Robert F. Smith Talks Investing in Enterprise Software on the Invest Like the Best Podcast

Vista’s Founder, Chairman and CEO, Robert F. Smith, spoke with Patrick O’Shaughnessy, host of the Invest Like the Best podcast, to discuss Vista’s approach to partnership and value creation and to share his experience founding and leading the firm. The responses below have been adapted from the full conversation which can be heard unabridged here.

The Evolution of Software

Patrick: You’ve been investing in software longer than most. How mature is the world of enterprise software?

Robert: The introduction of computing technology into the business environment created massive efficiency and productivity. Enterprise software, specifically, has been the most productive tool adopted by businesses over the last 50 years and will likely maintain that status for the next 50 years. We at Vista were early to recognize the nascent value of enterprise software and were among the first to launch a firm built specifically to invest in software companies.

So, as we think about the evolution of the software market, this is still the early innings. We’ve gone from computing power as the rate-limiting step to the democratization of technology and the advent of cloud computing. This transition has digitized workflows and exponentially increased productivity, but up until now, there’s been limited use of data insights and predictive analysis. We’ve only just arrived at the second order of enterprise software, which is data. The analytics of that data is in its infancy, and that is where the next phase of productivity expansion will occur.

An Engineer’s Mindset

Patrick: You’ve mentioned bringing an engineer’s mindset to software investing. How has that mindset been built into the culture at Vista?

Robert: Instead of an episodic fix, an engineer’s mindset embraces solutions that can grow at scale. So when we evaluate potential investments, we look for mission-critical enterprise software companies that can grow in value through a specific set of operational improvements.

Vista’s Value Creation Team has identified, developed and codified best practices that improve the operations of the businesses we invest in. These practices have been honed through almost 600 software transactions over the last 22 years, so when we spot problems at our companies, we’re able to leverage that experience and expertise and apply the appropriate solution.

Understanding Technical Debt

Patrick: Not all software companies are created equal. What qualities are most critical to you when evaluating a business – what makes a Vista company?

Robert: In today’s digital economy, enterprise software is mission-critical to businesses. If you run a software company well, you’ll have high retention rates with customers and a strong recurring revenue component. Unsurprisingly, we evaluate those factors and also work to understand the quality of a company’s product, their relationships and their position in the market.

One area that’s often overlooked – and that many investors don’t understand – is the amount of technical debt a software company owes. Technical debt is compounding, and if you don’t take the right product development approach, you create a tremendous amount of code that has flaws, bugs or other architectural idiosyncrasies. These issues worsen as you scale and create problems for a product team and a software company’s customers. All too often, investors who lack experience and understanding overlook this issue and invest in companies with massive amounts of technical debt.

Maintaining Price Discipline

Patrick: What are the key factors you consider as you think about what you’re willing to pay for a business?

Robert: We think about this in two categories: companies who are growing quickly and companies who have met their addressable market and are operating on a profitability metric. But either way, the past two years have been the frothiest that we’ve seen in the history of enterprise software from a valuation perspective. At Vista, we took advantage of the high valuations and took six companies public over that period. At the same time, we were one of the few who decelerated our investment into that same marketplace to avoid lofty valuations. We maintained – and continue to maintain – our commitment to disciplined buying, irrespective of what others in the market are doing.

Listen to the full conversation here.