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

0:01Capital 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.

0:43As 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 WCM is committed to defying the status quo by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of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 website at wcminvest.com. And tune into this slot on the show to hear more about WCM all year long.

1:26This 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 does 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 WCM invest.com for WCM's ADV and further information. Capital allocators is also brought to you by Morningstar.

1:55What if data wasn't just a bunch of raw numbers, but a clear and decisive language to help connect investment strategies with long-term investor needs in a constantly evolving market landscape. Morningstar created that language, bringing order and utility to insight-rich data so you can prepare for your next opportunity no matter the asset class or market. Visit wheredataspeaks.com to see what Morningstar data can do for you.

2:32Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators.com. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

3:11Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast. My guest on today's show is Mitchell Green, the founder and managing partner of Lead Edge Capital, a growth equity firm with$5 billion in assets that invests in software, internet, and tech-enabled businesses. Lead Edge leverages its LPs, comprised of over 700 seasoned executives, entrepreneurs, dealmakers, and celebrities, to connect its portfolio companies with customers, partners, and talent. Unlike any other firm I've seen, the impressive list of LPs is publicly available on the firm's website.

3:53Our conversation covers Mitchell's early exposure to business and finance, LeadEdge'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 sharks is my son, Eric. My name is Eric Seides, and I'm the creator of the food truck concept design called E.B.'s Bombastic Buns. E.B.'s meaning Eric's Burgers Bombastic Buns. Now, I have almost zero experience in the business world, but I'm very proud of it.

4:33My food truck is assigned around different themed burgers like the Seaside Munch Burger, which is lobster, queso cheese, on a burger patty, on a whole wheat bun. This has absolutely nothing to do with the podcast. However, I think you should still be listening. Thank you so much for spreading the word. An important disclaimer, VB's Bombastic Buns is not an actual business, has no products, and no website. It was a project Eric cooked up with a few hours of research for his ninth grade entrepreneurship class. That said, he's quite the entrepreneurial dynamo, so I wouldn't be surprised if you hear more episodes down the road, right here at our Spread the Word Shark Tank.

5:12Please enjoy my conversation with Mitchell Green. Mitchell, thanks so much for joining me. Absolutely. Thanks for having me on. Why don't you take me all the way back to where your initial interest and path to finance came from? I'm from Grand Rapids, Michigan. I was a nationally ranked ski racer. My father ran a manufacturing company of which was a third or fourth generation family business. They actually invented the bread slicer. Unfortunately, you don't get paid per slice of bread or I'd be running my old family's money. I was interested in business. As a kid, I used to look at stock tickers in the Wall Street Journal.

5:48My dad's father ran the municipal bond department at Payne Weber. Then when he retired from bond trading in the early to mid 80s, he became a stockbroker. And a stockbroker in the mid 80s was what we call hedge fund managers today. So I got really interested in investing in finance because of that. So I always was interested in making money. In fourth grade, I had a paper route. By fifth or sixth grade, I had three paper routes and I 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.

6:24You learn very quickly why you go to college. And unless you want to do the same thing every day of the year, it builds a lot of perspective. I also think it actually to this day helps me understand weird things like inflation and why Trump's been so popular and a lot of people in the coast can't understand it. I started a company when I was in college, left Williams. Of course, we were raising our Series B right around 9-11. That did not happen. I begged to get back into Williams, got into Williams, did a couple of years investment banking, worked for a small investment bank out in LA called Barrington Associates, which I loved.

7:02And 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 &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 &A group. And then I found an online job listing for Bessemer Venture Partners. And I had known Bessemer as this world-class early stage venture fund. And so I just applied for the job.

7:36and 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'd do five to seven deals, maybe 10 deals. They were good personal friends with the guys that ran Insight, especially Bob Goodman was good friends with Jeff Horan and Jeremy Levine, I think, was good friends with Jeff Lieberman. And those guys would hear about the deals that Insight was doing. And they're like, we're this world-class venture fund. Why are we not seeing these deals? And what they realized is that Insight was out there hiring 22 to 24-year-olds, pounding the phones, calling companies, going outbound versus being very inbound.

8:23So 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.

9:02And 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 in revenue growing fast, I'd connect the best CEOs together. Hey, you guys should know each other. You probably don't know each other. You're probably dealing with the same kind of crap. Maybe you guys want to know each other. And we had a rule at Bessemer. If the company called you back, it really sucked. It was the CEO you call every two days for a month. That's the CEO you want to get on the phone. How did you think back then about the investing path compared to joining the family business and the operating business?

9:38Oh, 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 it around M &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.

10:12He'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. 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, you're doing the cold call part of venture.

10:43Where do you take it from there? I left Bessemer and I learned a tremendous amount and it was like a apprenticeship. The guy I 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 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 Lanek and TCV.

11:25Other 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've traded stocks since I was seven years old. I was like, why don't I go work for a hedge fund? And so a family friend lived in New York and he's like, hey, you should meet this guy who is the number two or three at a hedge fund seeded by Julian Robertson at Tiger.

11:59This guy, Scott Booth. And Scott had started a fund at Tiger late 03, early 04. Before that had run Mark Kingman'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 of days a week, hang out with my buddies and I'll start working at this hedge fund.

12:33So 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. Citrip and Baidu and Alibaba. And this was a very Asian focused hedge fund. And I would 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 canned me his business card.

13:10He 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 Steak 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. It was a company called Bizarre 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.

13:38The 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 with this hedge fund while I'm in school. Love to get together. And I convinced him. And he's like, listen, I loved how helpful you were at Bessemer, but I wasn't ever going to sell 20 % of the business. But if you guys want to put in five to 10 million bucks, Mitchell, you've been incredibly helpful. And you'll continue to be at this new hedge fund. I'd be delighted to have you. But he's like, here's the deal. You're not going to be on the board.

14:02If 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. And so we ended up making this investment May of 08, helped him a bunch, started seeing other deal flow because guys at Battery Ventures and Austin Ventures kept introducing us to people.

14:35It's like, listen, if you can help Bizarre Voice, can you help HomeAway? Can you help All-Star Directories or a few of these other companies? And 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 three bucks a share or something. Bizarre Voice, 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, very complicated. But I still have a job because everybody in my business school class in their second year, it was all getting offers rescinded from hedge funds, private equity funds, investment banks, consulting firms.

15:17But I still had a job. And so then the CEO of Bizarre Voice calls me in February of 09 and says, I lost my last company in the last downturn to a down round. even though the thing's going to get sold for 300 or 400 million bucks. You've been crazy helpful. You want to put 5, 10 million bucks in the company. And I'm thinking, yes, but I got no clue where I'm going to raise the money from. But I said, can I have five weeks? And so I basically went out and cold emailed and cold called every person who was on the board at UPenn, the board at Williams. I figure if you're on the board, you must be rich.

15:49If 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. So what was that history? You're coming out of school, you have this job, but the hedge fund's clearly having trouble. Where did you plant your flag? I told everybody in the SPV, it had to be two and 20. And a bunch of people were like, I'm not paying two. This is a single asset.

16:24I should be no management fee or 50 basis points. No offense. If it's not two, I can't eat. So I did an SPV. We closed the first one in May of 2009. I think it was 8 million bucks. And then I became the cap table janitor at Bizarre Voice and just bought up any share lots I could find. I would email our LPs, hey, Bizarre Voice needs an intro to the NFL, to Coke, to Pepsi, to Nike. Do you know anybody? And one of my LPs who runs an NFL franchise would be like, I could introduce them to the NFL and I'll do it because I see the company's doing really well. You're being super transparent sharing all the financials with your LPs, which tons of funds do not.

17:07I mean, I have tons of transparency and I'm going to ask for help. So then a few quarters in, people would see the company continuing to do well. I'd send customer win emails when they won big deals to all our LPs. So then an LP would be like, hey, if you get more stock, tell me, I'll introduce you to my friend. Who were their friends? Successful executives, CEOs, wealthy people. And I just kept doing it. So I think we started with eight to 10 million in Bizarre Voice. And by the end, it 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.

17:44Same 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, if you want, I've got all these redeeming investors, we can tender them and see if they want to sell part of their side pocket.

18:23And 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 a million to five of Alibaba and I get to play with 75 cents of other stuff. Now, a bunch of people invested, I'm pretty sure, because of that.

19:00A bunch of people did not invest because of that. And the rest is literally history. So I would tell you 90 to 95 % of the LPs from the SPV became fund one investors. And if you're alive or not divorced, I bet you 90 to 95 % of those people in fund one are in fund six. It's all been word of mouth. We had no institutions at the time. Every institution we've had has been word of mouth. And our pitch was like, we're going to run around, find companies to invest in. And when we find them, we're going to leverage you throughout the entire investment life cycle. So if you don't want to get these emails like you got on Bizarre Voice, don't invest.

19:39My 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 LeadEdge. So when you set out to form LeadEdge and said you were going to play around with this other 75 cents. How did you think about what you were going to do? 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.

20:13We 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 six. At Bessemer, it was the Bessemer 5. Every Monday, we'd pitch to partners at Bessemer, our best companies of the week. And two weeks in, we found this great company. It's going to be the next Google. And they're like, no, it's not. This company sucks. They're like, what do you got next? Oh, we found the next Amazon. No, this company sucks. They're like, okay, find this companies that meet 10 million plus of revenue.

20:49So we find a company that's like 12 million of 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 going to tell me the name of the company, how many criteria it meets, what it does.

21:20If 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's 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. 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.

22:01Now, 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 sourced today. 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? The additional one was from an EBITDA line was actually profitable. And then the additional two were 90 plus percent gross dollar retention. It's very simple. Are your revenues greater than your historical cash burn? Not how much you raise burn.

22:38And 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 data dog. 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.

23:18And 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 to 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. The concept of going through these cold calls to hit out$10 ,000 companies, narrow the filter so you find 100 great ones to do work on. What do you actually say in those cold calls when you pick up and call a company? So let's use Refinery29, which was a bootstrapped$5,$6 million revenue business.

23:59Think of it as we were trying to build the next generation of Vogue magazine online. We basically cold called the company and emailed them and said, hey, we see you're a bootstrap business. We have some LPs who've got a bunch of experience around the media industry. We'd love to come in and talk to you. And they probably, I'm sure, didn't respond. So we emailed them again. And then we emailed them again. And then we get them finally on the phone. And what we do is, at the time, it was called Eastern Advisors Private Equity Fund. and it was, hey, I'm used to advisors, private equity fund. We're different than any other funds that will call you.