusion of others, but just ones that we tend to focus on more. And those include business services, financial services, health care, and ecommerce/digital media. Those are those are kind of the, the industries that we tend to, to like the most. And they all tend to have, to varying degrees an asset-like nature to them. Many of them have recurring revenues, which means they generate a lot of free cash flow. So those are those are usually the characteristics that we like to look for in business.
Patrick: And I can imagine, and another thing, also, when I was thinking about fit is as you’re talking to people, you have to find a way to make sure that they’re willing, and they’re eager to embrace that kind of change. And that’s part of your criteria, I’m sure as you look at it.
Vinay: That’s absolutely right. I mean, we want leadership. We don’t want to have to tell them what to do. We want them to tell us, you know how much they want to embrace technology, we want to hear about their vision, and then we want to help to make that happen. At the end of the day, it’s always more powerful coming from the business owner than it would ever be coming from us. They know their business inside and out. They have long term relationships with their employees. You know, the biggest agent of change is going to be the CEO. Not the external investor. So as long as it’s coming from leadership, that gets us really excited. And those are the kinds of people we love to do deals with.
Patrick: Yeah, and there’s no shortage of opportunities out there. But you got to make make the right fit. And one thing I’m sorry, we didn’t talk about earlier, but the headquartered in Silicon Valley, you’ve got a presence also in Texas. Are you limited geographically at all?
Vinay: Well, we invest all throughout the United States. But we’re limited to America.
Patrick: That’s fine.
Vinay: So yeah, that’s, we invest all over the United States.
Patrick: Okay. And with, you know, being founded in 2019, you’ve managed, we’re on the other side of COVID, depending who you talk to. So congratulations on that. And I think that’s, you know, your story is part of this story, where 10 years ago, there were maybe 2000 private equity firms. Today there are over 6000 and, you know, a lot of that goes to not only the success of professionals and the opportunities out there.
But there’s In a tremendous amount of contributions from the insurance sector, because a lot of risks, and a lot of losses have been mitigated or transferred away from the parties, through products like rep and warranty insurance, and other vehicles like that. And while it’s had a great impact for private equity in the lower middle market, don’t take my word for it. Vinay, good, bad or indifferent, what has been your experience or Weave’s experience with rep and warranty insurance?
Vinay: That’s a good question, Patrick. We haven’t used reps and warranty insurance to date. But it is something that we think about very carefully with each transaction. And it’s and we’ve,
we’ve gotten quotes on reps and warranty insurance in the past. And for us, the way we think about it is, the larger the deal, the more, the more it tends to make sense for us. So that’s, that’s been our experience to date. But again, you know, we evaluate it each time we do a deal and don’t make a decision ahead of time until we’ve kind of fully thought it out.
Patrick: Yeah, I think that’s what’s been nice is this waiting, you know, the industry for rep and warranty, we kind of won the argument. The past argument was, well, why have an insurance policy, they’re not reliable. And now that debate isn’t there. It’s just is it a fit or not. And what I’m very pleased to announce is that there is the presence of coverage. Now, your traditional rep and warranty policy were designed for transactions north of 50 million in enterprise value.
Which is very difficult for some of it, you know, particularly for add-ons, but also for smaller investments in the lower middle market. There is now a sell-side rep and warranty policy that the target company can purchase to protect the owners and founders and protect the buyer from loss. And those policies can be available for companies priced from a million dollars to $30 million in enterprise value. And at a cost of 15 to $20,000 per million in coverage. I mean, it’s a fraction of what the other larger programs are going to charge.
And there’s a lot less costs involved in getting eligible for third-party diligence, not necessary. And so it’s great now for organizations like yours that as you were going forward in the lower middle market, this is now a tool that you can bring out there and make available to your target counterparties.
And so that’s, it’s nice that we were able to have an opportunity to discuss that as we go forward. Now, Vinay, with regard to, you know, we’re near the end of the year. And I mean, we probably just blinked and now we’re already looking at 2023. You know, what trends do you see in the next coming year, both either macro or with regard to Weave Growth Partners, because you got through COVID, so it’s got to be easier now.
Vinay: That’s what you’d think. Yeah, I think what’s happened since 2020. And I think this point has been probably a belabored time again, which is, you know, kind of the acceleration of everything digital. And the conversations that we were having at the end of 2019 are very different than the conversations we’re having now. It’s not as big of a hurdle to convince business owners of technology and digitization.
That being said, you know, this year has been a very crazy year, with the most rapid rise in interest rates, maybe ever. And so I do think there is some consternation around out there around, you know, is this, are we entering a new normal? You know, do valuations have to come down? And if so, how much? I think there’s, there’s a lot of, I think, sentiment among investors and business owners, just uncertainty in this particular moment.
I do think that by late 2023, you know, mid to late 2023, we will have more clarity. But, you know, as a firm we are being more conscious, in general. Although we’re still meeting business owners every day, and if there’s an attractive opportunity, that won’t stop us from making a good investment. So that’s, that’s been kind of our outlook this year.
Patrick: All right, great. Well, Vinay Bachireddy from Weave Growth Partners, how can our audience members find you?
Vinay: So you can contact us via our website at weavegrowth.com That’s w e a v e growth.com or contact us at team@weavegrowth.com.
Patrick: Well, Vinay Bachireddy, thank you so much for being here today. It’s a real pleasure meeting you, and it’s great to talk to you.
Vinay: Thanks, Patrick. I appreciate the opportunity.