Orlando Bravo, Thoma Bravo founder and managing partner, joins CNBC's 'Squawk on the Street' to discuss whether private deals in tech are distorting the market, if he sees parallels in AI to the dotcom bubble, and much more.

The release of Open AI's ChatGPT has accelerated the development of artificial intelligence and warnings about its impact on society.

Rise of AI

Orlando Bravo, managing partner at Thoma Bravo, stated that current valuations for AI companies are in a bubble, likening the situation to the dot-com era. He noted that both public and private markets are seeing companies with modest revenue being valued at extremely high levels, which he considers unsustainable.

Bravo emphasized that while the AI investment surge provides significant tailwinds for enterprise software, profitability and sustainable growth remain crucial. He also addressed concerns about AI disrupting industries such as call centers, stating that companies leveraging next-generation AI solutions are well-positioned to adapt and thrive.

Orlando Bravo: AI valuations in a bubble

Our next guest leads the largest tech buyout firm with $181 billion in assets under management. Toma Bravo founder, managing partner Orlando Bravo joins us now. Welcome. It's good to have you. Sarah, it's great to be here. Hi, Carl. Thanks for having me. So all of these deals, particularly around open AI, are they distorting the private market? I don't think so. I mean, isn't it an astonishing amount of money? It's mind-blowing. And how quickly it is moving. Now, for enterprise software, which is the area that we focus on, that $1.5 trillion economy, this is a huge tailwind. All these investments, it's becoming clearer and clearer to the market, to customers, and to investors that this is a big tailwind for those companies. So it's a big beneficiary of these enormous investments. So you've been through cycles. You've been through the last dot-com cycle. People are drawing parallels to that just because of the size of the numbers and the deals and now the high valuations. Do you see any comparison? Thank you for mentioning the dot-com bubble burst. We, investing-wise and operating-wise, we're a product of that environment. That's when we learned to buy a software company cheap, when we learned to cut costs, when we learned how to operate. And it was wild. I was young in San Francisco in those days, and all the bars closed down and all the restaurants closed down all of a sudden. I can tell you there is a parallel, which is valuations. Valuations in AI are at a bubble. You cannot- Public or private? Both. You cannot value a $50 million ARR company at $10 billion. Think about how public investors and great investors think about companies. That company is going to have to produce a billion dollars in free cash flow to double an investor's money ultimately, even if the product is right, even if the market's right. That's a tall order managerially. Now, there's a big difference between the dot-com bubble burst and what's going on now. Now you have some really big companies and some big balance sheets and healthy balance sheets financing this activity, which was different than what happened roughly 25 years ago. So what do you do with all that? What are you doing? We focus on what we do. Look, the opportunity in private equity and for us specifically to transform a billion-dollar software company, it's bigger than it's ever been. And then the tailwinds that those companies have with AI, think about it. You're selling your customer an important solution, a workflow solution, a system of record, something that's deeply embedded in that customer's process. And now with AI, you have so much more to sell them, agentic solutions, an easier way for the customer to engage with your product. That is a big, big, new, exciting tailwind for the industry. And a few months ago, the market and software stocks went down and partly there were concerns. Is AI going to be a threat to software? Is it a benefit to software? Once again, it's becoming clearer and clearer that it's a big, big tailwind for software. Really? So the death of SaaS, it was over-exaggerated? They also said that after the dot-com bubble burst. I remember that like yesterday. I had one of my partners show up in my office and say, are we going to do any more software deals? I read this article that this is over. They remember there was a Y2K boom and everybody buying excess software. And the software industry is just, together with AI, is going to provide a new growth curve to it. When people look at moving from a sales cycle that relies more on debt, right, or when free cash flow begins to go negative in some circles, is that a reason to question the durability of the cycle? Look, it is so hard to predict cycles because it depends on investors' optimism and their attitude towards taking risk. We are not a subscriber to any money-losing company. At the end of the day, profitability and growth have to go together. It means that the company is making the right investment choices and that they have an organization that's well set up so that they don't depend on the outside for constant and constant growth and promoting their company that way. But are there portfolio companies of yours that could be disrupted by AI? For instance, I know you've invested in call center companies, and everyone says call centers are at the top of the list on those that could be disintermediated by AI. It is a contrarian bet, isn't it? That you're buying, and you're merging two of your call centers. I think you raise a great point, right? The easiest area for AI and agents to take over, right, as you can see it as an individual or an investor, is a call center. Very difficult areas to run, very difficult operationally, very difficult to recruit people and train people to give customers a good service. It's never really been done. AI is so additive to it. Now, the companies that we're putting together in that space, we believe have next-generation AI solutions and offer customers a full platform versus point solutions and understand the call center environment very well. In other words, there's value there because they're using AI. It doesn't necessarily mean they're using people. A hundred percent, we believe that.

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Orlando Bravo: AI valuations in a bubble

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