Robert Smith: Risks & Opportunities in Today's Digital World
November 11, 2020 12:30 PM
Register for this event
Robert Smith: Risks & Opportunities in Today's Digital World
November 11, 2020 12:30 PM
RegisterSpeaker(s)
Robert Smith
Founder, Chairman & CEO, Vista Equity Partners
Moderator(s)
Mo Lidsky
Principal & Chief Executive Officer, Prime Quadrant
Biography
Robert F. Smith was born in a working-class neighborhood of Denver, Colorado in 1962. While still in high school, Robert was initially denied a prestigious internship at Bell Labs because they were reserved for college students, but his persistence in calling the company every week for five months paid off when he was eventually offered the position.
Smith continued to work at Bell Labs during his summer and winter breaks while completing his chemical engineering degree at Cornell University. After graduating from Cornell, he worked as an engineer for several top companies – including Kraft General Foods, where he was granted two patents in the U.S. and two more in Europe – before going on to earn his MBA with honors from Columbia Business School.
In 1994, Robert joined Goldman Sachs to help develop more robust investment banking in technology, starting out in New York and later moving to Silicon Valley. He became the Co-Head of Enterprise Systems and Storage, where he assisted massive technology companies like Hewlett Packard, IBM, eBay and Apple with mergers and acquisitions. He was the first person at Goldman Sachs in San Francisco to focus on that specific area of financing.
In 2000, Robert F. Smith founded Vista Equity Partners to invest in innovation by way of enterprise software and technology solutions. Today, he serves as Chairman and CEO of Vista, directing the firm’s strategy, governance and investor relations. In 2011, Vista opened its office in Austin, Texas, and was recognized as the most active investor in the software industry by Berkery Noyes.
Smith was recognized by Forbes as one of the 100 Greatest Living Business Minds in 2017 for his business acumen and leadership skills.
Episode Transcript
Mo Lidsky 00:06
Now without any further ado, I'd like to introduce our very special guest today, Mr. Robert Smith, by sharing a bridge bio of with you. So, Robert Smith is the founder, Chairman, CEO of Vista Equity Partners. This has over $58 billion in cumulative capital commitments across private and public equity and credit strategies. It is one of the top performing private equity firms in the world, and its companies employ more than 70,000 people worldwide. What I found most fascinating is that Robert is known as much for his transformative philanthropy. As for his business argument, in 2019, Robert made headlines for shocking the graduating students at Morehouse College by informing them in his commencement speech that he will be personally taking on all of their student debt. And more recently, he has been galvanizing the business world to provide relief to the most vulnerable communities affected by the pandemic. Working with the private sector, the big banks and political officials, Robert has focused on providing capital to financially underserved communities and minority owned businesses. He is the chairman of Carnegie Hall and the chair of the Robert F. Kennedy human rights he serves on the Board of Overseers of Columbia Business School and a member of the Cornell Engineering College Council is as well as a trustee of the Boys and Girls Clubs of San Francisco. And it’s actually a small miracle that Robert is actually able to join us today as he's coming in from Palm Beach, Florida, which was affected by Hurricane atta, and Roberts team had to jump through some extraordinary hoops to get them connected to us today. So, Robert, thank you so much for joining us. And thank you to your team for, for making it happen.
Robert Smith 01:56
Thank you, Mo. So excited to be here and love what you're doing and the causes you support. So just happy to be supportive, and excited to see you.
Mo Lidsky 02:05
Thank you. Thank you. Thank you. So, let's dive right in. So today we were sitting, you're one of the wealthiest men in America, you're running one of the largest private equity firms in the world, you have publications like Forbes, including you amongst the most influential people. But you know, you came from fairly humble beginnings. I mean, both of your parents were educators, they were inspired by Martin Luther King. And in fact, I think you've said that, that 1963, March on Washington was one of the most seminal events in your life, to kick us off, can I ask you just to tell us why was that event, this lasting influence on your life?
Robert Smith 02:40
Sure. I think most importantly, in terms of me, I framed myself in a community. And my parents, were getting both educators, both teachers, and they always framed themselves within the community they talked everyday breakfast, lunch, and dinner about how do we educate the educators educate our community? How do we bring forward solutions for some of the problems that plagued our community, and many of those problems, quite frankly, we're not, we're not brought on the community by the community? And you know, my mother, who grew up in Washington, DC, when she heard about the march in Washington, decided to take her two infant children, myself, and my brother there. And I asked her about it later I said, Well, why don't you do that she said, I think it was important for you to feel the energy and the spirit of what your community can do when they come together. And you know, you of course, you don't remember the moment. But what you do remember is the feeling as recounted back to you over years, and decades, by your parents and others. And what that feeling in that emotion was, was you can make a difference tonight, I characterize it with my children, in that you are enough, you can bring forward, your energy to change the world, in ways that you think, help, you can bring your energy to solve problems. I always think about now the whole idea of you know, solving problems with elegant solutions, scalable solutions, but you know, it is the dynamic and we all live in this and you and I chatted about this, just before the call thinking about where you grew up, and what is your What is your obligation to the community in which you are from and the community in which you live. And so, some of us are fortunate enough that we have found a path and that path is often frankly guided by mentors, leaders, and teachers that lead us to be able to deliver abundant resources back into our community. And it is it is truly our provenance that we have to be thoughtful about how we do that and take on that responsibility. I was talking with one of my partners at my firm, it was endowing a scholarship. About one of the schools and It's his first time, he's making a major gift. And I said, and he was talking about, I said, let me tell you, you are going to have a rush of a different set of emotions that you've never had before, when you have realized that you have added to liberation of the human spirit, and that will change you. And you will figure out that beyond anything else that you do. It is that feeling of liberating the human spirit that will propel your soul. And so, I'm excited to see that many of my partners are influenced by my actions in that context and are starting to embrace that dynamic in their life. And that also started frankly, in my little house with my parents.
Mo Lidsky 05:46
That's amazing. In the Morehouse College speech that you gave, and I've heard you say this elsewhere, you've used this metaphor of getting on the bus or adding fuel to the bus. What bus are you referring to? Where's that analogy coming from? And what does that mean to you today?
Robert Smith 06:05
Sure, there's the physical bus and then there is the metaphorical bus. You know, the physical bus was what growing up, where I grew up in Denver, Colorado desegregation of the school system occurred when I was in kindergarten. And so rather than go to the local elementary school where my father taught, which was in 98%, African American, we were now bused across town. Well, at this time, there was still a tremendous amount of resistance against desegregating schools. And our whole neighborhood was slated to go across town, to a school that was predominantly white to integrate that school. But right before that was to start, some segregationist, basically burned 1/3 of the buses, and set them ablaze, before school started. And so not everybody in my neighborhood got an opportunity to go. And so only one bus came to my neighborhood, I don't know how they selected three or four blocks that got on that bus. But I just happened to be on in one of those blocks. And I got bused across town. And the quality of education that that bus received was, was far superior than the quality of education that some of the folks who weren't bussed. And I look at that, in the context of people who are on a bus with me become doctors and lawyers and gone to Ivy League schools, and very few outside of those few blocks had that same level of accomplishment in their life. So, you start to realize the importance of fundamental education K through 12. In this case, it was K through six can place in people's lives. So, the physical bus, it was bus number 13, quite ironically, is how I think about it. And so, part of what the metaphorical bus is, how do we get more of these children to have those same sort of access to opportunities that we did on bus 13 access to the higher quality education for all citizens of the community as opposed to those who just fortunate enough to get on that one bus because of whatever reason and resources etc. But that's a dynamic I think about, and I think about what the students but Morehouse what I wanted to really help them understand is, there is in some cases luck, that comes out of misfortune, the luck that I got a chance to get on that bus. But there also was an obligation for me to now figure out how to replicate that experience for many more African American students. And so, I devote a part of my time and a part of my wealth, to just that. And it's important for me when I thought about the liberating moment at Morehouse, alleviating these families, because often it just not the students, the families of the student debt were that that's the fuel because you may or may not know this, but in the US 65% of African American wealth is consumed by servicing student loan debt. We know first of all, a college education is still proven to be the principal lever to equalize the income gaps, but then if you graduate with an exorbitant amount of debt, it chews up so much of your wealth, generating potential that that for 2025 30 years, you may not be able to create wealth and building a home or buying a home, building equity in that home, taking out a business loan, etc, because of the burden of student loan debt because many African Americans don't have access to call it the equity in their homes to pay for student for student education. And so the few That I was giving them that day was alleviating him of that burden a 20 year burden of student loan debt, that now, these 400 young men have a chance to go realize their true potential real in that, based on a call an economic reality of how much debt I have to pay will limit my ability to go be a teacher, for instance, in the community to teach stem, or for me to become a doctor or to start a business or to take out a loan or to start investing in, in, in securities or houses to build wealth for their family. So that's really how I think about how to call it metaphorically, but it was based on real a real physical experience and seeing the difference in the kids who were on that bus versus those who were
Mo Lidsky 10:49
Fascinating. Coming back to your own education and development and sound of professional emergency, I think your first job, was this as an internship at Bell Labs, if I'm not mistaken, correct? And you've said it was one of the more formative experience, could you just share with us the story of how you got to Bell Labs? And what was the lasting impact of that internship?
Robert Smith 11:11
Yeah, it's always a fun story to tell. And I tell folks, it was my first professional job before that, I cut grass and shoveled snow. So, golf balls, and did whatever I could, to help support some of the needs and wants that young people have growing up, but I was in high school, and this was at an age, when, again, computing technology was not readily available, and they introduced computers into my high school. And I was fortunate, for whatever reason, and good luck to be able to get into that class. And so, I'm learning about the computer, I asked about, well, how does this thing actually work? And my teacher says, Oh, it's basically utilize these things called transistors. And I said, well, who came up with that? He said, Well, this place called Bell Labs, and I literally looked at this thing called the phone book back then and found out there was a Bell Labs in Denver or in Colorado. And I called them, and I said, Hey, I'm interested in, in summer internship, do you have those? I said, Yes, between your junior and senior year in college, you can apply I said, that's great. I'm a junior in high school, taking AP classes and getting A's in my AP classes. So that's just like being in college when I apply. And of course, the diligent Human Resources manager said no, call us when you're a junior in college. So, I literally call that human resources. person back every day for two weeks. She stopped taking the call after the second day. And I literally called her back every Monday for five months, left a message. And she called me back in June. And she said, Listen, a student from MIT didn't show up. We have an extra slot. We've never met you. We don't know you. But why don't you come down for an interview and I went down for an interview and got the job and worked there. And matric as I finished went through college studying chemical engineering, and I'll tell you, beyond the story of tenacity, that, that that that that that bears. The thing that I point to that I learned at Bell Labs, there's a couple I had a wonderful mentor. We shared an office, tiny office, he was you know, in his late 50s, early 60s. He was a distinguished member of technical staff at an undergraduate degree in chemical engineering, a PhD in solid state physics 35 patents to his name, just absolutely brilliant. And the thing I learned, most importantly, there from him was what I call he taught me the joy of figuring things out. And he would pose a question. In that case, it was we were looking at a certain a risky as an operational amplifiers type of semiconductor. And he said, these things are failing in the field in our in our, in our equipment out there, and your job this summer is to figure out why. And he said, you have the full resources, the Bell Labs at your disposal, the libraries around the corner, and you should come ask me questions. And he kind of turned his chair around. And at first, I was a bit incensed. I said, Well, what well, what kind of teacher is that? Then I realized what he was doing was challenging me to go figure it out. And so, I said, Okay, so I went to the library first, what's operational amplifier? What's it supposed to do? What's not doing etc. And I come back and ask questions. And anytime I asked a question, he would literally get on the whiteboard and spend hours diagramming and helping him answering all the questions and he was done. So, you have any more questions. I'll be back tomorrow. And that dynamic fueled my passion for figuring things out. And it fuels me to this day, I hope I can impart that on all that I get a chance to teach in my life because when you figure something out now, I characterize it as creating elegant solutions to complex problems. You know, that creates a wonderful sense of satisfaction. And I hope I always have a chance to figure things out, because there's a great joy in that.
Mo Lidsky 15:14
Let me turn the conversation towards Vista origins. So, you know, it sounds like you started your career as an engineer before then deciding to get your MBA at Columbia and then pursuing this career in finance. At what point did you realize that your goal was to have your own private equity fund?
Robert Smith 15:34
It's a great question. Because it's one of those I never had that goal. I was I call it a perfectly happy banker at a place called Goldman Sachs. And I was working in mergers and acquisitions in a tech group, which I helped form out in San Francisco. So, I was a first M&A banker on the ground in San Francisco books on tech. And it was just a wonderful time in the late 90s. To do that, well, one of my clients at Goldman or conduct, Goldman, approached me and said, Hey, would you be interested in running a private equity firm If I was your investor. And there's a whole story passed about that in future, but I thought it was quite interesting, because there was a dynamic of operational improvements in software companies, enterprise software companies in particular, that actually hadn't made its way into the marketplace just yet. And to give you some, some, some framing when I graduated from college, I worked as an engineer for six years, I worked in areas like applied research and development, I worked in process industries, and one of the first things that I did actually close to your neck of the woods was implement a programmable logic controller process controls for a manufacturing plant in Grand Island, New York, so not too far from Toronto. And once I implemented that solution, we actually were able to create 20. In that case, it was 26% more throughput through that plant. So rather than what I call control systems that operate like this, in an analog environment, I you know, you see something happening in the reaction, and you turn some knobs and change some reagents, and then it kind of adjust, and then you do it again, and change the temperature and do it again, which is how most processes were controlled in an analog environment. When you implement a programmable logic controller or digital controls, you actually make 1000s of corrections a second. And so now the controls look like this, right? Well, all that area under the curve is waste. Right? And so now, if you eliminate waste, you actually have a higher throughput, higher output, higher quality, etc, etc. Well, now think about that in the world of software. You know, that's a software solution that's actually implemented into a company or process. Well, that has massive implications. Like I tell people today, enterprise software is still the most productive tool that's been introduced in our business economy in the last 50 years, and likely will be for the next 50. So, if you think about the way that no, you're too young to know, this stuff, the way we used to buy airline tickets, or manage wire transfers, they were all manual dynamics that involved clerical interaction versus how we do it today. Okay, so think about all that waste, which creates productivity, if you run a business well creates profit. Well, there's that dynamic that enterprise software brings to its customers, but there's the other side, which is how efficient our software companies actually run.
Robert Smith 18:29
And if you look at the bat, vast majority of software companies 20 years ago, 15 years ago, today, there's not many places that you can actually go to learn how to run a software company. Well, most of the time it is a group of engineers or people who build a product that saves a whole bunch of costs or create some productivity, and they figure out how to sell it. And that kind of goes on, and everything in the back of the running of that business, just kind of kind of clued us together as they get bigger. Yeah. And nobody actually looks back and say, Well, how do you make this software company run more efficiently? And if you think about software, it has no raw materials, right? So, 95% gross margin. Can you build it wants to sell as many times as you want? There's no inventory, there's negative working capital. So why do these companies run at such low margins? That's typically because they're just not run? Well, well, why aren't they run? Well, because no one actually puts a whole lot of thought into running and well, because they focus only on what I call the top line growth and getting going customer acquisition process, and even that is inefficient. And so, what Vista actually is an elegant solution to private equity. It's an elegant solution and it brings what we bring is a disciplined approach. That is actually an evolving, disciplined approach to bring in control systems and software companies. So, if you eliminate all that waste, you can take all that you know, wasted now. Put that energy into building new products and accelerating your top line growth in addition to accelerating your bottom line grow, so we have some companies that operate on, we have what we call rule of 40. Right? 20% top line growth 20% margin. Okay, we have companies operating rule of 70 20%, growth 50%, even down margins used to mean, and, and with a 95%, gross margin based where you start, it's really a function of how efficient you can run that business. And then what do you do with that efficiency, you can return that efficiency into what I call catalyzing new product and product development, we can turn that efficiency into creating capacity to do add on investments. So, you can build up products and suites, you can turn that efficiency into return of capital to your shareholders. And so, our businesses designed to take advantage of those inherent advantages that enterprise software lends itself to in the markets in which we compete. Opera neofonie, for instance, is built that you hold this business and for families and family offices, you hold these business forever. In an essence, when you run these companies in about 50% EBIT dot margins, you run these companies well, And oh, by the way, there's no cap x in these businesses. So, EBIT Da, 90 plus percent conversion to free cash flow, you can return capital, in many cases, after five, six years, you're returning your basis in cash every year. Right? Right to market. On the other side we build businesses that have hyper growth, and we'll sell them to strategics, or financials or actually be able to recapitalize those businesses and re underwrite them in the world of software. So that's really how we frame it. And this is what I call the elegant solution in the in the private equity world to do that work.
Mo Lidsky 21:45
You made a huge bet at the time. And I think it's easy for people to take for granted today, how foreign, and risky enterprise software was then. So, I think you had this vision. But maybe before we dive deeper into enterprise software investing, which I'd like to do. Maybe could I just go back for a moment to those early years and early days in the business. What were some of the most memorable and instructive lessons or experiences that you had? That shine through until this very day.
Robert Smith 22:17
So, there's a few things that you learn in the world of enterprise software that even carry today. First is the power. And this is this is so important, the power of harnessing the creative mind of a developer. Okay. You know, it's funny, I was talking with one of my investors a couple of days ago in Asia. And they were saying, Robert, what, what do you think has the highest impact in terms of technology today? And what do you think about I said, honestly, it's still the human mind, I said, what has happened is we have actually unleashed that creativity, because we now have cloud-based computing. In other words, the human minds now have access to computing power, which, back in the olden days of starting Vista 95% of the companies that we bought, evaluate, and looked at the computing power was localized. There was a server room, and the computing power was confined within that server room. And part of your development capacity was going to be limited by how much capital you had to build out your server capacity, and how many people you could create access to and the processing power and the memory capacity, etc. So, there was limitations on the creative dynamic. So, one of the first things when I talked about early memory thoughts was, well, what happens when there's an unleashing of computer power, which we now call cloud-based computing, right? Then we call it ASP where you had access to it. But there were very few people who had access to that kind of I'll call it Unlimited, unlimited CPU capacity. Okay, so that's kind of point 1.2 is in the world of enterprise software, what you start to figure out is a standardization occurs within industries. You know, Mo, you and I are and 1000s of miles away from each other. But if I, if we've probably got, I don't know, hundreds of people, maybe 1000s of people ultimately viewing this, and we ask the question, how many of them in the financial industry use Excel as a spreadsheet? What percentage of the hands would go up?
Robert Smith 24:31
As majority? Okay, right. From when you think about that, say, Well, why have we all standardized on one platform to basically do the most fundamental and essential work for our industry? Right? Why? Because there's a convenience factor to it. There's an ability for us to communicate by sending a spreadsheet to each other. We all know how it works. So, we don't have to learn a new language. Back in the olden days, there were like five or six Different spreadsheets, you'd remember that right? You remember those Lotus 123, and Michael multiplan and visicalc. And Asterix, right? And it's all converged to one. So, the lesson there is product superiority, manners, execution, excellence, ultimately converges within the world of enterprise software. So that's the second lesson. So even though there may be a number of competitors, early on in an industry, you have to think about what those competitors are ultimately carries today, because in the world of enterprise software, the vast majority of the economic rent of that industry that they're serving endures to the benefit of typically one or maybe two providers over the long run. And the real question as an investor is, what are the things are going to lead to the Excel and not the Lotus? 123? Right? Or the multiplan? Or the Asterix? I mean, you don't even know enough nor the visicalc, which is the first one that was out there. And no one ever remembers that. Right? So, the point is, as an investor, you have to think about that, as a dynamic of enterprise software has a winner take all winner take most dynamic associated with it in specific industries. And as those industries form, which they do all the time, in terms of all here, some product is going to make some someone's life in this industry better, right? Or more efficient, right? How do you ensure you're investing in the right ones? And then how do you ensure that you make investments when you own those businesses so that they become the leaders in that space. So that's kind of point 2.3, in terms of lessons learned, is, you have to absolutely be on the same page with the management team. Because as great as these theories are that I espouse, it's the management team that has to execute every single day, which means you have to be in close contact with them. You have to discuss what it is that you're doing, why you're doing it, set a plan to do it, and then go execute against it. And so those are three, I think, some of the main things that we focus on at Vista in how do we partner with our management team, so they can be very effective in what they do? And how can we ensure that they get shared learnings this gets back into the Who taught you how to run a software company? Well, nobody, right? But what we can do is bring knowledge, information, insights of now having done almost 500 enterprise software transactions in the last 20 years, to help any one of our investors, or sorry, any one of our senior executives become a better software executive. That's what we do, right? And that's why we're effective at what we do.
Mo Lidsky 27:36
Let me drill down into that a little bit, because in this winner take most dynamic, there's an element of competing for deals and waiting for the right deals. So, you've been incredibly successful, and Vista has been continually ranked as one of the top performing funds and quite frankly, we're grateful to be among your many satisfied investors. Though, I guess the question that I would have is how does Vista differentiate itself in sourcing those "winner take most" opportunities those in what is ostensibly a well-capitalized and highly competitive environment in which we find ourselves today?
Robert Smith 28:11
Yeah, it's kind of great how you frame it: "how we find ourselves today". Back in the early days, no one really looked at this industry as one that was worthy of investment capital beyond venture capital, and the occasional IPO. Now, here's what's so interesting about this, Mo. As competitive as this market has become, they're still from what we can tell, and we probably have the most extensive database and access to information well over 110,000 enterprise software companies out there. It is the largest industry now. It actually is growing the fastest, has the greatest degree of impact on its customers highest ROI. Just to give an example are every year, we measure the ROI of the products that we sell to our customers, and it's still over 650%. Okay, so you think about that, if you're if you're implementing six sigma in a manufacturing facility, you might get 200%. If you're in real estate, and you buy a building and making energy efficient, you're going to get 45% ROI on those dollars. We're getting 650%, on average, for the products we sell to our customers, so there's going to be a massive demand for this product. And then, of course, people saw us, and others be successful as private equity investors in the space. Oh, man, let me go through that too. And so, then you say, Well, what differentiates Vista? Well, first of all, we have the lowest loss ratio of anyone who is investing in this space of any size does. That's point one. Point two, we have an ecosystem that is made up of very talented people at Vista Consulting Group, my operating group and my investment group that brings together our executives from all of our portfolio companies. They learn from each other. I think I'm the only place, this is the only place in the world where I can get 350 software people together who all work on in your heads of regional sales. And they're not competing against each other, they're working with each other. Or bring 60 CEOs together and talk about the challenges they have in selling product into Japan or selling product into France.
Robert Smith 30:31
It's no shared set of experiences the collaborative dynamic that we bring to the portfolio companies that makes a difference. And why is that important? So, when we sit in there talking to an executive, the CEO Board of Directors of a company say we are great stewards, not only of capital, but great stewards of businesses. And we help these businesses Excel and become better and become the leaders in their space and capture more economic rent and distribute that economic mentor, their stake stakeholders, some of which are investors, and some of which are their employees, our average company ends up increasing their employee base by 20%. Between when we buy it when we sell it. In addition to profitability and growth, right, we actually create better jobs, and you know, sustainable environments, our turnover goes down to single digit, versus when we buy a company, sometimes we're in 20 30%. True, right? So, the stabilization dynamic of what we bring helps us really compete. And then as a stakeholder who's in who is a CEO, and say, okay, you can look at other folks. And then you can look at our track record and say, okay, who has a track record for actually delivering returns to our CEOs? I've we delivered over a billion and a half dollars to CEOs and their senior staffs of last 20 years, in terms of returns. We're still averaging over 3.2 times cash on cash, and then it'll in just under 39% 38.7% IRR for over 21 years. The last 18 months, our IRR is 47 and a half percent, 47.8%. So, if you are a company that you are looking to sell, or to engage with an investor, you can go to one that doesn't have that kind of a track record, or you go to one that has probably again, the most consistent track record with the lowest loss ratio in the industry and say, they likely are going to enable me to be more strict, more successful. You know, we, as a private equity firm, and you as an investor with us, you have the great advantage by being diversified. You're in one of our funds, you'll end up in 1,825 different companies that ultimately do you know, 50/60 deals to make up those companies in terms of add ons, etc, when you're diversified. But if you're running a company, you're not diversified, you're in that one company, you need to have certainty, the highest degree of certainty that this will actually pay out after we engage with you. And so that's a dynamic that we share very openly with investors, and we share very openly with executives of companies, and that's what attracts them to us. And that that differentiates us from every other firm out there.
Mo Lidsky 33:18
Yeah, that makes total sense. I do want to just double click on again, the second part of the question, which is in a winner take most dynamic. You've seen the insides of 1,000's of enterprise software companies. What in your opinion makes a software company that's really likely to be successful and likely to be in that winner take most Echelon? Is there some systematic aspect to their success? Is there something else altogether?
Robert Smith 33:51
Sure. That is a big, big question. I'm going to try to unpack into smaller nuggets. Yeah, the two things that matter. In the world of enterprise software is product superiority, and execution excellence. Okay, now there's about 400 things under that, that build it. But at the end of the day, you have to focus your team and the management team on ensuring that you are building the superior product for that market. Because if you build the superior product for that market, you will capture the economic rent from those customers in that market, not for quarters, or for years, but for decades. Okay, we've been on Excel for what 35 years, not moving anything else for a while, as far as I can tell, right? I mean, there's some Google folks out there that have different point of view, but even then, you think about that, but it's important to build a superior product in that industry. So that's the most fundamental thing that you have to focus on with the team is, do we have a superior product? If we don't, what do we have to do to get there? Do we have to build it? You have to buy it, you have to put some things together, what is the ultimate dynamic that's going to lead to the superior product in that marketplace? And then you have to think about the execution excellence. How do you now deliver in the building of that product through the organization of your development? teams? How do you develop Centers of Excellence? Okay, how do you develop ways to attract and retain and develop people? Okay, how do you? How do you manage the go to market motions? Okay, is this a small to medium business segment? Or is it an enterprise segment? And what's the difference? And how do you approach it? You know, what, what's the what's the configuration? Should this remain as a localized solution? Or should it be native cloud? Or should it have become? Or do the customers need a hybrid solution? And do you have the capacity in the organization to do that? Or do you need to bring capacity to the organization in order to do that, those are all very complex underpinnings of what makes a successful enterprise software company. And I just, frankly, feel privileged and overjoyed that I have just a spectacular team to work with. And we now have taken all of these complex ideas and unpack them into modules of improvement. We call them best practices, right? and deliver those in a consistent and evolving fashion to our portfolio company executives who then implement and run these programs, and it evolves 10 years ago, we weren't implementing artificial intelligence solutions into our portfolio companies. Now 85% of our software companies are implementing some form of artificial intelligence in the delivery of a product, or an implementation of how they're delivering the product internally. Is it I mean, so we have to constantly evolve as a firm in order to do that? But it comes down to those two big areas, your products, curiosity, and execution excellence, and the execution excellence, does actually start with the highest quality management teams.
Mo Lidsky 37:01
Yeah, that must be quite different around the world. One of the things I want to ask you about was based on what you're seeing today, what global trends are sort of most Top of Mind and right before this show, we were talking about enterprise software, and having an increasingly global reach, and I think refer to talk about India and China before. What are some of the ramifications of that? To recap, global trends that are top of mind and globalization of enterprise software.
Robert Smith 37:38
Sure, the thing we have to remember and frame this discussion around is what has actually occurred globally as relates to technology, generally, and I'm going to skip the bits and bytes part are and really focused on what I call the distribution of computing power. That has been the biggest change in the last 20 years in our industry, where we went from localized computing power, where you had access to whatever the $1,000 an hour to, in essence, computing power $10 a month, all you can eat. Right? That's global. Why is it global? Because the second trend is connectivity, we now have connected all that computing power to all of us, right. And for the most part, almost every community has access to infinite computing power. Well, if you then look inside, well, from that dynamic, the more enterprising us on this planet will engage in this great wealth creating ecosystem and start to write code and sell code, right? And that will actually now start to create an uplift of the economic opportunity where that happens. Before that was around centers where computing power is available. Now it's happening globally. Right? And you know, the way I sit back and frame it, I say, wow you got seven and a half billion people in this planet, plus or minus, right? There's only 29 million people right now who actually write code. Think about that. So, our job is to find those people. Okay, and get them gainfully employed in Vista companies. We think about is kind of simple as that. And then the second part of our job is to think about, well, who is going to be consuming these applications in this software to improve their life? Sure, you can look at developed countries Canada, us, parts of Europe, right parts of Latin America. Then you got to look at well, where are the people on this planet? This is what you and I are talking about? Well, they're in India and they're in China and Asian countries and a lot of those are called those geographies actually don't have enterprise software layers? You know, they are, they are in a place where the vast majority of the computing resources are delivered in and consumer application software, not enterprise software. Okay. And so, what we think about is how do we ensure that we are positioned and making investments and thinking about and putting relationships in place where we can be the provisioners of the enterprise software layers in those markets as they expand. So, when I think about your investors those are on this call, what are the most important things to really understand is 98% of software companies are private. So, this thing is industrial, this fourth industrial revolution, this digitization of the planet, and pick up the consumer, but you know, look at the enterprise and digitization you actually don't have access to unless you're going into the private markets. It's only a few places you can go to get diversification. In those private markets, sure, you can go find a company and say, let me put 10 million 30 million and try and hope that company is one of those winners, right? Or you can come to places like us and say, you guys do 50 deals a year, let me diversify with you, which is obviously something new, all right. But I think that's the dynamic that that really have to understand about how this marketplace is working. And even only now there's still trickles of these companies that get into the public market with access to enterprise software, 90% of these things are private. And it is the most impacting but the single most productive to introduce in our business economy and last 50 years, and 98% of that tool is in private hands.
Mo Lidsky 41:58
As you look across, because you're looking across the full range of diverse technologies, what if you were to zero in on a specific future technology that you view as most transformative for our economy and for our society? What might that be?
Robert Smith 42:18
If you forced me to actually give you the answer that you want? As opposed to the answer I'd normally give? I'm going to give you both, I'll tell you because I gave you a little bit. The first one is actually the technology is the way the human mind is going to interact with this vast amount of computing resources, right? The unleashing of the human mind. And these are these are all happy, wonderful words, which are true. And as you think about brilliant minds who have access to computing power, they're going to create fantastic solutions. Now the question is, will they be able to execute execution excellence in order to make you know, right? So, there's that's why the frameworks are so important to create the platforms for value to be created and enterprise software. But to answer I know, the question you really want me to answer? I would say if I had to pick one, I would say blockchain and there's a piece that says artificial intelligence, but really blockchain and I'll tell you why. It's going to ebb and flow for a while. And there's going to be a settling that's going to have to occur within industries. But when those fabrics and I call them that blockchain fabrics ultimately settled within an industry, it will define that industry. And if you're not participating in that fabric, you will not be in that industry of any size. If you take shipping, or airlines or manufacture, there will be you know, blockchain fabric that gets built, that if you aren't in it, you can't transact, you won't be able to buy ship, deliver purchase order fulfill a good in that industry, unless you're on that fabric which creates, obviously heightened senses of confidence, quite frankly, in you know, who is this person I'm buying this product from? What is the security around the transaction? You know, what is the quality that I am desirous of versus what they may be trying to sell me. And it's going to be built for repeat players, which means people who are more substantive is as a supplier in that industry, and that may be a supplier of title insurance, right? It might be a supplier of a bond, or it could be as a supplier of woven fabrics. You see what I mean. So, when that technology ultimately permeates and settles specific industries, it We'll define those industries in ways that they haven't been before. And it will, it will create it, it will, it will liberate some waste, for sure. But it's going to create some constraints on I'm going to say on free market enterprise in some respects, if it's not built properly, then I think the economic construct of how that's going to work is still to be determined. And my guess is it probably won't work the same way in every industry In some cases are going to be the provisioners of that fabric will capture a small portion of the economic rent, in some cases, they'll capture the vast majority, depending upon how tight that industry is, and what the scarcity of the products around that industry. That's my sense.
Mo Lidsky 45:46
As you're talking about, sort of keeping up with that change, or evolving with that change, the thing that is coming to mind is where we are in the world. Lots of changes occurred since the COVID-19 crisis hit. I would be curious to hear your thoughts on which of those changes that we've seen will be indefinite changes? Is there a new normal that you're seeing on the on the technology side? Other than the obvious like flex from home. How should investors potentially be thinking about it?
Robert Smith 46:21
That's a great question. Mo, if you if you fast forward to the next pandemic. I don't want to, and none of us do, but we'll be faced with it. Right? Think about the importance of like a technology like blockchain, for the distribution of the vaccines, or the antibodies you might not worry about it in Toronto. But what if you're in a less developed city, and a shipment of vaccines come in just like now, they're shipments of fake seeds, that decimate whole communities, because they bought the seeds, assuming that it would change the ability for them to Farm, and now they're fake seeds? Well, you think about putting blockchain technologies in, that will change dramatically. How industries, how communities will interact with each other. So, there's going to be a next set of equilibria, that we will all start to look at which will indicate certainty around goods, products, and services that we are looking for. There's going to be, in part of that, that's how technology is going to be part of that fabric. There's also going to be a dynamic around how scientists share their results and verify their results that actually should accelerate drug discovery, vaccine discovery. Just to use that as the paradigm again, that will be driven by exchange of information, that computing technology will be at the base of.
Robert Smith 48:20
There's going to be the way that we all have eliminated waste in the way that we engage. Years ago, you and I would have made a plan to do this session someplace that required you and I to spend, probably collectively 30 hours to get there back, overnights, all that. But yet, we can set this up with minimal waste on the front and the back end. You and I will determine and figure out how we use that additional call it cycles capacity of waste elimination to do our work. And that's going to permeate all areas of business. You know, I look at our 70 plus, 1,000 plus employees 50 plus 1000 software, you know programmers and they are producing about two hours more per week of productive activity. That's massive. Wow. Okay, that's massive. And that productive activity means that we will bring products to market faster, innovations will accelerate, which hopefully the ROI will continue to hold or accelerate across our businesses. You see, I mean, those are the new equilibria that we will all be viewing as the next state. If we're lucky, we will be holistic in our thinking and you, and I will realize it's so much better for the planet for you and I to do this in this format than to burn a lot of fuel and pollute the environment so that we can literally sit in a room together. You see what I mean? Those sort of implications, I think will help bring a new equilibrium of how we, how we live, how we treat our planet, how we treat, frankly, the way our business fits in the construct of more holistic living, more sustainable living. And I think those are the ideas that will just naturally begin to manifest because they're just A) they're smart and B) they're just efficient. And we all I’m sure like to eliminate waste in our, in our daily lives. So that's, that's what I think is kind of the next states of equilibria that we will evaluate and move towards Yeah, and you're right there's going to be the basic "well, why do I have to go to work every day when I can just work a shift from home and go to work when I need to?" And I mean, there's all that which I think is going to decrease on congestion. This whole implication on real estate. Why do we have to go to cities, right? We went work from home, second week, in February across our entire or second week of March, across our entire portfolio, because we saw what's coming out of Asia with utilizing our data coming out of our businesses. And haven't missed a beat, in fact, have accelerated. So that kind of tells you, that's probably a better place to be longer term. But now we say, well what I'm bringing during onboarding, even though we're doing our training and all those sorts of things, virtually. This is something we need to focus on, is what's the new state of equilibrium.
Mo Lidsky 51:29
I want to come back to what you said about talent. You have 70,000 employees, across the portfolio companies, and you're aspiring to 29 million. I think I want to be on your health and benefits plan when you get there, but just if we're thinking about the talent that you've been recruiting and developing. Anything you can share with us about how Vista approaches the identification and development of talent. How you interview, how you hire, etc.
Robert Smith 51:57
Sure, I think for us it is we are scanning the globe constantly, for people with aptitude and personality profiles that work well in software companies. And that's an important part of what we do. And I tell folks, I mean, every 36 months or so, about 1.3 to 1.4 million people apply for jobs at Vista companies, we do aptitude and personality profile tests, we're about 400,000 plus to kind of hone down to about 25,000 to higher 5,000 kind of thing. For us again, it's global. It doesn't matter where you from, where your neighborhood is, everybody in you knows, kind of fit into what I call a certain bell curve. Across this and so we just look for people who are very productive, motivated, want to actually deliver value to, to our companies and to our, to our portfolio companies. And, of course, the VISTA. So, we have a unique way of doing it, we think it works quite well. But it also evolves we have to be very thoughtful about it, to ensure that we are meeting the needs of our portfolio companies. And portfolio company executive demands were the type of talent you and I chatted about this before we got started no centers of excellence, right. And so, we will literally say, okay, we're looking at certain we need 5000 I've got like now probably got 5000, open racks, whatever it might be. And we'll say, well, based on what we're saying we think that these four or five locations in Europe, these two or three locations and in India, these four locations and rest of Asia and the six eight locations in North America the right ones and we will evaluate and say okay, let's put a center of excellence in this place and we'll put four or five companies in hire to 300 people in each one in that location. And they'll all have to go through you know, our testing and training and all that sort of protocols. But what we found if you do that, well upfront, you've got a very low turnover and high product productivity, which in the world of software is what you're looking for. We invest on the front end, and then we invest in training and development. I think you know, we're probably the only firm I know that you can get a Nanodegree and artificial intelligence online using our system in doesn't matter if you're where you are in our organization in you know, in from employees in any in any station, if that's what you're interested in. I think it's important because now all of a sudden, your education educated a bit more on what it is we do and you can say, Hey I can actually make a more efficient work environment if I do this, leveraging some of this newer technology. So that's really how we think about it.
Mo Lidsky 54:43
I want to talk a little bit on the on the philanthropic side of things. Generally, I'd love to hear why you give, what drives you and what has always driven you to give back so meaningfully. But if we could take that and then jump from there to, in the in the US and overseas globally, but particularly in the US people of color have been disproportionately impacted by the pandemic and ensuing economic crisis. Can you talk a little bit about, after sharing why you give and why you're passionate about it, about the initiatives that you've been involved in to ensure that we emerge from this crisis?
Robert Smith 55:24
Sure. The, I call it, Robert, what's your passion for giving is actually just, frankly, it's my fundamental responsibility, he's right to do an all of us have that, to make the world a little bit better than how we found it. And I like to do it for communities that, frankly, have been disproportionately affected. And often in the US, because of systemic racism from the way that capital's not pushed into those communities or education, as we talked about earlier is not offered, or high-quality education or health care. And I have the great fortune of in leading Vista having a number of employees and companies that provide data and information on where some of these deserts and how these deserts came to be known the banking desert, for instance, in the African American community, 70% of them don't have branch banks. But if you don't have a branch bank, and you're a small business, then how are you going to manage your company to either you know, manage payroll, or get loans or, or anything of that sort, to grow your business. And so you're often constrained by capital these environments require that but you know, they've got more things I've been focused on is building capacity within I call it the capillary banking system, which are the community development, financial institutions in the minority depository institutions, to bring more capital into those systems and also to technology technologically enabled them to be more efficient at delivering products to their customer base when I gave you a little bit of a statistic, 650% ROI for the product we sell to our customers. If a small business implements software to run their business, it's actually over 900%. So, this can be scheduling software, payroll, software, payments software, etc. And so what I've been doing is working with a number of large people, like Microsoft and Dell and you know, other folks, PayPal and others who say, Okay, how do we come up with solutions, call a business in a box that deliver that can be delivered, not one of our companies Finastra to deliver to the small to medium businesses so that they can use this more effectively to become more efficient in what they do, and often is in the same communities. And then, oh, by the way, I look at the community development banks and API's, they need implementation of modernization of their infrastructure. So, we've been partnering with not just financial, but you know, working with JP Morgan and others and saying, Okay, what do you actually what can we actually provide and help these banks, these small banks and community lending organizations so they can be more efficient? One of them just give me a sense. So, the Delta Mississippi, Alabama, Georgia area last year, he said, Robert, last year, that's after we did our work, we get 52, loans, business loans. When we modernize our infrastructure, they did 7500 loans in three months. Wow. Now, that's well over 900% ROI, you see to me, for the modernization and delivering Now think about the impact and ripple impact of driving that capital and that enablement into those communities where they can become self-sustaining. And so, this looks back to the beginning of our conversation what's the greatest joy that one can have is frankly, deliberate the human spirit. And I don't think there's anything more liberating than enabling somebody to achieve their goal and success with a fair and equitable system for accessing capital, returning that capital, and then improving the life station of their family. And that's what I focus on. And I have the great privilege and honor to do that. The good news is our elegant solution still returns highest returns in the industry of lowest loss industry and lowest loss in private equity because the solution that we have. That's, call it, the elegance of the life I get the lead.
Mo Lidsky 59:15
We thank you for it. To wrap up with the last question because I know we're all at a time. I know that this year has been anxiety ridden for many in a lot of chaos, more ways than one. You at a global level have always been in remain optimistic and an optimist. If we were to end a positive, hopefully, inspiring note, what keeps you hopeful? What keeps you optimistic?
Robert Smith 59:41
Again, it comes down to the human spirit. You know, we have the ability to overcome so much. We have the ability to change, we have the ability to evolve. And we have the ability to most importantly learn how to love each other, more. efficiently and effectively. And that's what keeps me optimistic. You know, I have a great vantage point in that I have met people from all over the world in all walks of life. Now you got this little brown kid who grew up from Denver, Colorado, my whole family we'd have a birthday party, and you'd invite 20 people, and which meant all of your cousins, and you got to invite one friend. And that's how I grew up. And now I get a chance to meet people from all over the world. And I've learned how beautiful the human spirit is, and how people really do want a world that is better, that is cleaner, that is more livable, that has a high quality and standard of life and health, and happiness and joy. And that tells me who we really are. And it tells me that's what you know, the overriding influence is moving us in that direction. I call it you know; the these are the sorts of people that been the arc of humanity more towards justice. And those are the people I like to associate myself with.
Mo Lidsky 1:01:09
Yeah, Robert, who was absolutely fantastic. I can't thank you enough. I really thank you for sharing your enlightening and enjoyable comments with us and we appreciate your generosity of time and wisdom and I certainly hope to do it again soon whether virtually or you know, the stars align physically as well but thank you and for all our participants. Thank you for joining us if you haven't yet donated, please do so by going to the Donate page or clicking on the link that was sent to you. And lastly, we'd love your feedback on how to make these sessions better every time so please complete the survey at the bottom of the page or on the link you'll receive. Thanks again for your participation. Thank you, Robert, for joining us for lunch. And the charitable projects are initiative sponsoring. We are grateful for your support and look forward to seeing you again soon.
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Robert Smith: Risks & Opportunities in Today's Digital World
November 11, 2020 12:30 PM
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