Robert Smith Explains Private Equity vs. Venture Capital

0:00 So let's get into this conversation of private equity. Vista is the company that you started 20 years ago, I believe. And it has obviously made you a billionaire and, you know, extremely successful person. But can you talk, well, a lot of people don't even know what private equity is. They might've, I think people are familiar with venture capital at this point, because that's really trendy. But can you talk about what private equity is and the difference between that and venture capital?

0:24 Yeah, that's it's a great question because our community, it's important our community understand the role of capital and growth. And there's different providers of capital along different stages of a company. OK, one of the best ways to think about it is if you all have an idea, which you have. We're going to create. a platform to educate our people. You're going to start off first with the idea of labor. You too, right? And we've got ideas.

0:58 We're going to write them down. We're going to put a process together to now communicate those ideas. Great. And so you start off in social media because it's free. And I say, well, how do I now push this out more broadly speaking beyond trying to get followers? And you may say, maybe I should buy some advertising. Where am I going to get this money? Okay. The vast majority of investment capital even today is still out of the debt markets. So unfortunately, 70% of our communities don't actually have a branch bank. So depending upon where you live, there's no bank that you have a banking relationship with that you can go and say, hey, I need $ 10, 000, $ 50, 000, $ 100, 000 because look at how, you know, and they don't

1:43 understand your business. I've got 840,000 followers. And if I had $ 20, 000, I could rent a studio, okay, five times a month and get a million followers or two million followers. And by having two million followers, I can go get advertisers who will pay me to have access to, you know, my people, right? And if they pay me, I can now pay you back that money. And then I can invest in more of my business and make it grow.

2:14 That's the capital cycle. And it's a virtuous one. But our community hasn't had access to capital. The next phase of that is like some of the banks are like, well, there's no hard assets because your hard assets are your hard work. So I'm not going to lend you any money. I'm not sure you're credit worthy. So you can't come to me. So enter the venture capitalists. The venture capitalists are designed to actually look at what it is you're doing in the markets that you participate in, and if you have more capital, and in some cases, know-how and resources that they can hopefully bring to you, because they've done this once or twice or a hundred times in that industry, they can show you, yeah, take that $ 10, 000. Okay.

3:02 Don't buy advertising. But what I want you to do is actually build a platform where you can do your own streaming. It's more efficient long-term and you make more money long-term. And so that's advice you might get from them. And here's $ 10, 000. Now, they're not going to necessarily ask for an interest rate like the bank. Pam, you know, 4, 5, 6, 8, 10, now 12%, right? In interest. They're going to ask you for a percentage of the company. And they say, and when you sell the company, you're not going to own 100%.

3:33 You're going to own 100% minus how much they bought. That's venture capital. OK, now, years later, you're now running a big platform. You've got 20 million followers. You've got advertisers making 18, 15 million dollars a month in advertising revenues and what you're not spending on your team and crew because you're going to give them all raises because they're phenomenal. You guys should. I'm giving a shot.

3:57 Yeah.

3:58 Yeah. Yeah. but don't be too greedy. No. But now you're at the point where you're making, you know, 10, 30, 40, $ 50 million in revenues. And now you're trying to manage your business, how profitable and expenses and all that. And that's where private equity comes in. Private equity typically are larger checks. And we typically bring, in my case, we do buyouts. So we want to do control investments where you are selling control of your business. And you may say, well, why am I selling control of my business? A, you know, get the money. But B, what you really want is my know-how. Why do founders come to us? Because we've done it so many times in enterprise software. I can bring, remember those best practices I was telling you? Here's how

4:49 you run your product development organization more efficiently. Here's how you run your go-to-market system more efficiently. Here's how you do your contract administration more efficiently. Because you've never done that before, or you've done it, but you don't necessarily know the best way to do it. And we can share experiences with you that actually can enable you to do it. Now, not all private equity people bring that.

5:14 Some just bring the capital. And they say, I just want to own the business. Because if I buy the business and it's growing well... over time, and they may put debt on the business, they're going to increase the value of that business. And then when they sell it, they make the difference between where they sold it and what they bought it for minus the debt that was in the company. So the way to think about that is think about buying a house. If you go in, it's a house worth $ 100, 000. I know you guys talk about this in your show. And a buyout person can come and say, all right, I'm going to buy it for $ 100, 000. But then they go to the bank and they borrow.

5:57 $ 60, 000.

5:57 So they only have to put $ 40, 000 in. But because it's in a good neighborhood, five years later, it's now worth $ 200, 000, $ 300, 000, whatever it might be, right? Or they fixed up the house. They went in, put a new porch, and put $ 40, 000 in to really improve the value of the house. Now I can sell it for $ 300, 000. They sell it for $ 300, 000. They pay back the $ 60, 000 to the bank. They've been paying interest along the way, right?

6:22 And that difference, they put in $ 40, 000. The difference is what is profit. And that's what private equity firms do, okay? As an owner of a private equity firm... That difference in value, if I borrowed the money or raised the money, I've got to pay my investors back and then I get a percentage of the profits. So that's how that works.

6:42 So it's a different form of capital.

6:44 So you're just buying companies as opposed to where venture capital, they're investing in companies, but the owner still runs it. You're actually taking control and ownership of the company.

6:53 Yes, but like 90% of the founders that we buy our companies from are still involved in the business with us or in our ecosystem. Okay. And so... You're taking control, but you're also investing in the infrastructure. And I like to use words, you're accelerating the corporate maturity of that business.

7:14 So it might take you 10 years to figure out what we've done 45 times already. Right. And now I bring that intellectual property into the company and say, here's how we're going to design this a little differently. Here's how we're going to change your compensation plans for your salespeople to actually incentivize them to to give you more stable revenues or more visibility into the future revenues and earnings of that business that you may not have figured out or may not figure out because you may not be in an environment, a circle of people who have dealt with that before. And so that's why the expertise that we bring is often more valuable than the capital. Yeah, it feels like the highest level of mentorship slash internship.

8:01 Where it's like, you're giving it to me because you've already been through it. Right. And we create an ecosystem where our founders are, we intentionally bring them together. Our CEOs, we have 26 events this year. OK, we've got 86 software companies today. We've got ninety five thousand employees. But we have an event. And then last night, our CXO event, I had four hundred and fifty CXO. So that's, you know, CEOs, chief financial officers, chief marketing officers, you know, CISOs, all that in one city for three days. In that case, going through seven or eight different tracks. So if you're a CFO of a $ 40 million software company, you're sitting next to a CFO of a $ 400 million software company

8:45 sitting next to a CFO of a $ 3 billion software company. You all are dealing with different things on the one hand, but you want to understand what you need to do to build your organization so that you can support $ 400 million worth of growth. And you want to understand what you need to do in your organization at $ 400 million so you can support a $ 3 billion. You're not going to get that anywhere else but at Vista. You see what I mean? Oh, and by the way, we do that for the product and technology groups as well. And we do it for separately. And we'll do it for our talent organizations, talent development. And we'll do it for go to market. You see what I mean? All of those are elements that are value add intellectual property, best

9:28 practices that we now share with the community of founders and and executives in all of our portfolio companies. So it gets back into that efficacy, that efficiency I've talked about in engineering. Now, I could hope that you could figure this out. I can invest in your company and hope you figure it out. And if you don't, I'll fire you. But we don't take that approach. We say, let me give you tools and systems and let me actually equip your management team with tools and systems so they have a higher probability of being successful as opposed to let me just hope you get it right or you figure it out. You see what I mean? That's the difference in how we approach the market. And that's, in some cases, the difference between, I'll call it, highly skilled,

10:17 tuned investors, either private equity or venture capital, and those who are just providing access to capital.