Vista Equity Partners: Tech Investor Perspective | Macquarie Group
Hello, everyone. Thank you for joining this session of the Macquarie Technology Summit. As part of this summit, we're bringing together leading technology investors across the globe. At the forefront of that group is Robert Smith. He's the founder, Chairman and CEO of Vista Equity Partners.
Over the last two decades, since its founding in 2000, Vesta has completed over 500 transactions, building into 75 billion of assets under management across 70 portfolio companies that employ over 70,000 employees, largely focused on the enterprise software vertical. I'll give you a quick back... information on Robert's background. He'll correct me if I say anything wrong.
He's from Denver, Colorado. Both his parents were schoolteachers. After high school, where he did an internship at Bell Labs, he was a chemical engineering major at Cornell University.
Following that, jobs at Goodyear Tire and Rubber and Kraft General Foods, before getting his MBA at Columbia University in New York, graduating in 1994, and making the transition to investment banking at Goldman Sachs, where he segued into the technology sector, moved to San Francisco, left Goldman in 2000 in order to start Vista Equity Partners. Robert, thank you for joining us. And thank you for the continued partnership with Macquarie. Tom, thank you so much, and really appreciate the invitation. So good to see you. Let's jump right into the questions.
And while the focus of the conference is "for a better future", looking into the future, we find it's helpful to start with the past and some of the lessons learned from the past. For your background, Robert, I might describe it as a little bit of an atypical background for someone that heads into investment banking - chemical engineering major, internship at Bell Labs, Goodyear, Kraft General Foods. Certainly not the tried and true path to get to investment banking. Tell us how some of those things impacted you, impact the way you think about the world. and moved you towards technology investing? Sure, when I think about it, you and I grew up at the dawn of the computing age, and various elements of when it impacted our lives is how we got introduced to it, and it really started to inspire and inform us as to what the opportunity set was.
Mine started off early in high school. They introduced computers in my high school, I got to take a computer class and I asked the teacher, "Well, how do these things work?" And he was telling me about this thing called a "transistor". And I said, "Well, who made that thing?" And he said, "Well, this place called Bell Labs." And so I went and found out that there was a Bell Labs in my town, not too far out of town, and a gave 'em of call and said, "Hey, I'm interested in an internship, do you have those available?" And they said, "Well, yeah, sure, "if you're between your junior and senior year in college," and I said, "Well, I'm a junior in high school, "I'm taking AP classes, getting A's in them,". "So it's just like being in college - where do I sign up?" And they, of course, said, "No, you have to be a junior in college."
So I tell this story, I called the Human Resources person every day for two weeks. And, of course, she stopped taking the call after the second day, but I left a message and then literally every month-- or every Monday for five months, I called and left a message. And I got a call back in June, they said a student from MIT didn't show up. "We're not guaranteeing anything.
"Why don't you come down and interview?" So the interview, I ended up getting the job and then worked there pretty much almost every semester, in the summers, when I was then matriculating through Cornell. And I say that to say, the exposure and experience that I got working in Bell Labs and what I saw - the power of computing, technology, really shaped and informed my desire to not only be an inquisitive scientist, but also create and invent things that were heretofore never seen before. And so that's one of the reasons I went into chemical engineering.
The chemical engineers are the modern-day alchemists now. Today, computer scientists are now becoming the modern-day alchemists. Chemical engineers transfer one form of matter to another.
If you think about it, the computer scientists now transforms ideas into function. And so I had the opportunity to go into chemical engineering and then work in Applied Research and Development at Goodyear, Kraft, a bunch of other places where I learned the power of computing and was in those environments where we were really digitising the industrial operations of manufacturing companies. And that was when, at a time computing power was really managed by the government or large companies or schools and universities.
And for the first time, we're now starting to buy computers, multi-millions of dollars and cool rooms to now control process controls. And what you saw was, when you implemented these process controls, you eliminated massive amounts of inefficiency or waste, which increased the production or decreased your cost of manufacturing. And then that started to get introduced into the workplace, in terms of spreadsheets, or word processing, etcetera. And so that really just highlighted to me the importance of embracing and leveraging technology in all business environments. And now we all know, we're in this dawning of this fourth industrial revolution, where, in my view, every industry is getting digitised. But almost as importantly, most importantly, enterprise software, business software is the most productive tool, introduced in our business economy in the last 50 years, and likely will be for the next 50.
So that's the exciting world I get to live in day to day. But it all started from an internship at Bell Labs. Got it.
Thank you for that. So it's 2000, you go and you start Vista. You say, "We're gonna do buyouts of software companies."
And I remember this and people said, "You can't do a technology buyout." And the most interesting thing, Robert, was people said, "You can't lever the business." And the irony of that is you look at the businesses today that we put leverage on, it's probably one of the most highest leverage sectors that we look at. So things have come a long way since 2000. But, clearly, you saw something that other people didn't see at the time.
What was the... What did you see? What was the "ah-ha moment"? What did you have the foresight to see that others didn't? Yeah, so, Tom, it's a great question, because there were a few, and one of the most important I mentioned earlier was the... If you think about it, that enterprise software is the most productive tool introduced in the business economy, last 50 years. If you look back in the olden days, when you were implementing an enterprise software system for payroll, you would go to a company like Exxon. Exxon would have 80,000 employees, they'd have, 3000, payroll clerks managing all the day-to-day and the weekly payroll and exempt/not exempt, you know, all those sort of things.
Well, you implement a payroll system now, all of a sudden, you only need 30 payroll clerks, right? And so that efficiency, where you can actually deploy those resources other places, is one of the main reasons that people buy enterprise software. I look at our portfolio today, and I do a survey every year. And our average company delivers software to their customers that delivers to their customers a 625% ROI - return on investment.
That's how productive software is, even in today's environment, where computing power has been even more distributed. So that's kind of point one. Massive productivity for the people who use software. So that's point one. Point two, enterprise software, very differently, when you actually standardise on it in a company, and you realise those productivity benefits, you don't really want to lose them again.
So you're not likely to switch vendors all that often unless a superior of product shows up, which gives you superior value or value creation. And that superior product is easy to use, or easy to train your existing employees. Because once you get employees on a system, they don't want to move to another system. You remember... ..you got onto gold about the time when we switched to Excel. Prior to that we use a software program called Asterix.
It was a spreadsheet program. Prior to that we had, right, Lotus 123, right? And so remember the inefficiencies when we used to model, and one person was working on Lotus and another person was working on Multiplan and another person was working on Excel. And then you had to figure out whoever had the best model, you standardised on whatever system you were using. That was massive inefficiency. And now we all use one.
And so that creates a massive inefficiency, not only across that company, but across an entire industry. When we're doing a deal, and we're sharing an Excel spreadsheet with our investors, you know, they don't have to worry about the conversion because they're using the exact same spreadsheet, OK? So you think about that. So that's the second thing that was important.
The third thing is you always have to go through a process in software because someone wants greater feature, function, capability, delivery. You have a relationship with your customers. That relationship isn't days or weeks or months or quarters, it's decades. And when you put all of those elements together, you say, "Man, that's a pretty good investment thesis." Now, the banks 20 years ago said, "Well, the thing is your customers or your assets..."
I mean, your employees leave the building every single day and venture into a start-up. But when you have an established product, and you have customers, you've had them for decades, your asset is that customer base and those contracts, those relationships and the value that you bring to that customer every day. And that's why there's been a realisation over the last 20 years that you can leverage these businesses seven times versus when we first started, saying you can leverage these things one time. Recurring revenue was not in SaaS, were not terms people were using back then. If we were sitting together back in San Francisco at Goldman 21 years ago, and you said, "I'm gonna go do this, Tom," And I say," Hey, Robert, I've got a crystal ball, "I'm gonna tell you something. "This is what this is gonna look like 21 years from now," what would you have said to me? It wouldn't be that different.
The point to Vista is to create an efficient system to enable enterprise software executives, companies, to be more effective in what they do. So beyond what I'll call the investment dynamic that we focus on, there's a there's a value-creation dynamic, which is a big part of our heavy lifting. What I noticed early on in this venture is every single CEO, every single executive in the world of enterprise software did things differently - well, why? Where did they learn how to run a software company? Well, they often just made it up, right? Because they were the first ones in that industry to offer this product.
So they made up pricing, they made up Go-to-Market strategies, they made up market coverage, they made up product development strategies, and no one kind of converged on any one system, because no one knew which one was necessarily better. And what we did, and which is what I would have articulated 21 years ago was, why don't we do what we do in every other industry? Which is establish a set of best practices. You know, our days in... you have it in Macquarie, I'm sure you have best practices in terms of how you do certain things. And so when you have a new banker come on, you're teaching these best practices.
Same sort of thing, we have a new executive team come on, we say, "Here's what has worked in the past for 500 transactions, "here's the things that you are doing different "that could help you accelerate to build a market." Or a manager will go from a small-to-medium business to an enterprise sales organisation, or to manage and decrease the cost of delivery of your product. And so that's what we offer is a systemic approach to bringing these value-added components to every single software company that we partner with. And that was what I would have said 21 years ago. That's what we do today. Now what's interesting is that has to all evolve.
So 21 years ago, we talked about ASP, application service provider. Today we talk about a cloud-hosted environment. On the one hand, they're not that different. They are, but they aren't that different.
But the delivery mechanism is very different. So you have to modify your best practices, which we have over the last 20 years to meet the needs of the companies that we're investing in today. Very different than the needs of the companies that we had even five years ago or eight years. OK, so let's look forward now the next 21 years from here. Competitions come in, everybody's putting capital into the software space, all the large private equity growth players.
You got people coming in on the value side. I think you've touched on some of the answers to this question already in some of your comments. What's left in software investing, does it looks as good now as it did 21 years ago? How do you drive this forward for the next two decades? Yeah, I would say it is even better. This has gone through to date, kind of three phases of growth. The early days, everything was "on prem", right? On premise enterprise software.
The business model was a standard licenced maintenance model. Then there was an introduction of what I'll call "accessible computing power" - we all call it "cloud", right? And then there was, "OK, well, how do I move "from my on-prem to cloud "and managed hybrid environment?" Which is what a lot of legacy companies did. But so that's kind of phase two.
And I think we've migrated to move more businesses into the cloud. And, of course, the SaaS business model, which supports that sort of deployment than probably any institution I know of on the planet. We've done 510 transactions or so. And today, if you think about it, we are investing in a cloud native company, What happens, we have lower operating costs, lower start-up costs, but you have to have a different motion for you to go-to-market motion. So now we are focused on a lot of companies that grow at scale, companies that are $200, $300 million in revenue growing 20 per cent, and we want to inflect them so they can grow at 40 per cent. But what do you have to do to do that, how do you manage your go-to-market motion? How do you manage your product development, your service delivery? Those are the best practices that we've been refining and having for the last five to eight years.
First of all, we're doing eight and ten and fifteen years ago. And so our experience, that doing more deals than anyone else in the space, getting that and then having a mechanism through Vista Consulting Group, our value creation organisation, that is the way that we are constantly able to what I call tune in and feed forward innovations and insights that we develop or that we develop with our portfolio companies so that they can redeploy them into new companies. So that's one of the ways we keep our edge, keep our advantage and have the ability. And, look, now we still get literally hundreds of calls from founder-run companies, and they only call us. They say, "Look, I want you to do for me "exactly what you did at Marketo or at DAM?" Or any of those companies that doubled the growth rate and doubled their size. And that's what we want to see in terms of what we want to do with our company going forward.
And so that brand and that advantage is something that we continue to expand on. Great, thank you. So shifting gears a little bit. And I think about the answer to this next question in more a context of hardware, like an iPhone, you may think more in the context of software. If you look at the last 20 years, what was the one technology or item that's impacted society the most.
And as we look forward over the next 20 years, what do you see as the next focus area, be that a product or a sector? So there are three main forces that I always point to that really are driving what we're experiencing. The first is the accessibility of computing power. That's the first thing.
Again, 20 years ago, there was certain institutions that held all the computing power. Probably by next year, we will have shipped more servers and computer power in Asia than we shipped in the US, which is going to be a huge inflection point. That computing power, so that's kind of point one, the accessibility or ubiquity of computing power. The second thing is the conductivity of that computing power.
Many investment banks and investment bankers over the last 20 years have encouraged and aided in the conductivity of that computing power through all of the vendors, all of the wireless and cable companies, etcetera. Now that computing power is accessible to all of us on these little devices that we have in our pockets, and on our desktop, which is the third thing, which is our IoT, right? You know, the Internet of Things, or the Internet of Everything. These devices now have, in their own instance, the capacity to leverage that computing power, sometimes with instruction, sometimes they have their own ability to do it, which is part of the next wave of things.
And those are the three major forces that are going to continue to drive opportunity in this space. Massive, massive productivity can be accomplished and realised, much more so than what we've seen in the last 20 years. And so what we are now, of course, doing is looking to harness the power of what I think in all of that stack, the greatest productivity tools, which is the software.
I mean, ultimately, the hardware is commodity, it ultimately has, if you don't build it properly, it's got a lifecycle associated with it. Whereas the software has infinite flexibility and capacity in the way that we are managing software today. And by the way, we can now implement, AI tools or RPA tools and make it even more efficient and self-tuning and self-learning going forward. So that's where we're going to continue to see that exponential growth opportunity in the space. That makes sense. So we want to ask you a market question as well.
And people are quite interested now. And it's interesting parallel to the time you started this in 2000. And we know there's a lot of luck that goes into all this. And it's probably better that you started in 2000 than maybe 1997, because the market corrected itself right after which, for all of us people that had capital, provided excellent investing opportunities. Were sitting here in 2021, SPACs everywhere.
I like to refer to it as SPAC-A-Palooza. Robinhood, day trading, GameStop. Is this 1999 all over again? I don't think so. I will tell you my perspective.
One is you actually have, because of those forces I just named, you actually have a bigger, broader set of investors participating in these markets. And so on the one hand, just by the very nature of volume, you're going to have higher volatility in the trading environment. So that's kind of point one.
Point two, you have the ability, through leveraging these applications, to actually bring critical mass and coalescence on issues that then create even more volatility. But what do I mean by that? Well, you can look at the platform that people are trading on. And if you look at the platform in which they're communicating, sometimes they converge all in one. And sometimes they're separate. But on any point in time, depending upon who you are in this planet, you can converge and you can put out a message, and a billion people will see in minutes... ..and they may act on it. And so that creates a whole different dynamic of engagement, that if there is a capital markets component associated with it, will create much more trading volume and volatility associated with it.
So we're in a completely different paradigm. Back in '99, how many people actually traded online? How many people actually had... well, we didn't have smartphones, right. '06/'07 we first started to see those. We all had the flip phones, and memorising numbers, and all that sort of thing. Whereas today, you can use your voice to effect a trade while you're driving down the street and listening to a radio show, right? So those are the... The frequency and speed of interaction and data has changed that completely.
Now, how that's going to manifest and play out, we're seeing some effects of it. Volatility is one of the effects. And, of course, we're gonna see how the regulators decide that they want to participate in the construct of those markets. So it's going to be interesting.
We're nowhere like '99. But I will tell you, we're in a different paradigm that I'm not sure everyone understands quite yet. Got it. Thank you. And now talking about location, because another place you were ahead of the curve was really moving most your operations to Texas, to Austin.
I see those two cowboy hats behind you. What did you see there? And, if you could, position that in the context of what was attractive about Austin, what's attractive about Austin today? And how can other cities become tech hubs outside of Silicon Valley, attract and retain talent, provide lifestyles for employees? Tom, that is a great question. I get asked that by governments by state and local officials and politicians, etcetera. And I tell them, quite frankly, you have to look at the business... ..well, for me, the business that I am in. And if you think about it, there's about 7.5 billion people on this planet,
there's only 29 million of us that actually know how to write code, right? So I have to think about where do we put our centres of excellence where we can find people who not only can write code, but understand the impact of what that code is. So we look in... I've got offices in San Francisco, Chicago, New York and in Austin, and in multiple places around the globe now. A few places in Asia, India, etcetera. Well, a good part of that is we need to go where the talent is. So we need to make sure that talent has access to what I call the intellectual property of Vista and, ultimately, the intellectual property that makes up our value creation group.
And so that's what we look for. When we look at towns like Austin, Texas, in particular, we've got a huge university system. And, we'd like to draw from the university students, because you and I talked a little bit about it. I came to computers when I was 17 years old.
I'm a digital immigrant, right? We want digital natives. We want people coming out of colleges and who have spent their entire world and life looking through lenses and screens, etcetera. Because they see things differently. They engage with the world differently. Don't get me wrong, we need a full spectrum of people in our organisations, and that diversity is critically important. But it is important for us to make sure we have constant sources of talent in our core operations.
And people say, "Well, what do I do about it? How do I think about it?" And I tell them, what you need to do in America in particular is to engage and actuate every single citizen in this country. We have to have on-ramps for every single person in this country to participate. And this is the fourth Industrial Revolution.
I look to India, and my friend Mukesh Ambani has built a beautiful company there, has got 400 million-plus people on a 4G network. In the US, we're sitting here, we've got 40 million people who aren't. Well, OK, well, that's, that's something we can solve. And so when I think about, for the politicians and business people, let's focus on that, let's focus on enabling our talented people, all of our people to participate in this economy in one way or another, which means they have to have access to that computing power, OK? They've got to have broadband access, they have to have devices, they have to have training, they have to have learning management systems that can enable them to be productive citizens in this environment. So that's really what I focus on, in terms of where we put our businesses and locate them and why we put them there.
That's one of the reasons we moved to Austin, fantastic environment for business and getting people to really... ..young people to actually come on board and be a part of this journey. Let's wrap up with a question on philanthropy, how you spend your time. Wouldn't be a conversation with Robert Smith if we didn't. You're one of the leading philanthropists in the country. Thank you for that. You've been involved with numerous organisations really, too numerous to list.
But, you know, Columbia Business School and Morehouse and Cornell, Carnegie Hall, Fund II Foundation, which you founded and are the lead director there. It's really a two-part question. How you might... you're getting calls every day. How do you think about where you spend your time, what's important to you and then, part of that is bridging the digital divide, and how do we think about that? I know this is something we could talk about for...
But this summit is "for a better future". And nothing implies "for a better future" more directly than philanthropy. It's all about building a better future. Yeah, and a big part of it, Tom, again, thematically, it comes down to some very basic themes for me, and one of the most important in the context of what we're discussing is bridging the opportunity gap.
I look...as a child schoolteachers who never understood computers and those sorts of things. The gap was bridged for me through a great teacher and ultimately an opportunity, which was an internship, and then ultimately access to computing power. And so there are still citizens in our country, many of them, Black and Brown students who don't have that access. So I'm saying, "Well, what I should do is use my platform, my opportunity, to bridge that."
And I just...one of my friends, Chuck Robbins over at Cisco, they just made a $150-million donation to enable every one of these historically black colleges and universities to now come to a 4G standard - think about that. Now you have access, but this whole generation of students who have 4G computer software upgraded to 5G so that they now can all participate in the global economy that is digital in nature. Those are the sorts of activities to me that, OK, that are important for me to spend my time, energy and effort on.
I'm also a member of the World Economic Forum. And one of the things we're focused on there is called the EDISON Alliance. And it's the largest CEOs and CFOs of companies in the world, and we're focused on, "OK, how do we also do that, "not just in the US, but other parts of the world "where they also have digital divide?" We've got the capacity in terms of the computer capability in terms of the companies, the dollars, technology.
Now how do we do the funding? And so there's various ways that we're saying, "How do we create standards, "and here's how you go through this funding and bond financing or bank financing," to enable that to happen efficiently for communities. The Business Roundtable, the same thing, the Two Percent Solution. How do we now get these companies to say, "Oh, alright, guess what, "I actually provide broadband service in that state or that community.
"And I see we've got gaps in terms of where these schools are located. "Let's provide that there." Also let's provide capital for the small-to-medium businesses who want to have digital infrastructure. So what it really is is providing quality on-ramps into the opportunity set that the digital economy does provide for people who haven't had that access in the past. Robert, thank you for that.
Thank you for your time. Thank you for the partnership. I wish we had some more time. There's a lot more to talk about.
We appreciate you. And we'll talk soon. - Thanks for joining. - Great, thank you so much, Tom.
All the best and congratulations. And good luck on the conference.