Ep43: Robert F. Smith on How to Build A Culture of Success

Thank you.

Sure. Thank you. And again, thank you for inviting me to spend some time with you and like my good friend, Doug. Implementing computing systems into process industries, really looking to enhance the control dynamic of these process industries. And it led to massive productivity into those industries. And then as compute became more affordable, in other words, Moore's law kicked in and we were able to push computing power into the corporate environment. It started to give that same sort of productivity dynamic into the corporations. In Vista, just to give you a sense today, we own 87 software companies or so, and we test and measure the productivity of the return on investment of the products that we sell to our customers. And it still has return of investment over 640%. That was delivered through on premise based solutions, land type solutions. That was kind of phase one. And in that phase one, we really focused on how do you make the client server environment more productive? The types of architecture and products that were built and delivered to the consumer base and they were modestly growing type enterprises and you can make them actually pretty profitable. So from an investment perspective, I think about it was an ideal environment for buyouts and leverage buyouts. Well, once compute got to be a lot more ubiquitous and affordable and pushed into these super scalers, then we were able to move into cloud native environments, no public clouds. And from that perspective, you saw a massive expansion. Growth at scale type companies. In fact, our average company was growing at twice the level of the early days of Vista. Today, I'd look completed well over 600 and I think 20 transactions in that 23 years. And really since 2014, 2015, we pivoted and started to look for cloud native, or in some cases hybrid, cloud environments, and you could actually drive those companies to a higher level of growth and more profitability at the same time versus the early days you didn't have necessarily the growth rates. But those leveraged buyouts and you were really focused on the profitability. So the evolution of Vista has continued to track the proliferation of enterprise cloud computing and then ultimately cloud computing. Enhancements and products and solutions and services to the customer bases that we serve and more productivity in how you produce these products. So it continues to be a quite interesting and dynamic industry that still leads to a tremendous amount of productivity and value creation for those who consume enterprise software.

Sure. I think the world of enterprise software, I have to begin the framing of it. Business environment of the last 50 years likely will be for the next 50. And these companies traded really around two to four times revenue type levels for really a decade, decade and a half. And then of course the introduction of the cloud and cloud computing. And so then you had a rerating of software. They went from kind of two to four times to about six times because you had the ability to deliver software much more efficiently and have it consumed much more efficiently by the customer base. And that productivity was being realized through companies becoming more profitable as customers are being able to reach their customers more efficiently. And so you saw a pretty effective market in equilibrium from 2013, 2018, 2019, and then we entered into this global monetary. You know, there's six times multiple trading up to as high as 18. So three times evaluation can call it 20, 2019 up through 2021. Well, of course, through this monetary tightening, which is where we are today, you saw those multiples come back down. And so now they're trading more towards that historical average at about six times. So that's been the cycle that we have witnessed and experienced. For many investors who have felt that whipsaw, they are in some cases now saying, how am I going to return capital? We've been fortunate that we take an approach to build fundamental infrastructure in our businesses. So we've been able to exit even in this environment back since November 2021, where there's been the downturn in the market. We've got 19 monetization events. Because we've been able to build again and install what I call accelerate the corporate maturity of the businesses that we'd like to invest in. And we didn't really participate during that massive inflationary environment in buying companies. And so I think in the state today, it is a great time for us in our investing approach with plenty of dry powder to continue to invest in these mission critical, business critical enterprise software companies. And Doug spoke to this a few minutes ago, who actually have a tremendous amount of data and having sovereignty and dominion over that data enables you to utilize tools like Gen AI to create new products and solutions and services to sell to your customers and utilizing code assist type of applications in your own portfolio. Goods, but the services inflation numbers still seem to be pretty high on some commodity inflation numbers seem pretty high and sticky that I think we're going to actually have a pretty good investing environment. Probably one of the better that I've seen over the last 20 years. Given that massive monetary expansion inflation activity that occurred in 2019, 2020 and going into the early part of 2021. So a great outlook from that perspective. And I think investors who are looking to create like us, create fundamental value in their businesses. And just as Doug had talked to realigning cultures of businesses, implementing changes that create scalable infrastructure. Those are the sorts of businesses that would do very well in this next cycle of investing and returning value to stakeholders.

That's a good question. There's one topic that has come forward. I don't know about few others would agree with me on, but I continue to look at enterprise software, the productivity that has brought to frankly, the global business ecosystem, has had a profound effect on pretty much every. From my perspective, I think again, generative AI will be yet another catalyst that's going to create some more short term advantages for some disadvantages for other. But I believe this is actually going to play out in three waves. And we're seeing that early part of it now. The first wave, of course, is value of this technology and this technology shift is going to inert to the benefit of the hardware providers. And you're seeing that today. And it's going to see massive amount of capital being poured into the development of GPUs and TPU environments that you'll see investors putting capital in and governments putting capital in looking to create forms of strategic advantage going forward. The second wave will endure basically to the benefit of the super scalers, those who are providing these cloud based infrastructures, and then what will be GPU infrastructures. Will inert to the benefit of those who are utilizing that capacity and be very effective in creating specific products and solutions and services to sell into the markets. And that sets itself up quite well for software companies and enterprise software companies in particular. One of the advantages of being a company like S&P and Vista and others is you have data and workflows that others don't have access to. And if you maintain the sovereignty and dominion of it, you should be able to implement various large language models to utilize that data and those workflows to create an enhanced product, innovation services, innovations, product uplift, portfolio enablement, and ultimately decreasing your cost of delivery. Part of the way we do it is leveraging the size and scope and scale. Own hackathons with our own companies. We've had two this year with well over 300 participants, 40 companies. To use some of our companies, companies like Avalar to use AI to automate compliance processes and create conversational experiences with customers or PowerSchool, which is building AI products that create customized homework solutions for each student. Some may find that to be controversial on the one hand, but I think it will enhance the educational opportunities and the business opportunities that frankly accelerate those opportunities for our customer base, which will lead to an overall GDP pickup globally. And I think just ensuring that there's responsible management of how gen AI is used in corporate environments in particular, will lead to a positive outcome.

Yeah, sure. Our culture is really founded on what I call an engineering mindset. Like Doug, I was a scientist, engineer, I was a chemical engineer. We really focused on building processes, hopefully not infinite loops, but feedback and feed forward processes that give us the ability to continue to tune our approach to the market. We have a strong commitment to excellence. And as I tell my team, while we're not perfect, we work really, really hard to be really, really good at a lot of things. We'd like to refine and take data and information and refine our engagements. Having now done over 600 plus transactions, you learn something every time and you want to make sure that you can build that into your operations, either in your underwriting or your value creation, or you go to market in the companies. Our world now has become much more interconnected. There are some elements of our world that are decoupling in some cases at some level or another. But the consumer base in the world continues to expand and continues to be a lot more diverse and we want to ensure that we have the best thinking at the table. We do that through the programs at every level from the board level. We've reached gender parity at Vista for a number of years now at the firm, and within our portfolio companies in terms of our board representation, a hundred percent of our boards have at least one person of a color. And I think part of what we're looking to do is just ensure that we have opened the aperture of knowledge, information and tune our systems and ensure that we have the ability of. And so we have to build out institution that can frankly capture the best thinking, the best ideas and build them into a process that we can then proliferate into the marketplace to enhance the benefits for our shareholders and stakeholders within the community of Vista.

My parents were both lifelong educators, school teachers in the public school system in Colorado, which is where I grew up. It was kind of interesting. My mother and father were very much involved in their community. Everything from my mother writing a check every month to the United Negro College fund to my father ensuring that he provided access and opportunity for kids in our neighborhood to get outdoor education and headstart programs, which he was one of the leaders to ensure that was happening in our community. And as I was raised and thinking broadly beyond our household, it was important as you get more capacity to help and aid people in communities that you care about. Read to them, or in some cases, it's liberating, in this case, students of some student debt that can be crippling to them and inhibit their ability to participate as business owners or homeowners earlier in their career. And I have calls with these students once a month since then, and it's been a wonderful experience to hear how they've been able to do everything from start their own companies to get the questions, Mr. Smith, how do I raise money to expand my business? I'm doing renovations of houses, I need an 18,000 loan. Helping them to understand how to use the banking system and create bank accounts. Awesome. And those are the things others who are looking to create investment funds. This channel of broadcasting, you've been at some measure of good fortune and probably at somewhere along the way, I know I can point to two or three mentors that made a huge difference in my life. Sometimes it was advice, sometimes it was an opportunity. I think a good part of being a fundamentally solid human being is to pay that forward. And so I like to look to do that when I can at levels of scale that I think matter for communities that I care about.

My neighbors were dentists and teachers and Pullman porters and contractors. And I felt like I was part of a beloved community, I felt like I had everything I needed and nothing I wanted. But what I had was people who cared about the kids in our community and they cared in ways that when there was a young man who really was into rocketry. This is the age of Americans going into space. And he took eight kids in our neighborhood at his own expense, taught us how to shoot off rockets. He's asked us rockets. We build them. And I will tell you, of those eight children, six of them became STEM students of some point engineers, or in ways that meant whatever you had learned at work or in school that you would deliver to the children in that environment. And that was that sense of decency and that sense of community that has always permeated my psyche and the way that I like to approach life. Doug and I have a great opportunity to do some work together at Carnegie Hall. And part of what we do there is deliver music education programs and Wow Music Institute to students. We get over 600,000 students a year. And to me, bringing music education back into the classroom is important. Doug and I remember the days in the Midwest where we would listen to that single earbud. And it was a free concert and being in a segregated environment that folks on my side of the park would walk over with their lawn chairs and folks on the other side of the park would look different than us would walk over with their lawn chairs. And you sit there in the summer afternoons and evening going into the evenings with that smell of fresh grass being cut and listening to Beethoven or Bach or whatever they decided to play at that time. And you got to know people in your community, not necessarily your neighborhood, but in your community. And ultimately, when they desegregated the schools, you went to school with these folks. And I thought it just created a wonderful experience. And look, no community is perfect, but I think music is one of the ways that brings people together and creates a sense of community.

Engage with others cultures effectively, one is through food and the second is through music. And I love them both. If you can tell them both, and I think it's important. My father went to school on a band scholarship. My house was always filled with music, and he played the organ and piano, and his twin sister played the organ and piano, and they would literally on the weekends play for hours at a time, and it brought us together as a family, and frankly I think music continues to bring us together as humanity, and I'm just always fascinated when you see the instruments in the Middle East of the oud, which is similar to the Spanish guitar and you. Leaders is make sure that you haven't lost sight of our humanity as we continue to seek enhanced profits for our stakeholders and improve the condition of the communities that we represent and we care for. So it's an important part of what we do as leaders.

Yeah. The most interesting, I don't know. There are a lot of people I get a chance to meet are very interesting. And when I think about people who make a difference who are really unsung heroes, this is a credit union that frankly, I think they had prior to some of the digital enablement of that financial institution, they were doing 40 to 50 loans per year. And once they were able to really digitize their infrastructure, they are now able to deliver in process 3 to 4,000 loans per year. And these loans are on average 10, 11,000 that reached that community. And if I'm not mistaken, they still have a lower default rate than the average FDIC insured. Helping, if you can, on the actual people in the businesses in that community is profound. And I'm just proud to have been able to help during the time of the early parts of COVID and PPP to ensure that we can get capital directed to those sorts of what they call CDFIs, MDIs, Minority Depository Institutions to enable those communities to not only get through the pandemic, but digitize those infrastructures. So that creates a long lasting economic opportunity that all Americans benefit from. So that'd be a person I think.