On the occasion of SCP’s 10th anniversary, Clark connected with legendary Tech investor Roger McNamee to discuss starting his own firm and his unwavering desire to partner with leading technology companies.
Roger McNamee (RM): Clark, May marks the 10th Anniversary for Spurrier Capital Partners (SCP). Did you ever think you would make it this far?
Clark Spurrier (CS): I didn’t have a long-term plan back then, but I did have high expectations. I knew that our model was very different and that it would take time to establish. The early business plan was to partner with great companies and meet expenses. I just saw a huge gap in the market that our model could fill.
RM: When you say your model was different, what do you mean?
CS: The traditional M&A model is for a bank to put a “book” together, send it to as many companies or PE firms as relevant, then run a quick process to maximize competitive tension. That model works well when selling Snapple to Quaker Oats, but that is not the model used in the highest multiple Technology deals.
In Tech, the best multiples come from “companies that are bought, not sold”. As such, I wanted to create a new banking model in which we would operate closely with best-in-class private companies and help them curate and develop relationships within their partnership/acquirer ecosystems in advance of a liquidity event. In so doing, we help our clients to grow strategically and increase their visibility. The most important of those relationships evolve intro highly strategic outcomes.
What I didn’t initially appreciate is how this approach would differentiate us in straight sell-side processes. By building a team and practice focused on a few key elements, we’ve developed a sell-side capability that is stronger and more efficient than any I’ve seen.
RM: What are those elements that differentiate the model?
CS: We wanted to build something that didn’t exist in Technology banking — bankers that could easily move from advising large-cap CEOs to the founders of groundbreaking startups. As such, we sought to build three specific capabilities:
- World-Class Execution: Apart from my experience and training at JPMorgan and Morgan Stanley, I felt I needed to recruit a technical execution specialist to lead our deal teams. Enter Mark Yurko. Mark was from the TMT Group at Credit Suisse and was trained at Citi/SSB. I also liked his West Point/Army background.
- Deep Domain Expertise: We realized that we had to be smarter than other banks to win. Each of our Domain Experts (we have eight at this point) is expected to be the smartest person in the room within their sector. It’s an aspirational goal at first, but the more time the banker spends on the platform, the closer they come to achieving that goal. For those who have worked with Griffin Bealle (at SCP for ten years) or Chris Cavanaugh (at SCP for six years), they know exactly what I mean. And more recently, Derek Ritchea has been a major addition with outstanding expertise and relationships in HCIT.
- Differentiated Large-Cap Strategic/PE Relationships: If your stock-in-trade is advising late-stage private companies on how to get connected to partners/eventual acquirers, you need to know the large-cap Strategics and the Tech PE community better than anyone else. In the early years this was aspirational as well, but we stay in close touch with the GMs of the large-cap companies and the leadership of the PEs by making over 1,000 introductions a year. In fact, much of the domain expertise that we now profess was developed from this continual dialogue with these thought leaders.
RM: How has the market changed over the past ten years?
CS: I would say that the most notable change has been the rise of Private Equity, which is indicative of several changes. Prior to 2014, our relationship with the PE community was mainly as a source of referrals, while most of the exits were to large Strategics. In the last 4-5 years we’ve seen a real sea change with PEs getting more aggressive, paying higher multiples and regularly outbidding Strategics.
In the life of our Firm, roughly 75% of our deals have gone to Strategics and 25% to PEs. However, since the start of 2017, over half of our deals have had PE buyers and over the last four years, if a company did not sell to PE, the price was normally set by PE. Now we are designing processes that optimize for both PE firms and large Strategics as potential acquirers in almost every deal.
RM: And what do you think is driving this shift with the PEs?
CS: There are a number of factors at play, but over these past five years we have seen that the Cloud’s democratization of IT combined with low interest rates and lenders’ increasing comfort with financing on recurring revenues has created a favorable environment for PE firms to get more aggressive and consistently outbid Strategics. Many of the tech-focused PEs are behaving like strategics themselves in buying companies as platforms to seize market opportunities.
RM: So fast forward to today, SCP has been very successful and has won eight industry awards. Of what are you most proud?
CS: I’m most proud of the successes of our clients. We view ourselves as stakeholders in these outcomes, rather than a bank doing an isolated transaction. Personally, developing close relationships and helping these clients succeed is a very satisfying part of this job. Many of my closest friends are past clients.
RM: Given your client success stories and your industry recognition, why aren’t other banks copying your model?
CS: Leading domain expertise and large-cap Strategic relationships are very difficult to build. I thought I knew the Strategics when I was working at the bulge bracket banks but I was really only talking to Corporate Development heads. We are taking this to a higher level by talking regularly to GMs that have P&L responsibility and authority over strategic direction. Deep relationships of this sort with one company alone can take years to build.
In addition, each Domain Expert speaks regularly with their domain counterparts at each of the large Strategics. At last count, we had 38 senior relationships at IBM among our eight Domain Experts. I’m not aware of any other bank that comes anywhere near that in coverage.
Finally, we have a patient approach and are working with a client longer than most banks will allow. The traditional “book-model” that I mentioned earlier is still dominant in Tech, despite it not being the best way to sell a Tech business. Why? Because it restricts the process time to roughly four months. A banker can do that deal, collect his fee, and move on to the next transaction, independent of the relative success of the outcome. We would rather be more engaged to ensure a larger valuation. In that, we are truly a stakeholder.
RM: Did you originate the partnership approach, or had you seen it at work somewhere?
CS: SCP created it within the banking community, but I first saw it in action in my many years of supporting IBM. When I founded SCP in 2009, IBM was one of the most prolific acquirers within Technology. Amazingly, almost all these acquisitions had been partners with IBM in some way. Even when IBM was a direct competitor (Lombardi, Initiate Systems), they were also partnering with these companies.
RM: Do all your engagements take this partnership approach?
CS: Not at all. We offer M&A advisory services for more traditional sell-side/buy-side work and have significant capabilities in raising capital. However, even in the more traditional advisory work, the strong domain expertise, deep relationships and excellent execution capabilities are truly differentiating. We can get to the decision makers quickly because we are constantly speaking with them through our introductions. In recent years, half of our engagements have been straight sell-sides.
RM: You call your relationship approach the Consigliere Approach. What does that mean?
CS: The meaning of the word is “trusted advisor”. This describes the type of relationship we want with every client. We break it down into four elements: Trusted, Confidential, Objective and Independent. While we want to be known as having the best domain expertise, these points of integrity are just as important.
RM: Your bulge bracket background was primarily in B2B software and Internet. Why is SCP only in B2B?
CS: The biggest advantage that a boutique has over a bulge bracket bank is focus. There are few similarities between the B2C Internet and B2B Enterprise Software, and I thought it would be too hard to do both starting off. We have been very careful in the additions we have made as this market will not last forever. We have a strong presence in Application/Vertical Software, Infrastructure Software, Communications, HCIT and FinTech. We will add B2C when we find the right banker to lead that sector for us. Ten years in, we now have the platform and the reach to add B2C and are actively looking to do so.
RM: What do you look for in banker hires?
CS: High integrity is clearly the most important character trait. Aside from that, raw intelligence. I joke that in screening here the person needs to be smarter than me – which is getting less difficult as I get older. While every bank looks for smart people, the role of Domain Expert here is very challenging and not everyone can do it.
We also look heavily for people that have been competitive athletes. I know this sounds odd for a bank, but teamwork is the next most important attribute we look for. We task organize by using multiple Domain Experts on many of our deals, so our bankers need to be able to work together and work to support the other bankers’ success. Short of military combat, there is no better training ground for teamwork than competitive sports.
RM: You have been in investment banking for nearly three decades. How has banking changed?
CS: When I started at JPMorgan in the early 90s, relationship banking was much more important than it is today. In Technology, Goldman and Morgan did most of the large deals, and there were specialty boutiques that had excellent relationship bankers who also had strong domain expertise. Alex Brown and Hambrecht & Quist were among the best.
By the end of 2004, all the big banks had gotten into Tech, either by retreading bankers from other sectors or acquiring a boutique. Few of these firms have been successful. Domain-specific relationship banking gave way to commoditized selling and the Tech landscape is much worse off for it.
RM: A recent Wall Street Journal article reported that the bulge bracket banks are entering middle-market M&A. How will this impact your business?
CS: It is a misnomer that larger banks have better M&A capabilities or can produce better M&A outcomes. While this is still true in the IPO market, where broad distribution and research are critical, it is not true of M&A. In fact, the very best M&A tacticians have left the bulge bracket and have started their own firms. George Boutros and Paul Taubman are good examples of this. They understand that a singular focus on M&A advisory has its own rewards.
The bulge bracket teams that we have competed with have had less domain expertise, relationships and experience. Regarding the latter, the top senior bankers at these firms are not doing the middle-market M&A. These deals are covered by their younger, up-and-coming bankers that have dramatically less experience.
As such, we welcome the competition. If the client choice comes down to experience, domain expertise and relationships at the logical acquirers, we will win every time. If the decision comes down to which bank has the most employees or which bank has been around the longest, we made a bad decision in spending any time there.
RM: We have experienced an unprecedented run in Mergers & Acquisitions. When will the music stop?
CS: I don’t think it is a matter of the music stopping as much as the tune changing. Right now the strong activity and high valuations are being driven by the relatively low interest rate environment. As rates go higher, valuations will be impacted first. Beyond that, we expect M&A activity to continue, especially in the mid-market which will still be driven by PE activity.
We have not had a down market since the emergence of the PE’s paying such strategic multiples. In the past, when Strategics paid the higher multiples, a recession or major market correction would have an immediate impact on M&A. Going forward, the correlation will not be as direct. There will likely be fewer deals in a down market, but not dramatically so. There will still be a lot of money backing the PE-led deals and always a need for consolidation in maturing sectors. In fact, when multiples and valuations decline, large-cap Strategic M&A volume could increase.
RM: Clark, as we look to the next 10 years, what are your deepest concerns about the Technology sector and Tech M&A?
CS: My biggest concern is that we will see a continuation of the concentration of market cap and wealth among the largest companies. The five largest technology companies are worth a combined $4.2 trillion in market cap today or 17% of the S&P. Five years ago, they were worth $1 trillion or roughly 8% of the S&P.
We’ve never seen market participants with this level of market power. It remains to be seen what this implies for technological innovation, early-stage funding, labor trends and the economy as a whole.
RM: For fun, you had 77 jumps as a paratrooper in the Army. Will you ever do a 78th?
CS: (Laughs). I don’t think the Army wants me anywhere near their aircraft. But someday I will do it again. George H.W. Bush was 90 when he made his last jump. I have some time. (SCP will be in their 43rd year.)
Roger McNamee has been a Silicon Valley investor for 35 years. He co-founded Integral Capital Partners (1991), Silver Lake Partners (1999) and Elevation Partners (2004). He holds a BA from Yale University and an MBA from the Tuck School of Business at Dartmouth College.
Roger also plays bass and guitar in the bands Moonalice and Doobie Decibel System, and is the author of Zuck, The New Normal, and The Moonalice Legend: Posters and Words, Volumes 1-9. He also served as a technical advisor for seasons two through five of HBO’s “Silicon Valley” series.
Clark Spurrier has been in technology investment banking for over 25 years and has advised on over 150 Merger & Acquisition transactions, IPOs, common stock and convertible offerings, private placements and restructurings. Many of his transactions stand out as transformational and industry defining within their respective technology subsectors. He holds a BS in Engineering from The United States Military Academy at West Point and an MBA from the University of Chicago.
Clark has long been viewed a thought leader in the software and Internet domains, and has held senior leadership positions at Morgan Stanley, JPMorgan, Thomas Weisel Partners, and CIBC.