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

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1:36Hello 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.

2:00Patrick O'Shaughnessy is the CEO of Positive Sum. 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.VC.

2:27My guest today is Mitchell Green, the founder of LeadEdge Capital. When I think about LeadEdge, I sort of think about this giant money machine that Mitchell and his two partners have designed over the last 15 plus years to make remarkably consistent investment returns for their clients. 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.

3:01Mitchell 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.

3:17So the first time that I heard about LeadEdge 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? Why did you put that together? We've always found that the best way to communicate with our audiences, which is entrepreneurs and also our LPs, our clients effectively, is to like write a quarter letter about a different

3:49topic. And I started my career cold calling companies and that's the way we source deals. But when you start your career talking to, I think Brian and I probably spoke to like 10,000 companies. And if you want to know what's a good company, just call 10,000 of them. You'll figure it 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 joked that we sent this letter to some people in the VC community, one of which is like our buddy at Entryson Horowitz. And they posted it online for us.

4:22We just thought, I think it's like a very simple way, like in a world where people spout off total bullshit all the time. And like you see everything in decks. This is just a good way to distill it. Talk to me about the 10,000 calls. What did you learn 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 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.

4:56I think another thing you learn that's really important for young people, if you tell an entrepreneur that you're going to actually do something, then actually do it. Well, I think that's actually true of like a life. There are so many people that say they'll do things that just never do them. And so if you're known as a firm and a person that actually does what you say you're going to do, it goes a long way. So if you tell an entrepreneur, hey, I know somebody at Adobe, do you want an intro? Cause it looks like it'll be helpful for your business. And then he or she said, I'd love to. Well then guess what? Follow up with that. Do what you say you're going to do.

5:28Can you describe 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. 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. We run this place like it's a software company. My background was at Bessemer. I worked for somebody

5:59that was extremely disciplined. It was building a cold client program. Partner Brian worked at Bessemer. We were the first two cold cars. And my other partner, Nimei, worked at Insight. And I think Insight, Jeff Warren was on recently, 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 Atlantic or Bessemer or Sequoia, you just have to be like extremely rigorous. And so our number one KPI

6:32that we run this place by is what is our gross dollar retention for LPs? We want 95% gross dollar retention because the only way you can get that is one, have good investment returns and great client services. So how do you, through long periods of time across people that will come and go, generate world-class returns is you need to have a process. And the process for us starts with 18, 22 to 24 year olds that talk to about 9,000 companies a year. You get those 9,000 companies.

7:09How do you figure out which ones to work on? So then you need this framework to guide these 18 people to like, well, it's going to be an interesting company because in the investment business, we have one asset. 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 that we really took from coming out of Bessemer. And so they helped build the Bessemer five. We took the Bessemer five, turned it into the lead edge eight. And it's like drives everything we do. Now, when we find the

7:40company, we're then super creative. We'll buy 10%, 80%, LPs out of a 20 year old fund, buy employees, secondary, fund somebody's CV. We don't care. We'll do anything. 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 LP story that you have is also quite distinct and different. Can you describe that in a lot of detail? Our LP base is all world-class execs and entrepreneurs. I know we do have some big institutions, but 95% of our capital is all these world-class execs and entrepreneurs. And we use these LPs throughout the entire investment life cycle. It literally starts with

8:15sourcing. If a company won't call us back, we'll email our LPs. Two, let's say it's like an automotive software company. We'll have Rick Wagner, the former CEO of GM, 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 in them or a 22-year-old email in them. Then for diligence, we'll say, hey, you're a healthcare software company. You're 25 million in 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

8:48bucks. Could it be bigger? Oh, it could be 10 million. I'll meet the former CEO. And then I'll call up Ian Reid and be like, hey, Ian, can you really 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 call Pfizer and back channel it? And then you might say to the entrepreneur, hey, I don't want to see Biogen as a customer. Would you want to meet the former CEO? So then you call up George, like, hey, George, I found this company. I mean, it's seven of every criteria. Then post-investment. We literally send emails to our LPs. Be like, hey, 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 for help. That's how we

9:23do it and how we leverage them. But it's not actually why we did it. It would be a lot easier to go out of 20 giant institutions, right? You have 50 to $300 million 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 95% retention, that's what you need to do because they're your clients. 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

9:53probably is the same in industrial buyouts. But I knew in the venture world that it definitely flowed to that. And I had the pleasure of working for one of these firms, Bessemer Venture Partners. So when I was starting Lead Edge, I was like, why in God's name is anybody going to take my money? I could teach them how to ski, but that isn't going to be very helpful. But I said, you know what? Had I been the global head of HR at Procter & Gamble and my partner had been the global head of HR at Microsoft and the other one had been the head of HR at Nike, when I called the work day 80 times at

10:25Bessemer. And Dave Duffield 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 world-class HR exec, he would have engaged with me because he would have known that I could have introduced to those companies. Like I have tons of other HR execs. I know these people. In a world that's super crowded and undifferentiated, and I think it's exponentially the case more today, even than what it was 15 years ago, it just like differentiates us. And we do what we say we're going to do. How many LPs do you have? Probably like 800. 95% by number are these executives, yeah.

10:56If you think about the level of returns versus the consistency of returns, how much does one matter versus the other for this 95% gross retention? I think consistency is more important. On a per deal basis, we're trying to make a two to five X X in three to seven years. That's like a 25 net IRR 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 X nets with 20 net IRRs. Some

11:28of those deals aren't going to be five X's. Some of them might be 0.7 X's. Our downsides have been very low. I think we've only left all of our money in one deal ever. And that's because of the kind of criteria we look for in a company and what our average company looks like and the fact that very few of our companies have any debt on them. Now, 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 investment in the fund and we do not run funds with like a hundred, 150 companies in them, we run funds with 20 investments in them. So we've made something a seven, 10, 12, 15% position. And that goes eight,

12:0310, 12 X. That's how you can three X net a fund. Yeah. 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 Ripken, doubles and triples. We're not Sammy Sosa or like Mark McGuire. It's all about hitting doubles and triples. And if you do that with very little leverage in the portfolio, 90% of our companies or 85% 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.

12:3456% of our companies are like profitable businesses. You may get it wrong. You may back the wrong team. You may overestimate the size of the market, but I think 70% of the time we own the pref, you're downsides to one X. Now, sometimes you need to, we cut the deal with the entrepreneur or the managing team. So you're making slightly less than that. But if you can avoid zeros and turn the zeros into like 0.8 X's or 0.11 X's, it massively helps return. We'll sell. Probably a third of our exits have been secondaries. We won't buy secondaries. We will also sell. We constantly underwrite. We've been referred to as traders or corporate hedge fund

13:07guys. And we're like, no, no, we're just trying to actually make money because this company is about to be a living dead and you're going to be in this thing for the next decade. Maybe spend a minute before you go through the buy criteria, talking about selling more. What is the process that you run to be able to sell well? We have a investment company. There's three of us. Myself, Brian Nima. Been here all since fund one. We have a disposition company. Same thing. We think a lot of firms do a really, really good job on the buy. Very, very few firms do a very good job on the sell, like knowing when to sell, pressuring to sell. And I would tell you that the private equity funds tend

13:40to do a much better job on the sell than most venture growth guys. Hedge funds, if you do invest public equities or only funds, you constantly can buy and sell. The three of us meet once or 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? How can we try to position this company for sale over the next 12 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

14:11happens. What is the holding period end up being on average then? I bet our average holds are three and a half to four years probably. Everybody gets all excited by these 2015, 2016, 2017, 2018 returns. Like our 15 and 18 returns look very good. But it's just multiple expansion and we sold. That's it. If you think you're going to make a 2X in four years and you make a 4X in two years, it's amazing what it does to net IRR. People forget the reverse happened in 2021. Nobody's 20 and 21 funds. I think the venture growth ecosystem gets a bad rap,

14:47but it's going to be every alternative asset. Their 20 and 21 funds are going to be awful relative to earlier funds because people thought they were going to make a 4X in two years and are instead making a 1.6X in eight years. And so like that's going to drive, that's going to have huge impacts on the industry. What is the most interesting thing about the skill of selling and 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.

15:18Correct. Maybe in like a bad, medium, good, there's different kinds of outcomes that you'd be selling into. Are most of your sales into everyone else is excited and you're less excited? It can be everything in between. But if a company goes public, it's just hit a 2 to 5X in three to seven years. And then sell. So you're like the company goes public. You're at like a 3.3X in 18 months or 24 months. They're like annihilate a 12% or 20% in that IRR. It's a great company. But we

15:49constantly are underwriting like what's a forward net return from here. We made like a 3X in 18 months. That's like an IPO. In a secondary sale, it's about underwriting the forward IRR in Toast, which is one of our biggest investments, which we put like 12% of our fund three into. And we'd always get crap. But our fund three was like a $290 million fund. And we put like 36 million bucks into it. And before the IPO, we had sold 180 million bucks. I mean, I think we'd make 350 to 400 in it total. People are like, why are you selling? You don't believe in us? We're like, no, no. All these

16:20other knuckleheads that invested alongside us, none of them put 12% of their fund in it. And by the way, somebody is paying us a price in the secondary markets that we think is just lunacy. We sold like in the secondary markets like 40 or 50 bucks in Toast. The stock today is 30 bucks. We think it's cheap, but it's just, by the way, we sold like six years ago. And so it's constantly underwriting forward IRR. As your business scales up, everything gets more complex, especially your compliance and security needs. With so many tools offering band-aids and patches, it's unfortunately

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17:22every new tool and data source makes the problem even worse, adding more complexity, more head count, and more risk. Ridgeline offers a better way forward, one unified platform that automates away that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgeline.ai. Okay, now we get to talk about the eight buying criteria. I don't know if you want to tick them

17:53off or give us some highlights or- Let's get some highlights. So there's eight criteria. 10 million plus in revenue. Why? Do you have like product market fit? Are you growing? Because we don't invest in startups. Are you growing like 25% a year returns to gross? We don't use leverage. Do you have 70% plus gross margins? Why? Because at the end of the day, you trade on multiples for earnings. Revenue multiples are just shorthand math for what it will be, even double multiples or earnings multiples when you don't grow that fast. There's a reason that Facebook gives away

18:25electronics and the vending machines and Dell charges for Cokes. It's just like one has 80% gross margins and one has 15% gross margins. And we think that just drives at the end of the day earnings. Are you recurring? 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 has probably kept us out of the most trouble. It's like our version of return on equity. I mean, I think it's Warren Buffett would think we're idiots, but are your revenues today greater than your historical cash burn? So what do I mean by that? There's 20 of revenue. Have you burned to 80? Like every other

19:01tech company- Cumulatively. Cumulatively. Yeah. Have you burned 80 since inception? Or have you burned 10 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 you invest in startups or $2 million revenue companies, then obviously it's harder. Are you profitable at the bottom line? Do you have any customer concentration? I just don't want to wake up and find out 40% of my revenues like disappeared because some customer decided they don't want to work

19:32you. 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 the high growth rate. Toast was 25 million of revenue growing 150% a year. And it was, we paid like 500 million bucks. It was like 20 times revenue. People are like, that's crazy. Not when it went from 10 to 25. So we just try to build a forward model. And you're like, look, you can pay as high as price as you want. You just got to be right on your exit. You got to be right on your multiple. How people got

20:04in a bunch of trouble in 2020 and 2021, I think how they're going to get in trouble today and all this AI stuff is they just assume the exit multiple is 20 to 25 times. That's insanity because when you're at maximum multiple collapses. Now, so you can pay 20 to 25 times revenues. And if you're right, like some of our companies have been, 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 in our billions is a little insane personally, but like, I don't know if it goes on to do a trillion dollars

20:35of earnings. Yeah. I was going to be very wrong. I should have invested. It's almost like shorthand or if you're like, if this company grows and doesn't de-sell much for 18 months, am I in the money? And can I make a decent return for what I'm paying? And if the answer is, oh, am I even in the money in 18 months or 24 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 visual indicator of what's been going on, which is this intense skepticism of the market that boring traditional high

21:08gross 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 that have a lot of the components that make people fearful of the similar kinds of companies in public markets. Absolutely. Our belief for right or wrong is that the competitive advantage of software company has never been about R&D. We're not building semiconductor chips. We're not building biotech and pharma companies. This isn't that. It's to build like chamber of commerce software. You too could

21:39build this. My mother couldn't, but my brother could. No problem. He's an engineer. Who could Microsoft? Any of our companies in our portfolio. If Microsoft took 500 people and gave them a month, each one of our companies could be out of business. But they just don't care a lot that 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 niche product. So the software companies are really about like distribution, sales and marketing, customer success, client services. We believe that it is the incumbents game to lose in software today. I'll give you a couple

22:14examples. Workday has like 98 or 99% gross dollar attention. It grows 10, 15% a year. It only grows 10% a year. I'm sorry. It's like 10 billion of revenue. It only took like 20 years to get there. And it does like 3 billion of free cash flow. Exxon or your hospital system or Warburg Pincus or KKR or Procter & Gamble probably spent three to five years implementing the software. If you think they're going to like start building their own HR software, you're on your mind. Now, the GUI and how you access it is going to be far different.

22:46But actually, they already have the customer relationships. And the only reason they built it is because Dave Duffield and Neil realized 20 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 going to 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 SAP bought Ariba and they just left it for debt. So they built this big business. They took it public and now it's been sold to Tomarabo. So what I actually worry about Tomarabo or any of these big private equity funds,

23:18if they're putting a bunch of debt on, it's not growing that fast anymore. If they're putting a bunch of debt on it, and then what they do is they brag. They're like, oh yeah, we drive all our companies to like rule of 50 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. 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 at 99 and

23:532000, everybody thought every big box retail was going out of business. But if you look at the top 50 largest e-commerce companies in the United States, Amazon is number one. Two through 10 are Walmart, Home Depot, Lowe's, Macy's, Target. I mean, Saks is a crappy company. Their online business is actually pretty good. Neiman Marcus, same thing. A lot of the incumbents will win. Now again, Montgomery Ward, Kmart, Sears, one boss for either like over levered, didn't innovate. So 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

24:28entry multiples are lower? I think the best risk suggested returns right now are in public software names. By the way, Warren Buffett's at a spot when everybody's fearful and sell when everybody's super excited. People hate software. When we bought a bunch of our ByteDance stock two years ago, when everybody hated China, I mean, Alibaba's doubled off its lows and doesn't grow and trades at 15 times earnings. If you think about the CV, 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. You walk down the street, go into apartment building. My apartment

25:01needs 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. You can go in the side door and buy an early investor or early employee, but maybe that's not available. So we'll go through the basement window with a pickaxe and buy like a derivative. Because if you run a business and this can of Pepsi owns 30% of your business, and I go to the glass that is an investor in the can of Pepsi's fund, and that is the other half the LPs. And I literally buy that out and you own 30% and I buy half the fund. I just bought 15% of your company. It's the same damn thing. It's just a

25:31derivative. 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 in Zoom. So we couldn't go into the front door. The company didn't have money. We sure as heck weren't buying the entire business. You couldn't buy secondary. It was secondary to buy. You couldn't buy it because Sequoia would roll for you. They're smart. They're not dumb. They're like, why would we let these knuckleheads in? We'll fake the stock and make two to three times our money. And the company was one that took a long time to get funded and wasn't backed by Sequoia. They wanted it. It was backed by a bunch of random Chinese people on Chinese

26:03funds. It was actually secondary to buy, but you couldn't because they're over. So we're like, huh, why don't we go to this fund that has stock? Their LPs have been in this thing for 10 years. Maybe their LPs want to sell and we can do it one of two ways. We'll just buy your position on the fund and we'll know exactly how much Zoom we have through it. Or why don't you just create like a new vehicle? Any LP that wants to sell, we'll step into their shoes. Well, if you own 2% of Zoom and half the LPs want to sell and I then step in those shoes, I now own 1% of Zoom. And if I say to

26:34you, listen, we get to vote them like we own them. They used to hold it. The company gets an M&A offer and you get to vote. You have to call us. Day 181 of the IPO after lockup, you got to give us the stock. We just bought the position. In a world where LPs 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 a Notre Dame alum as well. If I think about the dollars deployed last year over the next year, how much of it is direct capital on the balance sheet, secondary is something creative, like what you just described.

27:0770% is creative on the balance sheet. 70% is special sets or like sector. We will evaluate in an IC a public position, a control buyout, a minority deal, or a special set. You can 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 it exploding in value, or like exploding in stuff to do. The hard part, it seems like, is finding a company that has six of the eight criteria that you can

27:42also buy at a multiple that you're excited about for the forward return. What percent of companies of the 9,000 or whatever meet all eight criteria? By the way, no correlation, how it performs either. 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 at, because what we try to do is, if you say it must meet eight criteria, 9,000 companies becomes 90. Okay. To do five to seven deals 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 10% yield. We're trying to get to a set of companies that we can

28:15then actually do work on. So you have 900 companies that meet five or more criteria. You diligence on about 150 to 175 to do five to seven deals a year. And you're like, well, not more. I'd love to, but like, we're cold calling entrepreneurs. They're like, oh, I'm sorry. I want to sell my business tomorrow. You just happened to call me on this day. No, the sales cycles can be a decade. And it's about staying in touch as an 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 like great firms. And so it's like, well, ask the entrepreneur,

28:46how do they need help? Try to tease information out of them. Oh, you sell into like the consumer space. You want to meet the former CEO, Kulia 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. 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 was a big baseball fan. He uses a baseball analogy. Like Ted Williams knew in the

29:20hitting zone exactly where to swing and what his probabilities were swinging the ball. Like, yes, you can hit a ball two inches above home plate and it could be a grand slam and 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. Our biggest mistakes 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 15 years to get more comfortable. And like

29:51when 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 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. But like getting a C or a D on a test is

30:23not your biggest failure. Dropping the ball at the Rose Bowl 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, hey, Patrick, pretend you're toast. We're doing work on the restaurant point of sale system space. I read a bunch of articles. Sounds like you're kicking butt. Oh, by the way, I just talked to like Square and Clover and said, 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

30:56different 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 to them if you don't want to make these people. Huh. Sure. Love to chat. By the way, we used to get the cold call people when Brian and I were doing this. Literally cold call people. And you'd be like, you feel like the person who calls you at 6 p.m. 20 years ago that you like slam the phone down on. Today, it's like, look, Mike, you guys get to send emails to people. Give me a break. We actually try to now encourage some of the analysts to start calling people. The biggest issue is it's hard to get people's cell phone numbers versus work phones. And it's just once you get the person on the phone, you just have to show

31:30knowledge. That's where, by the way, AI is incredible. It's like you give every analyst and 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 80 employees. So what are you like? 10 million in revenue? 15 million in revenue? Oh, I see like your employee trust growing like 80% a year. What are you growing like? 150%? Eh, not that fast. Oh, what? Like 100%? Yeah, around there. So it's trying to get numbers. If you think about this machine, so we've got this very unique LP

32:00base. We do 9,000 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 net MOICs 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? 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

32:31important thing. How do we get creative and do CVs? We were doing CVs and 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 to this thing going 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've made the last five years or something, how often are you like personally excited about the company and its product?

33:02Frankly, 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. 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 intros. 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

33:33business. How often do you control the business? We are in a control position about a third of the time. 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 around 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 have people that are in one cost. That's what there's all these 20 and 20, 21 companies haven't sold. 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

34:04a one X in a decade. But we don't go into companies and say, we're replacing the interim management. This is not what we do. When we invest in a business and when we exit, it's something like 75% of the time, 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

34:38officer or whatever. That's what's really important. I want to go back to the culture thing, 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. I've sent handwritten thank you notes every way I meet, almost everybody, every entrepreneur, every company, guess who also does now, the 22-year-old analyst. How about we track it and report on it? If you just treat people the way you want to be treated, that just flows. We built a culture of treat LPs like you yourself want to be treated. People

35:14appreciate that. And it comes from the top. The intellectual honesty comes from my partner, Nimei. A lot of the creativity comes from my partner, Brian. Now, of course, as you get to be 85, 90 people at a firm, we've built like a real training program, which is a result of a lot of work, Nimei and Brian and our COO, Susie's done, and that team and the recruiting team. We didn't have weekly IC meetings before three or four years ago. Why? Because the IC was every of us. We talk every day. And so it's just like building processes in place. Can you talk about this crazy one-on-one thing you do with every employee? I got the idea from Tom Barnes at Excel Kick Air. He's built a true

35:47machine at Excel Kick Air. I asked him, what do you think something you do that really helps the firm? He's like, interview everybody once a year. So we start with like a survey, and then you 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, what do you like about your job? First, give me everything you do, green, red, yellow. Green you love, red you hate. Let's figure out what you hate and why. And if there's things you

36:19hate, 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. 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. You get a bunch of really good ideas every year. It actually drives my two partners nuts because sometimes I'm like, that's amazing. Do it. And then they're 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?

36:49Being a good person is not that hard, frankly. In a world that's insanely competitive, if being the nice guy gets you the callback 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 25-year-old or 23-year-old associate here and you have to go to Seattle next weekend for a wedding, I'll pay your trip if you stay on Monday and go meet a bunch of LPs. But you're 23 years old. 99% of firms on this planet wouldn't put 23-year-olds in front of LPs.

37:25I'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 23-year-old associates love it, which helps us get great people. But then also the LP loves it too. Because nobody's like, oh, my son is your age. Would you mind talking to him? Or, hey, you went to Notre Dame? Oh, my son's plays lacrosse. It's like thinking of going there. Would you talk to him and be like, oh, well, actually, I'll talk to my partner, Tim, because he played Notre Dame lacrosse. 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,

37:56time with companies. I'm so curious. It's actually kind of hard to guess. Maybe there's different buckets than those three. LPs, companies, investments, internal. What does yours look like? And mine's, by the way, very different than Brian and Emis. And this is by design. I was impressed a little bit with fundraising, obviously. I probably spend 60% of my time with LPs. Wow. Now, again, that could be getting somebody to help a company though too, or coordinating with the team of people with us like, hey, let's figure out a way to get into Exxon. And then I

38:28would say 25, 30% of my time is investing related, which could be reading memos, helping people win deals. That's frankly all I want to help. I'm like, if we lose a deal because I didn't meet the company, I might say that I can help us win, but we got to at least put our best stretch forward. And then probably 15, 20% 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 our COO. So that's like my time. Nime probably spends 90% of his time investing,

38:5910% of his time on everything else, which is what he should do. I think Ronnie and the IC. Our partner, Brian probably spends 60% of his time investing and probably 20, 20 on LPs and operations. It's very clear to people that spend time with Brian Nime and I that we like play to our strengths and weaknesses. You mentioned Tom Barnes as someone that you've learned from. If you had to like create a Rushmore of other investment machines that you most respect, who is the Rushmore? Insight, TA, and probably Excel, KK. I think Devin, Jeff, Tripwood,

39:33the guys, Lieberman, and Insight have just built like a factory. You know how you know what a good software company is? First up to 30,000 companies a year. It's an absolute factory. It's a process. And so I think they're like amazing at it. TA is one that pioneered cold calling. Insight's obviously saved two to itself. I would guess Insight's growth rate in their portfolio between 2001 and today is actually pretty similar. TA's has definitely come down. They're more private equity-like, discipline and process. I get the sense that TA is very good at selling too.

40:04And then Excel, KKR has built like an incredible value creation team that I think actually adds a lot of, I think there's a lot of people like talk about value creation. I don't do much, but I get the sense that these guys are just like very good at actually helping companies and trying to bend the needle. What have we missed about what makes the machine tick that you think is really important? 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

40:35the machine. We literally negotiate carry economics for the three of us in 10 minutes. There's firms you are about to get into month-long fights over carry. We all highly respect each other 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 meetings, our investment committee is the three of us. Everybody that's basically VP enough gets to come. But if you sit in the room and listen to Brian and Imei talk about a deal, you would think the three of us hate each other.

41:06Or you might think we're Israeli because the ABC is just like a joke in Silicon Valley. If you listen like Israeli board meeting from the outside, you'd be like, these people all hate each other. Like how are they? Like, no, no, that's how they talk. So it's like, no, it's like, let's debate the merits of this deal.

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42:24the unglamorous infrastructure work and focus on your product. 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 LeadEdge for running LeadEdge the business and for the companies that you invest in. I'm the most fearful for what I don't know. AI is going to change the world and it's going to do it in ways that nobody can think about, just like the internet did. And in 2009, 99, 2000, we just sat here, we wouldn't have mentioned social media. Today it's $3 trillion of value. Now, I'm the most fearful, whether it comes to companies and processes for

42:58that. It's like, what don't we know? What are we missing? What am I the most excited about? For us, AI in the long term will create the biggest productivity game of the last 7,500 years. Don't know if it'll be like electricity, but it'll be pretty damn close. That's really exciting. But people get too excited about, oh, we're going to go like build the next piece of workday, or we're going to go build better call center software. You're going to see industries that we're not even thinking about. If they're thinking about what's going to be possible, it's going to happen. That's really exciting. It's going to be the age of entrepreneurism. People are going to be able to build awesome businesses. What I worry about, whether it's

43:31internally at LeadEdge or at our portfolio companies, is do we have the right people in place so that we don't get disrupted? Because you constantly want to be, I joke, you want to hire a bunch of young people. The people we're worried about, the young people aren't going to be able to find jobs. It's like, oh, the young people are the ones that are going to figure out AI more than the 60-year-old or 55-year-old. And so it's, we actually rank. We take all of our portfolio companies and we're saying, what's your AI readiness score? And then it's, okay, this company's like really high. This company's pretty low. Huh? We should connect those entrepreneurs together to figure out what they're doing.

44:03What goes into that score? What's your data look like? Is it structured in a way that you're going to be able to leverage AI? Are you iterating? How many 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 stay flat or go down. I, for one, strongly believe that if you think in 2020, if your budget in 2024 for 2026, what's that 150 software engineers, you should still have 150 software engineers because those software engineers can be exponentially more productive and they

44:34can then create more products that your sales team can then go sell. Who do you compete with? We would bid against Insight, FTV, JMI, Battery, Vesemers, where they do like bootstrap, Fishtripe stuff. Sometimes we compete against Meritech and IVP and rocket ship companies in Silicon Valley are freaking awesome. I was not paying a hundred times revenues for them. That's the problem right now. There's like too much money. Matt Kohler said it best. It's like they backed these giant internet companies when distribution was loose and capital was tight.

45:04It's like the whole first 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 Silicon Valley, do three great things. 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, overfrost. And I believe this AI CapEx bubble will end badly. 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

45:35this at the end of the day. We've seen them, but I think people are just going to overspend. I'm convinced that people invested in all these AI companies, all these VCs, like have to portray, the view that software is going to 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 work. Where are the nuclear power plants coming up? And it just doesn't work. That presents the opportunity. That's when you're going to buy it. That's when you're going to buy these companies. The counter argument would be in telecom, it was all dark fiber in AI. It's all burning GPUs.

46:11And yes, the capex is crazy, but everything still feels mega undersupplied. I'm just curious how you think about when the opportunities will present itself for an investor. My fundamental belief is that the models will commoditize 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, if you are all these Chinese models or European models, a bunch

46:43of these things cost a fraction of the cost to run and you can run them locally, especially companies outside the US. Like why would you pay that amount for open AI tokens or fantastic tokens when you can just run DeepSeq or one of these 110 models? I think we worry the most about modelization. I have no clue when this will stop. It will probably go longer than people think. In 99 and 2000, 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 Anthropoc round was kind of like an IPO.

47:17We're trying to hit doubles and triples. A lot of these companies we struggle with, they're either going to be 200 X's or 100 X's or zeroes. That's the struggle for us. What kind of company in the AI center of the heat map, I know you're probably not investing in any of them because of the multiples or whatever. What kinds of companies are the most interesting to you just as an enthusiast? I think it's fascinating some of the stuff that's being done in infrastructure software and actually agents appear to consume more resources than actually people. Some of these consumption-based models, the growth of companies. By dumb luck,

47:49we were very early investors in ClickHouse, which is a database company. We were early investors in Grafana Labs, an infrastructure company that competes with like Datadoc. I think Datadoc's run like high 20s, 30% 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. What do you think is the most surprising thing about you? You have a good sense of you,

48:21how you operate, persistence, enthusiasm, energy, process. What do you think if I spent 10 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 heart and soul into everything I do, whether it's like racing cars, which I race cars competitively. I was a national ranked ski racer or how I run the edge. Like I probably sleep five hours a night, four hours a night. It's because I love what I do. I'm insanely competitive. If you spent 10 hours with me, you'd be like, oh my God, this guy is the most persistent competitive person I've ever met.

48:53Were you born that way? Yeah, I think I was born that way. Was it enhanced through formative early experience? Ski racing. Skiing growing up as a kid, 100%. Can 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 GS course and constantly analyze video and do these things the next run and change this. And you fell, get up and go do it 10 more times. I grew up on a ski hill of 500 feet. I mean, Lindsay Vaughn, one of the best skiers in the world. She grew up skiing on 500 feet Buck Hill in Minnesota and doing laps from 4 p.m. to 10 p.m. at night. Just repetitive.

49:24Michaela Schifrin, who's one of the best female skiers in the world, views it as her time on snow is like limited. When you get off the chairlift, everything is a drill. Constantly be trying to improve. I think that's it. At lead edge, 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 15, 20 years ago. I think I've been able to recruit and maintain, motivate and build a really good team. I mean, very good to pick really good partners that treat

49:56other people really well. And that feeds on itself. Is there anything else from skiing? I'm not a skier that 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. And this was early 08. He said to me, because when things get scary, you're going to want to buy. And I didn't know what he meant. Because he's like, you can go down the hill at 80 miles an hour. This isn't scary. This is like nothing. You're like, you can make a decision that going down the hill at 80 miles an hour and what

50:28to do and what not to do and on at the fall. In the fall of 08 happened, I was like, this isn't scary. Let's buy. It's eventually going to go up. Ski racing helped me really understand a very fine line and risk adjusted and risk return behavior. I just think being an athlete, whether you play basketball, whether you play hockey, whether you play golf, I think athletes just have a work ethic. If you're trying to find it in young people and have a drive, there are athletes that have incredible athleticism, but also have incredible work ethic like Michael Jordan. Those are the

51:02best of the best. Then you have people like Steve Kerr, who are not very good athletically, but had a work ethic of Michael Jordan. They could be good. But then you have wasted talent, which is like Zanis Robbins in the world where they were amazing athletes, but they didn't have a drive. And I think the same can apply to investing. Why did you choose to start the firm? Because 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? Do you want to be an entrepreneur? My partner, Brian's like, we started a firm

51:35because nobody was going to like hire your ass. 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 tripping me. I always wanted to be solely 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 90 people. One of my partners, Zach, is very young. I mean, he's 30 years old and he's a partner because he joined here and he took a bet when the firm was tiny. I just encourage people,

52:08if 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 27, 25 than when you're 45 and have three kids. I had nothing to lose. If it failed, I was going to just go work against it. I guess it works for somebody. Once you made lots of money, do you still care? 100%. Why? Keep score every day. Because it's a score? It's a score because I want to win. People like Ken Griffin and Steve Cohen are mentors to LPs of ours. It's incredible how hard those people work. Now again, maybe these are NF2 people or if you look at some of these tech entrepreneurs, like an Elon Musk or Alex Karp from Palantir or Matt Prince

52:42from Clubflare or like George Kurtz from CrowdStrike. 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 constantly. To meet companies, to meet LPs, to meet entrepreneurs, to like meet bankers. And it's not work. It's fun. I 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 willing you are to just walk us through it all. That's so much fun doing this. When I do these interviews, I ask everyone the same closing question. What's the kindest thing that anyone's ever done for you?

53:15Pete Wilmot, he's passed away, was the former CEO of FedEx and he was a Williams alum. I started a company in college and he was the first person that ever believed me. I was like 19 years old and he became an investor with us and the company completely failed. When I was trying to get my first jobs and when he got my job at Bessemer, 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 never met. So that's probably the kindest thing I've ever done. I learned so much today about building

53:45something unique. Thanks so much for your time. Thanks so much for having me on. 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 more at Colossus.com slash subscribe.

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54:43invest. As your business grows, Vanta scales with you, automating compliance and giving you a single source of truth for security and risk. Learn more at vanta.com slash invest. Every investment firm is unique and generic AI doesn't understand your process. Rogo does. It's an AI platform built specifically for Wall Street, connected to your data, understanding your process, and producing real outputs. Check them out at rogo.ai slash invest. The best AI and software companies from OpenAI to Cursor to Perplexity use WorkOS to become enterprise ready overnight, not in months. Visit workos.com to skip the unglamorous

55:15infrastructure work and focus on your product. Ridgeline is redefining asset management technology as a true partner, not just a software vendor. They've helped firms 5x in scale, enabling faster growth, smarter operations, and a competitive edge. Visit ridgelineapps.com to see what they can unlock for your firm.

55:34Thank you. Thank you.