Robert F. Smith - Investing in Enterprise Software

Key Takeaways:

• Robert has a long history of investing in enterprise software companies, dating back to his background as a chemical engineer where he first experienced the power of digitization and computing technology in increasing efficiency and productivity in the process industries. "The whole reason I even got into this space, I started my career as a chemical engineer. It was at a time when we were really doing some interesting things in that area. And part of it was we were digitizing the operational elements of what we call unit operations, i.e., running plants and facilities, et cetera."
• According to Robert, enterprise software is the most productive tool introduced in the business economy over the last 50 years and will likely continue to be so for the next 50 years.
• Vista was one of the first to invest specifically in enterprise software, focusing on the ecosystem of these businesses and how they rely on software to manage day-to-day workflows and bring efficiencies to existing processes, as well as new insights into products, services, and solutions.
• Robert explains that Vista looks for enterprise software companies that are mission-critical and business-critical, with high retention rates, visible recurring revenue components, and strong relationships with customers.
• Robert also emphasizes the importance of execution excellence and reducing technical debt. Technical debt is a form of compounding issues in the code that can lead to bugs, architectural idiosyncrasies, and other issues that can cause problems for customers and make upgrades difficult. He mentions that many investors don't spend enough time evaluating technical debt and that it is a major factor that Vista takes into account when evaluating a business.
• Robert explains that Vista has always maintained a disciplined approach to valuing companies, and has been buying them at a lower multiple than the overall market. He mentions that they use a growth adjusted multiple, which is a ratio of price to revenue growth, instead of price to earnings. He mentions that over the last 2 years, the overall market multiple has been as high as 0.93, while Vista's average multiple has been below 0.43, and in the last couple of years, it's been around 0.41. "We've always maintained a very disciplined approach to how we buy those businesses. In the last couple of years, we've been buying them at half the price the last 2 years of the overall market.”
• Building an infrastructure that prioritizes and rewards innovation. He gives an example of how his firm, Vista Consulting Group, brings together senior executives for a "Best Practice Sharing Summit" to teach, train, and build out innovative engagements.
• We have to just make sure we take the time and the process and give them the opportunity to talk to the founders and the people that we work with and say, "Here, here's a list. Call any of them, call 50 founders. See what they think what it's like working for Vista." And guess what, of the deals that were contested, almost 60% of them came our way, even though there were people who had higher bids. Think about that in this world, where capital, in some respects, is fungible.
• “71% of our deals, I'll call it, just recently in the last few years, frankly, have been founder-influenced. And again, I told you this, 90% of those founders are still involved in the companies.”

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