How AI and Product Strategy Are Reshaping Value Creation

Guest: David Rowley, Operating Partner at Diversis Capital
Host: Alex Rawlings
Topic: Product Strategy, Artificial Intelligence, and the Evolving Role of the Operating Partner

🔍 Episode Overview:

In this episode, Alex Rawlings is joined by David Rowley, Operating Partner at Diversis Capital, to explore how private equity can drive value creation through smarter product strategies and the integration of artificial intelligence. With a career spanning back to the 1980s in software product development, David shares practical insights into aligning executive teams with PE theses, building agile innovation pods, and how AI is transforming both product development and organizational structures.

💡 Key Discussion Points:

• The Critical Role of Alignment:
  David highlights that one of the most frequent causes of failure in portfolio companies is a lack of alignment between leadership and the PE firm's investment thesis.
• Product Strategy Framework:
  Distinguishing between goals, vision, and strategy, David explains his approach to creating adaptive product strategies optimized for optionality and driven by data.
• AI’s Evolving Impact:
  David discusses how AI is reshaping product development, comparing the current inflection point to the rise of agile methodologies in the early 2000s. He introduces the concept of small, highly-focused “cocktail party” innovation pods to build and iterate rapidly.
• Scaling Innovation Across Portfolio Companies:
  He emphasizes the need for organizational models that support rapid, creative innovation while maintaining core operations—balancing “keeping the lights on” with breakthrough work.
• Grassroots AI Adoption:
  David shares how he's cultivating a culture of experimentation across Diversis’ portfolio companies, allowing individual contributors to explore AI tools, sparking internal champions and grassroots innovation.
• Avoiding AI Hype Distractions:
  With AI now included in many value creation plans, David outlines how to distinguish between superficial use cases and those that drive meaningful operational improvements.
• Leveraging CTO Experience as an Operating Partner:
  David reflects on how his hands-on CTO background across multiple sectors enhances his intuition and effectiveness in the PE world—particularly when decisions must be made before data is complete.
• Trends in the Operating Partner Role:
  From a recent operating partner forum, David notes the growing trend of more hands-on involvement from operating partners, suggesting a broader shift in private equity away from consultants and toward in-house expertise.

⏱️ Timestamps:

00:00 – Introduction to David Rowley and today’s topics
 01:28 – Biggest mistake PE firms make: lack of leadership alignment
 02:50 – Defining product strategy vs. goals and vision
 05:10 – Key indicators for pivoting product strategy
 06:32 – How AI is changing product development structures
 08:55 – Traits and structure of high-performing innovation teams
 10:42 – Balancing innovation pods with ongoing operations
 12:31 – David’s early exposure to AI (40 years ago!)
 14:52 – Deploying AI across portfolio companies
 16:44 – Using AI agents in business operations
 17:39 – Avoiding AI distractions and integrating AI into value creation
 20:00 – Testing leadership alignment through AI transformation
 21:14 – From CTO to operating partner: Lessons and intuition
 23:08 – Takeaways from the Operating Partner Networking Forum
 24:58 – Trend toward in-house expertise and interim CTO roles
 25:51 – How to connect with David
 26:20 – Wrap-up and final thoughts

Transcript

00:00
Welcome back to the Royal Selection Private Equity Podcast. Joining us today is David Rowley, an operating partner at Diversis Capital.  David focuses on technology as an operating partner,  as he was a prior chief technology officer. We're going to dive into a few elements today, but one of those is going to be product strategy. A second of them is going to be the application of artificial intelligence and how he was actually doing this 40 years ago.

00:28
And then latterly, we're to go into his journey  into being an operating partner and what he's learned along that route. So let's dive in. Thanks for your time, David.  David, if you can share a brief insight into you, Sure. I'm a  technology operating partner. In other words, a technology focused operating partner with a PE firm called Diversus Capital.  I work across a number of portfolio companies.  We buy software companies.  I've spent  all...

00:57
virtually all of my career, which started back in the eighties in software product development in one  way, shape or form.  Um, and so that's kind of prepared me for, uh, being in this role. I've been doing the, the PE thing for about four years now.  Um, so  most of my career has been as an operator,  uh, working at software companies. Okay. Perfect. So what's one mistake that you see private equity firms or portfolio companies making and what would you suggest to grow them? So, uh,

01:28
There are a variety of things  and some of them get talked about a lot. So trying to do too much, trying to reinvent a company that  perhaps, you know, within the limited constraints of the whole period that you have,  trying to build something from scratch, that's oftentimes not a good formula for  PE companies. But when I have to boil it down to sort of one thing, one characteristic that I think is indicative of success or failure, it has to do with alignment.

01:57
of the leadership of the portfolio company with the thesis  of the private equity firm.  And when there's a lack of alignment with executive leadership,  something will change  relatively soon. And so  you oftentimes as the sponsor don't get the kind of leverage and velocity that you're looking for until you have that alignment.

02:24
So my advice on how to correct that is just to be clear and transparent about the thesis with the executives that you expect to carry it out. Makes sense. So you mentioned obviously your focus on the technology side. And I know from our emails back and forwards, a lot of that sits around products. So what's the kind of framework that you use on the development of a strong product strategy within your portfolio companies? So I guess the

02:50
first thing to talk about is what is product strategy. A lot of times people conflate goals and vision with strategy. So goals and vision are sort of what you're trying to achieve and maybe there's a financial metric associated with that or something else. The strategy is really the game plan of how you're going to get there. And so when you're devising a product strategy, you have to keep your goal in mind.

03:18
but  you have to look for perhaps the unfair advantages that you have in the marketplace with your technology,  with perhaps a mode that you've built,  that sort of thing.  And I like to optimize for optionality, meaning my strategy, my plan of attack may actually change as I get more experience. And so I'm gonna be...

03:42
I want to create a strategy that  allows me to learn  and,  and then creates potential,  uh, different paths that I could go on based on the experience that I have. So I don't like to lock myself into a particular path or a particular route. If the market and evidence from, you know, building and releasing product tells me that maybe another path is  more optimal to get to the goal I have. So.

04:10
So that, know, at a high level,  that's kind of  the approach that I take.  Take advantage  of those things where there is  maybe white space in the marketplace that you could fill.  Maybe you could leverage  the advantages that you have in your product or with your customer base and that sort of thing.  And  think about creating options for yourself as you're sort of  moving towards that goal that you have. And don't conflate.

04:40
goals with strategy.  when you talk about strategy, it's not just like our strategy is to achieve this particular number. No, it's the actual  set of steps that you're going to take  to get there. Yeah, absolutely. Strategy is the how, what is  is the use of the goals and vision.  What, when you, so let's say for example, previous companies that you've worked with,  what has been the key indicators that have made you go, Hey, we need to pivot this product strategy a little bit.

05:10
What's caused that? Yeah. mean, a lot of times,  you know, the market is the indicator.  it's, you know, even though you may feel that you've demonstrated product market fit, there could be sort of  traction that you're getting or that you're not getting. And you might be getting traction in an area that you didn't expect. And so that might suggest to you that there is  an opportunity to pivot and pursue that.

05:39
Now,  you have to make sure that you're not optimizing for a local maxima. In other words, like, oh, this looks really good. I'm going to go and pursue that and find out like, oh, yeah, it was good, but it didn't really amount to much. So those are tough decision points that not to be taken lightly.  But oftentimes, it's, you you want to  set yourself up to be collecting data that is going to reinforce where there's traction and where you're getting  uptake.

06:09
and then perhaps allow that to lead you and  lead your product direction. So you have to make sure that you're instrumenting every aspect of your product  and your go-to-market and the way you interact with customers to collect the data that's going to inform you whether there's an opportunity there, there's another path  that might bear fruit.

06:32
So from the,  what changes are you seeing in the approach and roles involved with product development? Now we've seen the wider use of kind of AI and its capabilities.  I feel like that's all I ever talk about these days. It's  so,  everybody's sort of coming to terms with this and I'm seeing AI adoption. Obviously we're at the sort of  generational inflection point  with

07:01
with AI,  similar to  kind of late  90s, early  2000s with the impact that agile product development had. So it's like fundamental changes in the approach that you take to product development.  But obviously this has happened  much more acute, right? The change is much more acute and concentrated. the one thing that I've seen is that AI

07:28
tools enable a different set of participants in the product development, product creation process. So it's not so much that like, oh, I'm able to use AI tools as a product manager to define  a design idea. And then I hand that to my engineering team to go build and make real. Now it's like, I'm part of a small team that includes software engineers and designers.

07:57
and we're working on the product artifact itself together. so  the size of the teams, I think, is really important. I always tell people that four is a magic number. Four is the cocktail party conversation number. So if you're at a cocktail party and you have four people, you can have one conversation. You add a fifth or sixth person, it splits into two conversations. So actually, I think that that applies to really effective, concentrated innovation teams.

08:26
But the makeup of those teams  can be varied. And I think it's really important to have sort of senior, really good software engineers who can scrutinize the code that's being generated from AI tools.  We're not quite there yet where we can be totally hands off about that. But also being able to bring in context around the problem space so that everybody on that little team really understands the problem that they're trying to solve.  And

08:55
The number one attribute for success, I think, on these teams is creativity. And it doesn't matter whether you're a software engineer or a designer or a product person.  You have to bring creativity because you're going to just really understand.  like I said, immerse yourself in the problem space and come up with  a new differentiated approach  that leverages AI  to solve the problem. so then

09:23
It's like, okay, I kind of understand this construct of these small  teams  and  the tools that they use will sort of vary as they evolve from day to day,  week to week. But I kind of understand that approach. But now thinking about like, how do I scale that in an organization, in an organization that was structured to have  Scrum teams  and  hierarchical

09:50
organizational models and sort of product managers and product owners and scrum masters and everything sort of optimized for this other process.  This is different. so,  so thinking about like, how do you create  pools of resources that could be pulled together to achieve a particular outcome or objective in this way that I described  using these tools,  but it may be fairly short lived, right? So you might say,

10:19
hey, in three weeks, we're gonna solve this particular problem.  And the tools, the pace that you can do that is so short that that is not an unreasonable ask. But then you may disband that group and reform something else to pursue a different objective. So thinking about like organizational structure to accommodate that.

10:42
Obviously, the individuals that you're hiring and what you're screening for also  plays a role in this, right? Because it's perhaps a different makeup  of participant that you're looking for.  The other thing I've learned is that these teams  are only successful if they're uninterrupted in their focus because it's intense focus  for a short period of time. And so you have to create

11:10
models, operational models that allow them to be uninterrupted. And oftentimes you have a product out there and customers to support and you have to keep the lights on and you have to keep going. And there's features that you might have to deliver to keep those customers happy. there's issues that come in, bugs to fix, escalations to deal with, all of that stuff also needs to be accommodated. And you have to do so in a way that doesn't

11:35
hold in these people that you've asked to focus and solve these problems in these really short, aggressive timelines. So that suggests a type of organizational structure  that's geared towards sort of keeping the lights on and doing that while these innovation pods are able to do breakthrough work  in this  concentrated efforts. Sorry to interrupt. Just a quick mention of a long-standing partnership with Grata.

12:03
As you all probably know, the private equity scene is constantly evolving and deal flow is moving now to proprietary and data-driven processes. Grata provides you with the data and information of over 7 million private companies. So if you're looking to improve your proprietary deal flow and improve the data access, then reach out to Grata today. Now back to the podcast. I think with being  a  prior CTO,

12:31
with being in that role and in an operating partner role, we've seen kind of the emergence of AI and unless you've been telling me you've been working on it for 20, I know it's been around for 20 odd years, but unless you're going to tell me you've been working on it in 20 years, two questions here. How have you kind of developed your knowledge and awareness and use case for the capability of AI? And then secondly, how are you handling the deployment of this into the portfolio companies when...

13:00
new newer technology and the skill set I would assume is relatively  low based on the fact that it's ever evolving.  So it's kind of funny because I think back to  when I was in college and I had AI classes and this was 40 years ago, right? So, you know, writing code and Lisp and Prolog and building neural networks and that sort of thing back then.

13:25
There's a far cry from what we're talking about now.  sort of AI as a practice kind of went into this lull because the capabilities of  the compute and storage and all that sort of capabilities weren't there to enable what we see  for the last several years with the explosion of LLMs and that kind of thing. So it's kind of funny how  AI is actually  a pretty long tenured  practice or  area of

13:55
of discovery,  but now it's become mainstream. There was a period where there's a lot of focus on big data,  data science, like everybody wanted to be a data scientist.  And  now those people have now graduated into,  now I'm  very knowledgeable about how LLMs work  and  sort of...

14:23
where that  evolution has happened. So  I've seen all of that and been sort of party to that to some extent  over  the last decade or so.  now, yeah, it's very different and it's evolving so quickly.  I think that  to answer the question about how do we apply this  across our portfolio, how do you inject

14:52
expertise and capabilities into our portfolio companies.  I think right now it's still a bit of a crown sourced  discovery process. So the best thing I can do is create a culture in each of the portfolio companies where individuals are allowed and encouraged to explore and experiment and get hands on. I think the kind of

15:20
development efforts that I was describing with the cocktail party  teams.  Like you want to get a few of those under your belt, right, and see the success and learn about both the people that you have and their ability to do that because there's a lot of responsibility on their shoulders.  But you also want to see  the output of that and,  and sort of plant a seed. And I found that once you get some success there,

15:50
it starts to take off. Other people want to start working this way.  It's eye-opening and it  is transformational. So  at the very least,  where I can start is with a bit of a grassroots effort in creating that environment where  people are exploring being hands-on. There's such a proliferation of tools and models and approaches that  it would be difficult to be entirely top-down  in guiding this.

16:19
So you want everybody to be exploring the latest tools and everything and comparing them.  And then  you also are sort of identifying your champions that are  good candidates to work on very targeted  innovation efforts.  So that's kind of where I'm at,  but also starting to look at other.

16:44
business operations that can be directly impacted by the application of agents and AI solutions and thinking about your organization to include agents to do a lot of work that you might've had humans doing before. And a lot of that applies in go-to-market, in  customer service,  in a lot of the...

17:09
sort of very kind of labor intensive workflows within your organization. So we're looking for opportunities where you can apply AI there and start to get that experience. How are you avoiding like the distraction element? Because there's obviously a value creation plan that for a lot of companies, you know, we'll obviously we're long hold periods of the moment in private equity as we kind of basically wait for the market to come back and then we can all sell. But the

17:39
A lot of companies haven't planned into the value creation strategy AI, because it kind of wasn't there five years ago to go, yeah, we'll bring that in. So how are you keeping from the distraction of doing the wrong things that don't actually bring value to the business, but look good versus actually deploying AI into the value creation strategy or going after something that's going to be valuable that we didn't know we could fix, but you can because of AI. Yeah. I think more and more and very quickly,

18:08
PE firms and other sort of investors  are  putting AI as a core component of their VCP.  And so even looking for industries and opportunities where AI can be transformational and can create a huge value.  Obviously there are opportunities to reduce costs by bringing about efficiency. And so you have that in mind, but you always had that in mind, right?

18:37
but now you have tools that can be applied that can  do that perhaps more quickly than you could before. So I think it factors into your value creation plan.  But to your point, you don't want to be doing it superficially just to say that, hey, you know what? Now we have a chat bot on the website or something like that, right?  So you do have to have the same level of scrutiny and understanding  of the...

19:05
the business operations and what takes time and where there is friction.  And you just have sort of a different tool set that you can apply to address that. But it's really the same  scrutiny  and  transformation planning that you always had. It's just that now you have a way to do that,  that perhaps involves fewer people or can get results quicker.  You do have to look at sort of that  value to effort.

19:35
balance  and pick one thing that you think  will have  a sort of outweighed impact  and get that in place.  At the same time, back to my earlier statement, like you're looking for alignment with leadership. And so this is a bit of a test, right? Because it's like I'm asking you  as a CEO or as a functional to rethink

20:00
how your business operates  with the introduction  of AI and agentic  workflows and whatnot. And so  it will be revealing whether they're able to  think in those ways and help you do that.  But also providing resources who have experience and  we're in a unique position because we have

20:22
sort of a laboratory of companies that were  trying different things and we were learning from that experience so we could apply it  across  the rest of the portfolio. So,  as operating partners  are able to  provide best practices based on the experience that we're getting  in other companies in the portfolio. So,  prior to your criminal frame upon a role, were CTO.

20:50
What have you learned in your years as a CTO that you have leveraged in your role as an operating partner? Yeah. So I would always say that like, I wouldn't be any good  as an engineering manager if I hadn't been a software engineer, right?  And I wouldn't be a very good VP of engineering if I hadn't been sort of an engineering manager. I wouldn't be a very good CTO if I hadn't been a VP of engineering.

21:14
So I feel like I couldn't do my job right now if I didn't have experience as being  a hands-on operator as CTO across multiple companies  in different industries and different domains with different technologies and different challenges.  that experience, collective experience is definitely informed  my approach here. And you  you get to a stage in your career where the value you bring is the intuition that you have that's based on your experience, right?

21:43
And in particular in the PE world where even though the whole periods might be  longer than they have been traditionally, you have a fixed amount of time to bring about sort of a significant  value creation, right?  And so  you have to make decisions before they're fully informed.  So you're relying on that intuition that you gain through all of the experience over the years in different situations. I always used to kind of give myself a hard time because it's like, you know, I spent time in

22:13
you know, analytical instruments and, and laboratory automation and financial services and internet infrastructure and various sort of SaaS platforms, that kind of thing. It's like, you know, if you just stuck with one thing,  maybe you could have made something of yourself. But what I didn't realize is that by doing all of that, it's prepared me for this job because even though we're focused on software companies, they've, they are very different from each other and, and, you know, serving different industry segments. So.

22:40
So that kind of broad experience actually, I think makes me a better, more effective operating partner right now. You referenced before we hit live that you'd just recently been to an operating partner networking forum. I'm interested,  what did you take away from that particular group? Was there a conversation you had that were like, ah, that changed a bit of perspective or came back and did something with? What did you learn from all that? Yeah, I've attended events like this over the...

23:08
over the last several years.  And it's always fascinating to talk to other people who on paper have your same job,  even with sort of similarly sized  PE firms  with maybe even a similar focus and in lower to mid market or let's say,  and finding out like, wow, we do very different jobs, right? And so years ago, I would find that  it was more often the case that you would have

23:35
sort of tech focused  operating partners who would be, I won't say superficial because that's a bit of a pejorative, but like they would have  involvement across the entire portfolio, right? So it was definitely at a particular level that enabled that, right? And I was,  it's like, I can only do about three or four, because I'm also doing due diligence on stuff and I'm going deep and I'm very hands-on. And so I'm doing a very different job than these other guys.

24:03
And  what I've noticed like this year in particular, there are more people who work like me than  I'd saw in the past. Totally unscientific sampling, right?  But based on the conversations I've had, see more,  perhaps the role of the operating partner in PE firms is changing and they're sort of leaning more on the operating partners to be hands-on, perhaps doing less outsourcing to consultancies and agencies  and specialists.

24:32
and bringing that in-house and having their operating partners be more deeply involved.  We're talking before about sort of being an interim CTO and I've been interim CTO at portfolio companies,  Diversus.  And  that has  become quite commonplace where the operating partner has to be close enough to the action.

24:58
so they could effectively step into a CT role for a period of time  as  necessary.  so, still maybe there's a shift  in  sort of the approach that PE firms are taking and specifically the role that operating partners play. I think there is. What I call the professionalization of private equity is more things come in house, less things go out the door,  this competition is rife  now more than ever.

25:24
But it's not going to get any simpler as more capital comes into private equity, more people chase the money.  Private equity has created more billionaires than any other industry. Real estate has created more millionaires than any other industry.  And private equity is fairly new. If anybody wishes to reach out to you, David, post this podcast. How best do they get in touch, I'm easy to find on LinkedIn. I'm not the only person with my name on LinkedIn, but

25:51
I'm the only one that looks like this.  so unlike others on LinkedIn, my profile picture is not AI generated and it wasn't taken 20 years ago. So it looks pretty much like this. So easy to find. Hit me up on LinkedIn. it, like it. Well, thank you very much for for diving onto the podcast. really enjoyed the conversation, David, all around product strategy, moving into the obviously famous topic of AI, which everyone's love is at the moment. And then also moving into that kind of experience of from CTO.

26:20
into operating partners. So thank you very much for investing time and sharing your experience with us. Alex. And as always, thank you very much for everybody for yet again tuning into the Private Oxygen podcast. Please do make sure that you subscribe and you'll be notified of the next one that comes out every single week. So till the next time, keep smashing it and thank you very much for listening.