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A rough start
Orlando Bravo, the Bravo in Thoma Bravo, was in his late 20s and his investment career wasn't going well. The tech money of that period had gone into IT services and Y2K readiness companies, and many of those investments went to zero. Then he met Marcel Bernard, an executive who had come from Motorola and run software companies in Canada, and who had taken lean manufacturing and Six Sigma operating principles and applied them to building, shipping, and distributing software. Marcel became the godfather of the firm's operational metrics and playbook.
Profit 21
Application software then traded at about one and a half times revenue and two and a half times maintenance. Companies sold licenses and maintenance, and banks lent against hard assets and did not lend against intellectual property. Orlando found a small public company in Yardley, Pennsylvania, called Profit 21, and took it private with its CEO, Chuck Boyle.
Marcel's lesson was that in a headcount business, about 10% of headcount costs could come out up front without disrupting operations, and up to 20% with thoughtful handling. At Profit 21 the company also shelved its Skunk Works and science projects. The extra capacity let it borrow a little from banks and fund six acquisitions.
The repeatable process
That showed a process they could repeat: back existing management, focus on product P&Ls, and split the company into a manufacturing center, which is R&D, and a sales center, which is the distributor. Companies run that way could bootstrap, sustain themselves, and grow faster, financing growth through acquisitions. The firm then ran the same process one company at a time, and in 2008 Thoma Bravo was created inside Thoma Cressey as the software team.
Why did Y2K companies collapse so fast?
Y2K remediation was a one-time job with a fixed deadline of January 1, 2000. Once the date passed with few failures, demand for the work disappeared almost overnight. IT services firms that had hired heavily for the project were left with idle consultants and no follow-on contracts. The dot-com crash that began in March 2000 cut technology spending further.
Where did Six Sigma come from?
Six Sigma was developed at Motorola in the mid-1980s, with engineer Bill Smith credited as a key originator. The name refers to a process whose output stays within specification to six standard deviations, or about 3.4 defects per million opportunities. Motorola won the first Malcolm Baldrige National Quality Award in 1988. General Electric adopted the method under Jack Welch in the 1990s and helped spread it across industries.
Why did banks refuse to lend against software?
Lenders prefer collateral they can seize and resell, such as equipment, inventory, and property. Software and code are intangible, and their value depends on customers continuing to pay. That left software companies with few assets a bank would accept as security. Lenders later developed recurring revenue loans, which are sized on a software company's subscription revenue instead of its physical assets.
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