Mitchell Green of Lead Edge Capital on the Moneyball approach to investing, the art of effective cold calling, and managing 700+ strategic LPs

0:00Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Kaji, and on this week's episode, we have a conversation with Mitchell Green, founder and managing partner at Lead Edge Capital. With offices in New York and Santa Barbara, the firm has over$5 billion in AUM and specializes in helping growth stage companies scale. As you'll hear during the dialogue, the firm has a very interesting model on how it combines elements of private equity, growth, and an active network of over 700 LPs to build a really powerful moat.

0:29There were a lot of fun takeaways from this conversation, and I really enjoyed hearing about the strategic nature of the LP base and the programmatic way they evaluate companies. I hope you enjoy the conversation. Samir Khadji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third parties, investments, or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate. Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast.

1:07This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Mitchell, it's great seeing you. Thanks for being on the show on a late Friday night. Sure, absolutely. Thanks so much for having me. One of the areas that I think is a good place to start is going back to the origin story of Lead Edge, which now 14 years old, you were at a hedge fund at the time. And this was 2009, which is one of the toughest times to raise any capital. Tell us what inspired the start of Lead Edge back in 2009. Sure. So I would actually say it started before even 2009.

1:43And look, thanks so much for having me on. Quick background. So I'm from Grand Rapids, Michigan. I was a nationally ranked ski racer. I went to Williams. It's the only way I got into that school I could ski down a hill fast. Division of Wetski came after Williams. I made PowerPoints at three in the morning, investment banking for a year. And then I joined Bessemer Venture Partners. And that's kind of where it all started. So when I was at Bessemer, Bessemer had been a very like Shark Tank-esque fund. And this is talking 2005 thereabouts. Every year, Bessemer had five partners. Every year, 800 entrepreneurs would walk in the door.

2:22And they would, you know, invest in five to 10 of them. And like, it would be very inbound-ish. They had seen what firms like Insight, which had replicated what Summit and TA did by hiring 22 to 24-year-olds to go outbound looking for deals. And at that time, it was literally cold calling. You know, pick out the phone and we had a joke. If the CEO called you back, the company sucked. It was the CEO, you call every two days for a month. Like, that's who you want to get on the telephone. when you know you realize what's a good company by speaking to 10 ,000 bad companies that's all it did so I did that for a few years I left because while I loved Bessemer I just like didn't couldn't have told you the difference between like if you spoke to an entrepreneur of a company that was 30 million in revenue growing super fast bootstrap business didn't hadn't raised money or had raised very little money you know what was the difference between Bessemer's Growth Fund and Excel and Sequoia and General Atlantic and TCV and Insight and Summit Partners.

3:21They're like all really good firms. And I just felt like they didn't really have a lot of competitive differentiation. So I left and was like, I think there's a bunch of good firms that all the returns are going to go to in this industry and they all kind of look similar. So I left to go to Wharton Business School. And while I was at Wharton, I joined a hedge fund started by Julian Robertson at Tiger, one of the Tiger Cubs. And I joined this Tiger Cub and the guy that ran that firm and dabbled in privates. By dabbled in, you know, he started the fund in like 03 and in 04, he bought$10 million of Alibaba Group at 25 cents a share.

3:59And we can feel bad that, you know, Alibaba stock has gone from 300, you know, down to where it is today, it's still$75. So, you know, it would still have been a, you know, absolute grand slam. When I came to him, I, you know, I told him what I used to do. And he was intrigued by the fact that he'd be like, well, I've, I've, I've only ever owned common stock. I've only ever owned 3 % of a company at most. I've never been on the board. He's like, you know, would there be private companies if we said that, that would might want to take, that would take our, our private capital from us. And I was like, well, of course there's, you know, cause a lot of the standard venture guys or growth guys at the time wanted to own 25 % of your business, be on the board, wanted to like, you know, all these securities.

4:38And I was like, yeah, I mean, like if you're willing to buy common stock and buy 3 % of a company and don't need a board seat, we can probably, we can probably find a bunch of interesting things to do. And that's how it actually started at the edge fund. I did a couple of deals in early 08 working for them. What I would do is use the edge fund network. I like, I'd go to the prime brokerage network and meet companies like public companies. And then if I had a private company that wanted to sell into the public company. When I met the CFO of the company, I'd literally hand them a business card and be like, hey, I got this private company.

5:07They have a bunch of your competitors or customers. They'd love to talk to you. It's a lot easier to sell down than it is to sell up in an organization. So I ended up making a couple of investments when I was at the hedge fund. This is like a wait time frame. And the first one I invested in was a software company, Bizarre Voice. It had been a company that I had cold called when I was at Bessemer. It had originally been backed by Austin Ventures, and then Battery Ventures invested in it. And Bessemer could never get in it. But I had stayed in touch with the CEO. I had made a bunch of customer intros for him, and he invited us into the deal.

5:39And it started off as like, look, you weren't going to be on the board. You were going a couple percent of the company, combination of preferred and common stock. And then I started helping him a bunch, literally making customer intros using the public market networks. And we started to see other deal flow. So in the summer of 08, we set out to raise like a$50 million fund inside the hedge fund. Then September of 09 happened and I was lucky to have a job. And then I actually, in early 09, the founder of the Bizarre Voice came to me and said, Hey, would you guys want to put another 10 million bucks in the company?

6:14I'm not letting what happened to my last company happen to me again, which was a company called Core Metrics. He ended up selling it for 300 million bucks, but they had done a down round in 01 and the founder of Bisky had had nothing. And so he was like, you guys have been super helpful. I'd love if you guys want to put 10 million bucks in this thing and I'll do it like at a 10 % simple price. It's like February of 09. I'm thinking to myself, well, this sounds amazing, but the hedge fund, you know, it doesn't have any capital. I was like, can I have a month? I was like, can I have a month or six weeks?

6:44I'm like, you know how I help you a lot with big customer rentals to public market investors? I'm going to go raise money from people that I used to cold call, from people that were rich in my business school class, their parents. Then I'm just going to ask them for help. I'm going to be like, oh, look, you run a big e-commerce business. You're on the board of Procter & Gamble. This company is$20 million in revenue. They're looking for an entry at Procter & Gamble. Can you help? So I ended up raising a bunch of money in the spring of 2009 for this one vehicle to invest more money in Bizarre Voice.

7:15We actually then bought out the hedge fund stake as well. Did a second deal on another software company called Monetate in 2010. A bunch of my LPs came to us in 2010 and said, stop screwing around. Stop doing deal by deal. Raise a fund and we'll give you money. We'll be your first investors. We like love what you're doing. We're investors in a bunch of funds. Nobody asks for help. We ask for customer entrants like you're doing or helping with recruiting. So we literally started the fund, the first fund, from these same investors. And we'll call it, I think it closed on April of 11. $52 million fund.

7:57All the LPs from the SPV, some of them introduced me to their friends. And our pitch was really simple. We're going to run around the world and look for companies that meet very specific criteria. We're going to source them the same way we did at Bessemer. We're going to start to build a team of associates. That was two at the time. It's now almost 20. You know, we're going to run around North America and Western Europe and find companies that meet very specific criteria. And when we find them, we're going to leverage you through the entire investment lifecycle. You're going to be, you know, if this company is in Ann Arbor, Michigan, and you're from Detroit, we can't get in, we can't get an audience at the company.

8:32We're going to send you an email asking like, hey, do you know anybody at this company? Or if you're the, you know, former CEO of General Motors and, you know, we're looking at an automotive software company, we're going to ask the CEO if he wants to meet you in the process. It's like, you'll help us win. And by the way, you'll be our McKinsey. To post investment, we're going to help leverage you with recruiting at the senior level or C-level, or, hey, we're looking for a female audit chair. We're looking for customer interest to these 20 people. Hey, this company's 70 million of revenue, profitable, and looking to, you know, expand into Western Europe or going to Asia.

9:03Can you just like offer advice? That's what it does. Like, that's what it did. It's blossomed from this little SPV of the 10 million bucks into our last fund was$2 billion with over 700 LPs. And we met all these people through one another. So I know that was a long answer, but I just wanted to give you the background. It's actually incredibly helpful to get that type of background. And there's so many threads I can pull on, especially the fact that you still have 700 LPs to this day when so many firms as they grow and scale over time, they actually reduce the number of LPs and go more with the institutional LPs.

9:37Yet for you, these LPs that you have that are on the smaller side, i.e. high net worth individuals, CEOs, or people that are incredibly strategic to the mission. When we go back maybe 14, 15 years, how clear was the why of that and what the overall long-term plan for LeadEdge was going to be? Pretty clear. I'm one of a few people that run firms today at scale that have actually cold called the company. I started my career cold calling. And the three of us on the IC since fund one, my partner Brian and I worked at Bessemer together. He left to go to Columbia and then went to FTV and then joined me at the end of FUT1.

10:17My partner named I worked at Insight. I was on the frontline call-ins companies. I could not figure out what was going to differentiate at Bessemer. And when I started my own firm, I knew where the returns came from. I mean, Thelda Hardeman, who was a partner at Bessemer, is now one retired. He's there forever. He's probably 50 years. He was a Harvard Business School professor. They had all the data. He taught venture capital. All the returns in this industry flowed to the top 20 venture funds. Now, again, look, two-thirds of the companies we invest in have never raised money from, quote, tier one venture funds.

10:53So a lot of stuff we do is back a company like Pacemate in Sarasota, Florida that raised$8 million from 70 angel investors, and it only like barn three. You know, but yeah, yes. Have we backed companies back by Bessemer or back by benchmark or Sequoia? Yes. But it's not like a lot of times we don't. I'm an entrepreneur. I joked that I was in business school and at the entrepreneur conference, I never understood why they didn't get Steve Cohen to come and speak or Dan Ock or like guys that have built giant edge funds or private equity funds. Like Steve, Steve Schwartzman is an entrepreneur. And so is Steve Cohen.

11:25Like they might be investors, but they're entrepreneurs. They started companies. Why? I mean, if you, the only way to really get paid now, Like you can make a lot of money working for somebody else. You can make more if you do it your own. You could make a lot, but you would have made more had you done it yourself. But I also did. I want to be my own boss. I'm an entrepreneur. I started a company in college, totally failed. But like, uh, I, I, it's just, it's just my personality. Like, you know, my partner, Brian, if he was on here, would be, would be cheap chiming in right now that I was the worst ranked analyst at UBS in my analyst class.

11:56Making PowerPoints at three in the morning and what the line is straight on page 60 to media, I don't think is very relevant, but to some people, it matters. An area that I want to spend a little bit of time is on the sourcing side. So traditional venture, especially in Silicon Valley, maybe New York to a certain degree, you do have a lot of the opportunities that are through warm intros. And that could be from a founder, it could be from an LP, it could be from another GP. But your model is very much outbound cold calling, which is tough to do, but at the same time can yield really interesting opportunities that are uncovered.

12:32Maybe talk a little bit about how you built that team. So we have a team today, I think 18 associates, analyst associates, same thing. There's been title inflation in the last 20 years. These associates speak to about 8 ,000 companies a year. And we have these like eight criteria. And if you were to say that the companies need to meet all eight criteria, you would have 1 % or 80 companies that met all eight criteria. That would be too small of a sandbox to invest in five to seven deals a year because we want to invest about 20 companies a fund. That's not a big enough sandbox to do five to seven deals.

13:12So we find if you do like five or more criteria, and I'm happy to do what these are, then you get about a 10 % yield. So we get about 800 companies a year that fit our mold. And that results in us doing about diligence on 150 to 175 to do five to seven deals a year. Now, how do you get from 800 to 150? The founder's nuts. The market size is too small. The company's not raising money. A whole host of reasons. Now, to get to this 8 ,000, it's primarily outbound cold calling. But of course, we cover small investment banks. Of course, we cover small private equity firms. Of course, we have coverage officers for the different early stage venture funds.

13:53How the LPs help, starting with sourcing. Of course, they send us inbound lead flow and it's sometimes good. It's oftentimes fair. Not good. Remember, they're not seeing the company with 100 of revenue growing 25 % a year with 35 million of EBITDA. They're just not seeing that business. In a million years, they would never see that business. They're also probably not seeing the business that does 50 % of revenue going 150 % a year. This is not what they're seeing. Where they are insanely helpful, though, is what we call hard to cracks. We're calling into a company, the data looks really interesting from the outside, like employee count growth, the fact that it hasn't raised much money, and it's based in, you know, Minneapolis or Kansas City.

14:36Could we then email our LPs in Kansas City and be like, look, we've tried to email this company 10 times. Do you know anybody? We'll also have LPs email the company and be like, hey, I'm an advisor to Lead Edge. You like our software company that sells into the food space. I'm the former CEO, Kogi Pavalov. I would love to talk to you. He will respond. I'm not telling you it's 100%, but we have a pretty darn good hit rate of meeting companies that way. Now again, there may be nothing to do. The CEO's probably not looking for money, but we still get in front of the company. Then it's about diligence.

15:12So you say to the CEO, how do you need help? And he says, well, and everybody wants more customers. So, you know, let's say it's a company that makes restaurant point of sale system software. And you could say like toast. And I said, look, I got a bunch of employees that own restaurants. You want to talk to them? I mean, if the CEO says, no, you don't want to invest in the company to begin with. But if he says, yes, he like loves you or she loves you. And at the same time, you're getting diligence as well, because you're like asking the people like, well, what'd you think? and if a bunch sign up as customers you're like oh that's pretty damn good diligence like that's a pretty good signal and so it just like helps you and then we'll put lps on the boards of companies we'll make them advisors to companies is our lp based only individuals no by number it's 95 individuals 5 institutions by dollar it's about half individuals 20 percent individuals that write institutional size checks and 30 percent traditional institutions, you know, big pension funds, endowments, things like that.

16:15How do we leverage them? We literally just send them emails asking for help. We're like, hey, we just sent an email. Hey, one of our companies sells price optimization software to manufacturing companies. You know who owns manufacturing companies? Mid-market private equity firms. You know who cares about margins and pricing, private equity funds. They're like a perfect channel to sell into. We literally just sent an email out to like our LPs for 20 random private equity funds. I would say seven people helped out of like 20. Again, some of those were institutions actually, because they were like, listen, I'm like invested in this fund.

16:49I'm happy to help. So that's a way to think about how we leverage our LPs. When you think about all of these LPs, obviously many of these people are running companies or they're in a fairly senior position, probably really busy. How do you balance between adding value to both the NLP, who may want to see some of these companies, understand what's going on, and maybe they could be a client of some of the companies that you're bringing them, but not overtaxing them because sourcing, maybe it's a little bit of diligence, maybe it's the post-investment help. How do you make that balance? By the way, another way to ask the question is, how do you convince a multi-billionaire where they put$10 million in your fund to help?

17:29It's very simple. We've built this community of people where it's like, look, don't invest if you don't want to help. I don't actually care. We've got enough people that want to help. And when you've got 700 plus LPs, and we track every intro. We know how we met every LP, and we know how many intros we've made them to, how we've helped them, how we've engaged them. We track all this stuff religiously. If you have 700 people, no one person is helping that much, to be quite honest. And it's like very low touch, the low touch way to help. It must work because how do you think we've met all these people?

18:07I think Fund 1 had like 70 LPs or 100 LPs. Fund 6 has got 700 of them. Now, look, we could have 1 ,500. Now, the easiest way to double your fund size, right, is just ask every LP you invested a dollar to have them introduce you to somebody that invests the same amount as them and you've doubled your fund. But that's why we have institutions as well. We don't want to have 2 ,000 LPs. We treat people well. We have a quarterly call where we walk people through the portfolio. We tell people how we need help. We ask for help. I constantly talk to LPs and I'm like, institutional LPs, I'm like, how many times have you gotten an email in the last year asking for help?

18:49I know the answer already. The answer is zero. We just ask. You know, one of the things that often comes up with a lot of the firms that have scaled, and many of them did actually start the way you did, which is mainly non-institutional capital. And some of that was out of necessity, didn't have the track record to be able to raise. Over time, if you actually look at the percentage of institutional capital versus non-institutional, it becomes like 90-10. So 90 % of the capital comes from the endowment's foundations. And part of the reason they do that is because it's long-term sticky capital. It's much more predictable, at least.

19:24That's the biggest fallacy in the planet. Rich individuals who generate, who have wealthy individuals who have cash-generative businesses are the best LPs on the planet. They don't understand the whole idea of being over-allocated to private equity. I'm not talking about doctors and lawyers here, by the way. I'm talking about our LPs. If you look at our website, they are some of the people that run some of the biggest businesses in America. out of the world. These people have cashflow that come in every year. They don't think about, well, I've got 16.6 % of my assets in private equity and venture.

19:55I better not make another commitment. They're like, no, what's my unfunded? And like, how much money am I going to be called for this year? That's it. That's all that matters. We initially also thought, we had tons of people tell us, oh, you know, individuals are not sticky. They can't scale. The same people that told us that we have a fund that's four X bigger than them now. You know, I don't know. Something works. And by the way, I will tell you this, we raised Fund 5. We were going to start Fund 5 raising in March of 2020. The individuals were ready to go. They're like, dude, the market's down.

20:24Let's rock and roll. All the institutions are like, oh, we're freaking out here. We ended up raising it in July or September. The individuals are like most individuals that are investors tend to buy when times are scary, right? Yeah, and you're right. I mean, like a lot of firms found this the tough way in 2022 when all the big institutions had the denominator effect, couldn't do anything. And it was a lot of the, what I would call ultra high net worth investors, they were looking at and saying the markets have changed. This is actually a great buying opportunity. Rich people are still rich. Go look at the S &P.

20:58Yeah. Rich people own Apple and Microsoft and Google and they own NASDAQ. And yes, they're still rich. Like nothing has changed with them. Look, the reason we also have institutions are they make us a better firm. they do scale. You can raise nine-figure checks. So you don't have 2 ,000 or 3 ,000 LPs. We want to be able to have high touch and know all of our LPs. So that's why we have both. But look, our pitch to companies is, listen, let us invest in your business. We'll introduce you to our LPs. And oh, by the way, you're going to meet our LPs before we invest. That's not going to change. That's the entire proposition of what Lead Edge is based off of.

21:35It certainly speaks to the overall ethos. But going back, to something you said earlier about the eight criteria and looking at a company that meets all eight criteria, probably really, really hard to do. So let's say it meets five or six of the criteria. Maybe you can describe, you know, what those criteria are. And if you were, if you were to index on some of those criteria, which are like the most important criteria that are, are there must have criteria? No, there's not. It's money ball. Are you a 10 million plus, I'll just tell you, I'll give you the criteria and then I'll tell you like why they're important.

22:07One, to give you a sense, are you 10 million plus in revenue? We want companies that have product market fit. We don't invest in startups. We invest in companies that are growing, that have product market fit, that understand how to scale. Two, are you growing 25 % a year? We don't generate returns through leverage. We generate returns through growth. Three, do you have 70 % plus gross margins? There's a reason that Facebook gives away Apple iPads in the vending machine and Dell charges for sodas in the vending machine. or at least they used to. One has 90 % gross margins and one has 14 % gross margins or whatever they have.

22:43At the end of the day, businesses trade off on multiples of earnings when they don't grow that fast, when they grow 10%, 15 % a year. Businesses that have high gross margins are much more likely to be profitable at the end of the day and can actually run less efficiently than low margin businesses. Are you capital efficient? This is like our version of return on equity, it's really stupid, but it works for us. Are your revenues greater than your historical cash burn since inception? In other words, the world is littered with like$20 million software companies that have burned like a hundred million to get there or more.

23:19We define efficient as it's if you burn less than 20 million to get there. So in other words, if you've got a$20 million revenue business, it's only burning 3 million bucks. Even though you've raised 10, you're doing something right. So that's really important. Do you have 90 plus percent gross retention and then probably net that are like 130 plus? Again, leaky bucket syndrome. When you're like 10 million in revenue, really easy to have 80 % gross retention and survive. You need to fill the bucket and get$2 million back in new customers. Problem is when you get to 200. And if you've only got 80, 70 % retention, you got to get 40 to 60 million in new revenue every year just to break even to get to par.

23:58that's hard to do. Do you have a diversified customer base? Are you over 10 %? Do you have any customer over 10 % of sales? You could say the same thing about suppliers, but we don't tend to invest in businesses with suppliers. We don't want to wake up and find out a 30-year revenue has disappeared. Are you recurring? It's just easier to invest in December. Nine-year revenues are going to be in April. Then are you profitable or breakeven at the EBITDA line? These are all yes, no answers. This is our strike zone. Five or more criteria. Less than five, don't even care, won't spend more than two minutes on it.