Mitchell Green - Lessons from Cold Calling 10,000 Companies - [Invest Like the Best, EP.464]

0:02 And welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper. Check out Colossus, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus along with all of our podcasts at Colossus.com. Chick O'Shaughnessy is the CEO of Passive Sum.

0:29 All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, Visit PSUM dot VC Mm. My guest today is Mitchell Green, the founder of Lead Edge Capital. When I think about lead edge, I sort of think about this giant money machine that Mitchell and his two partners have designed over the last fifteen plus years to make remarkably consistent investment returns for their clients.

1:08 They have all sorts of unique aspects to the machine that they built, whether that's their collection of LPs, their eight point criteria for how they select companies, the way they do cold calls, the way they construct their portfolio. This is just a totally different way of approaching markets. They're trying to hit singles and doubles and deliver very consistent returns. Mitchell says it's really important in life to be memorable. That's just a great simple thing that you can do. I think you'll find listening to Mitchell today and him talk about his entire machine and the firm that he's built, that he himself is extremely memorable. I hope you enjoy learning about his business.

1:42 So the first time that I heard about Lід Capital was the very famous. list of what companies report Starting with cash profits. And then if they don't have cash profits and you go down this very funny list. Hierarchy of bullshit. And the bottom one is the place that's voted the best place to work in New York City or something. Absolutely. Where did that list come from? How did you put that together? We've always found that the best way to communicate with our audience is which is entrepreneurs.

2:08 And also our LPs, our clients effectively. is to like write a quarterly letter about a different topic. And I started my career. Cold coin company isn't that's the way we source deals. When you start your career talking to

2:22 I think Brian and I probably spoke to like ten thousand companies. And if you want to know it's a good company, just Call ten thousand. You'll figure out really quick, it's pretty good pattern recognition. Until our head of PR comms came in a few years ago. We had actually never posted any of these things online. We joke that We sent this letter to some people in the VC community. One of which is like our buddy then Tressan Horowitz. And they post it line for us. We just like it's like a

2:49 Very simple way. People spout off total bullshit all the time. And like you see everything in Dex. This is just a good way to distill it. Talk to me about the ten thousand calls. What did you learn?

3:03 Calling that many companies. You learn to be very disciplined, actually. And you learn that Most things are actually just noise. And to figure out what makes A lead edge company.

3:15 And then try to ignore everything else. And you learn a lot about like responsiveness of people and more responsive CEOs tend to be better CEOs. I think another thing you learned that's really important for young people, if you tell an entrepreneur That you're gonna actually do something. didn't actually do it. Well I think that's actually true of like a life.

3:33 There are so many people that say they'll do things that just never do'em. And so if you're known as a firm and a person. That actually does what you say you're gonna do? It goes a long way. So if you tell an entrepreneur, Hey, I know somebody at Adobe. Do you want an intro?

3:47 It looks like we help for your business. And then here she says I'd love to. Well then guess what? Follow up with that. Do what you say you're gonna do. Can you describe

3:55 What seems to me like I would call it a machine that is lead edge. Much more than most investment firms where A lot of great investors will tell you there's a lot of art, everything's different. Lead edge feels to me like unbelievably well constructed as a machine to produce returns. Yeah. Before we go into all the component aspects of the machine. Describe the machine itself at a high level before I get off on a tangent.

4:19 We run this place like it's a software company. My background was it Bessemer? I worked for somebody that was extremely disappointed and was building a code client program. Part of Brian Workship Bustomer? The first two co cars and my other partner and you may work at Insight. And I think Insight, Jafarne was on recently.

4:33 is one of the best software investment or technology investment machines on the planet. So we've like modeled ourselves on that. to build a good investment firm that stands the test of time. If you want to go build the next TA associates or General Lannock. Or Bessemer.

4:51 Oh Sequoia. You just have to be like extremely rigorous, to our number one. KPI that we run this place by. Is what is our gross dollar retention for LPs. We want ninety five percent gross dollar retention because the only way you can get that.

5:08 Is one. Have good investment returns. And great client services. So how do you Through long periods of time.

5:17 Across people that will come and go. generate world class returns that you need to have a process. І не просе про ас. Starts with eighteen.

5:27 twenty two To twenty four year olds. that talk to about nine thousand companies a year. You get those nine thousand companies. How do you figure out which ones to work on? So then you need this framework.

5:39 To guide these eighteen people to like well, it's gonna be interesting company because in the investment business. We have one That's it. It's time. And it's precious. And so, like, how do you guide people to say no quick? And so we built this framework.

5:54 That we really took from coming out of Best More. And so they helped build the Best More five. We took the best number five, turned it into the lead edge, and it's like drives everything. We do. Now when we find the company Or then super creative. We'll buy ten percent, eighty percent, LPs out of a twenty year old fund, buy employee secondary, fund somebody C V. We don't care, we'll the way then.

6:15 If I think about the two sides being the LPs and the companies that you invest in, I'll come back to the eight criteria. The L P story that you have is also quite distinct and different. Can you describe that in a lot of detail? RLP base is all world class execs and entrepreneurs. Now we do have some big institutions, but 95% of our capital is all these world class execs and entrepreneurs. And We use these LP is

6:37 Throughout the entire investment life cycle. It literally starts with sort if a company won't call us back. Well email R P is two. But say it's like an automotive software company. We'll have Rick Wagner, the former CEO GM.

6:51 Who's a long time investor? We will send them the CEO a note. If you're like an automotive software CEO and the former CEO at General Motors College, they're way more likely to take an email than my knucklehead email, and I'm a twenty-two year old email, and I'm Then for diligence. We'll say, Hey, you're a healthcare software company.

7:06 twenty five million of revenue. Maybe you say like biotech or pharmaceutical software. It's like oh I see Pfizer's a customer. How big is it? Two million bucks. Could it be bigger? Oh, it could be ten million. I'll meet the former CEO.

7:18 And then I'll call up Ian Reed and be like Ian. Clearly talk to this company, they'd love to talk to you. But can you tell us what you think? And then if it's super interesting, could you look called Pfizer and back channel it? And then you might say to the entrepreneur, hey, I don't see biogen the customer. Would you want to meet the former CEO? So then you call George. Like, hey George, I found this company. I meet seven of our eight criteria. Then post investment. We literally send emails to our LPs.

7:40 Toast is looking for intros to these restaurants. Do you know anybody? And it turns out all these people invest in funds. And never get asked help. That's

7:48 how we do it. And how we leverage them, but it's not actually why we did it. It would be a lot easier. to go have twenty giant institutions, right? You have fifty to three hundred million dollar checks versus me spending a huge amount of my time running around the world all the time spending time with these people. Because if you want ninety five percent retention, that's what you need to do.

8:06 The reason we did it. Is because I knew That the returns in this sector in the tech investing sector flow. To the Top 10% of funds. They just do. It probably is the same in real estate. It probably is the same as industrial buyouts, but like I knew in the venture world.

8:22 That it definitely flowed to that. And I had the pleasure of working for one of these firms, best for venture partners. So when I was starting late edge, I was like, Why in God's name is anybody gonna take my money? I could teach him how to ski, but that isn't gonna be very helpful. But I said you know what?

8:37 Had I Ben. The global N HR at Project Yamble. And my partner have been the global head of HR at Microsoft and the other one been the head of HR at Nike.

8:49 When I called a work day eighty times a bass mark and Dave Duffield was by the end was like, I'll hire you as a salesperson. I'm not taking your guys' money. If I had been like a wolf class HR exact, he would have engaged with me. Because he would have known that I could have introduced two of those companies like I have tons of other HR exactly. I know these people. In a world that's super crowded and undifferentiated. And I think it's Exponentially the case.

9:10 More today even than what it was fifteen years ago. It just like differentiates us. And we do what we say we're gonna do. How many LPs do you have? Probably like eight hundred. Ninety five percent by number are these executives. Yeah.

9:22 If you think about the level of returns versus the consistency of returns. How much does one matter versus the other for this ninety five percent? Gross retention. I think consistency is more important.

9:32 per deal basis We're trying to make A two to five acts. In three seven years. That's like a twenty five net hour.

9:43 If you just actually map it on a curve. Put it into a fund. We want to generate you two to Two and a quarter accents. with twenty net irr. Some of those deals aren't gonna have the five X's, some of them might be point seven X's.

9:56 Our downsides have been very low. I think we've only lost all of our money in one deal ever. And that's because of the kind of criteria we look for in a company, what our average company looks like, and the fact that very few of our companies have any debt on them. No. I'm trying to make a two to two and a quarter X net. Which is more like a two and a half X gross. However If something is a really big

10:16 Investment in the fund. And we do not run funds with like a hundred companies in them. We run funds with twenty investments in them. So if we've made something at seven, ten, twelve, fifteen percent position. And that goes eight, ten, twelve X. That's how you can throw action out of fund. Yeah.

10:32 And so Because you really lose money, does that mean you also almost never hit some like giant Grand Slam. Correct. We're like Cal Ripk, doubles and troubles. We're not Sammy Souza. Or like Mark McGuire. It's all about hitting doubles and troubles. And if you do that. With very little leverage in the portfolio.

10:50 Ninety percent of our companies or eighty five percent of our companies are like recurring revenue. So if you invest today and know what revenues are in July, that's a pretty good way to invest. fifty six years of recovery like profitable businesses. You may get it wrong. You may The wrong team. He made overestimate the size of the market.

11:09 But I think seventy percent of time we own the pref. You're downside to one X. Now, sometimes you need to we cut the deal with the entrepreneur or the management team. So you're making slightly less than that. But if you can avoid zeros. And turn the zeros into like point eight Xs or point one X's. Yeah, that helps return. We'll sell.

11:25 probably a third of our assets have been secondaries. We will buy secondaries, we will also sell. We constantly underwrite. We've been referred to as traders, hedge fund guys, and we're like, No, no, we're just trying to actually make money. Because this company's about to be a living debt and you're gonna be in this thing for the next decade. Maybe spend a minute before we go through the buy criteria talking about selling more. What is the process? That you run to be able to sell all. We have a devastate committee. There's three of us, myself, by anime. Been here all since fun one.

11:50 Yeah, but disposition committee. Same thing. We think a lot of firms Do a really, really good job. And why? Very, very few firms. do a very good job on sell, like knowing when to sell.

12:01 pressure in the cell and I would tell you that the private equity fund tend to do a much better job. On the cell Than most venture growth guys. hedge funds and you do most public equities or only funds, you constantly can buy and sell.

12:14 Three of us meet. Once twice a month. And just walk through the portfolio and just talk about it. Like hey There's a round going down in this company. Should we sell?

12:25 How can we try to position this company for a sale over the next twelve months? The fastest way to get fired at lead edge is have a company. And not tell us when there's a liquidity opportunity. Or just something's about to happen before it happens. What does the holding period end up being on average then? I bet our average old are Three and a half to four years probably.

12:43 Everybody gets all excited about it. twenty fifteen, twenty sixteen, twenty seventeen, twenty eighteen returns. So our fifteen and eighteen returns look very good. But it's just multiple expansion we sold. If you think you're gonna make it two X in four years and you make a four X in two years. It's amazing what it does to NetIR.

13:02 People forget the reverse happened in twenty and twenty one. Nobody's twenty and twenty one funds. I think adventure growth. Ecosystem gets a bad rap. But it's gonna be every alternative asset. They're twenty and twenty one funds. Are gonna be awful.

13:18 relative to earlier funds because people thought they were gonna make A forex and two years and are instead making it one point six X in eight years. And so like that's gonna drive that's gonna have a huge impact on the industry. What is the most interesting thing about the skill of selling and

13:34 making the transaction happen. Like presumably it's easiest to sell in private markets when a lot of other people are really excited about buying. You can't just hit sell like in public markets. Correct. Maybe in like a bad, medium, good. There's different kinds of outcomes. That you'd be selling into

13:49 Are most of your sales into everyone else's excited and you're less excited? It can be everything in between, but If a company goes public. It's just K to two to five X in three to seven years. And then sell. So you're like the company goes public? You're at like a three point three X. And Eighteen months.

14:07 Twenty four months. They're like to annihilate a twelve percent or twenty percent that R R It's a great company. But we constantly are underwriting like what's the forward net return from here. We made like a three X in eighteen months. That's like an IPO.

14:21 In a Secondary sale It's about underrating the four IR in toast, which is one of our biggest investments. Which we put like twelve percent of our fund three into. And we'd always get crap, but our fund three was like a two hundred ninety million hour fund.

14:35 And and we put like thirty six million bucks into it. And before the IPO we had sold a hundred and eighty million bucks. We think we'd make three fifty to four hundred in it total. Why you sound you don't believe in us? We're like, no, no, all these other knuckleheads that invested alongside us, none of them put twelve percent of their fund in it. And by the way, somebody is paying us a price in the secondary markets that we think e is just lunacy.

14:55 We sold like in the secondary markets like forty or fifty bucks in toast to stock today is Thirty bucks. But it's just by the way, we sold like six years ago. And so it's constantly underwriting forward IRR. Okay, now I get to talk about the eight buying criteria. I don't know if you wanna kick them off or give us some highlights or So there's eight criteria.

15:15 Ten million plus in revenue. Bye. Do you have like product market fit? Are you going? 'Cause we don't have startups. Are you growing like twenty five percent a year?

15:24 Returns to gross. We don't use leverage. We have seventy percent plus gross margins. Why? 'Cause at the end of the day

15:31 You trade on multiple fronts. Revenue multiples are just shorthand math for what it will be even have multiples or earnings multiples when you don't grow that fast. There's a reason that Facebook gives away electronics in the vending machines and Dell charges for Cokes. And we think that just drives at the end of the day earnings. Are you recurring?

15:54 It's like a heck of a lot easier. to invest knowing what revenues will be in July than they are today. Are you capital efficient? This metric is probably kept us out of the most trouble. It's like our version of return on equity. I mean I think it's more buffer with the gradients, but

16:08 Are your revenues today? Greater than your historical cash market. So what I've got. There's twenty of revenue. Have you burned eighty?

16:18 Like every other tech company. Cumulatively. Yeah. Have you burned eighty since inception? Or have you burned ten since inception? We're looking for like this one to one ratio. In a world where capital is a commodity. And capital is everywhere. If you can build a business that's growing nicely while burning less than your revenues. You've got a pretty good business. We don't invest in startups. If invest in startups are two million dollar revenue companies, then obviously it's harder.

16:42 Are you profitable at the bottom line? Do you have any customer concentration? I just don't want to wake up and find out forty percent of my revenue is like disappeared because some customer decided they don't want to work with you. I want to talk about the price you're willing to pay. for companies and how you would plot yourself on the So much of this sounds like a private equity strategy. But you mentioned toast and it's not like

17:01 The high growth rate. And it was We pay like five hundred million bucks, it was like twenty times revenue. People are like that's crazy. Not when it went from ten to twenty five.

17:13 So we just try to build a forward model and you're like Look, you can pay as high as prices you want. You just gotta be right on your excess. You gotta be right on your multiple. How people got in a bunch of trouble in twenty twenty and twenty twenty one. I think they're gonna get in trouble today and all this AI stuff.

17:29 Is They just assume the exit multiple is twenty to twenty five times. That's insanity. No, so you can pay twenty or twenty five times revenues. And if you're right. Like some of our companies have been

17:43 Then it's fantastic. But you can also be wrong, like some of our companies have been, and you look like an idiot. I think investing in open AI hundred billion is a little insane, personally, but like I don't know, if it goes on to do a trillion dollars of earnings, yeah, I was gonna be very wrong. I should have invested. It's almost like shorthand, or. If you're like if this company grows And doesn't d sell much.

18:03 For eighteen months. Am I in the money and can I make like a decent return for what I'm paying? And if the answer is oh I'm not even in the money in eighteen months or twenty four months, yeah, you're paying way too high price. So right now there's this seismic thing. You can look at the constellation and the constellation software stock price or something as the Perfect.

18:19 visual indicator of what's been going on, which is like a ski slope. boring traditional high gross margin software businesses are worth like much at all. But I'm curious how you process this moment. Where I'm sure a lot of the companies you're looking at are software companies.

18:36 That have a lot of the components that make people fearful of the similar kinds of companies in public markets. Our belief. For right or wrong. Is that

18:46 The competitive advantage of software company has never been about R and D. We're not building semiconductor chips. We're not building biotech in former companies. This isn't that it's to build like chamber of commerce software? You too could build this.

18:58 My mother couldn't, but my brother could. No problem. Success Microsoft. Any of our companies in our portfolio. If Microsoft took five hundred people.

19:06 And gave him a month? Each one of our companies could be out of business, but they just don't care a lot about the chamber of commerce market. They don't care about the price optimization market for manufacturing companies. They don't care about the tax, the tax software market for a very specific product. Software companies are really about like distribution. Sales and marketing. Касомер сус.

19:25 Client services. We believe That it is the incumbents game to lose. in software today. I'll give you a couple of samples.

19:32 Okay. has like ninety eight or ninety nine percent gross dollar attention. It grows ten, fifteen percent a year. Oh, only goes ten percent a year. I'm sorry, it's like ten billion of revenue.

19:42 It only took like twenty years to get there and it there was like three billion of free cash flow. Or your hospital system or Warwick or KKR. Or Procter and Gamble.

19:53 Probably spent three to five years implementing the software. If you think they're gonna like start building their own HR software. You're on your mind. Now the GUI in how you access it. Is gonna be far different. But actually

20:05 They already have the customer relationships. And the only reason they built it is because Dave Duffield and the Neil realized twenty years ago that Oracle and SAP had really crappy products. They have thousands of engineers that are trying to build the product much better and are gonna use workday versus Mitchell Green's cousin vibe coding his way to build workday. The flip side. Why did Coupa get built? And the reason that it was able to be built is

20:26 SAP Bought arriba. They just left it for debt. So they built this big business. They took up all work and now it's been sold to Tomorrow. So I actually worry about it Poma Bravo or any of these big private equity funds, if they're putting a bunch of debt on it, it's not growing that fast anymore. If they're putting a bunch of debt on it.

20:40 And then what they do is they they're like, Oh yeah, we drive all our companies to like rule of fifty businesses. Now Do they end up cutting. a bunch of people on R D and sales and marketing and product that if you were being run by an entrepreneur with no leverage, you would have kept

20:57 And is now I worry that a bunch of these private equity owned assets that are over levered are ripe for disruption versus independent software companies that are focused on growth that are trying to innovate. And I like to remind people That if you look at e commerce. In ninety nine and two thousand, everybody thought big box retailer was going out of business. But if you look at the top fifty largest e-commerce companies in the United States, Amazon is number one. Two through ten are.

21:22 Walmart, Home Depot, Lowe' Macy's, Target, I mean. Sachs is a crappy company. Their online business is actually pretty good. You and Larcus, same thing. A lot of the incumbents will win. Now again. Montgomery Ward.

21:34 came our serious what boss for either like over levered, didn't innovate. So that for us that's what we're constantly thinking about. Does that mean that right now feels like an especially opportune time for your style because entry multiples are lower? I think the best gr suggested returns right now. are in

21:53 public software names. By the way. Warren Buffett has buy when everybody's fearful and sell when everybody's super excited. People hate software. When we bought a bunch of our bite dance stock two years ago, when everybody hated China. I mean Alibaba's doubled off its lows and doesn't grow and trades at fifteen times earnings. If you think about the C V the very specialist type buys that you'll do, can you explain an example of one of those? We like to use the house analogy.

22:17 You walk down the street, go into apartment building my apartment needs to have these six things. You can go in the front door. And you can lead the primary round. and put money in the balance sheet. Or you can buy the whole business.

22:27 You can go in the side door. And buy an early investor or early employee out but maybe that's not available. So we'll go through the basement window with a pickaxe and buy like a derivative. Cause if you run a business and it's gonna Pepsi owns thirty percent of your business. And I go to the glass that is an investor in the can of Pepsi's fund, and that is nearly half the L P is. And I literally buy that out and you own thirty percent and I buy half the fund. I just bought fifteen percent of your company. It's the same game.

22:49 It's just a derivative. Do you have as much control? No. Do you have as much insight? No. But you trade off price. For access. We made a big investment. And Zoom. So we couldn't go into the pre front door. The company gave me money. We sure as heck weren't buying the entire business.

23:05 You couldn't buy secondary. They were secondary to buy. You can buy'cause Sequoia would roll for you. They're smart. They're not dumb. They're like why we've got these knuckleheads in. We'll fake the stock and make two or three times our money. And the company was one that took a long time to get

23:17 funded and like wasn't backed by Sequoia. They want it was backed by a bunch of random Chinese funds. It was actually second nearby. But you couldn't because they're over. Why don't we go to this fund? That like has stock.

23:28 Their LPs have been in this thing for ten years. Like maybe their LPs want to sell. And we can do it one of two ways. We'll just buy your position on the fund then we'll know exactly how much We'll know exactly how much Zoom we have to it. Or Why you create like a new vehicle? Any LP that wants to sell will step into their shoes.

23:44 Well if You own two percent of Zoom. But half the LPs want to sell. And I then step in those shoes. I now own one percent of Zoom. And if I say to you, listen, we get to vote them like we own'em.

23:56 the company gets an amen A offer and you get to vote, you have to call us. Day one eighty one of the IPO after lock up, you gotta give us the stock. We just buy the position in a world where L P is And GPs are desperate for liquidity, that part of our business is absolutely booming. And that part of our business is headed by Tim Beamer, who's one of my partners who was actually in Notre Dame alum as well. If I think about the dollars deployed. Last year over the next year. How much of it is

24:20 direct capital on the balance sheet. Secondaries. Something creative, like where you just cut creative. Seventy percent is special sets or like Sagar. We will

24:31 Evaluate. In an IC. A public position? Control by out. A minority deal?

24:39 Or a special sip. You could get four different things in one week and literally we underwrite the same return, but today the opportunity is in We are a market drawdown away from an exploding. And put and value. Or like exploding it's up to you. The hard part, it seems like, is finding a company that has

24:57 Six of the eight criteria. That You can also buy at a multiple that you're excited about for the forward return. What percent of companies of the nine thousand or whatever meet all eight criteria. Well like no correlation how it performs either.

25:10 If we do like an eight criteria deal versus like a five criteria deal, there's like actually no correlation to like it was a better deal. What about like four or three We've never looked because we What we try to do is If you say it must be the criteria, nine thousand companies becomes nine. Okay. To do five or ten business a year. It just doesn't work. And so for us, what we say is it just like must meet five. That's about a ten percent yield. We're trying to get to a set of companies that we can then actually do work on. So you have nine hundred companies.

25:37 that meet five or more criteria. U diligence on about a hundred and fifty to a hundred and seventy five. to do five to seven days a year and you're like, Why not more? I'd love to, but like We're cool coin entrepreneurs. They're like Oh I'm sorry, I wanna sell my business and tomorrow.

25:49 You just happen to call me on this day. No, the sales cycles can be a decade. And it's about staying in touch as entrepreneur because we're not the only ones calling them. There's great firms like Summit or TA or Insight or you know Bessemer or Battery and the great firms. So it's like well. Ask the entrepreneur how do they need help? I don't keep information out of them. Oh, you so into like the

26:09 Consumer space. You want to meet the former CEO of Kolia Pomalov. And you're doing that to try to build a relationship with somebody. If five criteria companies don't outperform eight criteria companies Doesn't that imply the criteria aren't predictive? So then why have the criteria Because you need to set a framework. For what to focus on and what not to focus on.

26:26 So they're not predictive, necessarily. It's not predictive, but it's getting us to a small enough Pool. It's like knowing your strike zone. My partner who's a big baseball fan, like uses a baseball analogy. Like Ted Williams knew in the hitting zone exactly where to swing and what his probabilities for swinging the ball. Like, yes, you can hit a ball. Two inches above home play, and it could be a grand slam and have hit the ball the far as you've ever hit it. But if you do that. over an entire career, your entire career won't be very long. And so it just enables us to know like what pitches to swing at.

26:57 Arbіст містекс Have honestly been not swinging at the pitches when they were in our strike zone. And I think that's what we've learned over the last fifteen years to get more comfortable and like when it's in our strike zone, swing at it. How do you train these young people to be able to get all this information to know whether or not it's an eight point score or whatever out of an entrepreneur? What is the art of Getting someone on the phone and then actually getting them to tell you the information that you need. It is incredible.

27:26 What people will tell you on the phone people are like listen, you just like call people and they talk. People love to talk. It's investigative journalism. With sales. We tend to hire People. That are former athletes.

27:38 But like getting a C or a D on a test is not your biggest failure. Dropping the ball at the rose bow or not making the Olympic team. That's failure. And so you're looking for people that are insanely persistent. People that are really inquisitive. And then it's just

27:57 Hey. Patrick. Potential toast. We're doing work on the restaurant point of sale system space. I read a bunch of articles. Sounds like you're kick'em by. Oh, by the way, I just talked to like Square and Clover and said I'll call you that. We'd love to talk to you on the phone. And oh by the way, I'm sure you're getting bombarded by other people. But we're different than a lot of firms. A lot of our capital comes from world class execs. Oh, by the way, one of our LPs, the former CEO Wendy's, we'd be happy to talk talk to them if you want to meet these people.

28:23 Fuck. Sure, love to chat. By the way, we used to get the cold call people. When Brian and I and Neme were doing this, literally cold call people, and you'd be like you feel like the person who calls you at six PM. twenty years ago that you like slam the phone down on. Today it's like my you guys get to send emails to people to give me a break. We actually try to now encourage some of the analysts to start calling calling people. The biggest issue is it's hard to get people's cell phone numbers.

28:44 Versus four funds. And it's just Once you get the person on the phone you just have to show knowledge. That's where, by the way, AI is incredible. It's like you give every analyst.

28:55 An associate. You give them the power of knowledge and you can sound super smart. And you won't get everything. It's like, hey, just on the game, you have like eighty employees. So what do you like? Ten million revenue? Каким образом? Oh, I see like your employee costs go on like eighty percent a year.

29:09 What are you growing like? 150%? Uh not that fast. Oh what like a hundred percent? Yeah, around there. Trying numbers. If you think about this machine, so we've got this very unique LP base. We do nine thousand calls, five to seven investments per year. We just raised our seventh fund. It was three and a half billion. Okay. So three and a half billion dollar fund. Two to two and a half percent.

29:28 net M O I Cs to your investors. So that's the machine. Where do you feel the most tempted to go tinker on the machine for the next decade. How do you hope the machine Improves.

29:40 As the firm gets bigger How do you Build a culture. Of teaching people to still be creative, the scrappy hustlers. That's the most important thing.

29:50 How do we get creative and do CVs? We were doing CVs, but nobody wanted to do CVs. We didn't know they were called CVs. We just thought it was paying somebody a profit share. It's continuing to innovate on that. What's really interesting is The secondary markets now for some of these names are so liquid. So actually you almost don't even have to underwrite.

30:08 To this thing go in public. It's like can it just get big enough? with enough escape velocity where I can then sell out. If you think about all the investments you made the last five years or something, how often are you like personally excited about the company and its product? Frankly, this is what drives me nuts about a lot of people in the venture capital ecosystem is they think they're actually changing the world. Which they are. But they should tell everybody about it and they're like doing God's greatest gift to mankind. Like we don't think that.

30:32 We love helping entrepreneurs. Like that is actually what gets me excited and gets us up in the morning. Helping an entrepreneur try to bend the curve and make that customer intro and help find that great CFO, the audit chair or whatever. We love making customer interests. That's what gets us the most excited. And I think we are still actually just scratching the surface on how we can leverage our obvious. How often do you control the business? We are in a control position about a third of the time.

30:58 When that's the case, how different is that? It hopefully should be no different at all, but there's less knuckleheads around the table. There's less people are on the table and what's really interesting is When you have a lot of different people around the table, you can have a lot of different competing interests. And so it's about building consensus. And you care people that are in one cost pay that's what those all these twenty and twenty twenty one companies haven't sold.

31:19 There's these late stage guys that are like, Oh, just get me out. I own the pref. I'll make a one X today or I'll make a one X in a decade. But we don't go into companies. And say We're replacing the entire master's not what we do, when we invest in a business. And when we exit Something like seventy five percent of the time.

31:38 The person who was running the business. when we invest is still involved in the company. It may not be running it. But it's like back people who just want to build awesome businesses and great companies and it's like listen, if I'm not the right CEO, well then make me the chairman of the board or make me the chief customer officer or make me the Chief product officer, whatever, that's what's really important. I wanna go back to the culture thing.

32:00 The lead edge culture, I mean. What have you learned about culture in the many years now that you've been doing this, especially given this is the thing that you want to keep nurturing? I didn't think I appreciated how much culture comes from the top. Follow ups. Send handwritten thank you notes.

32:14 I've send handwritten thank you, everybody. Almost everybody. Every entrepreneur, every company guess who also does now the twenty two year old analyst. Eventually crack it.

32:23 If you just treat people the way you want to be treated, like that just flows. We've built a culture Of treat LPs like you yourself want to be treated. People appreciate that and it comes from the top. The intellectual honesty comes from my partner Neme. A lot of the creativity comes from my partner Brian. Now, of course, as you get to be eighty-five, ninety people at a firm, we've built like a real training program, which is a result of a lot of work Neme and Brian and our COO Susie's done and that team and the recruiting team. We didn't have weekly IC meetings before.

32:53 Three or four years ago. Why? Because the I see was the three of us. We talk every day. And so it's just like a billion processes in question. Can you talk about this crazy one on one thing you do with Every employee.

33:03 I got the idea from Tom Barnes at Excel Kick Hair. He's built a true machine. Okay, yeah. I asked him. What do you think something you do that like really helps the firm? He's like interview everybody. Once a year.

33:13 So we start with like a survey. And then he sit down with every employee. You personally do. I personally do. Sit down with every other partner, every VP, every associate, the accounting person on the back end. Every receptionist. And be like

33:27 What do you like about your job? First, give me everything you do. Green, red, yellow. Green, you love? Ready hate.

33:35 Let's figure out what you hate. And why. And if there's things you hate Well then let's figure out other people that may be able to do it. Or how can we make your job easier? Okay, that's the first bucket.

33:43 Second bucket. If you were me Running lead edge, what would you change? Three. What's something we can do to make your job easier? What you learn is incredible.

33:53 You get a bunch of really good ideas every year. It actually drives my two partners nuts because sometimes they're like, That's amazing. Do it. And then be like, Come on, we need that build consensus. I'm like, No, we don't need to build consensus on some of these things. Is there anything else that you do in the culture that you feel carries that much freight? Being good person This is not that hard, frankly. In a world that's insanely competitive, if being the nice guy gets you the callback.

34:17 And being the helpful person then do it all day long. And then it's Another really important thing. about running this place is I can't be the bottle. I can't know every LP. And so like if you're a twenty five year old our twenty three year old associate here. And you have to go to Seattle next weekend for a wedding.

34:34 I'll pay your trip if you stay on Monday and go meet a bunch of L P is. But you're twenty three years old. Ninety nine percent of firms in this plant wouldn't put twenty three years in front of LPs. I'm like, if you're smart enough to work here, you're smart enough to meet this LP. I don't care. And people love that. The twenty three year old associates love it. Which helps us get great people. But then also the LP love it too.

34:53 Because no Oh my son is your age. Would you mind talking to him or hey, you went to Notre Dame? Oh, my son plays Lacrosse. Would you talk to him and be like Oh but actually I know talk to my partner Tim'cause he played Notre Dame La Crosse. You just build real relationships with people. If you think about the average month for you and The major slices of the pie are time with LPs time with companies. I'm so curious. It's actually kind of hard to guess.

35:19 Maybe there's different buckets than those three. L P companies. Investments internal. What does yours look like? And mine's by the way is very different than Brian Emez. This is by design.

35:29 I was imposed a little bit with fundraising, obviously. I probably spend Sixty percent of my time with L Pes. Wow. Now again that

35:38 could be getting somebody to help a company though too or coordinating with the team. of people with us like a let's figure out a way to get into Exxon. And then I would say twenty five, thirty percent of my time is investing related. Which could be reading memos. Helping people win deals. That's frankly how I wanna help.

35:56 I'm like, if we lose a deal'cause I didn't meet the company, I'm not saying I can help us win, but we got to at least put our best foot forward. And then probably Fifteen, twenty percent is operational. The operation steps come down. Because one of our partners, Susie, who lives in Greenwich, used to be an investment partner a few years ago, she became R T O L.

36:13 So that's like my time. Neme, probably spends ninety percent of his time investing. ten percent of his time and everything else, which is what you should do. Like running the I C. Sixty percent of his time investing?

36:25 And Probably twenty twenty on LPs and operations. It's very clear to people that spend time with Brian E and I that we like play to our strengths and weaknesses. You mentioned Tom Barnes as someone that you've learned from.

36:39 If you had to like create a rushmore of other investment machines that you most respect. Who is the Rushmore? Insight. T A? And probably XLK. I think Devin Jeff Triple.

36:52 The guys, Libreman, I didn't say have just built like a factory. You know how you know a good software company is? Thirty thousand copies a year. It's an absolute factory. It's process.

37:02 And so I think they're like amazing at it. TAs on the pioneered cold coin. Insight's obviously say to itself. I would guess insights growth rate in their portfolio between two thousand one and today is actually pretty similar. TAs has definitely come down. There more private equity like?

37:18 Discipline process. I get the sense that TA is very good at selling too. And then has built like an incredible value creation game. that I think actually as well. I think there's a lot of like talk about value creation I don't do much, but I get the sense that these guys are like very good Yeah, actually helping companies and trying to bend the needle.

37:36 What have we missed about What makes the machine Tick. That you think is Really important.

37:44 I would have said that the three of us who run the machine are all very, very different and we play to our strengths. And I don't think that should be underestimated. And I think that's what makes the machine like We literally negotiate carry economics. For the three of us in ten minutes.

38:00 There's firms you hear about that get into month long fights over carry. We all highly respect eча. And know what we're each really good at. Just a focus on intellectual honesty. That I think a lot of firms just don't have. Like if you go to our investment committee.

38:14 Investment committee is the three of us. Everybody that's basically VPN up gets to come. But if you sit in the room and listen to Brian and Emay talk about a deal, you would think the three of us hate each other. Or you might think we're Israeli. Because it's just like a joke and talk about it. If you listen to like Israeli board meeting from the outside, you're like, these people hate each other. No, that's just how they talk. So it's like no way it's like let's debate the merits of this deal.

38:36 Maybe riff a little bit more on just all the ways that you're excited and fearful about AI, both in the investment process. at Lead Edge for running Lead Edge the business and for the companies that you invest in. I'm the most fearful for what I don't know. AI is gonna change the world and it's gonna do it in ways that nobody can think about, just like the internet did. Thousand nine, ninety nine, two thousand if we guess out here. We wouldn't have mentioned social media. It's three trillion dollars of value. No, I'm the most

39:02 Fearful whether it comes to companies. And processes for that. It's like what don't we know? What are we missing? What am I the most excited about? Форс

39:12 AI in the long term will create the biggest productivity game over the last seventy five hundred years. I don't know if it'll be like electricity, but like we'll be pretty damn close. That's really exciting. But people get too excited about oh, we're gonna go like build the next piece of work day, or we're gonna go build better call center software. Gonna see industries that we're not even thinking about, even thinking about what's gonna like be possible is gonna happen. That's really exciting. It's gonna be the age of entrepreneurism. People are gonna build a build awesome businesses.

39:38 What I worry about, whether it's internally at lead edge or in our portfolio companies is do we have the right people in place So that we don't get disrupted. 'Cause you constantly want I joke you want to hire a bunch of young people. But people worry about the young people aren't gonna be able to find jobs. It's like the young people are the ones gonna figure out AI more than the sixty year old or fifty five year old. And so it's

39:56 Where's your rank? We take all of our profile companies and we're standing. What's your AI readiness score? And then it's Okay, this company's like really high.

40:05 This company's pretty low. H We should connect those entrepreneurs together to figure out what they're doing. What goes into that score? What's your data look like? Is it structured in a way that you're gonna be able to leverage AI?

40:16 Are you iterating how many new AI products have you come out with? What's your AI revenues on new products? How much more product releases are you able to release? It's not Did your engineering comp sta or go down? I for one strongly believe that if you think in twenty twenty if your budget in twenty twenty four for twenty twenty six was to have 150 software engineers, you should still have 150 software engineers because those software engineers can be exponentially more productive.

40:41 And they can then create more products that your sales team can then go sell. Who do you compete with? We would bid against insight. FTV. Jamai.

40:51 Battery. customers where they do like bootstrap fish type stuff. Sometimes we compete against Maritech and IDP and Rockets should probably still come out. You're freaking awesome. I'm just not paying 100 times revenues for the problem right now. There's like too much money. Matt Cull said it best. It's like they back these giant internet companies.

41:09 when distribution was loose and capital was tight, it's like the reverse happened. So capital's everywhere, but like four companies control distribution. So good luck going to build a giant internet company. And right now there's just too much money chasing. At least in so I got I do feel great, thanks. So decompose and expand on that a little bit. So I guess the question is your view on the state of markets and technology markets in general. Overhyped, overfrothed.

41:34 And I believe this AI Capex bubble will end that way. It's like the telecom bubble all over again. It will be very interesting if Apple may look like the really smart one at all. This at the end of the day. We've seen but I think people are just gonna overspend. I'm convinced that people investing in all these AI companies, all these DCs like have to portray

41:51 the view that software is gonna be dead because they have to justify how much money they're going to spend. If you start to run these assumptions on like how much money is going into these companies and what that means for how much earnings you have to drive and what that means for like how much power you need to generate, it just doesn't w Where are the nuclear power plants coming up and like just doesn't work. That presents the opportunity. That's when you're gonna buy it. That's when you're gonna buy these companies. The counter argument would be in telecom. It was all dark. fiber in AI, it's all burning GPUs. And yes, the cap is just crazy.

42:22 But Everything still feels mega under supplied. I'm just curious how you think about when the opportunities will present itself for an industrial. Is that the models will commoditize.

42:33 And That companies like Google and Facebook and Amazon and Apple have a competitive cost advantage. Companies like Amazon and Microsoft and Google have more data. to train a model than these new model companies will ever have. And then oh by the way

42:48 If you were all these Chinese models or European models. A bunch of these things cost a fraction of the cost to run. And you can run'em locally. Especially companies outside the US. Like why would you pay that amount for open AI tokens or phantomic tokens when you can just run Deep Seek or one of these other ten models? I think we worry the most about modernization.

43:07 I have no clue. when this will stop. It will probably go longer than people think. In ninety nine and two thousand people also thought we were in a bubble. People think we're in a bubble now, and it will just stop. Is it one of these monster IPOs happening And it just doesn't go like people think it does. I think this anthropic round was kind of like an IPO. We're trying to hit doubles and triples. A lot of these companies we struggle with, they're either gonna be two hundred X's or a hundred X's or zeros. That's the struggle for us.

43:32 What kind of company in the AI center of the heat map. I know you're probably not investing in any of them'cause of the multiples or whatever. What kinds of companies are the most interesting to you just as a enthusiast? I think it's fascinating some of the stuff that's being done in infrastructure software.

43:48 And actually the agents. appear to consume more resources than actually people. Some of these consumption based models, the growth of companies. By dumb luck, we were very early investors in Click House. was a database company. We were early investors in Grafana Labs, an infrastructure company that competes with like data.

44:05 I think data dogs were in like high twenties, thirty percent a year at scale. It's those types of companies I think we find super interesting. I find them fascinating. I really struggle with the valuations, but the growth rates are like we've never seen with very good economics. You see how much money a company like Clickhouse has raised. What they've burned is very little compared to what you might otherwise think.

44:25 What do you think is the most surprising thing about You. You have a good sense of you. How you operate persistence, enthusiasm, energy. Process.

44:35 What do you think if I spent ten hours with you I would be most surprised about? Probably how driven I am. And how much I truly love what I do. And like I just put my like heart and soul into everything I do, whether it's like racing cars, which I race cars competitively, or the National Rank Ski Racer or Hollywood. I probably sleep five hours a night, four hours a night. It's'cause I love what I do. I'm insanely competitive. If you spent ten hours with me, it'd be like, Oh my God, this guy is the most persistent competitive person I've ever met. Were you born that way? Yeah, I think I was born that way.

45:03 Was it enhanced through formative early experience? Ski racing. scheme. Growing up as a kid. Do you make that tangible for us? Like what was it like? Process Do these things and you'll get better. Do these things on video in a G S course and constantly analyze video and do these things the next run and change this. And you fail, get up and go do it ten more times. I grew up on a ski hill that was five hundred feet. I mean Lindsay Vaughn of best skiers in the world. She grew up skiing on five hundred feet. Buck Hill in Minnesota, and doing laps from four PM to ten PM at night, just repetitive. Michaela Sheffrin is one of the best female skiers in the world.

45:35 Use it as for time on snow. is like limited. Will you get off the chairlift? Everything is a drill. Constantly be trying to improve. I think that At least.

45:46 What you would find in me is constantly trying to improve. What surprised me the most, actually, if you had to say like Huh You started the firm fifteen, twenty years ago. I think I've been able to recruit. And maintain

45:58 Motivate. and build a really good team. I mean very good to pick really good partners that treat other people really well and that feeds on itself. Is there anything else from skiing? I'm not a skier. That

46:11 You find visceral and helpful. as an analogy for How to do things elsewhere other than reps and practice. Scott Booth, who ran Eastern. I asked him why he hired me.

46:21 And this was early oh eight. You said to me. Because when things get scary You're gonna want to buy. And I didn't know what he meant. 'Cause it's like, you can only have it eight miles an hour.

46:32 This isn't scary. This is like nothing. Like you can make a decision of going down the hill at eighty miles an hour and what to do and what not to do and not at the fault. In the fall of the late happened. This isn't scary. Let's buy. It's eventually gonna go up. Ski racing. helped me really understand a very fine line and risk adjusted and risk return.

46:49 behavior. I just think being an athlete Whether you play basketball, whether you play hockey. Why do they play golf? I think athletes just have a work ethic. If you're trying to find it in young people.

47:00 And have a drive. Your athletes. That have incredible athleticism. But also have incredible work athletic like Michael Jordan. Those are the best of the best.

47:11 Then you have people Like Steve Kerr. Who are not very good athletically, but had a work out there of Michael Jordan. But then you have wasted talent.

47:21 Which is like drive into the world where they were amazing athletes, but they like didn't have a drive. And I think the same can apply to investing. Why did you choose to start the firm?'Cause you were quite young when you did it. How would you translate that experience into advice for someone listening that Is thinking about starting a fund to decide whether or not they should do it. My border Brian's like we started a firm is because nobody was not like hire your ass.

47:44 And because you know what you couldn't work for anybody? I've always wanted to be an entrepreneur. I wanted to make a lot of money and be like really, really successful. It's always true for me. I always want to be fully focused on it. And If you want to generate generational wealth or build something, you need to be an entrepreneur. Yes, if we build Blackstone, everybody who's here will make an insane amount of money because it was ninety people.

48:06 One of my partners, Dak, is very young. I mean he's thirty years old. He's a partner. Because he joined here. And he took a bet when the farm was tiny. I just encourage people

48:16 If you want to do it your own way. There's no better time than now. What are you waiting for? I actually think it's easier to leave when you're twenty seven, twenty five. Then when you're forty five and have three kids. I had nothing to lose. If it failed, I was gonna just go work I guess I guess work for me.

48:30 Once you made lots of money, do you still care? Hundred percent. Why? Keep score every day. Because of score? Is it scored because I want to win? People like Ken Griffin and Steve Cohen are like

48:39 Mentors to LPs of ours. It's incredible how hard those people work. Now again, maybe these are NFQ people, or if you look at some of these tech entrepreneurs, like Elon Musk or Alex Carr from Pellantier, or Matt Prince from Clubflare, or like George Kurtz from CrowdStrike, like these people are incredibly driven. hardworking people that live and breathe what they do. And so yeah, I mean people keep score. It's not work for me. This is fun. I travel.

49:01 Constantly. To meet companies, to meet LPs, to meet entrepreneurs, to like meet bankers, and it's not work. It's fun. They tell people my schedule and they like cry. I'm like, Oh, it's not work, it's fun. It's pretty amazing what you built. A very unique model incredibly fun you are to just walk us through it all. I had so much fun doing this.

49:18 When I do these interviews, I ask everyone the same closing question. What's the kindest thing that anyone's ever done for you? Pete will not. He's passed away. Was the former CEO of FedEx, and he was a Williams alone.

49:31 I started a company in college. And he was the first person that ever believed when he was like 19 years old. And he became an investor with us. And the company Completely failed.

49:41 When I was trying to get my first jobs, and when he got my job at Bassamer, he was my reference. And he basically told the person they were insane if they didn't hire me, because I was the most persistent person he'd ever met. That's probably the kind of thing I resort in. I learned so much today about building something unique. Thanks so much for your time. Thanks so much, I'm gonna. If you enjoyed this episode, visit Colossus.com. You'll find every episode of this podcast complete with hand edited transcripts. You can also subscribe to Colossus, our quarterly print, digital, and private audio publication featuring in-depth profiles of the founders, investors, and companies that we admire most. Learn at Colossus.com slash subscribe.

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