The number of operating partners in PE has tripled, but this can be counterproductive. Flooding a portfolio company with functional experts often leads to uncoordinated efforts and confuses management teams. The most effective approach is often more targeted, with a principle that sometimes the best action is no action at all.
PE firms often assume engineering is the primary growth constraint in small software companies. The actual bottleneck is typically product management. Without a dedicated product leader to define what to build, engineers will still build, but they'll often build the wrong things, wasting resources and creating complexity.
While add-on acquisitions now represent 80% of PE deals, they are a crutch in software. Integrating disparate tech stacks is incredibly difficult and often deferred, leaving a mess for the next buyer. True value comes from strategic 'feature' acquisitions that can be deeply integrated into a core platform, not from rolling up unrelated businesses.
Private equity sourcing has become a tech-driven arms race of scraping data and sending cold emails, treating founders as mere inventory. A more effective, human-centric approach is to create valuable content that passively builds trust and relationships long before a founder is ready to sell. It's a 'give first, get second' model.
Unlike more stable functions like finance or supply chain, the technology landscape shifts dramatically every 18-24 months. For a tech-focused operating partner, standard playbooks are useless. The role demands continuous, hands-on learning to stay current, which is essential as portfolio companies must effectively rebuild their 'factory' every five years.
A PE firm's most impactful 'investment' isn't a company but its own repeatable C-suite hiring process. By systemizing hiring with tools like the Lou Adler method and Hogan assessments, firms can move beyond partner biases and dramatically reduce costly executive turnover, which is a major driver of underperformance in portfolio companies.
Software PE has gone from a niche to a crowded market full of generalist investors, or 'late-cycle tourists,' who keep valuations high. These firms lack the technical expertise to properly assess new risks like AI readiness, leading them to either overpay or kill deals based on superficial tech diligence reports, creating market instability.
Applying Little's Law from manufacturing, PE-backed companies with too many projects in process produce fewer results. Lower-middle-market companies often suffer from 'too many plans.' A key PE role is to enforce focus by killing low-value projects and aligning the entire company around a single, achievable 90-day goal.