Private equity is ruining technology companies

The WordPress and open source communities have many thoughts on Matt Mullenweg’s actions following his talk at WordCamp. Much of this commentary ignores what I think is the core of Matt’s argument: the growing role and influence of private equity in technology, especially in open source.

PE firms raise money from institutional investors and wealthy individuals to buy companies, restructure them and later sell them for a profit. It’s all about maximizing returns as quickly as possible, usually within a three to seven year period. That’s a shorter time frame than the typical founder or shareholder of a publicly traded company, and much shorter than Matt’s time horizon:

I would like future generations to grow up with a web that is more open, freer and offers more freedom. That’s why open source is really my life’s work, even above WordPress and everything else. I hope to work on it for the rest of my life.

When a PE firm acquires a technology company, a few things happen. The new owners are focused on aggressive cost cutting and streamlining operations to increase short-term profitability. This is extremely destructive and leads to mass layoffs, reduced benefits and large-scale outsourcing. At the same time, PE firms often overload acquired companies with debt, draining cash while making the companies more financially unstable. With a short-sighted focus on an exit, long-term investments in innovation, customer service and employee development fall by the wayside.

The result? Private equity-backed companies are ten times more likely to fail than publicly traded companies.

The basic business model of private equity firms often leads to disasters like ManorCare’s, for three fundamental reasons. First, private equity firms typically only buy companies for the short term. Second, they often load the companies they buy with debt and demand onerous fees for it. And third, they insulate themselves from the consequences, both legal and financial, of their actions. This leads to a practice of extraction instead of investment, of destruction instead of creation. While not every company owned by private equity firms goes bankrupt, the likelihood of disaster under their ownership increases significantly.
— Looting by Brendan Ballou

Open source communities are particularly vulnerable to this model. They are delicate ecosystems of volunteer contributors, transparent governance and values-aligned sponsorship. Applying the PE playbook can easily destabilize that entire balance.

Take, for example, Vista Equity Partners’ $1 billion acquisition of Acquia in 2019. Acquia is the primary commercial backer of Drupal, another popular open source CMS. In the years since the acquisition, the Drupal community has visibly struggled. Acquia appears to be contributing less code and providing less financial support to the ecosystem.

Just a few days ago, Acquia quietly laid off nearly a third of its workforce.

With fewer resources, core development and maintenance have slowed. This coincides with a sharp decline in Drupal’s market share compared to competitors like WordPress:

The Drupal story shows how applying PE tactics to open source projects can undermine their health and sustainability. By nature, these communities are not suited to rapid extraction of excessive yields. Their vitality depends on reinvestment, transparency and long-term stability – the opposite of the PE model.

Toys “R” Us. Simon & Schuster. Even the American ports. Not everyone can oppose private equity, but I believe we should support companies like WordPress, which have a long history of admirable values ​​and far-sighted leadership. WordPress powers over 40% of the web; the health of the community is too important to ignore.