Mitchell Green - Lead Edge of Harnessing Networks (EP.429)

Mitchell Green is the founder and managing partner of Lead Edge Capital, a growth equity firm with $5 billion in assets that invests in software, internet, and tech-enabled businesses. Lead Edge leverages its LPs, comprised of over 700 seasoned executives, entrepreneurs, deal makers, and celebrities to connect its portfolio companies with customers, partners, and talent. Unlike any other firm I've seen, the impressive list of LPs is publicly available on the firm's website. Our conversation covers Mitchell's early exposure to business and finance, Lead Edge's cold-calling strategies, investment criteria, and leverage of LPs to source, diligence, and add value to portfolio companies. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

  Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst, an always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point SuperAnalyst at a theme, company, or market, and it learns the coverage universe

• 0:46Ted Seides?

  so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to SuperAnalyst. Start a free trial at alphasense.com/capital and see what it has ready for you.

• 1:24Ted Seides?

  Capital Allocators is also brought to you by RidgeLine, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together

• 2:06Ted Seides?

  the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square,

• 2:47Ted Seides?

  the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators.

• 3:32Ted Seides?

  Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  My guest on today's show is Mitchell Green, the founder and managing partner of Lead Edge Capital, a growth equity firm with $5 billion in assets that invests in software, internet, and tech-enabled businesses. Lead Edge leverages its LPs comprised of over 700 seasoned executives, entrepreneurs, dealmakers, and celebrities to connect its portfolio companies with customers, partners, and talent. Unlike any other firm I've seen, the impressive list of LPs is publicly available on the firm's website. Our conversation covers Mitchell's early exposure to business and finance, Lead Edge's cold-calling strategies, investment criteria, and leverage of LPs to source diligence

• 5:03Ted Seides?

  and add value to portfolio companies. Before we get going, I'd like to welcome you to the first edition of Spread the Word Shark Tank. Entering the stage in front of our sharks is my son, Eric.

• 5:17Speaker 02

  My name is Eric Seides, and I'm the creator of the food truck concept design called EB's Bombastic Buns. EB's, meaning Eric's Burgers Bombastic Buns. Now, I have almost zero experience in the business world, but I'm very proud of it. My food truck is designed around different themed burgers, like the seaside munch burger, which is lobster, queso cheese, on a burger patty on a whole wheat bun. This has absolutely nothing to do with the podcast. However, I think you should still be listening. Thank you so much for spreading the word.

• 5:51Ted Seides?

  An important disclaimer. EB's Bombastic Buns is not an actual business, has no products, and no website. It was a project Eric cooked up with a few hours of research for his ninth-grade entrepreneurship class. That said, he's quite the entrepreneurial dynamo, so I wouldn't be surprised if you hear more episodes down the road, right here, at our Spread the Word Shark Tank. Please enjoy my conversation with Mitchell Green.

• 6:17Ted Seides?

  Mitchell, thanks so much for joining me.

• 6:19Speaker 03

  Absolutely. Thanks for having me.

• 6:21Ted Seides?

  Why don't you take me all the way back to where your initial interest and path to finance came from?

• 6:27Speaker 03

  I'm from Grand Rapids, Michigan. I was a nationally ranked ski racer. My father ran a manufacturing company of which was a third or fourth generation family business. They actually invented the bread slicer. Unfortunately, you don't get paid per slice of bread, or I'd be running my old family's money. I was interested in business. As a kid, I used to look at stock tickers in the Wall Street Journal. My dad's father ran the municipal bond department at Payne Weber. Then, when he retired from bond trading in the early to mid 80s, he became a stockbroker. And a stockbroker in the mid 80s was what we call hedge fund managers today. So I got really interested in investing in finance because of that. So I always was interested in making money.

• 7:07Speaker 03

  In 4th grade, I had a paper route. By 5th or 6th grade, I had 3 paper routes and had commissioned my mother to do the bagging of the papers. I turned 18. I started working in our family's business, actually in the manufacturing floor. I was definitely the only kid at Williams working in a factory floor. You learn very quickly why you go to college, and unless you want to do the same thing every day of the year, it builds a lot of perspective. I also think it actually, to this day, helps me understand weird things like inflation and why Trump's been so popular, and a lot of people on the coast can't understand it. I started a company when I was in college, left Williams. Of course, we were raising our Series B right around 9/11.

• 7:50Speaker 03

  That did not happen. I begged to get back into Williams, got into Williams, did a couple of years investment banking, worked for a small investment bank out in LA called Barrington Associates, which I loved. And then I decided, I said, I think I'm missing things. I need to go work for a big investment bank. So I joined UBS in the M&A group in New York. And 3 months in, I realized I was a glorified PowerPoint monkey. Making PowerPoints at 3:00 in the morning really wasn't for me. My partner Brian likes to remind me, I was the worst-ranked analyst. I was the bottom bucket. So I did that exactly for 1 year in the M&A group. And then I found an online job listing for Bessemer Venture Partners and I had known Bessemer as this world-class, early-stage venture fund. And so I just applied for the

• 8:35Speaker 03

  job. And at the time, Bessemer was this world-class, early-stage Shark Tank-esque venture fund. There were five partners and a lot of entrepreneurs would walk in and they'd do five to seven deals, maybe 10 deals. And they were good personal friends with the guys that ran Insight, especially Bob Goodman was good friends with Jeff Horan and Jeremy Levine, I think was good friends with Jeff Lieberman. And those guys would hear about the deals that Insight was doing. And they're like, we're this world-class venture fund. Why are we not seeing these deals? And what they realized is that Insight was out there hiring 22 to 24-year-olds,

• 9:18Speaker 03

  pounding the phones, calling companies, going outbound versus being very inbound. So Insight was effectively picking the companies off before Bessemer even got a chance to invest in them. And all that Insight was doing was replicating what Summit and TA Associates had done for the 20 years prior in software and internet. So now, a lot of these top-tier venture funds have cold calling programs. My now partner, Brian, and I were the first two cold callers at Bessemer. When I took the job, my dad said to me, "Oh, you're one of these morons." So given my dad, a manufacturing company, he'd get called by every mid-market private equity firm on the planet. And so he was like, "You need to figure out how to add value, or you look like everyone else." And so what I would

• 10:02Speaker 03

  do is if I was calling companies in Chicago, and companies in Milwaukee, and companies in Detroit, and they were all 15 to 30 million in revenue, growing fast, I'd connect the best CEOs together. "Hey, you guys should know each other. You probably don't know each other. You're probably dealing with the same kind of crap. Maybe you guys want to know each other." And we had a rule at Bessemer. If the company called you back, it really sucked. It was the CEO you'd call every two days for a month, that's the CEO you want to get on the phone. How did you think back then about the investing path?

• 10:34Ted Seides?

  Compared to joining the family business and the operating business.

• 10:38Speaker 03

  Oh, I actually wanted to join the family business and my dad sold it in May of 2007. Family dynamics, but I really wanted to go run the company. I thought there was like a huge opportunity around M and A. They since sold the business to a private equity fund out of Milwaukee that made a ton of money. Who then sold it to a big industrial holding company out of Philadelphia and the business, I think it's 200 million to be with that now. It was probably 75, 100 million of revenue when they sold it. So I actually really wanted to go work at the company, but my dad has told me managing capital is a lot less work than managing people. He's like, you run a very high margin business and have a lot less people than I had to deal with every day. And so it worked out. But my partners and I always joke, let's go find a business that just makes something and buy it.

• 11:23Speaker 03

  Cause we're in the picks and shovels businesses, buying software businesses, but it's funny. You talk to every executive or entrepreneur that runs a business that makes things. They all want to be in the picks and shovels businesses and so you never know.

• 11:34Ted Seides?

  So at that point in time, you had that entrepreneurial instincts. You had a little bit of banking experience. You had a little bit of venture experience. So you're doing the cold call part of venture. Where do you take it from there?

• 11:45Speaker 03

  I left Bessemer and I learned a tremendous amount and it was like a apprenticeship. The guy worked for Jeremy Levine, who's been one of the most successful venture capitalists over the last 15, 20 years. Was the guy who trained my now partner, Brian and I, and he's like, what you are learning here is going to be fundamental for your career going forward. And so I was also convinced though, that if you put the top 20 venture or growth equity funds in a room, you could whiteboard out all of the companies. And I didn't frankly, think there was much difference between Bessemer and Sequoia and Kleiner at the time. And General Lanick and TCV, other than some people wrote bigger checks and smaller checks.

• 12:27Speaker 03

  But since 2004, if you were an investor in 20 of these funds, you as an LP have made a ton of money. And I just couldn't figure out what the differentiation was. And so I was like, you know what? I've always really wanted to do public investing. I lived and died reading Wall Street Journal pages in the nineties, growing up in the late eighties. I've traded stocks since I was seven years old. I was like, why don't I go work for a hedge fund? And so a family friend lived in New York and he's like, hey, you should meet this guy. Who is the number two or three at a hedge fund seeded by Julian Robertson at Tiger. This guy Scott Booth and Scott had started a fund at Tiger late 03, early 04. Before that had run Mark Kingdom's Asian Fund and had made a ton of money and been very successful.

• 13:10Speaker 03

  And I got introduced to Scott and we hit it off. And so I was in business school. Scott ended up hiring me and he's like, listen, if you want to come work now, I'd love to have you. And my, my in-laws put their time between East Hampton and New York City and we're like, listen, we have an apartment. I was like, oh, great. I can go up to New York City a couple of days a week, hang out with my buddies and I'll start working at this hedge fund. So I started working at this hedge fund in January, February of 08. In early April of 08, he said to me, hey, I want you to go to the Goldman Internet Conference and meet a bunch of companies. Ctrip and Baidu and Alibaba. And this was a very Asian focused hedge fund. And I go meet the CEOs and CFOs.

• 13:53Speaker 03

  And I sat in one of these meetings and one of the meetings I was like, hey, you should meet this private company. XYZ company. I think you guys might be a customer or you might like them. This was always what I was doing at Bessemer, connecting people together. And the CFO of a giant public company can't see his business card. He's like, yeah, introduce me. I'd love to do it. And then I did it again in another meeting and got another business card and I was like, huh. So I went back and told the founder of the hedge fund. And he's like, we've done some private investments. We were early investors in Alibaba. We bought out Goldman's stake in 2004 when I launched the fund. He had been predisposed to doing a few more privates. So he's like, hey, listen, that company you keep mentioning, it was a company called Bazaar Voice. Why don't you call them up and see if they'll take any of our money? We can put a small amount of the hedge fund in private companies.

• 14:38Speaker 03

  The founder had gone to Wharton as well. So, and he was happened to be speaking at Wharton. I called him up and I was like, hey, remember all those intros I had made for you? I'm working at this hedge fund while I'm in school. Love to get together. And I convinced him and he's like, listen, I loved how helpful you were at Bessemer, but I wasn't ever going to sell 20% of the business. But if you guys want to put in five to 10 million bucks, Mitchell, you've been incredibly helpful. And you'll continue to be at this new hedge fund. I'd be delighted to have you. But he's like, here's the deal. You're not going to be on the board. If you want to come to a couple of board meetings here, that's fine. You're going to buy a combination of common and preferred stock. So I went to the guy that ran the hedge fund and said,

• 15:09Speaker 03

  I have this company. It's growing fast. I want to buy 2% of it. It's a combination of common preferred and we are not going to be on the board. And he says, that's fine to me. I've never taken a board seat. I've never owned more than 5% of a company and I've only over owned common stock. And so we ended up making this investment May of ' 08, helped him a bunch, started seeing other deal flow because the guys at Battery Ventures and Austin Ventures kept introducing us to people. It's like, listen, if you can help Bizarre Voice, can you help HomeAway? Can you help All Star Directories? There were a few of these are companies. And the founder of the hedge fund was like, let's go raise a 30, 40 million dollar fund and we'll put Alibaba in it at three bucks a share or something. And Bizarre Voice said, basically, nothing. And we'll raise 30, 40, 50 million bucks.

• 15:54Speaker 03

  This was August of ' 08. He's like, listen, finish school. You're in your second year, but I'll pay you full time to go work. I don't have to tell you what happened. Early ' 09, hedge fund's down 55 gated, very complicated. But I still have a job because everybody in my business school class in their second year was all getting offers rescinded from hedge funds, private equity funds, investment banks, consulting firms. But I still had a job. And so then the CEO of Bizarre Voice calls me in February of ' 09 and says, I lost my last company in the last downturn to a down round, even though the thing's going to get sold for 300 or 400 million bucks. You've been crazy helpful. You want to put 5, 10 million bucks in the company? And I'm thinking, yes, but I got no clue where I'm going to raise the money from. But I said, can I have five weeks. And so I basically went out and cold emailed and cold called every person who was on the board at UPenn, the board at Williams.

• 16:46Speaker 03

  I figure if you're on the board, you must be rich. If I cold called you when I was at Bessemer, I reached back out to you. If you were in my business school class and I thought you had rich parents, I reached out to you. And I scraped together 10 million dollars from 60 people and bought half of the hedge fund stake that needed to sell. That was the Bizarre Voice SPV. And the rest is history.

• 17:08Ted Seides?

  So what was that history? You're coming out of school, you have this job, but the hedge fund's clearly having trouble. Where did you plant your flag?

• 17:16Speaker 03

  I told everybody in the SPV, it had to be 2 and 20. And a bunch of people were like, I'm not paying 2, this is a single asset and should be no management fee or 50 basis points. No offense, if it's not 2, I can't eat. So I did an SPV. We closed the first one in May of 09. I think it was 8 million bucks. And then I became the cap table janitor at Bizarre Voice and just bought up any share lots I could find. I would email our LPs, "Hey, Bizarre Voice needs an intro to the NFL, to Coke, to Pepsi, to Nike. Do you know anybody?" And one of my LPs who runs an NFL franchise would be like, "I could introduce them to the NFL and I'll do it because I see the company's doing really well.

• 18:01Speaker 03

  You're being super transparent, sharing all the financials with your LPs, which tons of funds do not. I'm gonna have tons of transparency and I'm gonna ask for help." So then a few quarters in, people would see the company continuing to do well. I'd send customer win emails when they won big deals to all our LPs. So then an LP would be like, "Hey, if you get more stock, tell me, I'll introduce you to my friend." Who were their friends? Successful executives, CEOs, wealthy people. And I just kept doing it. So I think we started with 8 to 10 million in Bizarre Voice and by the end had bought 18 to 20 from spring of 09 to late 2010. I did a second SPV in a software company called Monitate and raised a couple million bucks in it. Same way I funded it.

• 18:45Speaker 03

  And then after that, Jim Schneider, the former CFO of Dell, who was one of my early LPs in Bizarre Voice, said to me, "Hey, I love what you're doing. I'm invested in all these funds. Nobody ever asked me for help, ever. I could have saved one of those firms billions of dollars when they bought a semiconductor company. I could have told them six questions to ask and they didn't call me. Now, you are asking me for help all the time. You should raise a fund." So we set out to raise in the fall of 2010, a $50 million fund. And the founder of the hedge fund said, "Listen, if you want, I've got all these redeeming investors. We can tender them and see if they want to sell part of their side pocket." And we said to people, "Listen, I'm gonna raise a $50 million vehicle."

• 19:28Speaker 03

  And I'm going to put 25% of the fund in Alibaba at 12 billion valuation, roughly. Additionally, I'll let you match it dollar for dollar. So if you put a million dollars in the 10-year private equity fund, you'll have 250,000 of exposure there. Plus, I'll let you put another million dollars of exposure into an SPV with just Alibaba at the same price. So for basically $2 million, you get a million two five of Alibaba, and I get to play with 75 cents of other stuff. Now, a bunch of people invested, I'm pretty sure because of that. A bunch of people did not invest because of that. And the rest is literally history. So I would tell you 90 to 95% of the LPs from the SPV became Fund One investors.

• 20:13Speaker 03

  And if you're alive or not divorced, I bet you 90 to 95% of those people in Fund One are in Fund Six. It's all been word of mouth. We had no institutions at the time. Every institution we've had has been word of mouth. And our pitch was like, we're going to run around, find companies to invest in. And when we find them, we're going to leverage you throughout the entire investment lifecycle. So if you don't want to get these emails like you got on Bazaarvoice, don't invest. My first hire was my now partner, Nime. He had been at Insight for two or three years. It's been the same three-person investment committee from Fund One to Fund Six. I mean, probably the thing we're most proud of is several people that we brought on in Fund One, young guys, 12 years later are now partners in Lead Edge.

• 20:56Ted Seides?

  So when you set out to form Lead Edge and said you were going to play around with this other 75 cents, how did you think about what you were going to do?

• 21:05Speaker 03

  The same thing we did at Bessemer. I knew the companies were out there. Let's build an outbound cold calling program. They're all cold call companies. We were looking for companies that meet very specific criteria. So today, we have the Lead Edge Eight, with these eight criteria that we look at. Every company that we source goes through these criteria. At the time, we had the Lead Edge Six. At Bessemer, it was the Bessemer Five. Every Monday, we'd pitch the partners at Bessemer. Our best companies of the week. And two weeks in, we found this great company. It's going to be the next Google. And they're like, no, it's not. This company sucks. They're like, what do you got next? Oh, we found the next Amazon. No, this company sucks. They're like, okay, find these companies that meet 10 million plus of revenue.

• 21:49Speaker 03

  So we find a company that's like 12 million in revenue growing 8% a year. No, find those things that are growing 50 plus percent a year. You find a company that has three customers. No, it's got to have diversified customer base. Then you find something with 8% gross margins. They'd be like, no, find me companies that 10 million plus in revenue, growing 50% a year, that have diverse customers, that have 70 plus percent gross margins. I'm like, well, I can't find any companies. They're like, perfect. When you start the conversations on Monday, you're going to tell me the name of the company, how many criteria it meets, what it does. If it meets less than three quantitative criteria, do not present the company. And if it meets four or five, make sure the follow-up meeting is already set. So when we launched their firm, we had what was the Lead Edge 6.

• 22:33Speaker 03

  So today, we have 18 people that speak zero to two years out of college. We talked to 10,000 plus companies a year. And if you said I needed to meet all eight criteria, it'd be 1% or 100 companies meet all eight criteria. So we say we need five or more criteria. That's 10,000 companies to get 1,000 that meet five or more criteria in order to do diligence on 150 to 180 of them. Now, again, oftentimes, there's just nothing to do because you're outbound calling companies and emailing companies to do five to seven deals a year. So the way we sourced day one is the exact same way we source today.

• 23:13Ted Seides?

  When you went from the Bessemer 5 to the Lead Edge 6 and now the Lead Edge 8, what were those incremental one and then two more criteria?

• 23:22Speaker 03

  The additional one was from an EBITDA line was actually profitable. And then the additional two were 90 plus percent gross dollar retention. It's very simple. Are your revenues greater than your historical cash burn? Not how much you raise burn. And this is probably what's kept us out of the most trouble over the most number of years. Warren Buffett and Charlie Munger would say we were idiots, but this is our version of return on equity. The world is littered with 20 million dollar revenue companies that have burned 100 million to get there. They might be great businesses. They might be the next Snowflake. They might be the next Datadog. They might be the next Google. They're not efficient.

• 24:04Speaker 03

  So we define an efficient business as anything that's a one to one ratio or better. And the reason we like that is we just think if you build a business with 20 of revenue, you're growing 30 and you've only burned 3 million bucks. You're doing something right. And if we can get in there and own preferred stock at the top of the cap structure and it's recurring and has 80% gross margin, the probability of lose all your money is really, really low. So you're basically buying one-way call options. We make money by having companies reasonably hit our numbers that we set out in the future.

• 24:38Ted Seides?

  The concept of going through these cold calls to hit out $10,000 companies, narrow the filter so you find 100 great ones to do work on. What do you actually say in those cold calls when you pick up and call a company?

• 24:51Speaker 03

  So let's use Refinery 29, which was a bootstrapped five, six million dollar revenue business. Think of it in them as we were trying to build the next generation of Vogue magazine online. We basically cold called the company and emailed them and said, hey, we see you're a bootstrap business. We have some LPs who've got a bunch of experience around the media industry. We'd love to come in and talk to you. And they probably, I'm sure, didn't respond. So we emailed them again and then we emailed them again. And then we get them finally on the phone. And what we do is at the time it was called Eastern Advisors Private Equity Fund. And it was, hey, I'm Eastern Advisors Private Equity Fund.

• 25:35Speaker 03

  We're different than any other funds that will call you. All of our capital are all these executives, XYZ people, former CEO of Xerox. She's on the board of Target. We'd love to come in and talk to you. And by the way, when we invest in things, we get our LPs involved and try to help you. So tell us among our LP list who you'd want to meet. We'll be happy to make an introduction for you.

• 25:56Speaker 03

  then you ' re like, oh, by the way, cares how big are you guys? I see your 50 employees on LinkedIn. What do you guys 75, 80 employees? And then you start to talk about the competition. You ' d be like, oh, I read an article. I see that you compete with ABC company. How do you think about them competing? And then you call that competitor. So you just become really smart on the industry. That same thing is how our analysts today also engage companies on the phone.

• 26:27Ted Seides?

  We ' re going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined long- term investing, uncovering value, and partnering alongside clients to shape tomorrow ' s economy today. Invest in the businesses that shape tomorrow. Learn how you can own what ' s next at Brookfield dot com slash own.

• 27:05Speaker 04

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 27:10Ted Seides?

  And now, back to the show.

• 27:14Ted Seides?

  How much work goes into each of those calls when you ' re trying to canvas so many companies every year?

• 27:21Speaker 03

  Not that much, to be honest, not any one individual call. It ' s a repetition game. AI has enabled us to create research assistants for our analysts so we can create tear sheets. Hey, I ' m calling refinery 29. What ' s its value prop? Who are its biggest competitors? Who are its biggest customers? The people we hire to do this, I think, speak to how we think about this. So you ' re hiring 22 to 24 year olds. Half of them it ' s their first job, half of them they come out of banking or consulting. We find the best people. You ' re looking for somebody who ' s insanely persistent, thrives on being told no.

• 28:02Speaker 03

  is smart and is also a journalist. So you gotta be a persistent journalist who's smart. Because you gotta be persistent to get the CEO on the phone. You gotta be a journalist to be able to extract information from the CEO on the phone without knowing you. Additionally, you gotta have a little bit of sales because you gotta also convince the guy to take a call with you. And then you gotta be smart enough to come to the partner meeting on Mondays and pitch the idea to be like, hey, this is why I talked to this company. We should engage with them.

• 28:31Speaker 03

  So we find the best analysts and associates are oftentimes college athletes or entrepreneurs. So I can't tell you how many times I've been told, what's your biggest failure? Oh, I got a D on a test. No, no, no. Dropping the football at the Rose Bowl, that is a true failure in front of millions of people. Debaters are also very good for it as well. There's just people you meet. You just know with young people, you'll meet some young alum of where you went to school and there are some people that'll email you four times and you're like, you know, I'll take a call with this guy. This guy's persistent.

• 29:04Ted Seides?

  When you start with that criteria, you're getting to a company that probably lots of people would be interested in. How do you find the competition from there to winning a deal?

• 29:15Speaker 03

  The biggest competition is doing nothing because almost 60 plus percent of our companies were the first institutional investor in them. They've raised less than $10 million. They don't have real venture investors. They have a bunch of angel investors or nothing. To go from 10,000 to 1,000, they meet five or more criteria, down to 150 due diligence. The most common reason is is nothing to do. He just doesn't need to raise capital because he's got a profitable business and grows nicely. And why do anything? It's fiercely competitive, which is why when we find a company we really like, we need to bear hug it and we need to be like, okay, I know you're not raising capital. How do you need help?

• 29:55Speaker 03

  Oh, you're looking for a CFO? Oh, you should talk to these 10 LPs of ours that are CFOs. They may know people in their network. Oh, you're looking for intros to these 20 companies. Do you know anybody? I'll give you a great example. So Benchlane, which we were an investor in, we're still small investors in it, was backed by Benchmark, world-class firm. Everybody was trying to get into the company. It was 12 million of revenue, growing 150-plus percent a year, very capital-efficient business, burning very little money, had amazing net dollar retention, and didn't lose customers effectively. It wouldn't return our calls. We leveraged our network to get introduced to them. And we said, how do you need help? And we said to the CEO, hey, by the way, you make R and D software for biotech and pharmaceutical companies. Would you want to meet the former CEO of Pfizer? Would you

• 30:37Speaker 03

  want to meet the former CEO of Biogen? Would you want to meet a board member of J and J? And the CEO was like, of course I would. That's amazing. And then we called these people, hey, we found this company. It meets seven out of eight criteria. Would you talk to them? By the way, you know more about biotech than we're ever going to know. Can you help us think about it? So they almost act as our version of McKinsey, but that version of McKinsey helps us win. That just differentiates us from anybody else on the planet. That's to this day how we win deals. In the case of Toast, we were doing diligence on Toast. We invested in Toast, but it was 25 million of revenue. I think it was 2015. Makes restaurant point-of-sale system software. It's now a 10, 15, 20 billion dollar public company.

• 31:21Speaker 03

  We literally emailed all of our LPs, asking if they knew people that owned restaurants. Never ask 500 rich people if they know people that own restaurants. Turns out, lots of people own restaurants. But a bunch became customers of Toast. That's the best diligence you can ever do. That helped us differentiate ourselves, and that's how we co-led the deal.

• 31:40Ted Seides?

  When you think about your reputation in the market to being able to really add value for portfolio companies, and you go through this hardcore cold-call effort to find the companies you want to do diligence on, how do you then do the diligence when you're marrying that to an opportunity that you think, right out of the box, based on your criteria, you're going to want to pursue?

• 32:05Speaker 03

  That's a great question. How do you get the data for something that everybody wants information on? We have passed on a bunch of companies, especially as they become bigger pre-IPO companies. And this was more a thing that we saw a lot in 2019, 2020 and 21, where people were like, well, I'm not going to share that much information with you. But XYZ firm's already an investor, so you should trust it. Yeah, sorry, that's not the way we work. If you don't want to engage in a full diligence process, by the way, if it was your capital in our fund, we would be wanting you to expect the same level of diligence that we're going to do on you guys. So it actually caused us in 19, we shifted the portfolio a lot from Silicon Valley towards more bootstrapped entrepreneurs in Ames, Iowa, or Sarasota, Florida, or Nisswa, Minnesota.

• 32:48Speaker 03

  And by the way, we'll do minority deals, we'll do control deals, but we're only doing deals where we're engaging in full diligence process. We've prided ourselves with, we're really creative and flexible. We'll buy LP stakes out of old funds where 90% of the NAV is in an asset. We'll do secondaries, but the type of work we do, we pride ourselves would look like KKR or Blackstone or General Atlantic or Leonard Green. We pride ourselves on doing really hardcore diligence. And I would credit Bessemer and Insight with that because the Bessemer guys, while they were early-stage investors, were writing 30-page investment memos on companies. It was more about market work there and the Thesi and customer reference calls, but all that type of work we do very deep work on.

• 33:29Ted Seides?

  What's your playbook for the value add once you invest in a company?

• 33:34Speaker 03

  One size doesn't fit all. So about 70-ish percent of the time, we're on the board. You should think about it as 30% of the time, we're not on the board. By the way, we're invested in ByteDance. We own Alibaba. We're not really involved in ByteDance on the board and value creation. Now, look, we go on TV and talk about them and say good things about them, which I think they appreciate when nobody else is really sticking up for them. So that's one extreme. To the other extreme is we're the only investor in a company. We own 80% of the company and we have three board seats. And then you might have in the middle, okay, we're on the board, we're a minority investor, we're the only institutional investor. And then you might have minority investor, but Benchmark or Sequoia is in there or Batteries in there. And we're minority investors too.

• 34:19Speaker 03

  Two-thirds of the time. It's we're the first institutional investor. That is where we're going to engage more our value creation playbook. Frankly, if you've already got one or two VCs on the board, you don't need one of us. Put one of our operating partners on the board. We'll engage LPs, we'll put LPs on the board. We'll have LPs work on specific projects. We send out emails to our LP base being like, hey, XYZ company is looking for a female audit chair. They're looking for customer intros to these 20 companies. We have 700 plus LPs. Engage these people to help the companies grow. If they say, I need help thinking about how to expand into the UK. Let's email our LPs, ask if they know people that know how to expand in the UK.

• 35:01Speaker 03

  Lori, president of eBay, who's been an operating partner since 2013. She moved to Amsterdam to help run one of our companies. Six, seven, eight years ago for six months. That's not normal, but we will get as involved as we need to be. We also have a value creation team with five or six people on it. The person who runs it was at Vista for many years. We can help them think about pricing and packaging. Our head of PR comms can sit down with the company and say, this person on the go to market value creation team thinks you should raise pricing by 8%. This is how you should communicate it to the press or to your customers from PR comms. It all works together. We don't have like a one size fits all. We do not come into a company and have the Vista 200 foot point playbook or the Toma Bravo playbook.

• 35:46Speaker 03

  It's more just very ad hoc.

• 35:48Ted Seides?

  When you have this 700 plus group of high powered LPs, lots of portfolio companies. What kind of process did you create around leveraging your LP base to help your companies?

• 36:03Speaker 03

  There's a couple of just like general frameworks. Every person who works at Lead Edge, once you've worked here six months, you can sit down with any LP. The more you can stay in front of LPs and communicate with them and tell them what's going on with the business and what the companies you're invested in and what you're working on. Just differentiate yourself. If you were the former CEO of Colgate-Palmolive, you got a bunch of money. Your money might be managed at some warehouse and they got you in a handful of funds. You don't know anything about those funds. Or what they own. You know much more about Nike and Pepsi and Microsoft stock. We come along, we meet you through your friend, you look on the website, you see 15 people you know. And we then regularly are, I guess, hey, listen, don't invest unless you want to help.

• 36:45Speaker 03

  We're going to find a business, we're going to ask you for help, you're going to meet a bunch of people on the team. We're going to do 15 plus events a year. We have a dinner in New York, 200 people show up. A dinner in San Francisco, 70 people show up. Our annual meetings, alternate East Coast, West Coast. 300 to 350 people show up. So it's just about like being ultimately transparent and communicate a bunch. And we run our LP base like it is a software company. What is gross dollar and net dollar retention, fund to fund? If you were trying to have really high gross dollar retention and net dollar retention, fund to fund, what would you do? Communicate with people, be super transparent with people, make sure they meet the entire team. Go see them, spend time with them and make them money.

• 37:31Speaker 03

  And no different if you were a software company selling HR software and you had 700 customers. What would you do to get them to buy more?

• 37:40Speaker 03

  We run it exactly the same way.

• 37:42Ted Seides?

  What if you learned about engaging and continuing to engage with these important people in your network? That you teach your team, this is how we're going to continue to keep this flywheel spinning.

• 37:55Speaker 03

  Treat people like you yourself want to be treated and your mother and grandmother were right. Thank you. Notes matter. I actually have a handwritten thank you note tracker that I get for every employee at the firm. And I assure you, if a 22 year old analyst wants to get called out in front of 85 people, I have no problem doing it. I get my monthly report, which I'll get in a couple of days for November. And somebody's written three thank you notes and I know they've spoken to 30 CEOs that month. I'll be like, what are you too good for it? And again, you just don't know when you're going to need the person's help in the future. And so just treat people the way you yourself want to be treated. That's how we run this entire business. I want transparency. By the way, we will go on calls and be like, we screwed up. We were wrong on this investment. It is not working well, very well right now.

• 38:41Speaker 03

  We're in the growth business. Every given quarter, one company is going to not be performing. It can change quarter to quarter, but we just believe in being just ultimately transparent with people.

• 38:51Ted Seides?

  When you put your portfolio together, how do you think about sizing and the management of the positions in your time?

• 38:59Speaker 03

  So we want to run funds with about 20 investments. We think there's too many funds that become index funds and they just have 50, 100, 200 investments in them. We think that's crazy.

• 39:11Ted Seides?

  So once you've spent this time and this powerful network of trying to help the companies, how do you then think about exiting?

• 39:17Speaker 03

  So that's a great question. We have a disposition committee that meets a couple of times a month. Most firms have investment committees. Very few firms have disposition committees. And so we constantly want to think about is now the right time to sell? And how can you sell a company? You can take a company public. You can sell it either to a strategic, a private equity fund, or a strategic backed by a private equity fund. That's what we've seen a lot more of recently. Or a secondary sales. So probably a third of our exits have actually come from secondary sales. We'll sell to another fund and that's already an existing investor in the company. We are investing in private companies. Liquidity windows don't come constantly.

• 40:00Ted Seides?

  How does that translate to what you're trying to achieve in terms of the risk return profile relative to your peers?

• 40:08Speaker 03

  So we have always been very focused on DPI. And that just drives everything. I can't tell you why more people don't sell, frankly. And I think we had five or six companies direct listed in 20 and 21, just because that was a way to exit them very quickly. We want to make two to five X, three to seven years, slap it into a fund, make two to two and a half X net funds, and not lose freaking money. Our loss ratios are very strong. We've only lost all of our money on one to two companies ever. I'm sure we will again. But if you back companies that grow on average 30% a year, don't have leverage, you own preferred stock in 70 or 80% of the time, and the vast majority recur,

• 40:52Speaker 03

  you may have overpaid, but then preferred stock helps you. And less than a third of companies I think have any debt on them. What gets the buyout funds in a lot of trouble is just leverage. The companies still survive, they just overlever the business.

• 41:05Ted Seides?

  I'd love to get a sense of some of the things that you've learned investing in other funds that you think are helpful for the lens of an LP.

• 41:15Speaker 03

  I would rate most funds information disclosure as awful, not bad, awful. I don't think it's because they want to get like, we just turned it on its head and it's like, you are my customer. If you were my customer, what would you want to know? We're going to tell you everything. And some people are like, don't you worry about the company is getting mad. It's their money I'm investing. So without their money, I can't invest in your company. And so the advice I give to all new young managers, you need to be insanely transparent. As you scale the firm, put on stage, people that are much younger than you so that everybody can see who's actually doing the work.

• 41:56Speaker 03

  And the next generation of talent. Another question I tell all LPs they should ask is of October or November of 21, we're at the height of craziness, that I say, show me your September 30th, 2021 statements. And show me how much stock is publicly available that's not locked up. And ask one simple question, why did you not distribute? I think the amount of money that private equity, growth equity, venture firms, cost their investors by not selling in mid to late 21 is in the tens, if not hundreds of billions of dollars. And what I can't understand is the GP could have distributed the stock and held the stock themselves. And if you're in the McCurry a bunch, the math almost flows the exact same way.

• 42:41Speaker 03

  I think people forget that good investment and good company are two fundamentally different things. And I think people just got greedy and think that stocks are going to go to the world. I think that's the most important thing.

• 42:52Ted Seides?

  How do you think about the growth of Lead Edge from here?

• 42:55Speaker 03

  Lead Edge is like a portfolio company of ours. We've been investing about $5 million a year since 2017. I think actually what's probably the most unique about Lead Edge is we're very young. So I am 43, my partner Brian is 43.

• 43:13Speaker 03

  We have seven kids between us. My 36 year old partner, Nime, has no kids. And we're having fun. We could have retired long ago. This doesn't work for us. I work nonstop. I don't know what vacation is. I might not work from an office, but I'm constantly working because it's fun. It's like a giant game. That's the best advice I have for people, by the way. Whether you're going to work for a hedge fund, a real estate fund, public fund, a private fund, a venture fund, a buyout fund, you better love doing it because if you don't, you won't win. Because the person who loves doing it is thinking about it in the shower. And that person will beat you.

• 43:49Ted Seides?

  What do you think makes Lead Edge special?

• 43:53Speaker 03

  I think it's a culture. I sit down with every employee at Lead Edge every February for 30 minutes. And I got the idea from the founder of a giant private equity fund. And basically ask them three questions. Before the meeting, you have to come in in red, green, or yellow. What do you do in your job? Let's figure out what those things are that you do that you don't like doing. Let's figure out how we can do them better. Who else could be doing them? How can we make the process more efficient? Two, if you were me running the firm, what would you change? Last question, how can I make your job easier? The feedback you receive is incredible. I have to pitch people, I'm like, nobody who runs firms does this. Our public fund does a quarterly call. I'm invested in 15 hedge funds. I'm the only public fund that does a call.

• 44:38Speaker 03

  I can't explain why every fund doesn't do a call.

• 44:41Ted Seides?

  All right, Mitch, I want to make sure I ask you a couple of fun closing questions.

• 44:44Speaker 03

  Sure.

• 44:45Ted Seides?

  What is your favorite hobby or activity outside of work and family?

• 44:48Speaker 03

  Ski racing, bike racing, and car racing.

• 44:52Ted Seides?

  How do you think about the risk management of all three?

• 44:55Speaker 03

  Actually, I guarantee that people would think car racing is the most dangerous thing. I can assure you that the number of people that have died racing cars over the last 20 years because of the Hans device, five point harnesses, roll cages. Less people have died racing legit race cars. The number of people that have died riding a road bike in the last month is much higher.

• 45:20Ted Seides?

  What's one fact that most people don't know about you?

• 45:24Speaker 03

  That I'm really not that smart. My kids tell me that. My wife tells me that. All my friends tell me that. I'm just the most persistent person on the planet.

• 45:32Ted Seides?

  What's your biggest pet peeve?

• 45:34Speaker 03

  People that say they're gonna do something and then don't do it. It drives me insane. Don't say you're gonna do something if you're not gonna do it, which is fine, but if you say you're gonna do it, actually do it.

• 45:44Ted Seides?

  Which two people have had the biggest impact on your professional life?

• 45:48Speaker 03

  Probably Jeremy Levine at Bessemer, who I worked for, and probably Bill Grave, who was one of the original General Atlantic partners, who's been LP and Lead Edge since Fund 2. Jeremy just taught us to be very rigid in our framework, stick to what you know and avoid everything else. Bessemer criteria came from Jeremy. We evolved it together and he's like, just ignore everything else. Amazon might be this giant company, but again, we avoided all the crappy food delivery companies because it didn't fit five or more criteria. And then Bill Grave has just been very good at firm building. He was at General Atlantic from very, very small when it was five people to a firm and he retired when he was 75 that probably had 400 people.

• 46:30Speaker 03

  And he's seen everything, how to mentor people, how to incentivize people, how to compensate people, all these different things.

• 46:38Ted Seides?

  What's the best advice you've ever received?

• 46:41Speaker 03

  Persistence is more important than smarts, for sure.

• 46:44Ted Seides?

  All right, Mitchell, last one. What life lesson have you learned that you wish you knew a lot earlier in life?

• 46:49Speaker 03

  The power of thank you notes. Very early on, my mom and my grandmother, like everybody's mom and grandmother does this. But it's a lost art and we literally get CEOs who write us LinkedIn posts or Twitter posts or X, whatever, or thank you emails for a thank you note. Gratitude just goes a long way. And in a world that's increasingly becoming more transactional, if you try to go out and create personal relationships, it actually goes a long way. If you believe what comes around, goes around in life, and if you're constantly trying to help people, occasionally you get screwed, but usually you don't.

• 47:33Ted Seides?

  Mitchell, thanks so much for sharing all these insights in how you're leveraging relationships.

• 47:37Speaker 03

  Absolutely.

• 47:39Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.