E263: Inside the $5 Billion Fund Backed by 700 LPs

0:00Brian, you've accomplished what many of our listeners dream of doing, which is you've raised$5 billion across six funds. I want to start, though, when you started in 2011. Tell me about that very first fund. I appreciate you saying such nice things about it. I remember when we started, I never knew what this was going to become. I was always just about putting one foot in front of the other and trying to be successful. But back then, it was difficult. I would say that the idea behind what we were doing was that we were going to create a new type of fund. I started my career at a firm called Bessemer Venture Partners, and I worked with my partner, Mitchell.

0:36And my partner, Mitchell, really was the one that spearheaded the initial fundraise. And I joined right in the middle of Fund One. And when he did that fundraise, the concept was pretty simple. And the idea was, instead of raising money from lots of institutional investors, let's try raising money from individuals. And if we raise money from these individuals, we could then have them help our portfolio companies. And we'd be very upfront and transparent about what we were trying to do. That was a model that we just aren't familiar with and really hadn't been tried out all that much. So Mitchell has an unbelievable presence about him and a way in which to sort of engage with folks.

1:12And probably I think a lot of them invested so that he stopped bothering them. And they ended up putting capital into the fund. And we're off to the races. That first fund was a$52 million fund. We raised money from about 100 individual investors. And, you know, you mentioned a lot of people would look at the success that we've had as a firm, would appreciate that. But I'd say that early on, the advice that I would give is, you know, start small. It's really hard to get institutional investors' attention. Many of them need to write bigger checks. It's hard to sort of compel them in a way. And getting individuals on board was a really powerful thing for us because you always felt the success building.

1:52You're able to talk to a lot of individuals. Many times they're able to make those commitments very quickly. They decide that they like you. And because of that, you feel the snowball rolling down the hill and building, building, building. And that's a really good thing for building momentum for the firm and always feeling like you're going to be successful. Rahul Mugdahl, who jumped on the podcast, he talks about just how busy institutional investors are. He had a billion dollar, one billion dollar foundation. So not a small, but not by any means a large foundation. And the CIO told him that he had over 900 voicemails the previous year, not even from funds that they had invested in and not even funds that they were looking at, but in funds that had cold outreach to him.

2:39just to give you a sense for how busy institutional investors are. But you went to the other barbell, which is high net worth individuals. And you also married your capital base to your value add to portfolio companies. Tell me how you went about doing that. Our LPG days today, we have about 700 individual limited partners, many of whom have built, run, managed some of the world's best businesses. And we're very upfront with them when they invest. We say, don't invest unless you're willing to help the portfolio companies. Now, what you notice oftentimes is a lot of these folks, they want to find a place to invest and they want to find something that's comfortable to them.

3:17So whenever we're talking to executives that might have a pretty significant net worth, they're kind of plus or minus five years from retirement generally. And they're in a place where they've got to figure out what to do with their money and they want to stay engaged. That's a good place for us to be having a conversation. and usually the conversation goes something like hey so you are the former cfo of xyz company it's a fortune 500 business congratulations that's amazing what are you investing in these days and you'll oftentimes hear the exact same story which is i was the cfo of i don't know pick a fortune 500 oil company energy company and you say what are you invested in they say you know my brother-in-law's friend got me involved in this biotech super interesting i'm really excited by it like okay and uh what else well my son's friend started a company and they have a social media website so okay great so tell me a little bit about what compelled you to invest in those things and i said well i don't know you know i put 250 000 in each one and they keep calling me for more capital and uh that's what i'm doing okay sometimes that works out but your knee-jerk reaction is someone who is a CFO of some Fortune 500 company, they're a genius and they know everything.

4:33And you know what? They probably are a genius insofar as that they're really smart, but they don't necessarily have the reps in terms of investing and looking at a lot of different things across a lot of different industries. And what ends up happening is oftentimes whatever comes across their desk first is what they might actually end up investing in. That creates a difficult dynamic because many of them end up kind of dejected and disappointed with the results. They end up in companies where they're trying to help them, but the companies aren't really appropriate for them to be helping. They end up in situations where the companies are asking that person to tap their networks and that person doesn't necessarily want to do it because the company is not doing that well.

5:11That creates a difficult dynamic. And so what we offer and what we talk to them about oftentimes is, look, that's great. You've got all of these like early stage things. Tell me about what else? And they'd say, well, my Goldman broker put me into this big fund and maybe it maybe that has some alt exposure to Blackstone or to Goldman Sachs or something like that. And so it's like a barbell. There's nothing in between. There's these early stage things that they probably shouldn't be getting involved in. And then there's very late stage, much more institutionalized type offerings where they'll probably make good money, but they're not really having a sense of involvement.

5:47And we say, look, we've got this framework and we've got a very specific set of metrics that we follow. And we're constantly looking at these businesses and we love to engage you. And you were the CFO of an oil company. How about when one of our companies is looking to hire a CFO? Or how about if we're investing in a software company that sells into the energy sector, we'd tap you to help. Would you be interested in that? And I say, well, that would be great. And then I say to them, well, what if there were companies that are growing really fast and doing very well? So I love that too. And that creates a very different dynamic.

6:20And by talking through that with people, they start realizing, gosh, I might have made some bad choices early on in what I'm investing in on the early stage. I could get involved in things that are interesting to me. Let me push on that. And ultimately, it's served us very well and served them very well. A couple of really important principles there is people forget that they are in a market. So that biotech startup is in a market, which means by the time it gets to the CFO's desk, hundreds of tens, if not hundreds of biotech companies have said no on that. The other aspect is style drift. So you're familiar with this in private equity.

6:57If you were to go from$50 million EBITDA companies to$150 million, a lot of LPs would have a lot of questions on why are you now doing$150 million companies versus$50 million? And you might say, well, there's still the same widgets, there's the same management teams. But even that style drift of going 50 million middle market to upper middle market is scrutinized so heavily. Why is that? Because your other competition, that$150 million market is the same level of intelligence, the same level of experience, the same level of deal flow. So when the CFOs are going to the biotech market, they're not only kind of picking up one foot, pivot foot, they're like jumping to another whole part of the industry and a whole other stage.

7:40And even if they can provide the value, which I'm sure they're actually providing some value, their deal flow is just abysmal. I couldn't agree more. How do you manage having 700 LPs and how does this practically help you win on the deal flow side when you're sourcing targets? So the first question is, how do we manage it all? And it's been pretty organic over time. I'd say that we do a couple of things in order to maintain those relationships. So the first thing that we do is we probably have an inordinately large investor relations team, right? And so the concept of just sort of fielding questions isn't something that we subscribe to.

8:16We actually have a couple of people who their sole job is to spend all of their waking hours meeting with and talking to our existing LPs. And so they're traveling around, they're spending time. And usually these are young folks who are engaged to understand our business really well. And they're spending time trying to understand our LPs and build a relationship with them. So that's from a day-to-day standpoint, that's a lot of how we manage it. Now, what are some of the things that we do to make sure that it's a good experience for both of us? So the first thing that we do is when we have a new investor, a new individual investor, what we'll do is almost like an intake form and really have a conversation with that person about what it is that is interesting to them in terms of being able to help businesses.

8:58And what you'll realize is different people want to help in different ways. So you might talk to one investor that's an LP and they've come in. You say, look, how do you want to help companies? And they say, look, I've gone through IPOs. i've gone through geographic expansion if a company needs advice in any of those areas i am so happy to help but the one thing that i want to stay away from is i don't love the concept of helping with customer intros it makes me feel uncomfortable to make an introduction i don't want to necessarily endorse anything i'd really not rather not be asked because i feel like i'll be put in a tough position if you do that okay well now you know what that person cares about.

9:40And then you might go to the next person that's an LP who's new and you talk to them and they say, all I want to do is open up my network. I have so many relationships. I want to keep them fresh. People love hearing what I think is cool or interesting. I would love to make a lot of introductions for the portfolio companies. So anytime that you have an introduction that you think that I could make, just ask me. I'm sure that 95 % of the time I'm going to be willing to do it. Well, those are two very different attitudes across these folks. And you kind of know who's willing to play ball in what situation.

10:10Once you do that and you have that information logged properly and easily categorized, now you're in a situation where you actually know who to ask for different things. And when you have a company that's looking to get some guidance on their IPO planning, send them to person number one. And when you have a company that says, gosh, I've been trying to bang down the door at Coca-Cola selling them my software. It's been a difficult journey. I can't get to the right person. Do you have someone that could help me? Maybe person number two knows somebody at Coca-Cola and we could get that conversation flowing.

10:43And that's a lot of it. So on the front end, it's a lot about communication and understanding how they want to help. On the back end, it's about sending our team out to go spend a lot of time with the LPs. Amongst a lot of other things that we do, I'll name two more dynamics or two more activities that we pursue. Number one is we have a lot of dinners with our LPs. So we have about 16 or 17 dinners each year in different cities where we invite our LPs geographically to come to the dinner. And I will tell you, it started out as sort of like this awkward thing where we're talking about our fund and spending some time with the LPs.

11:21and now 14 years into it we have a lot of situations where people have been coming to these dinners for years and they get excited because they get to see old you know people who are now old friends they used to be new friends now they're old friends and it's great and you start seeing these dynamics where people become friendly with each other they do different deals together outside of us and you start seeing them hang out with each other even not under the Alita Jumbrella. I'll tell you a quick story. Like I was, I was just, um, I was skiing last winter with my family and I called one of our LPs who lives in Colorado and said, you know, I'm going to be in town.

11:57Let's go grab dinner. And he said, well, would you mind going with me and this third guy? I said, yeah, I know. I know that third guy. Absolutely. He's one of our LPs. He said, yeah, I met him at your dinners. He happens to be in town. I met him down in one of your Miami dinners when I was there and he's in town. He called me and said, I didn't even know he was there. Okay, that's wonderful. So now we're meeting up as a group. And I think that it's a really powerful thing to have that network. So that's the first thing that we do is these dinners that I was going to mention. And the second thing that I'd also mention is we have what's called the next gen event.

12:30And every quarter we do our next gen teach-in. And the concept of that is we end up talking about very basic topics in finance and do seminars and sessions for our LPs, but more importantly, oftentimes for their spouses and their children. One day in many cases, it's a spouse or a next of kin that's a child that's going to end up controlling the capital. And it's really kind of incumbent upon them to understand what does it mean to invest in a private equity fund? What does it mean to invest in a public equity fund? What should we be looking for? And we sort of teach on an objective basis and have these discussions.

13:09And oftentimes there's like three, 400 people that join. So that's been a powerful tool for us to keep people engaged. And then the last thing that I'd mention, I guess, would be we've always been militants about our communication. We have quarterly calls where we update on the portfolio for every one of our funds. We've done that every single quarter for the last 14 years. Nobody can ever accuse us of not sharing information. It doesn't always go the way that we'd like, but we're up front and we spend the time to communicate it. And I think that that built a lot of trust. I recently heard a statistic that 60 % of women, of widows, when their husband passes away, change their financial advisors.

13:50So this, people kind of take the next of kin or the widow or the family for granted when it comes to investing in LP relationships. That's right. And I'll tell you, we've seen it time and time again. We've seen situations actually where unfortunate circumstances have taken place. And oftentimes the LPs are calling us saying, okay, you were the one that the patriarch or matriarch or however it was trusted the most. What should we be doing? I don't know necessarily, but I'm happy that they trusted us. I'm more than happy to have a conversation with you to try to figure it out. But that happens from time to time.

14:29And we want to be a group that people really trust. And I I think that that's a powerful thing. I think a lot of it comes from the education that we provide and the fact that we're so straightforward and communicative. You mentioned you have two full-time people that travel around and work with your LPs. What primarily are they doing and what's their week look like? I get like an update from our team every week from a bunch of the different folks that work on our team just about what their weeks look like. And if I opened up what those updates look like, you'd say, gosh, this looks crazy. um more or less it's just they'll they'll pick out a city they'll travel to it and they'll reach out to everybody that's an lp beforehand and they'll try to schedule meetings with as many of them as they possibly can so in a given week you know like garrett who works on our team he might have 30 meetings in person 40 meetings in person with lps and it's amazing like we i'll talk to and I'll say, okay, like I haven't seen you in the office in three weeks.

15:30You're like, oh, I was in Austin last week for three days. Then I went to Dallas for two days. I was in Miami for three days. I went to Denver for three days. I say, who do you see? And then I get the emails at the end of every week. And it's like amazing. And so keeping that engagement is really important because ultimately when we ask the LPs for a little bit of help with our portfolio companies or whatever it might be, we want them on the spot. We want them right there willing to help. and feeling like they're part of a team. And if they don't feel like we're constantly catering to them, that sense of urgency isn't going to be there.

16:05And we want them to feel our sense of urgency, and we want, in turn, to have them create that for themselves. There's an adage that's become so overused. It's trite. Build your well before you're thirsty. I think it's the name of the... And the reason is because most people do not build their well before they're thirsty. My partner, Mitchell, is the best I've ever seen at this. It is amazing. The guy is just, he's out there, he's talking to people, And he's constantly asking the question, how could I help you? And when you think about it through that lens and you frame it through that lens, what ends up happening is you end up being helpful to a lot of people.

16:37And on the back end, a lot of people end up wanting to be helpful to you. We have this meme we create internally called forced value add. Whenever we're on calls, we force the person to find a way that we could be helpful because we're building these long-term games, playing these long-term games with these partners. Moving over to the investing side, you look for eight key metrics before you invest in a company. What are those eight key metrics? I'll share with you the key metrics in a moment, but let me first speak to how that came into being. So it might be helpful just for framing for you, because I'm not sure that we've spoken about this in the past.

17:14About 20 years ago, I was hired to a firm called Bestroom Venture Partners to be the first person that they were hired to do cold calling. And they didn't even know exactly what they were looking for when they hired me. They just said, we think that if we go outbound, we could find some really interesting deal opportunities. and I met my partner Mitchell there and we started about the same time and we start calling these companies and spending time with them and what would end up happening is every Monday we were supposed to present to the partners at the firm the different companies that we spoke to and they were supposed to then pick which ones they wanted to follow up on and they'd say, okay, Brian, this is great.

17:52You left 112 voicemails this week. You wrote 140 emails. Wonderful, we're tracking you. you had 11 calls with CEOs wonderful which are the ones that we want to follow up on and when we first started there was no framework around anything and I would say guys I got this amazing company let me tell you about it the product is going to be unbelievable the founder they went to Harvard it is crazy amazing and they'd look at me and they'd say all right um that's great Brian you know so like how big is the company I said oh my god I had to ask how big it i don't know how big it is okay well get me a revenue scale let's do this don't bring any companies to me unless they're like five million dollars plus in revenue so okay fine so you go back out you do a bunch of calls the next week same thing happens talk to another company say oh my god this company it's amazing it's got this great product i went to harvard it's another company and they've got seven million dollars of revenue and they're like okay good good all right so how fast is it growing i'm like oh my god i had to ask that question jesus i didn't know that okay we'll go back and find out so you could see where this is going which is they kept asking lots of questions and because they were asking lots of questions it became harder and harder to find companies that net all of their criteria and at a certain point when i was there we got to about five or six criteria and that was it and there were like no more questions that they were asking and they basically said to us look don't worry about what the company does and and and and all of the framing around it.

19:22The first thing we want you to talk about is how many of the metrics it meets. Once you tell us that, and it's qualified as a lead based upon the number of metrics, then let's talk about all of those exciting things, why the company is so amazing, what their business model is, what their product is. And that's more or less how we've decided to run our firm at LeadEdge. So we're thematic. We try to understand the various industries. We try to get really smart about different companies, but we really try to stick to a very deliberate framework in terms of the metrics of the company. So back to your question of what the BeatEdge 8 criteria are.

19:57It's revenue. We're looking for companies$10 million and up in revenue. It's growth rate. A lot of companies, a lot of investors might make money through leverage or through buying things super cheap. We make money through growth. So we look for companies, 25, 30 % growth rate annually at a minimum. We look for companies that have high gross margins. Many companies that we look at are not yet profitable. Some are, but many are not. And so gross margins are a great indicator of future profitability. We look for companies that are kind of profitable or break even in a perfect world. Then we have a series of non-sort of P &L metrics.

20:33So there's recurring revenue, is a business recurring revenue business, high retention rates. So we look for companies with like 90 % plus gross retention. It's probably the most important metric that we track. We look for businesses with a nice, diverse customer base. If they only have three customers and you lose one, the business is going to go under. That's a real problem. So you want to be able to sleep at night. And then last, we look at the unit economics. And for us, that's sort of like a return on equity type metric. Based upon the amount of cash that the company has burned historically, how big is the business?

21:04And we see way too many businesses that have burned through$100 million to get to$10 million of revenue. It's just not an efficient business. It might be perfectly good. it might be super technologically advanced. Other people can invest in those types of things. We're going to look at that one-to-one, two-to-one type ratio. If you burn through$10 million, maybe you're around$10 million of revenue. Something in that neighborhood feels good to us. And we judge every company based upon that metric stream. And once we do that, it kind of leads us to where we should end up. Curious about online trading, but haven't taken the first step?

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22:43So because we're communicating with our LPs and saying, don't invest unless you're willing to help the portfolio companies. I think that that gives us a leg up during the courting process, because what we're able to do oftentimes is make a lot of really great introductions to the prospect companies. And if you're courting a business and trying to learn more about it, it's really great if you could introduce that healthcare software business to the CEO of a big hospital system. That could oftentimes work wonders. And because we're able to do that, and because there's always more to go back to in the well because we have so many LPs, the companies that we're spending time with really feel like, gosh, not only are they helping me now, but I really feel like they're going to be helpful throughout the deal lifecycle.

23:27So that's kind of like thing number one that we do is like we left there. Is there an art to that in that there's a optimal frontier of how much value add you provide before you win the win, you win the deal? Or is it just give as much value add to get the deal closed? And then, as you mentioned, you have you have just this well of a you could you could give. A lot of it is what you talked about before, which is like, what's the force value add? You're going to ask that question. We always ask that question. I've been asking a question for 20 years. It is usually when we're talking to a company that's, you know, we're starting to discuss, it is two questions.

24:07Number one, what do you feel like you need help with? And then number two, what do you feel like you're doing uniquely well? And what you're doing with those two questions is when you're asking what they need help with or what they're doing poorly or feel like they're not as sufficient with, you're figuring out a way that you could alleviate some of that issue by helping them. And when you're asking them what they're uniquely good at, people generally love to talk about the things that they're uniquely good at. And so ultimately what ends up happening is if you find that thing, then oftentimes you could leverage those folks to say, okay, we could, well, let me connect you with somebody else because they need help with that thing that you're uniquely good at.

24:44And it creates a, that's what creates a network effect to the whole thing. when i met blake shoal from founder of boom supersonic he asks he frames and he asks things in such such a way that is incredibly powerful he once had breakfast with richard branson he needed him to write an oi he had nothing he had his model supersonic jet and he was going to yc demo day with nothing and he framed it so elegantly before he even sat down with richard branson he the first thing he said is richard i'm not here to ask for your money right yeah that's Then they were pitching for 15 minutes and Richard's like, oh, you know, I don't know.

25:19Some of the parts he likes, some of the parts he didn't. And he said, Richard, I'm not asking you to believe. I'm not asking you to believe that this will work. But if we do accomplish what I say we will accomplish, do you want the first thought to have a Virgin logo on it? There you go. And he ended up getting the LOI and, you know, now it's revolutionizing private aviation. And so that video really got me thinking about the power of questions and framing. You said two great questions, which is, what do you need help with? And what are you uniquely good at? What are some other powerful questions that you've asked at your career that have gotten you great answers or that really helped accelerate your career?

26:00Gosh, that's a really good question. They set the standard high with your two questions. Those two questions that I outlined before are probably like our best two. And there's the most bang for the buck. Oftentimes when you say, how do you need help? It doesn't necessarily translate to who could I introduce you to? And I think that one of the other questions that's always very powerful is who could I introduce you to? Who do you want to meet? Because it might not necessarily be that they feel like they need help with something. It might just be that they want some knowledge or to pick somebody's brain more proactively.