Capital Allocators – Inside the Institutional Investment Industry
Episode: Mitchell Green - Lead Edge of Harnessing Networks (EP.429)
Release Date: January 27, 2025
Host: Ted Seides

Introduction to Mitchell Green

In episode 429 of Capital Allocators, Ted Seides welcomes Mitchell Green, the founder and Managing Partner of Lead Edge Capital. With $5 billion in assets under management, Lead Edge specializes in growth equity investments in software, internet, and tech-enabled businesses. Mitchell shares insights into his journey, investment strategies, and the unique approach Lead Edge takes in leveraging its extensive network of Limited Partners (LPs) to add value to portfolio companies.

Early Career and Path to Finance

Mitchell Green's interest in business and finance was sparked early on in Grand Rapids, Michigan. Growing up in a family with a manufacturing background, Mitchell was exposed to the intricacies of running a business from a young age.

• Background and Family Business:
  "I started working in our family's business, actually on the manufacturing floor... I learned very quickly why you go to college."
  [04:50]

• Education and Early Ventures:
  Mitchell ventured into entrepreneurship during college, starting a company and navigating the challenges of raising capital, especially during the tumultuous period around 9/11.

• Transition to Investment Banking:
  After leaving his family's business, Mitchell gained valuable experience in investment banking, working at Barrington Associates in LA and later joining UBS's M&A group in New York. However, he soon realized that the role wasn't a perfect fit for him.

Learning Cold Calling at Bessemer Venture Partners

Mitchell's tenure at Bessemer Venture Partners was pivotal in shaping his investment approach. At Bessemer, he and his partner Brian became the first two cold callers, a strategy that distinguished them from other venture funds relying solely on inbound deals.

• Cold Calling Strategy:
  "If the company called you back, it really sucked. That's the CEO you want to get on the phone."
  [07:00]

• Building Relationships:
  Mitchell emphasizes the importance of connecting CEOs and fostering a network where mutual growth is possible. This outbound approach allowed Bessemer to identify and engage with promising companies early.

Transition to Hedge Fund and Founding Lead Edge

After his stint at Bessemer, Mitchell sought a more differentiated path in public investing, leading him to a hedge fund seeded by Julian Robertson at Tiger. His proactive approach in leveraging his network led to significant investments in companies like Bazaar Voice.

• Founding Lead Edge Capital:
  "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 life cycle."
  [15:31]

• Building the SPV:
  Faced with challenges during the 2008 financial downturn, Mitchell successfully raised $10 million from 60 investors through cold outreach, demonstrating resilience and innovation in fundraising.

Investment Strategy and Criteria (Lead Edge 8)

Lead Edge Capital employs a rigorous set of criteria, known as the Lead Edge 8, to evaluate potential investments. This framework ensures that only companies meeting specific financial and operational benchmarks are considered.

• Evolution of Investment Criteria:
  "The same thing we did at Bessemer. I knew the companies were out there. Let's build an outbound cold calling program."
  [19:28]

• Lead Edge 8 Highlights:
  The criteria include revenue thresholds, growth rates, gross margins, profitability, and customer retention metrics. This meticulous approach minimizes risk and ensures capital efficiency.

• Defining Efficiency:
  "We define an efficient business as anything that's a one to one ratio or better."
  [22:45]

Leveraging the LP Network for Value Add

One of Lead Edge's standout features is its extensive network of over 700 seasoned executives, entrepreneurs, dealmakers, and celebrities. This network is instrumental in adding value to portfolio companies through strategic introductions and advisory support.

• Network Utilization:
  "We're acting as our version of McKinsey, but that version of McKinsey helps us win."
  [28:15]

• Case Studies:

  • Benchling: Leveraged LPs to introduce the company to industry leaders, facilitating rapid growth and strategic partnerships.
  • Toast: Connected portfolio companies with LPs owning restaurants, leading to significant customer acquisitions.

Diligence and Risk Management

Mitchell underscores the importance of thorough due diligence, especially as companies grow and become less transparent. Lead Edge maintains high standards, often shifting focus to bootstrapped entrepreneurs in diverse geographic locations to mitigate risks.

• Diligence Process:
  "We pride ourselves on doing really hardcore diligence."
  [31:04]

• Risk Mitigation:
  By focusing on capital-efficient businesses with strong gross dollar retention, Lead Edge minimizes the probability of total loss, viewing investments as akin to one-way call options.

Exit Strategies and Fund Performance

Lead Edge employs a proactive approach to exits, utilizing a dedicated disposition committee to evaluate optimal exit timing and methods, including public listings, strategic sales, and secondary sales.

• Exit Mechanisms:
  "We have a disposition committee that meets a couple times a month... We constantly want to think about is now the right time to sell."
  [38:10]

• Performance Metrics:
  With a focus on DPI (Distributions to Paid-in), Lead Edge aims for 2 to 2.5x returns without incurring significant losses, maintaining a strong loss ratio with only one or two total losses to date.

Culture and Team Management at Lead Edge

A strong, transparent culture is at the heart of Lead Edge's success. Mitchell prioritizes open communication, feedback, and personal relationships, fostering an environment where team members feel valued and empowered.

• Operational Transparency:
  "Treat people like you yourself want to be treated."
  [36:55]

• Employee Engagement:
  Regular one-on-one meetings and a commitment to personal and professional growth ensure that the team remains motivated and aligned with the firm's values.

• Acknowledging Mistakes:
  "We will go on calls and be like, we screwed up, we were wrong on this investment."
  [36:55]

Personal Insights

Mitchell shares valuable life and professional lessons that have shaped his approach to investing and leadership.

• Importance of Persistence:
  "Persistence is more important than smarts, for sure."
  [45:40]

• Power of Gratitude:
  The practice of sending handwritten thank-you notes fosters strong, lasting relationships and underscores the firm's commitment to personal connections.

• Mentorship Impact:
  Influential figures like Jeremy Levine and Bill Grabe have been instrumental in guiding Mitchell's strategic and operational decisions, emphasizing rigid frameworks and effective firm-building practices.

Conclusion

Mitchell Green's journey from a family business in Michigan to leading a $5 billion growth equity firm exemplifies the power of persistence, strategic networking, and rigorous investment criteria. Lead Edge Capital's unique approach to leveraging its expansive LP network not only differentiates it in the competitive landscape but also provides unparalleled value to its portfolio companies. Through a culture of transparency, continuous learning, and personal relationships, Lead Edge continues to drive impressive returns while fostering sustainable growth in the companies it invests in.

Notable Quotes:

• "Persistence is more important than smarts, for sure." — Mitchell Green [45:40]
• "Treat people like you yourself want to be treated." — Mitchell Green [36:55]
• "We define an efficient business as anything that's a one to one ratio or better." — Mitchell Green [22:45]
• "We're acting as our version of McKinsey, but that version of McKinsey helps us win." — Mitchell Green [28:15]

Resources:

• Lead Edge Capital Website: leadedgecapital.com
• Capital Allocators Community: capitalallocators.com