EP 108: Tech and VC market dynamics. Growth strategies, AI, and the economy.

In this episode, our host James Mackey is joined by Sanket Merchant, Partner at PeakSpan Capital, to delve into the complexities of the current economic environment in the tech industry and its effects on businesses. They examine the supply and demand dynamics within the venture capital ecosystem, as well as the influence of generative AI on both businesses and customers.

   0:28 Sanket's background
   2:24 Tech industry and VC market overview
10:23 Impact of growth and budget constraints
18:40 Impact of economic factors on investments
22:49 Growth and investment strategies for boards
27:06 Generative AI's impact on businesses and customers

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Our host James Mackey

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Transcript

James Mackey: 0:27

Hello, welcome to the Breakthrough Hiring Show. I am your host, james Mackie, very excited for today's episode. We're joined by Sanquette Merchant Sanquette, thank you for joining me today. Thanks for having me, james. Let's do it. So, before we jump into the topics, could you please tell us a little bit about yourself?

Sanket Merchant: 0:44

Yeah, absolutely so, james. Delighted to be here. So my name is Sanquette Merchant. I'm a partner at Peaks Bend Capital. We're a US-based growth equity firm. We've got a billion and a half of capital under management active the best we can have our third fund, which is a $6 million vehicle. I like to have to pitch myself.

Sanket Merchant: 0:58

I've spent the better part of my career over a decade and a half working with growth stage software companies.

Sanket Merchant: 1:03

Spent four years chopping my teeth doing software investment banking.

Sanket Merchant: 1:06

For those who are familiar or unfamiliar with it, it's effectively being a glorified real estate broker, but instead of selling a house, you're selling a commercial piece of property. You're selling a software business and loved it, fell in love with the entrepreneurs, business software just generally and 2016, found a home at Peaks Bend and over the last eight years which is kind of crazy and a wife and two kids later I've had the privilege of supporting over a dozen portfolio partners as their growth partner and helping businesses that are kind of at that startup phase at $3 to $5 million of ARR, 30 to $40 employees really traverse that scale up journey, which is how do you get from $3 to $5 to $30 million plus with conviction and confidence, and so my expertise is the scale up journey, b2b software. Within that, I've spent my entire career focused on infrastructure, ed tech, learning, development and HR tech. So I think this is the best environment for me, because I've been around people, organizations, but also the vertical category of software for folks on people and technology for a long time.

James Mackey: 2:05

Yeah, I love this, and for everybody too. And again, the reason we brought on Sunket is we really want to understand the current VC landscape as it pertains specifically to the tech industry. A lot of executives out there are thinking about strategic planning, they're trying to think about how they're looking at things like retention and growth, and it's definitely a very challenging market, and so I know a lot of folks out there are looking for advisement on how to lead through the challenges that we're seeing right now in the tech industry. So I think everyone would be really interested to hear your thoughts on what's currently happening in the tech industry with the VC market. We'd love to get the latest news out there, the things that you're seeing right now.

Sanket Merchant: 2:45

Yeah, no, it's a really good question and I would say so. I'll just caveat, like my perspective has come from the world of growth equity, and so we think about this as, like, private capital is an ecosystem. You've got seed funds, You've got traditional venture capitalists, You've got growth equity firms, firms like Geekspan, but also folks that are playing a little bit later stage, You've got the momentum VCs and then private equity firms, and we all play at different stages. I would say, from my perspective, I think that the two things that I would probably call out is, in terms of impact to venture capital as an asset class is one. No surprise, there was a lot of a bullions back in the market in 2020, 2021, we thought it was going to be the end of the world With COVID. What we ended up seeing is the resilience of software and I'll share this all for the POV as a B2B software investor, not from consumer or internet or any of these other verticals but what you ended up seeing is a bunch of bullions, a lot of funds having to effectively get caught up in paying high prices to be competitive in markets, to be able to put capital to work, to get access and exposure to different asset classes, vertical markets, product categories, et cetera.

Sanket Merchant: 3:52

And as things got harder, as we started to one cost of capital increase, we saw inflation, we saw a tightening labor market and companies struggle to find growth or it get harder to grow. As we saw these economic kid wins, it put a lot of pressure on businesses and generally some companies on the barbell on the spectrum of benefiting from the current economic environment and really being in the hurt locker. I think a lot of companies with discretionary spending on technology kind of coming down because consumer walls are tight. People are a lot more fiscally conservative. You've seen the layoffs I've seen across the tech landscape. It's getting harder to sell, it's getting harder to grow.

Sanket Merchant: 4:29

And so I think a lot of one focus in the venture capital ecosystem is how do we continue to either triage or support existing portfolio? Companies that require additional capital are seeing our high burn rates, our growth decline, our seeing runway on cash kind of contract, pretty meaningfully. So how do I support my portfolio where I've got massive capital at risk? I think the other side of it is a supply and demand imbalance, which is, as a venture capitalist, ultimately your job's to generate great economic outcome for your stakeholders right, and that's the job for every investor, whether you're a growth equity firm or private equity firm, and I think the reality is that you've got a ton of capital out there, whether it's committed to support existing portfolio partners or not. So you've got, so some capital is earmarked to support existing portfolio companies. Who knows what that percentage is?

Sanket Merchant: 5:19

The dry powder that is available in market is that's looking at net new investment opportunities in an environment where there's a decent amount of supply, but the number of companies that are crushing it that fit the 2X, 3X, 4X plus growth year over year.

Sanket Merchant: 5:34

You're not seeing that at high frequency or volume, right, and so you have a lot of capital chasing very few or a few were, I should say, potential investment opportunities, and so what you're seeing is deal activity is slowing down. Some of the large funding rounds are slowing down. You're not seeing a lot of those new flashy 100 million off-financing things like we did back in 2020 and 2021. So I think that's what you're generally seeing here is there's a lot of enthusiasm. Folks want to stay busy, they want to invest new capital, but I think that part of that is a supply demand imbalance. I think part of that also is and I think you know, trying to correct perhaps some of the impact of not eating well, not exercising regularly that we saw in 2020 and 2021 in terms of just getting caught up with some of the hype in the market. So I'm really happy.

James Mackey: 6:17

that's all it is, and I would like to get your thoughts on what's happening right now, because we've seen this trend in terms of constrictions of the capital market, harder, less access to capital and that's been happening over the past about a year now. What's been interesting from my vantage point running a recruiting solutions firm working with the tech industry is that we saw a big decline in demand, starting essentially around this time last year. We started to see less demand for our services and that continued to decline, I would say, through around March of this year for a solid nine months. Then we started to see a plateau where a little bit of demand started coming back. It was more consistent. We weren't seeing a growth market when it came to hiring, but we were seeing stability and consistency. What's been really interested over the past month is we're starting to see another dip in demand for hiring, which has been really interesting to see. I'm wondering Is it just on the hiring front or companies like are getting even more squeezed for cash now? Like what's going on?

Sanket Merchant: 7:26

I think the reality is that, like, I think it's a fair question and I think that we, you know, probably what you ended up seeing is a lot of ambiguity. I think the market started correcting in Q421. You saw a lot of like freaking out what's going to happen over the next four quarters. Let's tighten our belts a little bit, and I think what we ended up seeing we had one of the chief US economists for one of the largest kind of economic firms investment banks come out to present to our entrepreneurs and I think what you're saying is one consistent kind of pessimistic outlook that was kind of the consensus across the street to where, I think, entering 2023 and really at the turn of like Q1, going into Q2, you start to see that sober up a little bit where, yes, the consensus was things are bad and it may not get better for a long time, but a view that it's potentially we saw the bottom of it or the pace of decline is going to slow down pretty dramatically, and so I think what you ended up seeing is that a lot of organizations, as you and I have seen in the past, we see a tight labor market. So I think the reality is that folks probably in 2022, 2023, adjusted, and adjusted pretty deep, but got to a place where they were right, sizing organizations based on where they saw demand at. I think folks are, and what we're seeing across the portfolio, we're seeing across like the software scale landscape, is that outlook on growth has not changed. It hasn't gotten worse, but folks are seeing pockets of opportunities and I think folks are being very surgical around not over indexing on some of that positive signal data until they feel like the trajectory of the trend line feels more predictable, right, and so I think that probably explains what you're seeing in terms of potentially some companies who are feeling better, who made some adjustments quicker or more earlier, are getting on a let's get back on a growth trajectory, which means potentially hiring folks. Other folks are saying, hey, we're not going to be doing any risks or reduction in forces, but until we feel more confident in the growth trajectory, we're going to just hold back and kind of slow down.

Sanket Merchant: 9:19

But I do think in this market right now, like when things are tough, like it was really easy quote, I'm like, quote. I say that on a relative basis. It was easier to grow in 2020 and 2021, where folks are buying anything and everything Right, but I do think that even across our portfolio, across the companies that we talk to, that we work with, I think in moments like this, there is going to be appetite and demand for proven, durable executives that have been there and shown an ability to execute in both positive and then turbulent economic environments, and I think that demand has never been higher Right. I think that boards are holding teams, founders, leadership teams, management teams accountable to find a way to succeed, and I think that applies to our business as well.

Sanket Merchant: 10:00

Regardless of what market conditions look like, our commitment to our LPs is a find a way to stay on strategy and fulfill the mission that we've set out to fulfill. So I think you're seeing that in the startup ecosystem as well, and my guess is that we'll see some stabilization. We'll see potentially some volatility going into Q3, but my suspicion and I can be wrong, but my suspicion is that we'll see some stabilization heading into 2024. And so I would imagine we see a lot of what you're kind of monitoring closely pick back up in a couple of quarters.

James Mackey: 10:30

I hope so Right now, again through my lens recruiting solutions. We went from a pretty 50-50 split of working with category leading companies and early stage companies late stage and early stage in 2021. Every kind of level of growth seemed to be scaling, hiring a lot. Late stage companies were the first to churn due to lack of demand. We had customers cutting 500-person teams and really scaling back. Early stage didn't seem to have overhired quite as much and fared a little bit better. And now it's from a demand perspective, hiring growth.

James Mackey: 11:03

We're still seeing more in early stage from my vantage point, and what's interesting is we're starting to see bigger companies request putting together RPs, wanting us to do statements of works. It's starting to come back. But the conversation that I'm having with these executives at these companies are well, look, we don't need you now. We're not going to be hiring in August, but we're thinking September, october. We're going to start to need to get back on track for growth and we've cut so deep in terms of our internal organization that we're not ready really to support that growth. That's why we're having the conversation with you now, so we can get some kind of high-level MSA in place. So we just can't support the growth.

James Mackey: 11:44

So they're looking at flexible arms in multiple areas of their business, different types of contractors and solutions to come in to support internal stuff. Because I also think, even though companies want to get back on track for growth, they don't necessarily want to add too much internal headcount. They're still worried about all the uncertainty. So they're thinking about technology, implementing AI and doing different things with vendors in order to, I think, have a little bit more flexibility with their costs. So it's very interesting right now. It's on the horizon. It seems like people are somewhat optimistic, but they're still incredibly tight on budget right now.

Sanket Merchant: 12:20

No, I totally agree, and I think maybe just starting at the public markets and working away down, I think the reality is that, like when you're absolutely right, different industry markets are going to feel this differently. Like my wife was formerly a gap, and I think retail in general has been hit pretty hard, and so I think that the kind of like some of those companies have gone through multiple rounds of rifts Like the reality is, for most publicly traded software companies, no surprise that if you are a software company that is growing today's market environment like a snowflake for example, that you're being you command a premium view of value, right, and so growth despite challenging market environment is really valuable, and the ability to do that while being profitable or generating cashflow is even more valuable, right, and so I think what you ended up you end up seeing is that, like a lot of organizations ended up adjusting their organizational model and their cost structure to fit the kind of mold of how the market was valuing different businesses. We went from a market of growth at all costs we weren't necessarily valuing or as critical of how efficient or what your burn looked like, even as a public traded company, to saying, all of a sudden, now. We want to see responsible and healthy growth and so I think a lot of companies were adjusting to fit kind of that new, that new outfit, if that makes sense. And I think that as you head into Q through Q4, what you're saying makes a ton of sense, because every leadership team, every executive team, boards, are going to be sitting there and thinking about how are we feeling about growth?

Sanket Merchant: 13:46

Right, we probably went into 2023 planning saying, hey, 2022 was rough, we caught one on the chin. Let's be a little bit more proactive here. Let's have a more sober view as to what minimally constitutes success in a really tough economic environment. The macro data is not encouraging. Let's make sure that we are resource for what we know we can achieve, that we're stretching for situations. We've got a stretch goal in terms of what is possible but certainly going to require a lot of work.

Sanket Merchant: 14:13

And, as we're falling, more confident in execution and, importantly, what is the growth curve look like heading into the next 12 months? And if we feel confident in that, then let's go ahead and start to think about what our headcount strategy looks like. So I would say that piece on the private side what I do think is interesting, and something just for I think for some of your listeners will have experiences because they've been working with private equity firms. But I think we're just coming out of an LPAC meeting where we present to effectively a board of our largest investors and one of the things that we had highlighted in that session is kind of the resilience of private equity right. Dry powder is at record levels over a trillion dollars across balance sheets for private equity firms. Right, there's a lot of dry powder that is eager and keen to be deployed.

James Mackey: 15:01

These are quick for our audience tuning in that may not know what dry powder means. Could you provide a definition there? Oh yeah, absolutely so.

Sanket Merchant: 15:07

dry powder is just capital available for investment, so it's equity capital available for investment. So there are a lot of firms out there that are. The punchline being is that there's a lot of money that's sitting on the sidelines that Canon wants to be invested to help drive growth programs, to invest in product innovation, et cetera. And so I think, as we start to see a bit of you know for companies that want or crushing it today or growing despite all of this challenge, they are getting money. And that's always been my thesis that if you're a healthy, if you're a good business showing great capital, efficient growth, leadership or emerging leadership in a strategic segment of the market, you're showing great retention performance, there is capital available for you and you're going to benefit from the supply, demand and balance.

Sanket Merchant: 15:50

But I do think there are a lot, there's a lot of capital sitting on the sidelines that is waiting to be deployed. And so as we start to see as confidence kind of picks up and I think it's going to pick up, it's starting to pick up, but as that picks up more strong form in the second half of the year I think you're going to see whether it's demands on services that you provide or other folks who are involved with the town ecosystem just more broadly. I think you're going to see a lot more demand for that. You know, heading into end of 23, but certainly going to 2024.

James Mackey: 16:18

The follow up question just what's going on in the public markets right now? We're seeing the market seems to be performing quite well. Looking at S&P and everything else, like it seems to be at a high right, like things seem to be going really well in terms of reflected in stock prices. One of my friends, who's incredibly successful, built and sold a couple of companies. Ceo of a category leading cybersecurity company mentioned that one of the reasons this possibly could be the case is these companies cut a lot of people. As a result, their financials look pretty good as a result of making those cuts and that could be boosting stock price. I'm curious to kind of get your thoughts on what's happening with stock prices right now and why the market seems to be doing so well.

Sanket Merchant: 17:00

Yeah no, it's a question.

Sanket Merchant: 17:02

I'm no expert, so you know, take my word of the grain of salt, it's just my POV, but I do think that you know, I guess in post-docs psychology right, and at the end of the day I think it's a, you know, performance relative to expectations.

Sanket Merchant: 17:15

And I think that what you ended up seeing is a number of companies in these indices that ended up outperforming, even modestly, their growth outlook and expectations that they had set with the street, outperform on profitability relative to what they were guiding to. And so I think I think when you see kind of consistent data points of outperformance relative to guidance or expectations, no surprise that we saw positive movement in broad indices markets et cetera. So I think that's probably what I would say contributed to that. I also think the second part of that too is probably, you know, a bit of a cyber leap. We did see a small rate hike, but I think folks are growing a little bit, are building ease with some of the loosening of the build a little bit from the Fed. So I think that's probably contributed to us as well, which is like some of its macro, some of its micro to some of the companies and how they're performing and what does that tell you?

Sanket Merchant: 18:06

just where game and is that potentially?

James Mackey: 18:08

Well, I mean like I, but from from my perspective. I love for your help to understand this a little bit better. But I mean the Fed just raised rates, I think last week. Again, I mean it seems like they're still tightening raising rates. Are we really going to have over covering when rates are so high? I mean, do they have to come down before we start to see companies start to invest in growth again? I mean this to me it seems just like another for the tech industry a little bit. It just felt like with these more rate hikes it's like we're getting kicked while we're down. Right, I mean it's it's already pretty tight out there. So I'm just wondering from your perspective what you know from the Fed strategy and how interest rates are going to continue to impact the tech space over the next six months or so.

Sanket Merchant: 18:50

Yeah, I mean it's a really good question. I'm no macro journalist, right, I would tell you I get it, but no, it's a really good thought and I think the reality from my perspective is that you got a bunch of rational actors that I think are sensitive to not doing too anything too extreme on either side of it, and I think that they're seeing, like the health you know, I think tightening of policy is impacting perception, capital markets, performance, cost of capital. I mean we're seeing that across, obviously, across the private markets as well. Right, I mean you went from a market environment 20 and 20, 21, where effectively capital was free, to one where capital is quite expensive If anybody's in the market to buy a house. You certainly are feeling that, so I do, I think, at the end of the day, I think the, I think the velocity of adjustments as certainly seem to sober up a bit, I think the confidence that's building in performance and absolute performance is encouraging and I think that's what's reflecting in the stock market is, I think, one, a reflection that the Fed are going to be rational actors and understand the delicate kind of line that they have to walk, but, importantly, that companies, despite you, know, and I think it's helpful.

Sanket Merchant: 19:52

When you see kind of inflation come down, you see again consistency and kind of tightly remarkets, like, I think a lot of things people are anchoring off and saying perhaps there's not a lot of data points you can hear hat on and saying, gosh, it's getting a lot better, but it I think where folks are at is that it's not getting worse and I think that that's that's certainly like the wind that you kind of need right, and I think you're seeing that evidenced in some of the confidence in the public markets and I think as you look at the data on the private markets I started to interrupt you, but I think you're going to start to see that in the private markets as well.

Sanket Merchant: 20:22

In terms of like capital point, I totally have talked to a lot of good friends who are at different firms and I think the consensus is investment could be. Your ICs are opening up, there's a lot more deals coming to committee that are being reviewed, and so I think that is it's a it's a positive trend line to throw folks on the line who are in the market looking to raise capital because you want to support growth programs. You're feeling confident in that, in that growth line that you're seeing or acceleration you're seeing in a business, I think patients in terms of just I think, continue to drive awareness with prospective investment partners. But I do think that you know patients will reward it and I think heading into 20 at the end of 2023 2024, I think you're going to have a different reception if you are having those conversations.

James Mackey: 21:02

So one point that you spoke to a little bit earlier and I like to dive in a little bit more is how VCs are thinking about selecting the right leaders for their portfolio or possibly even evaluating which startups to invest in and looking at folks that have possibly a better understanding of the financials of the company, understand things like unit economics and customer acquisition costs to lifetime value, and are looking at are we able to scale in somewhat of a sustainable way, or do we see a path to profitability and our prep call? We also talked about the importance of the J curve and how growth again is compounding on a year over year basis. So I would love a little bit more insight there, and I think this also ties into not only how VCs and growth equity are looking at leadership, but what they, when they're sitting on the board with their expecting to see from from leaders right now.

Sanket Merchant: 22:07

Yeah, I a lot to impact there. I would say the two points I would call out and I really enjoyed the conversation we had in advance of the session but one is I think a lot of boards and investors, when they look at their leaders is you're looking for resilience, right? Ultimately, we've got great alignment, we're all lined around in terms of like generating great equity outcomes for all shareholders, and the reality is that it's gotten harder to grow. But I think, at the end of the day, are we thinking creatively as to where we're seeing opportunities and what we can do to take advantage of that? So, for example, I think right now, if, in fact, discretionary spend of technology is contracted by so amount, what that tells us, or eight out of 10 proposals sitting on a CFO's desk are going to go into a non decision or defer on that RFP, what are we doing to earn the right to be in that category of two RFPs, right? If we're in a situation where we are you know we've revised our growth forecast to that say, we're not underwriting to 75% of your growth this year we actually think that a much more responsible growth level or achievable growth target is 50% growth what are we doing to operationalize confidence in achieving that outcome Right.

Sanket Merchant: 23:19

So, for example, are we running if we're filling, like our win rates are dropping Like? Are we seeing proactive, intensive around pipeline coverage and just making sure we've got the right kind of shots on goal? Are we thinking critically around what we're doing on the retention side of the business in terms of ensuring that we're fulfilling our commitments to driving impact for our customers and we're staying ahead of potential renewal activity driving if new logo acquisition is getting much harder? What are we drawing to drive expansion opportunities with existing client relationships where we have known success, where we've got a clear demonstration of value, we've demonstrated impact. We've got great evangelism and championship without relationship, without account.

Sanket Merchant: 23:57

So I think that's what a lot of boards are looking at where their teams are. We've got exceptional leaders. We've got. If you look at the core of any software business, I'm of the opinion that very few companies, very software businesses, have true, true IP. I think the IP sits within human capital and execution, and no surprise that do. I think that some of the incumbents that are public software companies do they have superior products, maybe?

Sanket Merchant: 24:22

I think that so much from yours would say not the case and different kind of discrete, vertical marks that they play in. But what's exceptional about these organizations is they will out execute you. They're absolute machines. And so I think that I think what you're seeing from a lot of boards is like challenging teams to be great stewards of capital, to manage businesses to their P and L right. We want to drive capital efficient growth. We want to make the right business decision and then, importantly, we're trying to be agile in terms of how we're adjusting strategy to take advantage of things that are working well, right and trying to like shore up our businesses and make sure we've got no unlocked doors or windows as the storm is coming in, right, and I think that's what you're seeing and making sure that we are. We're talking about our positioning the right way, right. We're doing a great job in terms of driving stakeholder engagement outside of just the, the, the, the initial buyer within our organization. What are we doing to engage the entire C suite If we are fighting for fewer and fewer budget dollars? So I think that's from on that one dimension, that's what I think, what what boards are expecting of teams.

Sanket Merchant: 25:24

And on the second piece, I think I think the other part of it, too is you know, I think boards are thinking and this goes back to what you and I talked about is opportunity cost, and I think that the example we had talked about is in a market where you know we are valuing profitable growth. You know, one example that I can, I can call upon that I think is relevant is we're actually thinking through it's harder to grow. We're seeing digital marketing programs paid marketing programs get to a point of diminishing return or yield on every dollar, which may be fine. At the end of the day, growth is still very valuable, right, it allows us to invest, allows us to expand team. A dollar of cash from your balance sheet is worth a dollar, but a dollar of revenue could be worth multiples of that, right, and so growth is still very valuable.

Sanket Merchant: 26:09

And so the example you and I, james, talked about is I think there's a lot of challenging of teams, which is can we, can we build confidence in a J curve of investment? What does that mean? Meaning that, even if we are leaning into programs that are showing diminishing efficiency, are there other things that we could be investing in, for example, in content marketing, that potentially allow us to hit the upswing on that J curve over time. So we have to embrace.

Sanket Merchant: 26:35

We are prioritizing growth. We still believe that in the long, in the medium to long term, it is going to be a fishing growth. We're going to have to stomach potentially some diminishing efficiency, but that's okay because growth is still valuable and we have a plan in terms of our confidence, or how are we talking to our board, to our stakeholders, about confidence in those investments over time being profitable, investments that we can make to drive growth in our businesses? So I think you're seeing a lot of these types of conversations, whether it's in startups and scale ups, to ensure that the equity that leadership teams, employees, ics hold is growing in value despite some of the challenges that we're facing.

James Mackey: 27:14

And up on time here. Ai right now is happening with chat, gpt, generative AI is really changing the game and it's it's impressing folks and I think we're going to start to see a lot of. Of course, a lot of companies are incorporating AI elements into their product offering and a lot of new companies are coming into existence solving problems in a way that is allowing companies to be a lot more efficient with their spend. I'm curious how you're seeing tech companies right now start to incorporate these technologies and how it's. When you're talking about planning growth, hiring, just general business operations what? How are you seeing these technologies essentially being implemented or thought of as part of the roadmap?

Sanket Merchant: 28:03

That's a really good question. I would answer it from two, two facets, so I think one is how do we leverage a lot of the innovation and LLMs and GNI to like, supercharge our existing solution offerings, deliver even more impact and value for our customers? And two is how do we make, how do we use it to get better as a business? Right? It's like, you know, I started taking a protein powder and it's like that little supercharger, right? So I think every one of our companies we're challenging them and I think every company out there, every investor is, is telling them in terms of, can we do more with less? Right, but importantly, it's not about doing necessarily only doing more with less, but importantly, like, how can we redirect some of the OPEC, some of the investment resource that we have, on things that drive incremental yield?

Sanket Merchant: 28:46

We see that at peak span there are things human beings can do. There are things that systems that don't sleep, don't require meals every single day, can do even better, because they're doing it at the same level, if not improved efficiency, for 24 hours a day, seven days a week, three to five days a year, and so things that should be relegated to systems because systems are better to do it. Let's try to identify those, those, those, those workflows, those initiatives and activities. Let's be wickedly good at process automation and building SOPs, and so we're challenging our teams to do that, because what I'd love to do is take that, that incremental investment dollar, and try to figure out what growth programs can we put it into Right?

Sanket Merchant: 29:23

Are there CS initiatives where we want to build out a technical account management team and want to invest in headcount there? Do we want to invest in new product innovation in the R&D and the product organization? Is there a gap in the leadership team? Right, I would love to identify better uses of that capital If innovation can drive those opportunities. I welcome that and I think a lot of folks do welcome that. On the other side, on the commercial side of it, I there's a phrase that you know for one of our portfolio partners, mindbridge, that folks on you know kind of the external audit use case, internal audit use case, one of the phrases that they shared with me that I thought was pretty powerful, which is AI is not going to replace auditors, auditors using AI. Ai will use replace auditors. That don't.

James Mackey: 30:03

Right, right.

Sanket Merchant: 30:03

So it's a whole phrase of innovate or die, and it's obviously a pretty extreme example or phrase, but I think the reality is that our thesis has always been domain expertise, verticalization is always going to win Right. And so I think that if you are intimately or hyper focused on your ICP, understand who is your champion, the problem, you understand the technology, infrastructure, you understand motivation and incentives, you understand organizational models, you understand pain points, you understand flow of work and if you can incorporate generative AI, whether it's in a learning development application, a sales and marketing application, to supercharge and be able to deliver even greater impact with less friction and to really pull out those value levers for your buyer and the use cases that you solve, I think that only makes you more indispensable in these types of market and allows you to have the opportunities to continue to grow your business. So we are challenging everyone of our portfolio partners, which is how do we, on the spectrum of being commoditized and being the beneficiary of generative AI on the commercial side, how do we drive great self awareness in terms of where this could be potentially harmful to our businesses and make sure we build motes around that? And, importantly, what are great elements of our value proposition or the value levers available to us that that we should take advantage of. So if you, for example, are a learning development company, what can we do to drive more intelligent, automated content creation, for example?

Sanket Merchant: 31:30

Right, ai is really good at that.

Sanket Merchant: 31:32

That doesn't need to circumvent what we're doing to create awesome tools for folks to create best in class content, but how can we reduce friction from that process, make it easier to consume our product and deliver on the outcomes that we commit to our customers?

Sanket Merchant: 31:43

So I don't know if that answers the question, james, but it. I think it's a multidisciplinary approach and one that is constantly evolving. But I do think that, like one of the coolest parts of my job, and why I love it so much, is that you get to be a part of this rich tapestry of missions and visions, and every one of our companies touches Thousands and thousands of end users and customers and their missions and impact, and so for us to be a part of that, for us to like identify innovation, support that from an investment perspective that drives impact for retailers, for mom and pop, you know, small coffee shops and hotels that, to me, is pretty exciting, and I think that there's a lot of cool things that will continue to come down the pike is as a lot of this technology gets more mature.

James Mackey: 32:27

I actually I had a board meeting earlier today and we were discussing AI's impact on, potentially, my business and my customers, and so some interesting points came up that I can share here that I think will be valuable to to the audience.

James Mackey: 32:41

We are looking at our strategic roadmap, looking at a three year plan, five year plan, where we want to grow the company, and we're looking at how we're positioning our solution on the market and how this technology might actually require us to think about changing our value proposition and slightly changing the solution that we're providing, because in some ways, the solution that we're providing to our customers are going to be impacted by generative AI.

James Mackey: 33:11

I mean where there's tools that are coming about which can slightly potentially like, shorten or shorten the delta between high performing teams and low performing teams by providing this extra process and support.

James Mackey: 33:26

So there are certain things that we're looking at when it comes to revenue model, when it comes to value proposition, these aren't massive shifts at this point in time. We still see, generally, us going in the same direction for our value proposition and how we're thinking about delivering our solution, but we are starting to become aware, like how we might we need to pivot and tweak a little bit based on what the technology is doing and how can we potentially incorporate it for our own organizations and how can we essentially use this shift to benefit us and limit the potential risk of it to our solution. So it's we're starting to have these conversations and take them a lot more seriously than we might have a year ago, right? So it's definitely something that I'm starting to think about a lot more with our advisors than I possibly would have a year ago, before everything came out with chat, gpt, right, yeah no, I totally agree.

Sanket Merchant: 34:19

I totally agree. The cool part about that is that, like you know, can't believe it. If you can leverage some of these things and job description creation, for example very tactical example but if that returns an hour of a team members time on your team, that's now an hour focused on client services, right on, you know, candidate curation, right. So it's like it. I feel like every it's like. It's like the whole concept of getting a percent better every single day. Potentially you can get 10% better in one day, right. So it's great that you're thinking about that, and I think a lot of your folks on on the liner are are rightfully johns themselves to think about how, how does their business, their value proposition, how they, how they deliver for their clients, evolve over the next couple of years?

James Mackey: 35:04

It really is and in the recruiting text based there, some companies are working on some pretty crazy stuff. I mean, there's a basically using generative AI to and language models to actually do screening interviews top of funnel interviews for candidates, to the point getting a good to the point where it's going to be actually sort of difficult to distinguish between technology and people, right to the point where it's like that good, right. And so there's things that people are thinking about doing. Now, who knows, I mean, maybe people looking for jobs are not necessarily going to want to engage with a company that's doing that, but I think it's like I honestly I think that there's a way to do both. Like I see potentially companies offering hey, you can have a screen call with our recruiter, or it's kind of like this self-serve, like maybe you don't want to talk to somebody yet Maybe you can almost talk with this product solution, learn more about the company, ask your questions, do the screening call with the product and then you can engage down funnel if you want to. So it maybe helps people like they can just go directly on a careers page and, boom, knock out a screening call without having to schedule with a recruiter, go back and forth and do that manual process.

James Mackey: 36:17

So it's gonna be really interesting to see how it impacts people, organizations as well, because there's just so much application to drive efficiency and I think a lot of people are saying, like well, the human touch, like yeah. But there's sometimes where people just want things to go quickly and they don't want to wait and they want, like to just learn the things they need to learn about a potential employer or get the answers that they need to get around something with their benefits package. They don't want to wait for an HR business partner to respond. Or if they want to learn about the professional progression or career patting, they only have a certain amount of time with manager having an additional resource available, opposed to like combing through a bunch of like resource documents that are kind of tucked away. I think that there's just so many gonna be interesting applications for everything and, of course, on revenue side right, I mean the applications on the revenue sales marketing is gonna be insane.

Sanket Merchant: 37:10

I totally agree. I think we've been investing in HR tech for almost a decade and a half now and I think the without getting into a philosophical debate, I do think that the consciousness of AI is gonna be one that has to be top of mind, particularly with anything touching people. We were early investors in the digital interview and category with a business called HireView, which is kind of the pioneer in that space, and I just I think there are areas where we're gonna be able to like hit the gate running with Gen AI and some of these applications in other areas where it's gonna be a crawl, walk then run. But importantly, I just think it's to your point, it's gonna supercharge people, organizations, folks on their front lines, driving impact in terms of what organization models are, how they're evolving.

Sanket Merchant: 37:53

But two is, I think it's just gonna make, particularly for large organizations where you're collaborating with the engineering team and the marketing team, the sales team, and you've got different co-collaborations in those processes, how do you make it more efficient? How do you make sure that you are one, being thoughtful in terms of how you're deploying and using your organization's time, because it has a cost associated with it? But two is leveraging technology and data points that can only you and I and a lot of these organizations may not have perv you into, because these AS systems collecting so much data that aid the process for candidate qualification and the like right. So it's gonna be cool because I do think that it's gonna have a pretty palpable impact in terms of people operations too, which I think is awesome.

James Mackey: 38:36

Yeah, across the board, I'm excited and a little anxious about it as well, so we're just gonna have to see how it plays out. I'd say a little bit more on the excited side, but it's something that I'm thinking both ways. It's like how do we use this and make sure that we're on the side that benefits this right, which I think is important to be thinking about. I think a lot of times there's it depends through the lens you have to look at it like in terms of potential threats in terms of how you're delivering your solution to the market, and then potential benefits in terms of how you can optimize, and I think companies are probably smart ones are thinking about both. But anyway, sunket, this has been a lot of fun. I really appreciate your expertise. Thank you so much for joining us today.

Sanket Merchant: 39:18

Thanks so much, James. I appreciate you having me on.

James Mackey: 39:21

Of course. So for everybody tuning in, make sure to take this episode, drop it in Slack channel, share it with your teams. A lot of valuable insight here that can help guide town strategy, executive strategy, business strategy and, really exciting, I actually can officially announce now that Greenhouse has partnered with the Breakthrough Hiring Show. The co-founder and CEO, daniel Chait, is gonna be coming on a quarterly basis to be a co-host on the show. It's gonna be freaking incredible. He's gonna be bringing on a strategic guest as well. I mean, we're talking about the top executives in the world are gonna be joining us on this show. So we're continuing to level up, add more value to you and I love hearing from everyone. So if you have any feedback, if you have any guest suggestions, topics that you'd like for us to discuss, or just want to say hi, make sure to reach out to me on LinkedIn, dm me. I have an open profile and I'd love to connect with you there. Anyways, thank you so much. We'll see you next time, take care.