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KP Unpacked
KP Unpacked explores the biggest ideas in AEC, AI, and innovation, unpacking the trends, technology, discussions, and strategies shaping the built environment and beyond.
KP Unpacked
Why AEC Keeps Missing the Point
Welcome to KP Unpacked of the #1 podcast in AEC.
In this conversation, KP Reddy and Nick Durham cut through the noise and challenge the stories AEC leaders keep telling themselves. From LinkedIn posts that sparked heated debates to hard truths the industry avoids, this episode doesn’t play safe. It pushes you to rethink how innovation, scarcity, and leadership actually work in the built world.
We revisit KP’s most discussed LinkedIn posts, including:
- Why paradox is a moat.
- The real reason startups fail in AEC.
- What leaders get wrong about exclusivity.
- Wrappers vs. Builders: the value equation no one wants to face.
- Why “safe” advice will kill your vision faster than risk ever will.
💡 Episode Highlights:
- “Innovation in AEC isn’t optional. It’s survival.”
- “Scarcity creates power. Abundance creates noise.”
- “Wrappers aren’t builders. Services aren’t IP.”
- “Safe advice is the fastest way to kill a big idea.”
- “Exclusivity is a moat, but only if you dare to enforce it.”
👉 Explore more at KPR Co and follow us on LinkedIn for upcoming episodes, events, and insights.
Sounds like you? Join the waitlist at https://kpreddy.co/
Check out one of our Catalyst conversation starters, AEC Needs More High-Agency Thinkers
Hope to see you there!
yeah all right I've got.
Speaker 1:I've got my trusty ipad here, kp and nice, believe it, believe it or not, on the screen I have a presentation you did pulled up. Okay, it's called. It's called entering brackish waters. It's a subject you've talked about on this podcast, as far as I know.
Speaker 2:Yep, I think we have talked about it.
Speaker 1:Yeah, true, so I thought this would be a good topic for for today.
Speaker 1:We can um, let the audience know that this will be the.
Speaker 1:The core focus of the of the of the episode is just digging deeper into this concept of brackish waters, and thele here is ae is shifting from financial engineering to technological reordering. This is a presentation you gave at um at an event last week. You can kind of cover the uh, cover the basics of what the event was and why you decided to present this here. But you know, I know you've, like, at a high level, presented what this idea is. But I thought it would be really great if we actually dug into the presentation and walk through the granular details and the aspects of what this looks like in practice to actually either you know, if you're a VC firm, if you're a startup, if you're an AD company, how to actually take action steps and you know, potentially ride this wave. I think that was the intent of the speech, am I right? Yeah, so, yeah, I mean. So talk me through at a high level why you wanted to create this presentation for this event and maybe even talk about what the event was.
Speaker 2:Yeah.
Speaker 2:So the event was the Swag M&A conference and private equity people in the room, which made this discussion even more interesting because you actually had capital allocators in the room. It just wasn't industry. So this WEG event it's basically focused on mergers and acquisitions in the AEC space I would say mostly AE. It's called AE space. So if you look at what's happened, when I was a lowly civil engineer back in the day, I I never saw a path forward and like staying in the industry because everybody just kind of built these firms and then they there were partnerships or they were esops and that's how they evolved. And what you've seen over the last decade really is this industry is really attracting a lot of having attracted a lot of private equity Right. So it used to be if you were Joe Smith and Associates and you wanted to retire, you sold the firm to your employees and that kind of thing, and so private equity showed up and they said, no, no, we'll buy your firm Right. So this attraction that private equity has up and they said, no, no, we'll buy your firm right. So this attraction that private equity has had to boring businesses, and so what that's also done is it's created this interesting dynamic of if you want to exit your firm. You have a couple of choices, right, you have sell to private equity, sell to your employees, either directly or through ESOP, which if your employees have been in civil engineering, they probably are not that rich, so they're not going to pay you a whole lot because they can't. You probably just get some kind of earn out or something right, or some owner finance debt. And then these private equity guys showed up, right, and if you think about that, they've come in and said no, no, no, we'll buy you as a platform company. And then we'll go do a bunch of bolt-ons or tuck-ins. So buy a 250-person firm, bolt-on, tuck-in. And then, of course, the last one was if you got large enough, some of the larger publicly traded companies, like an AECOM, like a WSP or Jacobs, will roll you up. And so the roll-up strategy has been there right.
Speaker 2:So this industry in the last 10 years, I would say, has been heavily exposed to, I would say, kind of corporate development through capital allocation or M&A, right. So that's been the construct. So what I presented I I think is important because if we look at what's happening in the advent of ai and the advent of kind of ai roll-ups. Um, I think it's it's very relevant to this industry because, after all, ai, ai, is kind of quote unquote, coming for the white collar job, so to speak. Right, so it doesn't get any more white collar than engineers, so to speak, or architects. And so you've already seen it. You've seen it with accounting, you're seeing it with legal, you're seeing it in these other highly white collar jobs. You're seeing it with legal, you're seeing it in these other highly white-collar jobs.
Speaker 2:The other, I would say, vector in all this is these are industries that building KPIs. Take it from kind of a mom and pop founder-led business to more of a professionalized business, maybe add some debt on the books to get some leverage, to make some acquisitions, all the things that a single owner maybe cannot do from a financial engineering perspective and maybe doesn't have the access to capital and or doesn't have the expertise right. They've just never done it before. They've been engineers, they've been architects, not private equity people. So I gave my little talk and we can unpack the talk, so to speak, but it really freaked people out. I was very surprised at how really freaked people out.
Speaker 1:I was very surprised, um, and how many people when you texted me that I was surprised to hear that too, and I was. I mean, let's just talk about that like what. What about? I mean? The topic is is I don't think it's like you know it shouldn't convey threat like it shouldn't feel that should be should be opportunity right.
Speaker 1:Yeah, I mean that you know, as a co-creator of this thing with you, like it's, I've approached it optimistically, like I was like, oh, this is what's happening behind the scenes, and like it's, it's interesting, it's compelling and it's happening, it will happen to this industry and you have a chance to like to, to actually ride that wave rather than essentially miss the boat and I'm also assuming that a lot of firms in the room.
Speaker 1:They actually weren't consolidated right. Like anyone who's an owner, who's not a PE firm in the room and wasn't a part of a previous roll-up, like you're looking for, everyone's looking for liquidity at some point, right, so to me it's a very, actually opportunistic topic. So, yeah, I couldn't really understand why that happened.
Speaker 2:So I wrote a separate LinkedIn post and it was really about how corporate CEOs I think it was my Sunday Scaries, which, funny enough, the Sunday Scaries was the topic was fear, right, and it came from this presentation, which I thought was fascinating, that the corporate CEOs were afraid. And so what were they afraid of? I was just kind of saying like they're afraid of new capital entrants coming into the market. New capital entrants that historically I'm not saying is always the case historically tend to pay a premium. They don't mind paying a premium. In this case, most of the VCs entering the space are operating out of evergreen funds. They're not looking at a five-year, 10-year flip, which is what the private equity people, 10-year flip, which is what the private equity people. So what I would have heard me as an entrepreneur, what I would have heard is wow, more capital coming into the market, I can sell for more. Maybe I can sell partially and still own some of the upside partnering with venture capital.
Speaker 2:The people that should have been afraid should have been the private equity people saying, hey, these VC, these wild VCs, are going to come in and overpay and block us out of deals. What should have been the takeaway? It should have been the takeaway the PE should have been afraid and the CEO should have been. This is amazing. Oh my God, when can we talk? Right? But I think it comes to how kind of the founder mindset is so different than the corporate mindset. I think the founder mindset, we are highly indexed to optimism. Oh there's more capital, man, we can go build more. Oh, there's a change and shift in the market dynamics, oh, we can go monetize it. Right, I think. For whatever reason. The corporate CEOs right, I think. For for whatever reason, the corporate ceos, um, they kind of index towards risk and fear. Oh, like I've never talked to a vc, how would this even work?
Speaker 1:and they just freak out. The status quo is changing. The, the service area, the game that I know of, a game that I know that I've been playing for a long time, is changing. So it's to me, maybe it's you know, it's the desperate feeling you get when, when that, when that, that game evolves and you don't know how to play it.
Speaker 2:Yeah, I think I think that's where it is right. So I think that's where it's done from. I think what they should have been afraid of right I kind of look at what should they have been afraid of is, I think, with these models, right, the 250 person firm that is at scale, generating EBITDA, has a certain profile that's very attractive to PE. Those people should be a little bit afraid because now, with the new VC entrance into the game, there might be more interest in investing or buying a 50-person firm, a smaller person firm, making investments that are high risk in R&D and kind of leveling the playing field and basically creating a new breed of competitors. Right, you and I might look at a 50-person firm and say creating a new breed of competitors.
Speaker 2:Right, you and I might look at a 50-person firm and say, hey, we can make that a 250-person firm, or the equivalent of 250-person firm revenue in two years, which is unheard of because we're not interested in squeezing every penny out of it. So in many ways these PE-backed companies are so growth constrained you would think they would be growth-oriented. They're actually very growth constrained because there's no risk capital If the payback is not under five years, which is the five-year flip of all PEs, mostly right. They'll never invest, in fact I would say most companies in the AE space that have gotten private equity funding. The R&D and innovation goes down because any meaningful innovation or R&D needs a longer time horizon than five years and the PEs are unwilling to allocate that capital with no benefit to them.
Speaker 1:Yeah, it's just increased costs and it's not obvious where the revenue generation is going to happen.
Speaker 2:Right, yeah, whereas you and I probably look in and say, no, let's throw a couple of million bucks into R&D and create an AI tool that helps you design structural engineering and building. We would take that risk, we would do that risk, we would make that bet. That's what they should have been afraid of. And the 50-person firms should be coming up to me saying, hey, kp, let's go play, let's go do this Right? So it's kind of bizarre, right they?
Speaker 2:Of course, I stepped back and I, two of my teammates there with me in the, in the audience. I'm like, was I a poor community? Like, did I communicate this incorrectly? Like when you communicate something with expecting a certain conclusion and takeaway from your audience, and the takeaway is very different. You say, well, I mean, I do this. I say, well, was it me or is it them? So I was trying to understand what my part in this was. That I did, I communicated incorrectly, and my team was just like no man, like I don't. I think they just they wanted to be afraid. They wanted it like it was them.
Speaker 1:Did you sense any skepticism from the audience? Just like general skepticism of this idea is going to play out.
Speaker 2:No, I think that was. And you know, and you've heard me speak before, like I'm not very I don't gain with style points, right, like my deliveries. I think I have a very matter of fact delivery and I said that to someone and they said that's what's so scary. You're so fact and data driven. You're not, you know, you're not hyping it up or anything. It scares us even more, like at least we can't even write you off to like you just hyping up AI or whatever. You're just giving us facts and figures and that's maybe the facts and figures are scarier than me, you know, being a hype guy for AI. But I think the reason there were so much fear is.
Speaker 1:there wasn't a lot of skepticism, so let's get into the nuts and bolts of the model again. I think you've talked at a high level that AI is creating opportunities for VC to dig into what you presented and, essentially, what the, what the, the audience viewed as a threat.
Speaker 2:So you have the you see, so essentially, there's the the VC era playbook.
Speaker 1:So there's two acts. Act one is to incubate AI, native software. So that would be the idea of of of me and you or or any or any technology founders going out to build the software stack before you go acquire the company. The software stack that's going to, you know, change and, you know, offer operational efficiency, improve the margins of the business, and I don't think it's too big of a leap for anyone to listen to this to know that that software can be built, for anyone to listen to this to know that that software can be built. Essentially, you're embedding AI into existing software to improve operations.
Speaker 1:The second act and this is the one that I think most people haven't heard about yet but is becoming more and more common in the VC world is to acquire the distribution.
Speaker 1:So, instead of selling that software that you go build, which is the traditional way that entrepreneurs would go to market, essentially, what you're saying is selling is really hard, adoption in our industry is really low, implementation is bad.
Speaker 1:So, even when you sell software, maybe they're utilizing 30% to 50% of the features and maybe, you know not obviously changing the cost structure of their business. So you're saying, okay, I know this. The software that I've built with AI native tools is amazing, and the only way to ensure that the utilization and the implementation is as as great as it should be is to actually go acquire the companies and use it yourself and at the same time, while you're making that judgment call, you're also saying, hey, I'm going to go compete with the market and run the firm. So the act two what I'm describing is acquiring distribution, and I imagine that's the rub that a lot of the audience you know that's where it feels disruptive and that's where it feels threatening is that acquisition of distribution is now competing with them and they have this new entrant of competitors that they didn't actually know about before your talk.
Speaker 2:Yeah, I think so. By the way, there's this rumor going around, you know, and I'll perpetuate the rumor just because it's an interesting rumor. It says what if, in our space, two of the big software players, autodesk and Bentley there's a rumor going around that says what if Autodesk and Bentley decide to compete with their customers? Ie, they already have all the design data. They have all the design data. Advent of cloud, they have all the design data their customers have already trained, call it the AI model.
Speaker 2:So why can't Autodesk just go directly to the end customer and be in the architecture and engineering business? Same thing with Bentley, right, and I always say, well, if Bentley was still private, then I would be worried. But for both those companies as a public entity, I don't see how they could do it right. I just don't see how they could do it. It'd be too much turmoil. They'd have to go private first, is what I would say. Now, if they went private and did it, then I would be worried. But as a public company, I don't mean a lot of these firms couldn't even move from on-prem to cloud as public companies, just because revenue recognition would just trash their earnings for like a couple of years before they could gain the value of SaaS revenue versus licensed revenues. They already went through that and struggled. That was an obvious one. So I don't see it, but it's an interesting concept. It's an interesting thought experiment, more than anything else.
Speaker 2:And so I think this idea that we can use AI and build the next generation firm. I think what these folks really struggled with was we went out and talked to their customers and so I think, in the process of talking to owners and developers and asking, how do you feel like your AE firm is serving you? Are they serving you well? Are you happy? And the resounding response was they're a necessary evil of what we do. They're not happy, and the firms that we saw the attribution of, firms that actually had high customer satisfaction were smaller firms that were spending the time and understood the customer's needs.
Speaker 2:So now, if you say, well, in a world of leveraging AI for high personalization or a different type of customer experience, can a 25 or 50 person firm that has kind of that their customers actually do like them? Can they now scale those businesses using AI and drive a higher level of customer satisfaction? I think the thing that really bothered people is when, typically when they say like well, I mean our customers won't go for it, Is there a response right, Like we, we are the way we are, we do business the way we've always done it because that's how our customers dictate it to us. When I show up and say no, we talked to 200 of your customers and that is not true. They are not happy with things, how things are going. They would like to see change.
Speaker 1:I think that probably freaked them out more than anything yeah, so the the constraint previously on high customization was you can't scale it right like you can be super localized and you know, have a, have a, have a good lifestyle business, but you're not going to scale to compete with those, the players that you're referring to, but it's feasibly referring to, but it's feasible to do that today. Yeah, and that's threatening.
Speaker 2:Yeah, because mostly you know you can make a great living as a 50-person owner, a firm owner of 50 people. I think this applies to most professional services, lawyers, accounts right At 50 people you're probably have enough infrastructure. You're not like in that seller, do or death loop where like sell the work, do the work, sell the work, do the work, and it's feast or famine. You're probably out of that because you have enough scaling in the system. You have other people doing some stuff. But the next real scale point to where as a owner, you can make good money is at about 250. So from 50 people to 250 people is this weird valley of death that you actually become as an owner. As a principal. You probably make less during that till. You scale to about 250. And of course at 250, keeping up customer satisfaction and that client intimacy the services requires is very, very difficult yeah.
Speaker 1:So some more details on this strategy. So let's get into the mechanics. So, essentially, what VCs are doing right now and we'll call these kind of the large generalist VCs, all the big names that most people are familiar with they're going to target sectors where 30% of task hours are automatable, essentially today, with the foundation models that we see. So that is a prerequisite 30% of task hours are automatable. Another part of the playbook mechanic is there's no to low leverage used early, which is really different. So this is not like a debt-heavy strategy. They're taking VC equity and they're using it to buy the company and then build the technology stack. Build the technology stack.
Speaker 1:During my research, I found something that was really interesting that I didn't know before is the idea is actually the idea is not to reduce the costs out of the gate.
Speaker 1:So when you know a big VC invests in this concept, it's very different than a PE firm where they're again, they're not taking on debt, but the intent is like not to reduce costs by 15 to 20%.
Speaker 1:They're not firing people, and instead what they're doing is they're they're keeping the exact same cost structure and then embedding the software, and that software alone should allow them to take on two to three times the customer, the customers, in revenue. Then that, then that previous you know headcount was able that they were able to scale with that previous headcount. So, um, I thought that was really interesting because that playbook is fundamentally different than a PE playbook which is like, hey, we're going to come in and we're going to cut costs, we're going to trim the fat, we're going to, you know, we, we will, we will purchase things, um, that have higher ROI and we'll take on debt to do that. But that mechanic, I think, was worth calling out. So, essentially, yeah, they're spending equity to add software engineers, data infrastructure, ai subscriptions, and again, the goal is to take on two to three times the customer count, which directly translates to two to three times the revenue.
Speaker 2:Yeah, I think what happens I mean I think that's fair One. It's like, hey, we have more work than we can handle is usually the narrative. Right, that's what you're looking for. I think the second thing is, as these firms have grown, they might have exited businesses or service lines that maybe they were lower margin because their cost to serve. You know, if I'm, if I have a $250,000 a year electrical engineer, you know I can have plenty of work at 250 an hour. Why would I have them go do work that's 150 an hour, right. So you kind of optimize this to drive your service lines around the most profitable We've seen it even through some of our port codes. Right, like bridge inspection is hired by DOTs. They'll only pay like 75 bucks an hour. So why am I going to take an engineer that I can bill at 150 an hour to go do bridge inspections? Let's just get out of that business, right. So what you can do is you can retrench into businesses like service lines with your clients that maybe you opted out of before because the margins weren't there. But because of technology, you can still keep your cost to serve in a place that makes margins sense because you're leveraging technology. And so I think you're seeing this kind of call it like vertical integration of services where people have opted out. I mean, you've seen this in every industry. It's also been that way in services.
Speaker 2:An architecture firm. Maybe you exited your structural engineering business and decided to subcontract it out to structural engineers because you couldn't keep them busy enough, like when you were busy they couldn't handle the capacity. When you were slow, you had nothing. You couldn't have structural engineers do architecture right. So instead maybe I reenter structural engineering, stop subcontracting it out, because I can hire a couple of structural engineers and leverage AI and instead of having a team of 50 sitting around, I have a team of two sitting around, but I have the power of 50 to execute the work. So I think that's where there's like this weird kind of. I think we talk about vertical integration mostly around product businesses and supply chain In some weird way. If we want to talk about people as supply chain, I think you now have the option to vertically integrate service lines as well. That maybe you exited before, but it in many ways just makes sense for you to be in. Yeah, yeah, in many ways just makes sense for you to be in.
Speaker 1:Yeah, yeah, let's talk about the VC advantage versus PE in this world. So for any of our PE listeners, here's why we believe VCs are better suited to execute the strategy. I think it's like fair. It's fair to you know, it's a fair argument that you know PE firms could, in theory, theory, go try this themselves. But the reason vcs have an advantage is obviously it's technology. First, they're building you're actually building software, you're incubating it from scratch and that's essentially building a startup fundamentally different than any pe playbook, right? Um, you're dealing with the people you're dealing with are ctos and engineers, not your you know standards corporate C-suite management team. So you have to know how to speak their language and relate to them. And then the value creation is via software and data compounding, not cost reduction. We covered that one, not cost reduction, we covered that one.
Speaker 1:So the old world, the PE structure, it's going to be a capital structure debt structure and then it's about operations discipline, and the value creation was via process purchasing, sg&a reduction and sometimes tech enablement. Tech enablement was always a factor, I think, for forward-thinking firms, but was never the core driver of how they increased the value of that company. So you know, when you have these different core attributes, underlying attributes, at play, you have questions about change management, you have questions about data rights, you have questions about model brittleness, you have regulatory and antitrust questions, talent scarcity questions. I don't think I'm curious to hear your take on this. I don't think a PE firm wants anything to do with those things, nor do I think they understand exactly how to execute that strategy.
Speaker 2:Let's simplify it even more.
Speaker 1:What percentage?
Speaker 2:of PE people have MBAs 90%, probably more. But if they don't have an MBA, they have a law degree. What percentage of VCs I mean the good ones have MBAs?
Speaker 1:10%. There you go. That's your answer.
Speaker 2:The industrialized complex of MBAs does not leave much room for creativity and and like thinking, like even first principle thinking, right, um, I mean, I, I know that's a, you know, I'm sure there's a couple of MBAs listening to this, by the way, it's a cheap shot, cheap shot. Cheap shot. Also, like on your LinkedIn profile, do not put MBA as credentialing in your title, please. Generally. When I see that I look down and it's credentialing in your title, please, generally. When I see that I look down and it's like, oh, like, okay, you attended something, but anyway, it's not a cheap shot.
Speaker 2:I think it's a pattern of thinking, right, I think some people, right, are going to go down the MBA path and get trained in a method and system that is highly scalable, right, pe. That's why we say PE scales really well, right, PE scales really well. Vc kind of doesn't scale really well. There's too much of that 90% artisan experiential thing. So I don't think it's a cheap shot. I think it's a different sport. Right, we're both skiing. They're just doing cross-country skiing and we're doing downhill skiing, right, it's just, it's a different skillset. So, you know, maybe it's a cheap shot because I have not earned an MBA for the record, but I think, I think it's a pattern of thinking that you build in your career. If you went from, you get your MBA, you go to McKinsey, you go work at a PE shop, you have your standard formulas and metrics and ratios that you live with. I mean, what comparative ratios are we running when we invest as VCs? It's fairly limited. We operate with such limited information, so that's our comfort zone, right?
Speaker 1:I'll be honest the first time I I mean not the first time, but the amount of times I've uttered the words EBITDA really has only happened in the last. I mean it's very, very small scale Only happens one when I'm talking to LPs who are selling their companies or two. We're looking at the strategy and market from the VC perspective. So, like, this is a new concept we're actually looking at the you know the underlying financials.
Speaker 1:When we're investing I mean usually when we're investing, just to give people a really clear picture we have zero revenue.
Speaker 1:Or you know very minuscule amounts of revenue and you know a couple customers that maybe they got through friends and family and you know very minuscule amounts of revenue and you know a couple of customers that maybe they got through friends and family and you know maybe one or two investor introductions, usually nothing repeatable at that point. So the amount of data and the financial metrics is completely non-existent. And so you know, any analysis that we're doing is like very you know future looking and we're anticipating and making a lot of assumptions. And so, while I do think it's healthy to like know the capacity of like I have seen VCs talk about projecting out the TAM like obviously TAM's a big you know component to underwriting. But running the real math on that from a bottoms up standpoint and like having a certain degree of conviction that's not cherry-picked about how big that business can get at the concept phase is a real thing. But beyond that you've got to make sure the margins check out, you've got to make sure that they're go-to-market sound, but there's really not much analysis to do.
Speaker 2:So what do you think I mean? So here's another thing that I think people no-transcript at tennis and ping pong, but for some reason pickleball. I just can't figure out that. The pattern of motion and all feels familiar.
Speaker 1:I think you need a new paddle. I think you need a new paddle. Maybe If you've got the natural tennis swing, I think you can figure it out. Yeah, possibly.
Speaker 2:You know what I mean. It's just like it's a re-engineering of thinking, right? So I don't think it doesn't mean that MBAs can't do VC and non-MBAs can't do PE. I just think you train a certain way and have a certain swing and maybe you adapt.
Speaker 2:I think one of the things that I've found interesting, right, I think we have an idea about what we live and breathe every day as VCs, that I think sometimes we forget what the outside view of VC is, especially people that are not as in it. You know, they read from the sidelines what VC is. And someone said something to me that I thought was very interesting. They said it's really interesting that VC-backed companies seem to have a lot more run-ins with the Department of Justice and antitrust than traditional companies do. And they said, and I was like, really, they're like, yeah, it's because you guys have a winner takes all mentality. There's Google, and then there's Bing, right, and there's Apple, and then there's everything.
Speaker 2:So I think there was something that maybe we don't realize right that when we talk about these venture pathways into these industries, maybe some of the fear comes from a bit of a winner-takes-all mindset that I think we do have right. We do have that mindset when we think about a TAM total addressable market and we're trying to figure out how much of that TAM we can take, right? I don't know that PE thinks that way, right? So I kind of asked the question to you like, is that part of like something, a blind spot that we don't see? Culturally, that we're viewed as kind of people that have a winner takes all mindset versus a play well with others mindset, which is the antithesis of this industry.
Speaker 1:Yeah, I mean, mean I think the let's, let's talk about why there is a winner's take all mentality in the technology space. It's because there's no like the game. The game of vc and the game of of technology is a game of scale. You deliver quality, you know a know, a high quality product to someone at scale. You can't win in VC, you can't win in technology, if that scale quotient isn't met. And when you reach a certain scale, there's all these compounding advantages that start to. You know that start to matriculate back to the core business, and so you know that start to matriculate back to the core business, and so you know that's why Google wins, that's why you know OpenAI is in a massive lead right, there's so much compounding benefit that comes back. You know, with Google, for instance, like, once it becomes the dominant search engine, all the views you know, all the like. You know all search queries, because it's a better product, the data is getting more refined, the feedback loops are tighter, it's a better search experience every single second. So then you, just you know you create more and more customers and so like.
Speaker 1:The question is, will that happen in this dynamic with? You know, with with AI roll-ups and in particular particular to A&E. Can it happen? Where scale can occur? Pe firms they scale through capital, but there's always a constraint, there's still a bottleneck on that capital. Unless you have you know hundreds of billions and you know potentially trillions of dollars and no one you know, no one's really owned, you know the the A&E space and taken real market share, because those compounding advantages are really constrained unless you're using technology to improve and compound the product over time, and they never. It was a people scale, it's people scale, it's capital scale, it's different. So the product experience wasn't occurring for someone like so let's call out some people like AECOM, jacobs, wsp. These are massive, massive firms that as they scaled through capital and through acquisition, did their platforms get better? No, they got worse. Did they accumulate an advantage over time on cost?
Speaker 2:Actually, in many ways a disadvantage time on cost, actually, in many ways a disadvantage. Many ways a disadvantage because they acquired so many companies in such concentrated sectors they were almost like they reduced the odds. So they reduced the odds of winning because they already owned. You know, if you're, if a client says, hey, I need bids from three firms, if you own the firms, how do you get a competitive Like? They had to make room for competition, right, they had to like divvy out the work to other people. But you know.
Speaker 2:So my friend runs this company called Udia. They're an AI legal firm and they've acquired a bunch of law firms. And he sent me a note inviting me to his annual summit and it was mostly like his customers were speaking and it was probably like 50 of the top Fortune 500 general counsels were there. I was like the firm is two years old, the company is two years old, so does he? I mean it feels like he's on a path to like winner takes all the Fortune 500. And then it's just a matter of choice to go from there, right? So how much of its market dynamics and I mean it's more of a question back to you how much of it's just like how we're wired versus the market and how we like strategically. I mean, I kind of don't like losing and our idea of winning is that there's only one winner, right.
Speaker 1:Yeah, I mean, I think the mentality is if you create the best product experience which that's the goal of these VC roll-ups is to create the best A&E product experience on the market, a service experience that's tech-enabled, right. If you can create that and you feel very confident that customers agree with that assessment, why not capture the whole market? What's the constraint? Well, why don't we throw more capital at it? That is the VC mentality, for sure, and I do think that is different than PE, because they haven't participated in that game before.
Speaker 2:Yeah, I think there's also the time horizon, right If a PE is doing their five-year flip right.
Speaker 2:There's, there's, no, it's, you don't care, right? You're not trying to dominate anything, you're just trying to flip an asset, right? Not that I'm not, I'm generalized. Not all PEs are wired that way, right? But and I think that's the difference, when you look at the pools of capital that VC is forming, the capital formation around these ideas, they're not even doing the 10 year typical fund typical fund. They're doing evergreen, which kind of implies like, oh, they want to hold these things forever.
Speaker 1:I think that's a great point. I think the mindset is entirely different around liquidity, which drives a totally different behavior of incentives. For sure, I think that's a really good point.
Speaker 2:And I mean it's interesting not to go down this rabbit hole too much. But it seems like VC, maybe it's because of secondary markets and you know, like this way of staying private longer mentality I think was maybe by accident, in previous fund vintages, like previous years. I don't think that was a strategy, but it does feel like with some of the new capital formation that there isn't a push to a 10-year liquidity event and that the startups are even staying private longer. And, as you see, the formation of secondary capital pools, when you need liquidity, either for employees or I mean, who was it just did a tender offering? I forgot who it was Someone had just done a tender offering just for their employees, right, so their employees could get some liquidity.
Speaker 2:So you're not even selling this strategy that says, hey, your stock options or your restricted stock units are going to be worth so much over this four-year vesting period when we go public, it's literally saying like no, I mean you can secondary market it, whether it's SpaceX or friends at Andral, right, there's some theories that say they could. But I get hit up with brokers all the time trying to sell me secondary shares in Andral and stuff, right. So I mean I think if you take that along with some of these longer-term strategies of going and dominating a market, look, I don't think anyone that's venture-backed is trying to have a share of the market. I think we're all wired way too differently to change that.
Speaker 1:I don't think we're satisfied that way the as you look at, you know each, each tranche of financing and VC. This is, you know, the, the, the tranching between the two different asset classes, pe and VC, are also. It's also quite different in terms of the time horizons and the expectation on return, right? So if you're a, you know if you're a, if, if you're a VC and you're investing at series A or series B in one, in one of these concepts, you still have, like you know, five, seven, 10 year timeframe, like, you're not like, and it's fully illiquid, you're not expecting a quick flip. I think if you're investing in a really late stage PE concept like you're not, you know you're not waiting for 10 years, like, that's the expectation of the LP is and why they're investing. It doesn't have that liquidity profile and it doesn't have the like. The risk reward is entirely different. So, yeah, I think, yeah, I think the mentality and the incentive structure is I hadn't really thought about that as much, but I think you're exactly right about it.
Speaker 2:Yeah, and I think also like, if you're a long-term shareholder, like you know, do do venture firms, do venture funds start issuing dividends because these businesses are going to be profitable? They're not right. You started issuing dividends back to your lps. I mean it's, it's a, it's a very interesting yeah world. I mean, I was talking to one group that's doing this and they they set up a. You know, it's an evergreen fund and your money's tied up for the first three years, but then, after three years, every six months, there's sale windows where you can sell your liquidity, sell your share, your equity, back to the firm, and so there's these sell windows. And so I think giving people this optionality investors right, and so I think giving people this optionality investors right.
Speaker 2:I know we're digressing a little bit from the first conversation, but I feel like where venture capital is doing a better job than private equity is actually listening to LPs and adapting to their needs. We're not stuck on. Oh well, it's a 10-year and you're locked up and there's no liquidity and the only way to get liquidity is an IPO or a sale of the business. Now we're saying like no, we're going to invest in long-term, we'll pay you out in crypto, whatever it is, I think that's where VC does do better. I think PE is like well, no, this is how it works. This is how we underwrite things.
Speaker 1:Way more rigid. Yeah, in the whole structure. Yeah, agreed, okay, so let's get back to the ending of the presentation, the talk. Everyone's feeling threatened. You have zero awareness about this, but you're're going through your, your slides and you're getting to the end. You're pointing out all these fundamental differences that the, the floor underneath everyone is is um, quickly evaporating. What like what? What's the? What was the instruction on what they should do, with all of this happening in the background? Like, how did you like what? What direction did you point them in in terms of taking action steps?
Speaker 2:I mean honestly, I just said like, hey, come talk, come grab me, come talk to me. You know, I think if you're looking at trying to do something with your firm and you thought only PE or you know, a PE sale or sell to your employees, because there are some ESOP people in the room as well that want to help you start an ESOP, I think hey, here's a new option, come talk to me. And I mean it was a room of about 300, 400 people, I think, something on that order. I probably had 20 to 50 people reach out to me, because I think some of them I mean, I think, after the initial shock and of course, there was a lot of grabbing me at, you know, dinner and happy hour and having a conversation what I found interesting is so a lot of companies that were already private equity back that are getting ready to go through some you know what they call a recap ie, it's been five years, the private equity firm wants out and they're going to flip it to a new private equity firm.
Speaker 2:Those people seem much more biased to having a conversation with me. In other words, they had already experienced what private equity felt like and they weren't sure if they wanted to go through another five years of that. I mean, none of them could say anything negative about private equity. But you sell, you go through another five years of that, right? I mean, none of them could say anything negative about private equity. But you sell, you go through five years. They're getting ready to recap you and you're like do I want another five years of this? Like, now I know what it feels like, is this really what I wanna do for the next five years with another private equity group that's probably larger and now has bigger expectations know, bigger expectations. Is this really what I want to do? Right?
Speaker 1:I think that you know just one call out on that. I think this the cycle of hey, I need to sprint to this, to these exits with PE firms, it's really unattractive, you know, if you're in the ownership seat because um man it's hard like it's hard, it's, you know it's, it's hard to shift the boat so many different times and change the cost structure and just keep, you know, keeping expectations high.
Speaker 1:For you know, for for these different shorts, short sprints as um like, the idea of a sprint is you sprint towards something and then you take a significant break. Right, you got to let the machine, you got to let the body recover, but we've been programmed, if you're on that cycle, to you know, kind of keep sprinting, yeah it's funny.
Speaker 2:It's really funny too. Like one of the, of course they had a bunch of PE back. You know, I wasn't the only speaker there. I got to hear from other people, which is fun, and one of the big metrics around this M&A stuff has been employee retention and it's not great. It's not great. I mean, hey, we're selling to so-and-.
Speaker 2:My friends is the CEO of an engineering firm, told me that he basically tracks these PE sales and he'll like have his assistant go on LinkedIn and find all the people on LinkedIn that are in revenue driven positions at these firms. And then he just makes a list and he contacts them about six months in to say, hey, how's it going? And they're like well, not that great. I got six more months to get the rest of my money and then I'm gonna be looking at options. And he's like then I hire them, right? In fact, there's someone I had, one PE group telling me like, hey, there's a whole group of people that build companies, get them to 50 or 100 people and sell them to us, and a year later they go back and do it again. It's just a machine. So I don't know. I think, look, it's the most interesting of times right. You take AI and you take these new capitalization models. You take VC, you take all these things and you throw it all in a blender. It's it's probably the most interesting time in this industry.
Speaker 1:it's a good way to end it. Yeah, part two in the books.
Speaker 2:Look out for parts three through ten coming over the next couple years I think we need to have a guest on yeah, we should totally do that. I think we need to have a guest on yeah, we should totally do that. I think we should either have a PE person. I feel like we agree too much. We are. The problem is we spend so much time together, right? So whatever we have, we don't leave much to argue about on the podcast, but I feel like if we found some folks that just do not believe there's no way VC can do this, or whatever, yeah, no, for sure.
Speaker 1:I mean, let's get the counter perspective on it yeah, that's more entertaining.
Speaker 2:I mean, that's just being right.
Speaker 1:All the time gets boring yeah, I mean, even if even if it's true, it's still boring sounds good, let's do that all right man tbd for the next one, all right, all right, talk to you later, see you.