Operators Before Deals

Sam Parr and Shaan Puri discuss the challenges and importance of finding competent operators when building a portfolio of companies, particularly in the context of companies like Constellation Software.

Key Points:

• Finding Competent Operators is Critical

  • It's extremely difficult to find someone who's competent to run a business
  • Most CEO hires (except 1-2) have been "horrible" in Sam's experience
  • The biggest challenge isn't finding deals, it's finding operators

• Operator Recruitment Strategies

  • Most successful companies pull from personal networks
  • They rely on people they've worked with before
  • Constellation Software is viewed more as a "recruiting company" than an innovative software company

• Incentive Structures Matter

  • Need balanced incentives ("counter incentives")
  • Example: Sales quotas need to be balanced with quality metrics
  • Constellation's approach:
    • No share options for executives
    • 75% of after-tax bonus must be used to buy shares
    • Shares held in escrow for 4 years

• Business Continuity Challenges

  • When buying out owners, you risk losing great operations
  • Maintaining business quality depends on having good operators
  • The operator challenge is the "make or break" factor for portfolio companies

• Real World Example

  • Enduring Ventures bought UpCounsel
  • CEO placement came from personal network
  • Despite being "outside the model," deal structure made it potentially profitable

This perspective emphasizes that successful portfolio building is more about finding and retaining talented operators than just identifying good acquisition targets.