Billionaires & The New Math of Private Equity

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller and today I have my dear friend Michael Fillios.

Michael is the author of two private equity books: Tech Debt 2.0 and Tech Equity. He's also the founder and CEO of IT ALLY, a private equity advisory firm that helps you private equity carnivores to unlock unseen value and avoid the unseen liabilities in the companies that you buy and sell.

So what this means is that Michael is about to teach you about the new math of private equity, and how to avoid getting left behind when Making Billions in this space.

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[THE GUEST]: Michael is the author of two private equity books: Tech Debt 2.0 and Tech Equity. He's also the founder and CEO of IT ALLY, a private equity advisory firm that helps you private equity carnivores to unlock unseen value and avoid the unseen liabilities in the companies that you buy and sell.

[THE HOST]: Ryan is a Venture Capital & Angel investor in technology and energy.

Transcript

Ryan Miller  0:00  

My name is Ryan Miller and for the past 15 years have helped hundreds of people to raise millions of dollars for their funds, and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers, so that you too can enjoy your pursuit of Making Billions. Let's get into it. 

Ryan Miller  0:22  

Your ability to make money for you and your investors in private equity, all starts with understanding the new math of private equity. My next guest is about to demonstrate the new math of private equity valuation so that you can win and win more. All this and more coming right now. Let's get into it. 

Ryan Miller  0:39  

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller and today I have my dear friend Michael Fillios. Michael is the author of two private equity books: Tech Debt 2.0 and Tech Equity. He's also the founder and CEO of IT ALLY, a private equity advisory firm that helps you private equity carnivores to unlock unseen value and avoid the unseen liabilities in the companies that you buy and sell. So what this means is that Michael is about to teach you about the new math of private equity, and how to avoid getting left behind when Making Billions in this space. So Michael, welcome to the show, man.

Michael Fillios  1:11  

Hey, Ryan, thanks for having me, and a big fan of the show and congrats on all your success. It's been great, I love talking to this audience, because that's who we speak to every day all day. 

Ryan Miller  1:19  

Yeah, that's right. All the private equity carnivores, you're very kind, yeah, we've been fortunate to be in the top 2% world because of amazing guests, just like you. So before we get into all the stuff, I'd love to address the beginners really just give them something to sink their teeth into and but before we do just 30 seconds, who is, who's Michael, what do you do? Just warm us up a little bit to the kind of things that you do? 

Michael Fillios  1:39  

Sure, I appreciate that. So look, I've got about 30 years, a career that started out in finance and accounting, moved into consulting, and then ultimately entrepreneurship and my last stint was a fortune 500 CIO and multiple industries. And basically, I've tried to take that accumulated experience and bring it to the smaller businesses, particularly those that are private equity funded. And really try to take those learnings that we've had as individuals and as a company collective, and bring that back to them, because we know how important it is for them to generate the most value that they can for those investments for their shareholders, and ultimately, for those owners of those companies.

Ryan Miller  2:12  

Yeah, I love it. Brilliant. So very experienced guy. I love this. So let's let's dive right into it, let's hit it between the eyes. For the beginners, let's talk about how you can get some early points on the board and then we'll continue on. Maybe how to avoid getting wiped out in the early days, how did beginners win in the early days?

Michael Fillios  2:27  

Sure, that sounds good. So first, let me just put a disclaimer that I'm going to make some comments here around private equity firms, but they're all not treated the same, they're all are not the same, they're certainly not created equal. So my comments are going to be directed sort of what our experience has been in working with them over the past, you know, nearly seven years or so. 

Michael Fillios  2:42  

So the first thing I would say, for those that want to win, you know, this is a bit of a paradigm shift, you got to really think about technology as a strategic weapon. It's a key lever for value creation and I would argue that it's a lever that's going to get pulled as we move forward even greater, more greater than it has before. And that's just something that I think companies need to start to think differently about. And what do we mean by you know, technology here we can mean things like, making sure that your infrastructure is sound, making sure that your cybersecurity in place protects the assets of the company, but it's also those things that we'll talk about that get into are we automating all the processes that we have inside the company? Do we have really good data and analytics and fundamentally what it comes down to though is when you think about these investments is what are we doing to serve our customers? Regardless of what business and industry that you're in, we should be thinking about these investments in a way that prioritizes those investments that are impacting the customer because of course we're thinking about long lifetime value here and that's a very important metric for a lot of our our clients and their and their owners. 

Ryan Miller  3:43  

Yeah, brilliant so you know that can help, once you focus on infrastructure, cybersecurity, automation, process management, you're a man after my heart, man, I love all of this stuff. I actually did a lot of it when he managed quarter billion dollar IT projects portfolios. So you know, in a big part of this is it reduces friction. I think you and I were talking about this offline, these types of investments, so it's, it's just like flipping a house, right? You look and it's a little dated paint, and maybe we could use a new countertop and you want these things to be a little outdated, because guys like you and IT ALLY can come in partner with private equity firms, just like a contractor who's really got experience on unlocking value specifically in this area and say, Look, you do A, B, C, and D, you're gonna unlock a ton of value. And so doing these things, it creates better customer loyalty, we can assume, better customer loyalty from reduced friction, better process which leads to the coveted LTV or lifetime value. So we can have customers stick around and continue to spend money in this company, all because we made sensible investments inside of a private equity fund. Would you say it's fair summary on how to win?

Michael Fillios  4:43  

Well said man, well said. 

Ryan Miller  4:45  

All right, I knew we were buddies, all right. So now when you're starting out you can also do a lot of dumb stuff. Obviously everybody else but us right and anyone listening to the show, everybody else makes the mistakes, but not everyone listens to Making Billions right? But in all seriousness, sometimes not knowing or being new to an industry no matter how well intended and virtuous you are in your efforts, you can still make mistakes. So I'm curious, just with all of your experience, what advice can you give to a beginner to avoid doing, to avoid getting wiped out? What would you say? 

Michael Fillios  5:12  

Sure, I mean, listen, if you're, if you're just thinking about technology, and you maybe not have been experienced and well versed in it, you know, one of the things that I think it's important to do is to take stock of what you have, right? I mean, you've got to do some basic blocking and tackling, like, understand the current state environment that you have within your technology portfolio. And the reason you're doing this is because it kind of fixes a starting point for where you want to drive the value creation plans, and those value creation plans, of course, are going to last multiple years, right? I mean, the whole period is not overnight, so that's the nice thing here, we've got a runway that we can use and be very deliberate about making those investments over time, that will avoid hopefully, what we call preserving of a lack of value preservation, or perhaps value creation. So really, we're looking at this from two perspectives, we're saying, look, we've got to take care of the fundamentals, make sure that we're not creating what we're going to talk about here in tech debt, and also balance that out with how we're going to create tech equity, which is really something that's going to drive the maximum value for your company. 

Ryan Miller  6:09  

Yeah, I love it. And so the thing is, you may have a different definition and I would rely on yours than mine. But typically in tech debt back in my tech days, and insure tech and all these other tech and energy. One of the things with technical debt is we would look at it as to say there are some assets that we're running that add strategic or financial value, or risk mitigation, whatever it might be, and they're running, we're running on overtime. It's like, typically, you're supposed to do an oil change on a car every so many months, and now you're probably twice as long than you should have and this could lead to other issues, more expensive issues, value loss, all of these things. And so one of the things that Michael and his team are talking about is that tech debt that can say, these are not things that show up on financials. And very often,  and we'll get into this, Michael, I know you're chomping at the bit to do this, but one of the things, folks is when you're starting out, and you want to be in private equity, some of the off financial statements are technical debt, tech equity, and these kinds of things. 

Ryan Miller  7:02  

And so working with Michael and his team can really help to expose some of those hidden costs that do not show up in the financials, but they will show up in the financials, if you don't see them. It's too late once you do so working through that, understanding what tech data is, understanding what tech equity is, and something about the new math of private equity, I think you're gonna get into that. But would you say that not only just doing due diligence on financials and revenue and all that, but also understanding the tech stack, and some of the deficiencies can also unlock potential value creation opportunities as well, would you say that's fair?

Michael Fillios  7:34  

100% and one of the things about my background is I started out in accounting and finance and was a CFO, and I didn't realize, you know, 30 years ago how important it was to have a CFO background when I was in the boardroom as a CIO, right, because all roads lead back to finance. And you really got to understand the economic value of these investments and I think the expression that you're describing, Ryan is sweating the asset. We used to talk a lot about sweating the asset, right and how can we get as extract as much value from that asset? Well, there's a fine balance there because we think about tech debt as a liability, there could be a balloon payment, you're going to have to incur to service that asset. And the ideal is that you service it over time, don't wait for that last minute, kick the can down the road and then ultimately, you've got to deal with this massive balloon payment. So but it starts with knowing where that tech debt lie, like you said, it's an off balance sheet item, but it will have some of those implications that any other liability would have in your business. So it's important to keep an eye on it, understand it and manage it proactively. 

Ryan Miller  8:29  

Yeah, because the visibility or the lack of visibility in these areas within any company, whether you're buying companies or just running one of your own, we got all kinds of people listening to the show. Either way, this does not have a lot of visibility, but it doesn't have to be that way. So a good leader in their company will be able to really make this a priority to say I not only do I want to understand the exact costs that come but I understand the things that aren't showing up. Sometimes I'm also a recovering CFO, so I'm with you on that one, so we're still in recovery, but...

Michael Fillios  8:56  

Yeah I mean listen, lord forbid somebody hires it ally to do due diligence on that company that's being acquired, we've got the train die. So we're going to discover it, we're going to uncover it, we're going to tell you what it's all about, and the size of that liability that you're gonna have to deal with post acquisition, so for sure. 

Ryan Miller  9:10  

Yeah and speaking of acquisitions, there's a lot going on in the market and maybe you're thinking it's ramping up or it's shutting down, but I'm curious to get your take on the market. Where do you see things, where are they at today and then maybe we can add on, where are, where do you see the opportunities in the future?

Michael Fillios  9:24  

Sure. Well, I mean, I think we're still dealing with some of the hangover effects from last year with respect to deal flow and the number of transactions. And, you know, depending on who you ask, and the economic experts around this, it's probably going to continue for some period of time, but we are starting to see some uptick. And I think that's the encouraging side of this, from our business, you know, we're seeing a lot more add on transactions versus new platforms. Some of that just happens to come down to cost of capital valuations, of course, which are always, you know, extremely important when you're thinking about buying or selling a company. 

Michael Fillios  9:53  

So, but we are seeing some indicators that lead us to believe that the market is improving, and certainly we're going to see an uptick in transactions. And it's related to the fact, to that, what I love about the private equity market and the folks that are in it, is there's a beginning, middle and end to that investment. At some point in time, there's going to be an exit, right? So you're almost guaranteed, you know, in some respects that we're going to have to get this company fine tuned and tuned up to maximum value so that we can exit it because we're not going to hold on to it forever. So it's really about, you know, a build,  a buy and build strategy. So I think it's just if there are market conditions out there that are impacting valuation, then the focus becomes internally, how do we drive operational efficiency? How do we create more margin expansion? How do we support and enable true growth? And I think those are the types of things that we're going to see more of a balance of certainly for the next decade or so.

Ryan Miller  10:46  

Thank you for watching, if you've made it this far, we must be friends. So don't forget to like, subscribe and click that notification button. Now, let's get back to the show. 

Ryan Miller  10:58  

Man, I'm curious on, I tease the audience on your new math. So I'd be curious to see what are you seeing out there as far as new math, old math, all of that stuff, maybe we can unpack that a little bit?

Michael Fillios  11:09  

Yeah, let's talk about it and I think it's a kind of clever way to talk about it, in terms of new math. So you know, at the end of the day, look, multiple expansion is certainly, you know, huge, right? That's the idea, we want to expand the multiples, right. But historically, let's say going back the past 10-20 years, it's been a lot of reliance on leverage and financial engineering and structuring to sort of create that multiple expansion. So the new math suggests that we've got to look at certain things that are more operational value creation levers. There's going to be more focused on revenue growth, margin expansion, things of that nature, that are going to really impact the company. But that's also going to be impacted by slower economic growth and shrinking labor forces and higher inflation, and so on. 

Michael Fillios  11:55  

So what we're saying with the new math is a couple of things. One, those traditional means they're still going to be there, right, but we're also suggesting now that you got to take that traditional valuation. And we have a point of view that suggests, look, you've got to add what we call tech equity, and subtract tech debt, because those things can have an impact, plus or minus on your valuation. And this is kind of the analogy of skating, where the puck's going right, we're starting to see now a greater emphasis on exploring, whether it's being during due diligence, or in those value creation plans. How companies are managing their tech, how they're looking at it as a strategic asset, and ultimately how it's going to enable those operational value creation levers. So the formula is evolving and it's going beyond just typical financial engineering means and structural changes and things of that nature to now, much broader categories to really maximize value creation.

Ryan Miller  12:48  

Yeah, I love that, and you know, this just reminds me of, there's actually a lot of new concepts that are coming out or new math that's coming out. And so you know, just to summarize, but also expand a little bit on that topic, if that's okay. Is, so yes, traditional valuations where you take three statements, financial statements, you assess growth rates, and free cash flow and all these things that we have to do is responsible investors that we are, and, but now you're starting to see things whether you agree with them or not, but ESG. You're starting to see tech debt, tech equity and a lot of these things people are like, it's an investment thesis. Actually, if you read the documentation, it's not an investment thesis, it's a risk management framework. So it's saying, yeah, like, keep doing businesses  as you are, but they're traditionally the old traditional way, which isn't bad but we're expanding on it, is saying, actually, there's new dimensions that the market demands, if you're going to be successful. And you need to understand the hidden costs, whether it's environmental, whether it's a poor operate, like I came from oil and gas, so maybe, you know, some people are horrible operators, are horrible for the environment, they obliterate communities, maybe and so they're saying you have to factor that in. You can't just ignore that, because that really is part of your business and so I think what Michael is talking about folks, and just through my filter, is saying there are other dimensions that have always been there. But traditionally, we have not been challenged enough as operators, investors, private equity, carnivores, we have not filtered our full analysis through the full impact the full cost and the full benefit. And so now folks like Michael are tip of the spear, leading the charge to say, guys, there are other dimensions that you do need to consider in the new age of private equity. Would you say that's a fair synopsis?

Michael Fillios  12:48  

Yeah, I think that's an excellent point and the example I can use maybe to reinforce this is that, I would say maybe three, three and a half years ago, we weren't being asked to look at cybersecurity during due diligence transactions. Now, cybersecurity due diligence is a standard in our scope. What's also happening though, now is the importance on value creation is starting to get more intense where, you know, quality of earnings, and some of those things that you talked about are still there and standard in terms of due diligence. But it's really more about assessing how well and the confidence level we have in this company to execute the value creation plan. And I would imagine that today, most value creation plans are going to have some dimension of technology, largely because look, the pace of technology is rapidly changing and becoming more mainstream as never ever before. I mean, it's just the advent of the cloud and other things, so for you to ignore technology, innovation, and to not make that a lever and your way of thinking about buying a company or selling it, you know, I think that's going to have some shortcomings for you, and you're going to leave money on the table, you're going to leave money on the table, which nobody wants to do.

Ryan Miller  15:31  

Yeah, absolutely, so the new math tends to challenge us. So traditional valuation methods of private equity, just to wrap up this thought, there's traditional valuation, which typically, we will look at things like revenue growth, right, top line revenue growth, but one of the things that Michael is also challenging to do, so we're not saying don't do that, yes, continue to value it, those, the accounting methodology still applies. But when you analyze tech debt, and tech equity, not only does traditional help you to figure out growth, but tech debt, and tech equity helps you to figure out margin expansion. So just sit on that, folks for a minute of what Michael is telling you and what we're seeing is, not only do you get top line revenue growth through traditional valuation, you can get a price of the company. But also, if you start implementing how to fix technical debt, and discover and implement and exploit tech equity, now, you can use that to expand your margin. So not only do you have high growth, now you can have high margin. and folks, we all know that you private equity carnivores out there, that leads to a nice exit price valuation. So you can see the value that IT ALLY, Michael Fillios and his team also add to the private equity sphere, so any final thoughts on that? 

Michael Fillios  16:42  

Yeah, maybe just one, I would say that a lot of what we've been seeing lately on acquisition, on on transactions have been through add on acquisitions and some companies are using that as the primary driver for growth, you know, versus the organic growth, they're looking at inorganic growth. So when you think about synergies and when you think about integrating another company, right, if you don't have a sound platform, from a technology standpoint, it's gonna be extremely hard for you to accelerate the synergies that you want to gain from that acquisition and then of course, now you're talking about a platform, and you could be adding on multiple add ons, right? So, think of how technology becomes an accelerant to add on acquisition strategies. and there's so many other examples of where managing your tech debt and tech equity become very much in the forefront of ultimately, ultimately here, unlocking massive value. That's, that's how we make billions. We want to unlock the massive value from these things. 

Ryan Miller  17:35  

Awesome, so that was amazing, man. So you know, as we ran through base, I'm just wondering, we always, we always leave the best for last. So you have had a ton of experience, my man, I'm wondering if you would be able to leave behind, say two or three things that would give our listeners a competitive advantage from your experience? What would you say? 

Michael Fillios  17:53  

Yeah, I alluded to this earlier, I didn't know and it was completely by accident, how important it was for me to understand finance and technology as I became an executive and business owner and entrepreneur. And I think for those of you that are, you know, in private equity, or some level of investing, and maybe you've got, you know, really strong business acumen, and you've gotten all the training that's needed to look at financing, and all those things that go along with it, I would suggest that, you know, either taken on as, as a side hustle or some project to really understand the technology components of and I think it's important that it's really hard to decouple these things. So I do explore that new math get familiar a little bit more doesn't mean need to be an expert, but you need to be conversant in it. Right? It's not that just the technology person in the room was going to answer these questions these days. A lot of these, these, these decisions are coming down to business and technology together partnering on trying to solve complex problems for their organization. So I would say just be open to that, try to expand your horizon a bit more and I think you're gonna benefit tremendously from having that acumen added to your overall experience.

Ryan Miller  18:57  

Brilliant. So I would love to unpack that just one level deeper, that was amazing, so let's just simulate a little bit. Let's say people do hire you, they get to work with you, they want to work with it ally, to unlock tech debt, understand what is it that I'm dealing with a really want to understand what is this thing worth? Is it worth more than the seller thinks it is? Okay, we may have something here where we can work with, you know, I mean, do you have a bunch of dimensions that you work through? I mean, how do people kind of work through that process?

Michael Fillios  19:28  

Yeah. So I mean, you mentioned the books, I mean, one of the reasons why, you know, we wrote the books is that we want to bring some of this knowledge that we've accumulated and bring it back to the masses, right? And it's trying to educate business owners, investors, and otherwise IT professionals to start to think differently about these things. So the two books are available on our institute site. But in addition to that, what we've also done was create some diagnostics that allow you to take these surveys that go across 50 some odd dimensions to get what you would equivalent, equivalently call a FICO score. So If you want to see what your tech debt rating is, or your tech equity rating is, you know, take a minute, and that might be a one way for you to educate yourself a little bit more around what do we mean by these terms? And why are they important? Another thing that you can do is, if there's an IT leader in your organization, you know, you maybe want to ask them some probing questions around how they're thinking about the investments that we're making in technology, and are they going to impact the company's valuation. You might get some blank stares back from them, they might not know what the hell you're talking about. But I think it's going to be very telling to determine whether or not you've got the right people leading the function inside your company or whether or not you're going to need some outside help and of course, you know, we're there to help you in those cases. 

Michael Fillios  20:38  

Lastly, I would say, look, you know, we're very collaborative in our, in our environments, these days. Groupthink, I love groupthink, don't need to be the expert on everything,so look for people that are experts that understand these things and reach out to them and try to understand where they're coming from. These are complex issues to solve, right, and they are not, you know, going to be always the easiest thing to identify. So bring some experts in and pressure test plans, you know, take a look at things, make sure that you feel like you're on the right track and I just think that's just good, that's being responsible. At the end of the day, we're managing a lot of money, investment and ownership. We've got to do all the diligence that we need to do to make sure that we can maximize those values at the appropriate time. So that's one thing that I would say, you know, that we can offer on that front. 

Ryan Miller  21:21  

Yeah, I love that and yes, I remember the old man many years working on tech and that was a big shift that we were able to, to accomplish was getting senior leaders to call it ELT executive leadership team to actually be the sponsor of these massive 100 plus million dollar tech deployments, having senior leadership if you're an intrapreneur. Folks, if you're an entrepreneur and a company, and you're maybe a director or something like that, or a VP, you can actually sponsor or get an executive leader to sponsor that because it's important to bring those folks in. So I absolutely love that advice, that's something that gets lost and I know you've obviously worked in big corporate, you use the word function. So that's, that's important to have an executive sponsor on any project you a little career advice.

Michael Fillios  22:03  

We would stop projects in their tracks, quite honestly, if we didn't see that there was an executive sponsor overseeing that initiative because if you treat these like IT projects, that's your first mistake. A lot of times these are transformational, right and you think about how can we change the way that we work? How do we automate business processes, and although IT needs to be at the table, at the end of the day, it's the business leadership, the CEO, the board, the investors all need to have a stake in this process. It's all hands on deck, and treat it like a transformation because guess what, it's a gift, this is a gift, this is an opportunity to enroll others in the company also to be part of shaping how this company is going to run in the future and it's should be a huge development opportunity for those. That's how I got started. I mean, I didn't know what an ERP was 30 years ago, I called it an ERP, but I raised my hand I got chosen, I got involved with how we run this company and automate it from a technology standpoint and that experience, I still lean on, you know, 30 plus years later. So these are some signs where you can tell whether or not to that trained eye and lens that we have, whether or not a company is going to be successful. And there's a significant investment that goes into these projects, it's, they can be highly disruptive, they have high failure, failure rates, that's the bad news. The good news is there's, a there's a lot of good lessons learned because we've been doing it for a long time, where we can avoid some of those pitfalls. And that's really some of the things that we want to do to our knowledge and thought leadership is to try to avoid those mistakes that maybe we've made or so others make and make sure that they aren't done again, right at the end of the day.

Ryan Miller  23:35  

Yeah, brilliant. One of the things that I've discovered I'd love to get your opinion on, is because folks what we're talking about, yes, we're talking about tech, but what we're really talking about are strategic assets and a company, that's what we're talking about. And assets, if you believe this definition is something you own that puts cash in your pocket. So what we're talking about is discovering the real cost of these assets in any company, whether it's yours or one you want to buy or sell, and exploiting and understanding those assets. Now, sometimes you exploit the current assets, sometimes you need to build a new one. And I've noticed and I'd love to get your take on this Michael, often when people try to build a new one, their first go to strategy, which I don't think is optimally is, we got to make custom because we're special and all these wonderful things. Sure, you probably are special, but would you say that customization is the right approach all the time or do you have a different viewpoint? I'd love to get your opinion. 

Michael Fillios  24:23  

Sure, I mean, listen, are going in position is always buy versus build. Okay, and that's just our going in position, just like are going in position is leverage the cloud, versus build a server farm inside of your company. Right, now again, there's always going to be exceptions to these kinds of trends that you've got to really think through and what I would say the framework for thinking through whether or not you need to build something is a couple things. One, if we build it, is it going to create massive tech equity? Is it going to create a higher rate of return for our business and the way that we either serve our customers or the way that we can defend against competition right. So if there's truly a value add okay, and you can honestly look each other in the eye and say, okay this is this is a necessary thing. And we've got clients that have built custom ERPs, because they're in niche businesses where you can't find something off the shelf and it makes a lot of good sense. I would just say that if you go down that path, you've got to be committed to ongoing investment and this is where either that's going to come through resources, through other infrastructure or whatnot. So if you're gonna go take the path of developing your own software, in this case, or developing a new application, you just need to make sure that you've got enough investment in there to maintain it. It's the ongoing cost that sometimes and that's how tech debt also manifests itself, well, we got some defects, we're gonna release it anyway and the next thing, you know, we got more defects. And then we never get to fixing those defects and then you've got that balloon payment concept that we've talked about. The converse of this, when you buy off the shelf, it's not only that you're getting, you know, contemporary software, you're also getting that company's R&D budget and we all know how much the R&D investments are for software companies, it's enormous. So you want to leverage their R&D dollars to bring on new functionality inside of your organization through upgrades. So the more you tinker with or customize that off the shelf software, it's going to create challenges for you down the road to either upgrade, you might even open it up for security risks and other things, so customizations in an off the shelf is no bueno. It's not something that you really want to do, try to avoid it. And that's where maybe good governance, good leadership comes into play, making some tough decisions on trade offs because there's always going to be that person in the room that says, we need to do it and this is the way that we've done it and this is how we've done it for the past 30 years. You've got to challenge the status quo thinking, you've got to use this as a transformational change and I think that's a leadership element here that's not nothing to do with the technology. It's really about challenging the status quo, and making sure that if you're going to make those changes, there's a good business benefit behind it.

Ryan Miller  26:52  

Perfect. What would you say are some of the downfalls of doing for customization versus off the shelf? What are really help people understand, let's take that one step deeper. What would you advise on what to look out for?

Michael Fillios  27:04  

Yeah, I mean, we see this, I'll give the example of due diligence. So when we're helping a private equity sponsor buy another company, and we know that they have customized a piece of software inside of their shop, a couple of things we want to really dive into a little bit when we see that scenario. The first thing is, is there any key man risk. In other words, we've come across situations where there's only one person in that organization that knows how that software has been built, architected, and knows all the code, knows all the passwords and everything like that. So never ever do you want to be held hostage to one individual who knows where the crown jewels are, that's a bad situation, right, that's key man risk. The other thing is that it's expensive, I mean, you got to continue to invest in supporting this custom environment, that could also impact you from a skill set perspective. So if you want to go find a talent to replace that person, they may not be somebody on the planet, because that person learned it over the past 20 years. So you're going to have difficulty in either, maybe finding resources that can support that. Now, of course, there's all kinds of options in the outsourcing firms that have built businesses around managing tech debt and legacy software, but that's probably not an option you want to have to deal with. And, you know, ultimately, you know, again, if it's something that you believe, as a business, there's going to be value add, then just make sure that you're thinking about it holistically, you have a plan to manage it, you're looking at the code. Also, by the way, you've got to do some code reviews and make sure that you're not violating any licensing concerns, open source issues, those types of things. So again, it just at the end, you're not a software company, but you also need to start building some muscle because you decided to build software, that you've got to do some things that are software company like. And that's just something you got to be aware of, and you got to take it on otherwise, you know, you're not going to be building it for the long term.

Ryan Miller  28:50  

Perfect. So before we wrap things up, is there anything else you'd like our fans around the world to know where to go like websites to go to, ways to reach out anything at all? 

Michael Fillios  28:58  

Yeah, so I mean, I guess a couple of parting comments. What we've been talking about here is really under the umbrella of what's at stake, you know, for private equity firms and their investors. And when I think about tech, debt and tech equity, we see that there could be potential financial impact, right? That could be the erosion of existing value, that could be cash flow implications for unplanned expenditures, it could be potential reputational damage, and loss of intellectual property, perhaps if you're getting a cyber attack, and so on. Operationally, you know, listen, if you're having to spend more time fixing things, and you're dealing with tech debt of like, it could be a major distraction for you in terms of focusing on value creation plans and delaying on future acquisitions and so on. So there's a real financial and operational impact to this that we want to make sure companies understand and have been thoughtful about in the way that they think about their technology investments. So you know, for you know, firstly, again, thank you so much for having me on on the show, we certainly want to try to get back to your audience as much as we can and in either resources and are ways that they can learn more, certainly open to anyone that wants to connect with me on LinkedIn. And for the first 10 connections that referenced the show, I'll ship out a free copy of my book, Tech Equity, to you directly because we want you to be educated and try to benefit from some of this. Outside of that, you can certainly pick up the book on Amazon and any other channels where you can download, you know, books and access them. And if you want to learn more about IT ALLY, as a company, you can visit our website at itallyllc.com or the Institute, which is itallyinstitute.org. So you can get some of the free diagnostics that I mentioned earlier, and learn more about our thought leadership. Yeah, I mean, that's certainly LinkedIn is a great source to connect as well and look forward to, to meeting some of you. 

Ryan Miller  30:40  

Awesome, perfect. So just to wrap things up, get to know accounting and technology to master the private equity valuation and the creation. The other thing that we talked about is to just if this is not you, and you're not an executive, or if you are, it's important to have executive sponsorship for all tech investments. A lot of times this is a very old school way of thinking is tech is an IT department. It's not that anymore, it is the quality of your financials, the quality of your analysis. These are key strategic assets, tech is now increasingly becoming some of the top asset classes in many companies. So yeah, if you're an executive sponsor these projects if you're not get one, so doing that, making sure you have the buy in to win the hearts and minds of the executive is important. And finally, resist the temptation to customize if you can, seek configuration more than you seek customization. You do these things and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  31:42  

Wow, what a show, I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better and make sure to come back for our next episode where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.