412. The Hierarchy of Bullsh*t, The 8 Criteria that Matter Most, Why Boiler Rooms Win, and the Key to Raising Capital (Mitchell Green)

412. The Hierarchy of Bullsh*t, The 8 Criteria that Matter Most, Why Boiler Rooms Win, and the Key to Raising Capital (Mitchell Green)

Mitchell Green of Lead Edge Capital joins Nick to discuss The Hierarchy of Bullsh*t, The 8 Criteria that Matter Most, Why Boiler Rooms Win, and the Key to Raising Capital. In this episode we cover:

  • Investment Criteria for Scaling Companies
  • Leveraging a Network of High-Net-Worth Individuals for Investment Opportunities
  • Hiring and Evaluating Analysts in the Venture Capital Industry
  • Investing in Private Companies and IPOs
  • AI, Entrepreneurship, and Investing

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Transcribed with AI:

Mitchell Green joins us today from Santa Barbara, California. Heโ€™s the Founding Partner at Lead Edge Capital, a growth stage venture fund investing in software, internet, consumer, and tech-enabled services. Prior to founding Lead Edge, Mitchell was on the investment teams at Eastern Advisors and Bessemer Venture Partners. Mitchell, welcome to the show!
Thank you. Thanks for having me. Yes, sir. You started your career at Bessemer Venture Partners prior to go into business school? What motivated you to start lead edge? Yeah, that’s a good question. So first, thanks so much for having me on the show today. I think it’s important to understand how I got to lead edge. So to understand what I was doing before, when I was at the I grew up in Grand Rapids, Michigan, was a nationally ranked ski racer. Frankly, the only reason I could gotten to Williams is I could ski down the hill fast, there was about a point 2% chance they would have gotten past the first page and I have
not been a recruited athlete. After Williams, I spent a year in investment banking at UBS making PowerPoint presentations till three in the morning. Pretty sure I was the worst ranked analyst. I then joined, I then got a call to join Bessemer Venture Partners and I saw the listing online. And at the time Bessemer was this very storied old school venture fund that had five partners on one side of the table. And every every year, you know, 1000 entrepreneurs and walk in the door, and they would back 10 of them, no different than at the time Sequoia or benchmark or Venrock, or all these like world class early stage funds. Sure. And what they, they had seen what firms like insight were doing in finding companies that they had never heard about, even though they were investing in the same space. And all Insight was doing is hiring 22 to 24 year olds to pound the phones calling companies. And they were just replicating with summit and TA did two very large private equity firms, but only doing it in really in software and internet. And so they hired myself and my other partner, Brian, put us in a room and said like, Go get him. And this is like 2005. So it didn’t oh five and oh seven, my partner Brian and I left about 20,000 voicemails sent 15,000 emails. And when I took the job, my dad said, Oh my God, you’re one of these idiots. You know what my dad was it was a CEO of a mid market manufacturing company, it would get called by lots of you know, private equity firms that wanted to invest in the business. So I was always trying to like, he always said, Look, you better try to figure out how to add value. So what I would do is if I would call some software company in Boston, that may have been 30 40 million in revenue, and then talk to some other software company with 30 40 million in revenue. Neither of them may or may not want to take our money. But I would oftentimes like connect with CEOs together to say, Hey, you guys are probably dealing with the same sorts of issues. You might want to like know each other, or hey, maybe you’re a software company that sells to e commerce businesses, you should meet this other internet, e commerce business, it’s growing super fast. So I build a lot of relationships.
Also, my partner, Brian, and I learned, he’s now my partner, we work together at Bessemer. We’re the first to cold callers. We learned that if the company called you back, the company sucked. It was the CEO you call every two days for a month. Persistence. That’s the CEO you want to get on the telephone. And so you know, over that time, Brian and I probably spoke between Oh 507. He said an extra year, probably spoke to five to 6000 CEOs, and my partner NaeNae my third partner named Mei who did the same job but it Insite
likes to joke that you learn in like dog years. You know how you know what a good company is? Speak to 5000 Crappy companies. 100%. That is like you just it’s like just pattern recognition. And so it was like an incredible job. I did it for a few years. I loved my time at Bessemer. I then left to go to Wharton Business School. While I was at Wharton, I was really bored. And so I started working for a hedge fund seated by Julian Robertson, one of the tiger cubs, not Tiger global, one of the other funds there. And when I got there, he had that that that guy Scott Booth who ran that firm, Eastern advisors had kind of dabbled in privates, most notably, five or six years prior to me joining I think back in 2003 2004, he had bought a stake in Alibaba Group from Goldman Sachs that had an old fund that had just spread the money around Asia, and they sold because they thought, you know, eBay is gonna come in and crush you and you’re giving all like free stuff away. So he hired me, I worked while I was in school. I made a couple private investments while I was at the fund, and then due to everything that happened in Oh 809 I ended up buying the asset out of the fund actually one of my investments Bazaarvoice, which was a company I’d gotten to know invest several but never able to invest in it and bought it out created an SPV and
then what I would do is I would ask the investors in the SPD for help. Basically, I would say, hey, Bazaarvoice is looking for an intro to these, like 10 companies, do you know anybody? Or hey, Bazaarvoice is looking for a CFO, do you know anybody? And people would respond and be like, Hey, I know, you know, ABC person, or you know, I happen to introduce you, I see the company is doing really well, you’re sharing some information on the company happened to be helpful. So ended up and then what happened is, as we would help the companies in would report back on the feedback, and they’d be like, Hey, we get if you find more stock to buy in Bazaarvoice, tell us, I’ll introduce you to my friends and these friends that the people knew were pretty successful people. And so we were able to help Bazaarvoice more, did a couple SPVs from Ghana 2009 to 2010. And then in early, late 10, we raised our first fund, a bunch of my LPS came to me and said, Hey, stop screwing around doing deal by deal, raise a fund. So in 2000, and late 2010, we set out to raise 50 million bucks. And our pitch was pretty simple. If you invest in our fund, we’re going to ask you to help our portfolio companies, when we find really interesting businesses that won’t call us back, we might ask you, if you live in Kansas City, and this company is in Kansas City, do you know anybody? Hey, we’re gonna have you help with recruiting. So XYZ company is looking for a CFO or CEO or CRO Do you know, anybody? Hey, XYZ company is looking for an introduction to the gap or GE Do you know anybody?
And that’s, that’s how it kind of it all started. So I know that was a long answer, but wanted to give you some color. Amazing. And then tell us more about the thesis and the type of investments lead edge focuses on? Sure. So we are not an early stage venture fund. I believe in investing, don’t care if you’re an energy investor, if you’re a software investor, if you’re a public market, software investor, private market software investor, focus in discipline is absolutely the main most important thing. And when you veer out of your strike zone, that’s when you lose lots of money. So you could argue like crossover funds decided they wanted to be early stage investor and drove up valuations to craziness. You could say that, you know, in the private equity fund, sometimes we’ll expand into other verticals, that goes horribly wrong. So in order to do this, something that came out of our time at Bessemer, we’re guardrails. And so we have what’s called the lead edge eight, which is our eight criteria. But this originates from the time at Bessemer. And the reason was when they stuck now the two knuckleheads in the room, Brian and I, two weeks in, we’re like, every Monday, we’d meet the partners, and it’s, Hey, they’d have us come in and be like, I spoke to this great company. It’s a million revenue, and it’s gonna be the next Microsoft. And they’re like, No, it’s not. So they’re like, find us companies that only are 10 million plus in revenue. So the next week, you find a company with 12 million in revenue growing 8% a year, and there’s no finance companies that grow 30% a year, and then you’d find one that has like 8% gross margins, or was burned 100 million to get there. So they built this crate guardrails know, like, listen, only find his companies at the time, you were like five criteria, only find US companies that meet three or more of that criteria and start the meeting with a doctor company, ABC, it meets three or more criteria. And so and that’s just like, again, it’s like a framework for what you’re looking for. So fast forward, when we started lead Ed, we had six criteria. Every quarter, we write a quarterly letter about different topics, and the way that everyone would want to get the letters were usually happy to share them. And it was like our first letter was we’re not a venture fund. Here’s what we invest in. And there were these six criteria today. What are the six missions? Well, we have, we have eight now, and six of the eight are still the same. So I’ll just tell you with the AR.
And these are questions that anybody talking to an entrepreneur and any company on the planet, what in whatever industry you that you invest in, is a simple yes, no answer.
Are you 10 million plus in revenue? Why is that important? So you have product market fit. We’re not early stage investors, we you know, we’re really focused on finding companies that we can help scale to, are you growing 25% plus a year? Why is that important? We want to invest in companies that grow that number used to be 50%. So we move that down to 25%. Because sometimes we’d like to trade off between profitability and growth. And we moved that down a long time ago, not not when profits became an issue.
Three, you have 70 plus percent gross margins. Why is that important? Because at the end of the day, as most people forget,
businesses when they grow 5% or 10% a year are valued Alpha multiples of earnings. When you have 70% gross margins, it’s a lot easier to make money than when you have 20% gross margins set another way. Companies like Facebook giveaway iPads and their vending machine
It’s companies like Dell charge you for a soda. And it’s because one has, you know, 90% gross margins and one has 20% gross margins, we just find it a lot easier to make money. And you don’t have to be the good operator, frankly, as good of investor focusing on high gross margin business. So So I agree with you. And it’s similar to what we invest in. But I gotta push back, you know, some of the most valuable companies in the world that are tech companies take Amazon take apple take, I don’t know what Tesla, SpaceX, you know, these are, some of them, you know, do not have the margin profile and some of these factors that you’ve mentioned, that’s fine, we would have missed Amazon early on, we would have missed Amazon, it’s completely fine. We don’t have to hit everything, right. It’s stay in the strike zone. You know, what I also back to the focus. Yeah, you know what I also mean, no, you know, I’m gonna go through all these criteria. And then the great thing is you can just like run companies through it, you’d be like Instacart, go puff all these like delivery companies. For you. They made three out of eight criteria, kill them, I don’t have to hire McKinsey, or go spend three weeks on, you know, doing diligence, figuring out potentially we can go focus on the next interesting company. It’s just like, remain laser focus on what we’re doing for this is the next criteria is a new one we added probably five years ago, and probably one of the most important things that have kept us out of trouble.
It’s our version of return on equity. Now, Warren Buffett would say we’re idiots. But but this works for us.
It’s called capital efficiency. Are your recurring revenues today are your revenues today, equal or greater than the amount of cumulative cash burn since inception, now, not money raised if the money’s in the bank, like who cares? Like you didn’t spend it, the world is littered with $20 million revenue software companies that have burned 100 to get there. Yep, they might be turned into amazing businesses. They’re just not efficient. And then a world where even if I Control A majority of a business or on a minority, we want to beat we’re still in the passenger seat or even in the back of the car, we want to make sure an entrepreneur doesn’t run the run the run the car off the cliff, and buy back a company that’s got 20 year revenue growing 60% a year with high margins, and has only burned $10 million to get there. It’s doing something right now, again, if I was investing in companies with 2 million in revenue, or 3 million in a revenue, it would be harder to find these businesses because like you’ve made you require engineering talent, and other things to just build the business up. But again, capital efficiency, we added this in over the last what’s the ratio? What’s the cap 11142? And, again, it just keeps us out of trouble for Highborne stuff. No, no have we get through this, and have we ever invested in a business that’s not capital efficient 100%. And we’ll talk about that in a second.
590 plus percent gross retention.
The reason gross retention is so important is as the hole get as the pond gets bigger, if the hole is bigger than that the dollars you have a churn get too big. So in other words, if you’re a $10 million revenue company, and you only have 70%, growth, retention,
that means you lose three bucks a year, that means you lose 3 million bucks a year, you can like refill the bucket. But the problem is when you get to 200 million in revenue, the bucket became $60 million. And so the sales and marketing efficiency just gets like worse and worse and worse. It puts all the pressure on customer acquisition. 100% Instead of product 100% diversified customer base, we just say do you have any customer over 10% of revenue, we just don’t want to wake up and find out that, you know, 40% of your revenues disappeared on this something that we couldn’t control?
Recurring. I like investing today, knowing what revenue gap revenues will be in February. It’s just an easier way to make money. And then lastly, are you profitable at the VA dot line? Now, again, if you call 1000 companies, but when we’re talking to about 8000 companies a year 1% or 80, companies will meet all eight criteria. And those eight criteria deals are a plus companies, probably d minus prices. Why do you notice presence? I mean, if you’ve got a business with 50 revenue growing 80% a year that’s generating 15 million of EBIT da you’re not getting a good deal. Most like Oh, I see. I see what you mean. It’s like an incredible business. You’re overpaying. You’re overpaying for like an incredible business, but it’s like good investment in good company are two very different things, which is what a lot of people got very wrong over the last few years and 20 and 21. So what we find is if you just take five or more criteria, objectively just pick five or more you get about a 10% yield. So out of that 10% yield. That’s what 800 companies the pond is big enough to fish in will do deal
engines on about 150 companies. And then you know, we’ll do five to seven investments per year. That said they have five to eight of the criteria. five or more criteria. Yes, it’s very, we’ve, I don’t think we’ve ever invested in a company with less than five criteria, we now have 18 associates that are zero to two years out of school, that cold call companies for us. Now, again, we started probably two or three.
When they every Monday morning at Pipeline meeting, the call the meeting starts with, each person goes around the room, I spoke to ABC Company, it meets X number of criteria, here’s what they do. If it’s a seven criteria deal, we literally tell the person don’t even really care. I hope you have the next meeting setup. If it’s a four criteria deal, the response is why are you wasting my time? So again, it’s just it’s really anybody’s are very quantitative numbers, like if like yes or no, did it hit that? Or did it not hit that? Now, of course, market size is super important. Management, Team quality is super important. Like, but again, you know, you know, ability to scale, things like that, you know, but like, again, it’s what you have to know what to spend your time and know where to fish.
And so when do you break the rules? You mentioned before, like cap efficiency, you might is it is that to compensate for that with the five, eight, so you can break through? It’s just like more than it’s more than five or more criteria. Above that, it doesn’t matter. There are things like it’s really rare for us to invest some 10 million revenue, have we done it? Absolutely. Do we occasionally make option bets that aren’t core bets in the funds? Where we’ll like do that. We have entrepreneurs that have made us a fortune, and they’re starting a new company where we throw in a little bit of money 100%. But in core investments in the funds, which usually around 20. Like they meet five or more criteria. It’s just so what if I have a company that’s growing like gangbusters? Like, call it four or 5 million arr? It’s got a bunch of your criteria? Is that something you want to look at? Or do we might take a look at it for going to 12? Yes, to going to four? No, like, we’d rather stay close to that company at four or five. But look out look, we just invested in the business with seven or 8 million of ARR growing like 90 100% a year and profitable. Yes, like get it but again, it meets that company, I think Matt like seven of the eight criteria.
Love it, love it. And what would you say makes your firm unique aside from your evaluation, you’re very forthright, easily accessible, sort of
tell entrepreneurs these things do are like, listen, these are our criteria, like I won’t waste your time either expectations set them very simple, our LP base. So if you were to go on our website and look under Network, you would see a huge amount of our LPS listed not all of them, of course, we get permission from the ones out there. And we’ve raised a lot of our capital from like world class execs and entrepreneurs, and we ask them for help. So you’re going to be McKinsey on the way in. And that you know, you’re the former CEO of a giant pharma company, you can help us look at a software company that sells in the pharma better than we ever can. We know we’re software experts, but we can’t be experts on hundreds of industries, like help us. Oh, hey, like when we were when we invested in toast and led the Series C, which, you know, it was a $25 million revenue company growing 200% A year something like that.
We said to the company like want us to email our LPS asking people who own restaurants, Word to the wise never email 500 Rich people and ask if they know people who own restaurants because like half of them own restaurants. But like a bunch became close customers. That’s like the best diligence you can ever do. And then the company is like, this is freakin sweet. Like I’m getting introduced to customers, or, you know, post investment. Hey, I need intros to these 20 companies and looking for a female audit chair. In the case of Asana, which we were investors in, they wanted a female audit chair. I think we emailed our LPs and got 50 suggestions. Now again, not all of them are relevant. The CFO of DuPont is probably not relevant to Asana software company. But again, you only need one. And so you know, we’re constantly asking our LPS for help we tell our lps on the way in do not invest in lead edge capital unless you want to help. Now the great thing is when you have 700 plus LPs, nobody helps that much. But you’re using everybody a couple of times a year and so that is our value added prop like the difference to us between sequoias Growth Fund and you know, take you know and kick ers growth vehicle and Blackstone’s growth vehicle in general Atlantic and LLR and level minute
You name the funds TA and submit an insight I,
it’s our LP base, like people want to take our capital to get access to our LPs to help them grow their business faster, and it’s in the value add is true and substantial because I’ve heard I’ve heard this from other VCs before, oh, you know, we’re gonna have all these LPS that are going to be active, but then activating that network in the right way. On the right problems. You know, it’s, there’s some disconnection here, here’s what I’d say.
One ask our entrepreneurs, to, we’ve invested with firms like benchmark, like five or six times and our operating partners. So six of our LPs are like on our payroll, and like, you know, work elite exec, and like, their exclusive delete edge, we’ve done five or six deals of benchmark, we’re on the boards of a bunch of them, benchmark can work with any firm on the planet, I think they found that were pretty helpful. More than that, are LPs. I don’t think we met these all these people through one another. Like, I didn’t know when is he going from Grand Rapids, Michigan, like grew up like,
middle class, like, sure, I didn’t know. And so like, what we were able to do is get people like all these people in the reason this works is actually very simple.
All these people invest in stuff, but like, say, or, you know, the CEO of a Fortune 100 company, you know, just like a pig, a normal, plain vanilla company, not some rocket ship that went from nothing to $100 billion,
they can probably worth 40 Did the 60 million box like I don’t know, I don’t think it’s worth 300 that only you were 10. Once your money is prime, manage Goldman Sachs, which are perfectly fine or somebody else. And those people have put you into a different you know, those people have put you into a diversified assets and 10 to 20%, maybe in private equity. And so you’re in like Apollo and Aries and Goldman and Blackstone like, and maybe some tech funds, like those funds, don’t even know who you are, as an individual. We come along and you know, every quarter, we update our lps on the portfolio, we’re like, you know, asking our LPS for help, we have our annual meeting in a couple of weeks, we’ll have 300 people there 270 are paying their own money and own dime to get there and don’t get invited, don’t get invited to one other annual meeting. You know, we have some institutions too, but most of these individuals, and we’ve figured out how to activate them, and then you know what they introduce us to their, to their friends who you know, we want because it’s just like an active form of engagement. We tell people look, if you are plus or five years away from retirement, or I’ve been retired, and you want to play golf all day long. And the idea of somebody at least sending you an email once in a while introducing you to accompany is like the scariest of the worst thing in the world for you, then that’s fine. Like, please don’t invest. We don’t care we get Luckily, there’s enough people in the world that want us to engage. And like how do you handle those that think they’re helpful, but they’re not? Oh, like most, you never know how people can be helpful. If I told you some of our most helpful intros have come from like a professional golfer, if you would like to send that on the way and I’d be like, No way. He’s really helpful. He knows a lot of people. There’s a lot of big execs who play golf. So you never know who you know, we have adapt. We have a doctor in New Orleans who owns a bunch of hospitals, who, you know, we were doing diligence on a construction business, construction software. He made some intros that were insanely helpful and diligence, like it just it’s literally A Random Walk Down Wall Street. It’s amazing. So Mitchell, I was reading this Twitter thread about the hierarchy of bullshit thesis at lead edge. How do you think entrepreneurs mislead investors?
I think I think there’s some that just like blatantly mislead them, and then I think
there are
it’s a lot easier to show LTV, or it’s a lot easier. So total contract value, because you look a lot bigger than annual contract value or GAAP revenues, or profits if you have that. And so I think people just try to always paint their businesses in the best light they can which like, I don’t fault them. Certainly, occasionally, it’s just like blatantly like wrong. Like we’ve had companies that tell us their 10 million of ARR up from three and you’re like, Okay, fine, you know, annual recurring revenue. So that means you have monthly recurring revenue times 12. Please give me a waterfall of all your customers. So you get them out, it gets MRR shouldn’t do it. You’re like, wow, like this is like fundamental 101 thing. So look, in a world where a World War deals get done it we’re getting done in two days. And people were like just throwing money at stuff. It’s impossible. You can do that much diligence on any of these things. So what we did is look for right or wrong. I credit my partner NaeNae who’s both three times smarter than me? Maybe 10 times and then he said in early 2020 We’re going outside
Silicon Valley, we’re gonna go find stuff that maybe growing a little slower, oftentimes may not be maybe bootstrap businesses or raised some some local venture firm. And you know what
we’re gonna go find. So like in fun five and fun six, we’re currently investing in our roughly $2 billion, fund six, we have done two deals in the Bay Area. Not because we don’t like barriers, we love very entrepreneurs, we disrupt used to pay 50 times revenue, or 100 times revenue for a business because we think that’s absolute lunacy.
And whether you
walk us through sourcing, you know, how do you think about sourcing and do you have any strategic or tactical advice for others on sourcing, we run it inside, we run an inbound call center.
I mean, we have 20, Associates and analysts. I mean, there’s been title inflation. So like, you know, it used to be called analysts. Now they’re called associates, same job, hire people zero to two years out of school. You looking for somebody who will run through walls
is insanely persistent, good companies don’t call you back. Like you gotta call them back and back and back and back. 100% especially good profitable companies. So you get to call the CEO every two days for a month like I was offered inside sales job on the spot at Bessemer. Like when cold calling like you could you call me this many times, you’re gonna come work here. Great. I’m I think investors money, though, not taking anybody’s money. And I’m gonna do the best one. So you’re looking for like highly persistent people, but they gotta be smart. So they gotta be smart, resistant, and kind of have some sales skills. Why? Because you get to see you on the point, you got to talk to him. Now, I’d say nowadays, it’s way easier, because now used to be good at writing emails, like when Brian and I were calling at Bessemer pertain to Oh, 507, like, you’d call it five o’clock, and get the CEO on the telephone. So then it’s like, you know, you’re like the guy answering your telephone at 6pm at night while you’re about to have dinner. And, you know, none of the younger generation everyone remembers this, but you know, they had a landline phones, right? Yeah, hey, I’m Mitchell Green from Bessemer Venture Partners, like doing research on your space. So you had to be like, click on your seat. And then by the way, every Monday you get to come in and pitch the partners and tell people your best prospects that week and tell them why they should be willing to do a follow up call with you. So we find that athletes from like real athletes are great people for this job, are entrepreneurs. The reason for that the boy, these athletes don’t have to have gone to Harvard or Stanford, you can be the captain of the football team at your pace. And you know, by the way, you only may have a three, two, but the reason you have a three two is because you worked 40 hours a week, they’re in school to play football,
or more or more. So those are the types of people that we and that and the Galway, those people have really failed. It’s not that they got like a C on a test. Like, you know, in front of 50,000 people, they dropped the football, how many people survive initiation. And then environment, the sort of the boiler room
or boiler room is also you get to work on the deals you work on and things like that. And, you know, we were in the office, August of 2020, we made everybody come back. Because for us, it’s like how you learn in this job when you’re young is listen to my partners and I get the screaming matches about like, you know what we’re investing in and then being friends, two minutes later, you thrive. It’s I will tell you that, you know, we’ll have Boeing, the people who run the firm here. So there’s myself, Brian, and he may, Avery and Tim have been here for 10 plus years, they started as called going analysts. You know, Evan and Susie and Dan were all promoted laterally, or sorry, came in laterally. But Brian lob dowel and Zack are principals they both started here as analysts, David bird off, who’s the vice president here started here as an analyst.
You know, a couple of people get promoted every few years you’re looking for. What it comes down to is you need people that have real good deal judgment as well to get promoted. Yep, you can, you can throw a bunch of crap against the wall. And if enough stuff sticks, you can be a really successful analyst associate. But it’s the one who’s like, look, I didn’t have any companies for the last two weeks. Like I couldn’t find anything that was interesting. And then the next the third week, they come in and have two really interesting companies. It’s just like the deal judgment to know when something might be interesting or when something’s not how many calls would you say they’re making per day.
Had to go look at our good code pipeline. Look, they should be send in the do that AB 10 at about 12 to 14 calls a week, they’re talking that 8000 companies a year. You know, an 18 of them. Do the rough math. Well over the 14 a week off the 15 a week. They should be leaving 200 to 250 emails in a week. Nobody leaves voicemails anymore. I actually joke to my team they shop maybe they should start leaving voicemails because nobody actually leaves them. So 100% So I don’t know. But yeah, sometimes the contrarian moves work because people aren’t expecting. I can tell we can tell you
If you like look at an analyst, one analyst specifically has put their pipeline over the last like three weeks. And they’re called their, their emails are like 50 or 75 a week, I can tell you, like two or three weeks later, they’re gonna have bad numbers. Like, it’s just like, you can’t pull it all down the job, top of funnel? Not exactly. So Mitchell in the current market environment, what creative deal types are you using that, you know, will not adversely impact other funding? Yeah, we’re finding. So look, I mean, in our current portfolio across your entire fund, I think 50 Plus think it’s like 50 to 55% of companies or free cash flow or even net positive. And those that aren’t have two plus years of cash runway, don’t worry, a couple of the ones that have cash for life, if they were raising rounds would be raising down rounds, although I don’t and by the way, in one case, we let the deal so we’re at it’s now those companies probably will never raise again, the reality of it is they just don’t need to they’ll become profitable businesses in our current fund and 75% of companies are free cash flow, or even if positive, which we’ve invested in over the last 18 months. And so they obviously probably weren’t free cash flow EBIT up positive on the way in, we’re finding interesting stuff to do. You know, we just invested in a company down in Sarasota, Florida, that’s 20 plus million in revenue growing, you know, 90% a year, that makes like software for like cardiac device monitoring. The company had raised $8 million, but only spent three profitable breakeven business. We bought on all the angel investors. Another company we did 100 of revenue, genuine, a great example. We bought out, you know, good our company was like 125 million in revenue, not in a sexy space at all. Gross 25% a year a company is probably 20 years old. Last year did leather 12% free cash flow margins on 125 Our revenue this year probably does 145 of revenue. And you know, probably 1618 of EBIT, da, we bought it for like seven and a half times last year’s EBIT da not worth 30 times, it ain’t worth seven and a half. And you’d be like, well, who sold? You know, one of the one of the banks that blew up in the financial crisis of 2008 out of their 2005 Vintage fun.
Did another deal did another deal in a company with 100 of revenue grows 25 I think was 97 of GAAP last year gross 25. Up, you know, 34 million of EBIT da last year as a rule of like 60 to 63 business, we paid for, you know, we paid a $500 million valuation. And for our business that two quarters after we’ve invested is like, you know, on a 44 million EBIT, da run rate bought at flautist, we bought it from a strategic that needed liquidity that you know, like, just like weird stuff like that, by the way, the company is not in some great wild, great area. Sure. But markets like this environment, or there’s opportunities. Yeah, a lot of these companies are never going to go be IPO, they’re going to be sold the
they’re going to be sold to private equity. And that is something that I don’t think people are coming to fully appreciate.
What sort of at your stage, you know, what sort of multiples are you underwriting these investments to? Oh, yeah, two to 5x, two to five years, don’t lose money. The fastest way to get fired at lead edge is invest in stuff and lose money and like Boeing, make a failure be a 1.1x or a point 9x through either preferred stock or just like types of businesses you’re investing in. You know, we’ve only you know, we’ve only lost all of our money, I think in one deal ever, maybe to like any main deal like one. But yeah, we’ve we’ve never had like a 15x either. We’ve had a couple of 10 X’s God bless the guy that toast on Alibaba, but
yeah, it’s hit doubles and triples. That’s what we’re trying to do.
Yeah, we’ve we’ve seen arm Instacart CLEVEO IPO very recently. You know, what’s, what’s your view on the IPO market going forward? Like CLEVEO is a great company like that guy on people entrepreneurs forget. When you exit a company or the IPO or m&a exit, there’s two numbers that matter. It’s called price times ownership. Some people just think price and then you own like point no 1% of company think there’s plenty of founder and like 37% or something. It’s a multi billion dollar company.
Look, the press has been yapping about all these IPO markets bad Well, I think it’s pretty good, frankly, it’s like it’s fine. By the way, if you if you you know, these things priced near where they’re trading in a pretty bad market this week. So I didn’t look today. So I can’t say Instacart is 27 or 32 or whatever. It’s not 10 down from the last private valuation but
Yeah, whatever, that’s irrelevant, like completely irrelevant. The whole you’re gonna see so many down round IPOs it’s not even funny. Like, by the way companies should go public. But you know the best way to screw me because my uni itself invested in a high price and a couple of these deals go public you’ll auto convert don’t do a down round go public that they like just because just because some dope investment it’s some crazy price. Like,
like, okay, like, boy, you can make money in these down round IPOs to like, I think box was a box with a data block square with a down round IPO. I think that thing’s probably a 10x or something from the IPO? I don’t know exactly when it’s up. It’s up a lot.
Do you do you try and liquidate it and IPO or pre IPO? Or do you do you hold?
Everything? I mean, the answer would be yes. Yes. And yes. And we held this up for years. Yeah. After IPO? Yes. Have we have we sold stuff before? IPOs? Yes. A bunch. Have we sold stuff after and we asked like I’m giving your example. TransferWise and these are like rough numbers. TransferWise. Now took hold wise, an awesome business like an incredible, profitable FinTech business, like probably one of the 1% of FinTech companies that make lots of profits these guys do and grow fast.
We originally invest at something like to spark five pounds a share something like that. I it’s not exactly right. But probably in the ballpark. I think we like it goes public at like eight pounds a share. You know, we then you know, when it gets towards 10 pounds, we distribute the stock. We say look great company, we think it’s expensive. So we’re gonna give you the stock, do our LPs, do what you want with it.
It trades to like 11 or 12. We feel like idiots. It goes back to to spot like nine
between like six or five and to spot nine, we bought the entire position almost back. It’s now like seven. Nothing changed. Like, like, it’s a great company. Perception, perception. And so like buy stuff in public markets when the world gets scared, make a lot of money. Why not do more public market investing once that’s the case? Why don’t we do do some public market investing so we can do public’s inside our main funds. We don’t talk about it much. We find that most companies when they go public are like, c’est la vie Sta. public markets are efficient. Snowflakes a great company. But like data dog is a great, great company. But like, what else do we have over anybody else? You know what I would like buy those business when the world is collapsing. And people are puking stocks. Or like maybe some company misses a quarter, you know, so you know, people could look what we own. And you would find a bunch of very boring companies. Like I think we bought Yext when it was one times revenues, it shouldn’t trade at one times revenues.
Yes, we also like a lot of boring companies from my roots at Danaher. Yeah, give us 100%. Give give us some of your thoughts on industries, types of businesses, categories that you think will be interesting over the next few years from an investment. No clue I hope software.
Software is the world with incredible as the average age do is, is 18 Associates pounding the phones calling or emails, funding companies, every week, they bring new companies up like are we gonna run out of stuff to call? No, it’s incredible how much innovation is in America happening, this AI stuff will be very real, it’s gonna this is going to be just like the internet bubble, though, convinced the Google and Amazon mam will probably emerge. Who knows which ones they’ll be. And then there’s gonna be a whole lot of carnage. But over the next decade, then people are going to build awesome businesses on top of AI. And
it could be incumbent too. So like, a great example is like, look, it’s some point Delta Airlines does not need 10,000 people in their call center, they probably need 500, it will lead to a better customer experience, you’ll push a button on your iPhone and like you’ll get the customer service rep. It’s actually the computer and then the 1% of time, you’ll need to speak to the supervisor, that will actually be a person instead of waiting 40 minutes on the phone or look, I mean, I’m actually shocked. They’re they’re solving this like screenwriters strike in Hollywood so fast. Universal Pictures, I mean, I have no idea how many people they have in the writers room. And that’s 300 they probably need 30. By the way, New York Times, they don’t need 400. Writers, they probably need 50. But again, I actually think in a world with AI. People with real creativity, actually can use the tool to get become more powerful and actually, like make themselves more productive. I think like AI is gonna be very real and lead to huge productivity gains. Is this going to take a long time?
I mean, rewind like 1015 years ago, it was the entrepreneurs and the
Young folks that learned how to leverage software and code to their advantage. They got an edge. And now it’s the people that learn how to leverage AI. 100% agree. Like, I think there are so many, by the way, you know, one of the biggest companies that’s gonna win from this is Microsoft. And it’s got massive distribution. And like just somebody I saw this interesting stat, one’s
really smart hedge fund guy new putting his quarterly letter.
Here’s how much people make in a profession. So like the average financing guy, you know, they use a Bloomberg terminal spends makes like $300,000 a year on average. And but they spend like $25,000, a year on Bloomberg or something. So it’s like, you know, what was like the 7% yield or something 8% Like Cost of Ownership of using Bloomberg, the average white collar worker that uses a Microsoft product, it makes like 70 grand a year, and what do they spend 250 bucks, like Microsoft can literally double the price of their product, and like, nobody’s gonna care. And it’s all going to flow to the bottom line with this. And they’re gonna do it through this AI stuff. Like, there’s no reason if you think about like the Microsoft calendar, if I put my calendar that I’m going to St. Louis, and it knows that I always stay at W hotels, every time I travel, hotels lit up, it could either be given me hotel rooms direct or sending that off. 100% send that off to Marriott and selling the data back. But it’s better for me as a user to 100% It’s like a series of macros running on your behalf that know who you are and correct exact does the scheduling for you. Mitchell, what advice would you share with emerging managers that are trying to raise money and build LP relationships? There’s no such thing as over communication. Create your LPs, like they are a client, pretend you are a money manager, pretend you are a customer of one of the companies you back. How would you treat them? People don’t treat people very well. So one of the secrets that lead edge capital is we write handwritten thank you notes. And it is I get a tracker every month showing how many thank you notes, every employee of lead edge capital.
The best way to piss me off is not write thank you notes you won’t last year very long. Be thankful treat people well communicate with them. I invest in a bunch of funds. Communication is awful. Like awful, terrible, like sometimes quarterly has come out like two months later, or like not even that, but like do a call walk people through the portfolio share bad news because there’s always going to be bad news. You hear good news too. But they be transparent. What I try to pride ourselves on like being the most transparent, communicative firm out there, like and I think, I think most people in this business you start think it’s like the opposite. And it’s just like, treat your ailment. This is like your mother would have told you this. It’s like treat people like you want to be treated like the golden rule 100%. It’s the North Star. I had this conversation with one of the employees at our firm the other day. Don’t forget the LPs are the Northstar. We’re here to serve LPs, any decision you make needs to be in their best interest for their money. Just to be very clear. Unless you’re running up your own bank account funding your own all your own deals, then it’s not but until then it’s your own money. And I think like the whole alternative asset industry has actually a big issue with with I had a hard time understanding that.
Michel, if we can feature anyone here on the show, who do you think we should interview and what topic? Would you like to hear them speak about Bill Gurley and entrepreneurs? Just in general? Me to Mitchell, do you have any habits, tactics or techniques that are a secret weapon? I thought you handwritten thank you.
And finally your Mitchell was the best way for listeners to connect with you and follow along with lead edge Kevin, just like so we just hired a new PR and marketing. So she’s like, Okay, please have them say the right answer. I think you could look at our look at our LinkedIn profiles. We’re not big Twitter people or x or whatever it’s called, I think few I think I think there’s too many people in this industry that spend far too much time thinking about tweeting, and things like that, and actually just invest in. If you ever want to get our quarterly letters, just figure out how to reach us and we’ll add you to the list. Perfect. So yeah.
The man is Michelle green. The firm is Lita capital Mitchell. Thanks so much for the time today. Best of luck with the returns and enjoy yourself out at Campus point. Sir few do enjoy. Like I said cares. All right.
Transcribed by https://otter.ai