Faces of the Lower Middle Market: Investment Bankers

David Stevenson | Managing Partner and Co-Founder

These days there is no shortage of tech-focused investment bankers, but that wasn’t exactly the case in the late ʼ90s, when PEAK’s founders got their start. And that bootstrapped beginning not only helped the firm survive its early days but also better relate to their clients and understand the nuances of what sets technology M&A apart from other verticals.

What got you into the technology side of investment banking?

David Stevenson: I’ve been doing this since 2000, specifically focused on what I’m focused on now for about 13 of those 20+ years. The pivot really happened after business school, but, to me, technology was this special place compared to what a lot of my other colleagues going into investment banking were doing. It’s very typical in this business to cover a certain industry or a certain product. That’s not that interesting to me. You look at any of the verticals like manufacturing and oil and gas—all of the disruption, all of the change, all of that is interesting about them revolves around technology. It’s where all the disruption happens.

My thoughts? Why not just focus on that part, period? You can be vertically agnostic since, as they say, technology is horizontal, and that is where my passion really lies. I was a history major as an undergrad, and you can look at history through three basic lenses: economics, power, or technology. I’ve always thought that the economic and technology lenses were by far the most fascinating.

On the technology side, you’re doing IPOs and secondaries, and you’re acquiring a lot of businesses. In most industries, when you’re talking about M&A, it’s all about synergies. And most of the time, those synergies are mainly on what we call the cost side, which is another way of saying you’re either going to sell assets or fire people. That’s where your cost savings come from; that’s where the synergies are.

Technology is this special place where, because there’s so much disruption happening, when you talk about merging two companies the synergies are on the revenue side.

What does that look like in practice?

DS: I’ll give you an example. A lot of our clients have great technologies or great products, but they really don’t have the ability to sell or market them very well. If you plug them into, say, a Microsoft or another major acquirer that knows how to sell all day long, you can accelerate their development in that area and then sell what they’ve built.

So, after a tech merger happens, it’s actually more common for the company that just got acquired to ramp up hiring versus firing. I really like that aspect of it, too.

How does the lower middle market suit that mindset?

DS: I started at big banks and then moved on to the more mid-market-focused investment banks before starting my own, and I would say that there’s an inverse correlation between the size of the firm and how happy I was at those firms. Also, the smaller the firm the more likely it is I’ll be working with a founder.

It’s like that poem: “We are the music makers, And we are the dreamers of dreams.” I’m totally botching that quote [RH1] by the way, but it’s about the power of being the movers and shakers. And I really like that energy.

Let me contrast that with what the process was like at the larger firms. You’re calling on and working with people just like yourself. They all went to the same schools. You look the same. You are stewards of a larger business that you didn’t create. You just work there. That is a very different dynamic from somebody that has come up with an original idea and built it from the ground up. That is so much more interesting than just dealing with the stewards of these larger businesses.

That’s fascinating. But 20 years ago, technology was the new kid on the block. How has that changed over time?

DS: I mean, Moore’s law—the observation that the number of transistors in an integrated circuit doubles about every two years—has already been around for nearly 70 years, and we’re not done yet. What’s even wilder is when you think about how far it will go. A lot of very smart people have written a lot about what they call super intelligence. When you’re talking about something like AI in general intelligence, you think about the average IQ of human beings is 100. Imagine having a computer that’s 200 and 300 IQ. Now imagine if that IQ was 300,000.

And that’s not too far away. It will likely happen in our lifetime.

How do you decide who you work with, and how do those clients choose PEAK?

DS: The parameters around what sort of clients we’re looking for are pretty simple. We want to take on clients that are revenue producing. If they’re not profitable, they need to be growing very quickly. And if they’re not growing very quickly, we want them to have substantial profit margins. As far as the business model is concerned, yes, it should be within technology, and we tend to do more software and services than hardware because it’s a bit more commoditized, but there are exceptions. Very generally, we help companies, specifically technology companies, do one of two things: they’re either raising capital north of $20 million, or they’re selling themselves entirely.

But why do those clients choose PEAK? I’d say they pick us because we are very experienced within the technology space. We know the ecosystem very well, we have a solid track record of success, and we promise and deliver senior-level attention.

Lastly, and this is very important to some, we eliminate the conflicts of interest. And what do I mean by that? Rewind the clock to when I was with a previous bank. No names, but I’ll never forget literally sitting at a table on the sell side, and on the other side of the table was the buy-side. The buyers were with a very large private equity fund and our job, very simply, as the outside bankers was to optimize the outcome and maximize the valuation on the deal. It was a long day, so we took a break at some point and all of us bankers huddled in the conference room. And I’ll never forget what my managing director said at that point: “I feel like we can’t push on the private equity buyer anymore because they have another portfolio company that’s about to go on sale, and I want to represent them.” I was a new investment banker at the time, and I just stood there thinking: is this the way the world works? Really?

But it’s a tried-and-true business development tactic. How do most bankers find new clients? Most of them spend all day calling on private equity funds because you make one phone call and you can get access to sometimes hundreds of different companies that may be for sale. It’s a great way to build a network. But therein lies the problem. When you do that, who is the real client? So what we said when we first started—and this is at the core of the ethos of PEAK—we eliminate those conflicts of interests by not taking sides like that and instead focus on our clients alone, not third-party relationships.

Questions? Want to partner with us? Reach out to the PEAK team at contact@peak-tech.com.