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

Summary

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

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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.

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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.

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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.

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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.

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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]

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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.

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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.

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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.

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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]

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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.

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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.

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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]

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Resources:

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

Transcript

[Ted Seides]

Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30 something years investing in managers, there may be no one I've come across who does that as clearly and as well as wcm. I've seen it up close. As an investor in their international growth strategy for the last five years, WCM is a global equity investment manager majority owned by its employees. They believe that being based on the west coast, away from the influence of Wall street groupthink provides them with the freedom to live out their investment team's core values, think different and get better. As advocates of integrating culture research into the investment process and advancing wide moat investing with the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. WCM is committed to defying the status qu by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of themselves. To learn more about WCM, visit their [e-mail] and tune into this slot on the show to hear more about WCM all year long. This testimonial is being provided by Ted Seides and Capital Allocators who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators testimonial and production of podcasts and is not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADB and further information. 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 [e-mail] All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the.

[Mitchell Green]

Opinion of Capital Allocators or their firms.

[Ted Seides]

This podcast is for informational purposes only.

[Mitchell Green]

And should not be relied upon as.

[Ted Seides]

A basis for investment decisions.

[Mitchell Green]

Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

[Ted 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 custom 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. 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 shark is my son Eric.

[Mitchell Green]

My name is Eric Zaides and I'm the creator of the food truck concept design called EB's Bombastic Buns. EB's meaning Eric's Burgers Bombastic Buns.

[Ted Seides]

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.

[Mitchell Green]

Which is lobster queso cheese on a burger patty on a whole wheat bun.

[Ted Seides]

This has absolutely nothing to do with.

[Mitchell Green]

The podcast, however, I think you should still be listening. Thank you so much for spreading the word.

[Ted Seides]

An important disclaimer VB's Bombastic Bums 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 9th 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 in our Spread the Word Shark Tank. Please enjoy my conversation with Mitchell Green. Mitchell, thanks so much for joining me.

[Mitchell Green]

Absolutely. Thanks for having me on.

[Ted Seides]

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

[Mitchell Green]

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 own 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 Paine 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. In fourth grade I had a paper route. By fifth or sixth grade I had three 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 learned 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 it helps me understand weird things like inflation and why Trump's been so popular and a lot of people in the coast can't understand it. Then started a company when I was in college. Left Williams, of course. We were raising our Series B right around 9 11. That did not happen. I begged to get back into Williams, got into Williams, did a couple 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 and the M and A group in New York. And three months in I realized I was a glorified PowerPoint monkey. Making PowerPoints at three 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 one year in the M and A group. And then I found an online job list in for Bessemer Venture Partners. And I had known Bessemer as this world class early stage venture fund. And so I just applied for the job. And at the time Bessemer was this world class early stage shark tank esque venture fund. There were five partners and a thousand entrepreneurs would walk in and they 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 Horing 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, 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 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 ran 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 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 of 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 call every two days for a month. That's the CEO you want to get on the phone.

[Ted Seides]

How did you think back then about the investing path compared to joining the family business and the operating business?

[Mitchell Green]

Oh, I actually wanted to join the family business and my dad sold it in May of 2007. Family dynamics. I really wanted to run the company. I thought there was 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. Because 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.

[Ted 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. How you're doing the cold call part of Venture. Where do you take it from there?

[Mitchell Green]

I left Bessemer. 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 Atlantic and tcv, other than some people wrote bigger checks and smaller checks. But since 2004, if you were an investor in 20 of these funds, you as an LP have made a ton of money. 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 90s growing up. And in the late 80s, I traded stock since I was 7 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 Kingdon's Asian fund and had made a ton of money and been very successful. 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 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 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 or 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 would go meet the CEOs and CFOs and I sat in One of these meetings. In 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 came to me. His business card. He was 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 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. The founder had gone to Wharton as well, and he 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 was never going to sell 20% of the business. But if you guys want to put in 5 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 a year, 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, I have this company, it's growing fast. I want about 2% of it. It's a combination of common and 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. We ended up making this investment May of 08 helped him a bunch started seeing other deal flow. Guys at Battery Ventures and Austin Ventures kept introducing us to people. It's like, listen, if you can help us, our Voice, can you help homeaway? Can you help all star directories or a few of these that are companies? The founder of the hedge fund was like, let's go raise a 30, $40 million fund and we'll put Alibaba in it at 3 bucks a share or something. And Bizarre Voice said basically nothing and we'll raise 30, 40, 50 million bucks. 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 funds down 55 gated. Fairly 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 Bazaar 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 3 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 until I basically went out and cold emailed and cold called every person who was on the board at UPenn, the board at Williams. 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 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.

[Ted Seides]

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

[Mitchell Green]

I told Everybody in the SPV it had to be 2 in 20. And a bunch of people were like, I'm not paying two. 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. They closed the first one in May of 09. I think it was 8 million bucks. And then I became the cap table janitor at Bazaar Voice and just bought up any share lots I could find. I would email our LPs, Hey Bizaarvoice 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. You're being super transparent sharing all the financials with your LPs, which tons of funds do not. I'm going to have tons of transparency and I'm going to ask for help. So then a few quarters in, people would see the company continue 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 bazaar 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 Monetate and raised a couple million bucks in it. Same way I funded it. 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, 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 going to raise a $50 million vehicle 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 1, 2, 5 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 1 investors. And if you're alive or not divorced, I bet you 90 to 95% of those people in Fund 1 are in Fund 6. It's all been word of mouth. We had no institutions at the time. Every institution we've had has been word of mouth. 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. So if you don't want to get these emails like you got on Bazaar Voice, 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.

[Ted 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?

[Mitchell Green]

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, which are these eight criteria that we look at. Every company that we source goes through these criteria. At the time we had the lead edge 6 at Bessemer, it was the Bessemer 5. Every Monday we'd pitch the partners at Bessemer their 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. Like, what do you got next? Oh, we found the next Amazon. No, this company sucks. They're like, okay, find this companies that meet 10 million plus of revenue. So we find a company that's like $12 million in revenue, growing 8% a year. No, find these things that are growing 50 plus percent a year. You find a company that has three customers. No, it's got to have a diversified customer base. Then you find something with 8% gross margins. They'd be like, no, find me Companies that have $10 million plus in revenue growing 50% a year. That have diverse customers that have 70 plus percent gross margins. I'd be like, well, I can't find any companies. They're like perfect. When you start the conversations on Monday, you're gonna 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 six. 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.

[Ted 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.

[Mitchell Green]

The additional one was from an EBITDA line, was it 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 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. 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 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.

[Ted Seides]

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

[Mitchell Green]

So let's use Refinery29, which was a bootstrapped 5, $6 million 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. And then we email 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. We're different than any other funds that we'll 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. And then you're like, oh, by the way, how big are you guys? I see you're 50 employees on LinkedIn. What are 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.

[Ted Seides]

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[Mitchell Green]

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, is smart, and is also a journalist. So you got to be a persistent journalist who's smart because you got to be persistent to get the CEO on the phone. You got to be a journalist to be able to extract information from the CEO on the phone without knowing you. Additionally, you got to have a little bit of sales because you got to also be able to 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. 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 what, I'll take a call with this guy. This guy's persistent.

[Ted 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 their to winning a deal?

[Mitchell Green]

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 ten thousand to a thousand. They meet five or more criteria down to 150 due diligence. The most common reason is nothing to do. Guy 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? 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 a great example. So benchling, 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, 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 want to meet the former CEO of Biogen? Would you want to meet a board member of J and J and the CEOs 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. That 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 public company. 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.

[Ted 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?

[Mitchell Green]

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 20, 19, 20 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. Yes, 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 away a lot from Silicon Valley towards more bootstrapped entrepreneurs in Ames, Iowa or Sarasota, Florida or Nizwa, Minnesota. 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 processes 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 theses and customer reference calls. But all that type of work we do very deep work on what's your.

[Ted Seides]

Playbook for the value add. Once you invest in a company, one.

[Mitchell Green]

Size doesn't fit all. So about 70 ish percent of the time we're on the board. You should think about it is 30% of the time we're not on the board. By the way, we're invested in ByteDance, we owned 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, our batteries in there. And we're minority investors too 2/3 of the time. We're the first institutional investor. That is where we're going to engage. More of 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/LP's 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 asking if I know people that know how to expand in the uk. 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 a 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. If we don't have like a one size fits all, we do not come into a company and have the Vista 200 point playbook or the Thoma Bravo playbook. It's more just very ad hoc.

[Ted 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?

[Mitchell Green]

There's a couple, 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 are 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 going to say, listen, don't invest unless you want to help. 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. It's just about 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. And no different than if you were a software company selling HR software and you had 700 customers, what would you do to get them to buy more? We run it exactly the same way.

[Ted Seides]

What have 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.

[Mitchell Green]

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 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 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.

[Ted Seides]

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

[Mitchell Green]

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.

[Ted Seides]

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

[Mitchell Green]

So that's a great question. We have a disposition committee that meets a couple 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 that's already an existing investor in the company. We are investing in private companies. Liquidity windows don't come constantly.

[Ted Seides]

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

[Mitchell Green]

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 list in 20 and 21 just because that was a way to exit them very quickly. We want to make 2 to 5 x 3 to 7 years, slap it into a fund, make 2 to 2.5x net funds and not lose freaking money. Our loss ratios are very strong. We've only lost all of our money on one of 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. You may have overpaid but then preferred stock helps you in. Less than a third of companies I think have any debt on them. What gets the buyout fund in a lot of trouble is just leverage. The companies still survive. They just over levered the business.

[Ted 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.

[Mitchell Green]

I would rate most funds information disclosure as awful. Not bad, awful. I don't think it's because they want to get lucky. 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 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. Then I say show me your September 30, 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 MAKARYA Bunch. The math almost flows the exact same way. 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.

[Ted Seides]

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

[Mitchell Green]

Lead Edge is like a portfolio company of ours. We've been investing about $500 million a year since 2017. I think actually what's probably the most unique about Lead Edge is we're very young. I am 43. My partner Brian is 43. 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.

[Ted Seides]

What do you think makes Lead Edge special?

[Mitchell Green]

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 him 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? 2. 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've talked to many 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. I can't explain why every fund doesn't do a call.

[Ted Seides]

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

[Mitchell Green]

Sure.

[Ted Seides]

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

[Mitchell Green]

Ski racing, bike racing and car racing.

[Ted Seides]

How do you think about the risk.

[Mitchell Green]

Management of all three 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.

[Ted Seides]

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

[Mitchell Green]

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.

[Ted Seides]

What's your biggest pet peeve?

[Mitchell Green]

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

[Ted Seides]

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

[Mitchell Green]

Probably Jeremy Levine at Bessemer, who I worked for, and probably Bill Grabe, who was one of the original General Atlantic partners who's been an LP in 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 Grape 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. And he's seen everything. How to mentor people, how to incentivize people, how to compensate people, all these different things.

[Ted Seides]

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

[Mitchell Green]

Persistence is more important than smarts, for sure.

[Ted Seides]

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

[Mitchell Green]

The power of thank you notes. Very early on, my mom and my grandmother, 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 get screwed, but usually you don't.

[Ted Seides]

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

[Mitchell Green]

Absolutely.

[Ted Seides]

Thanks for listening to the show. To learn more, hop on our [e-mail] 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.