The Exchanges

Q I'm just intrigued because it's a very different world to the one I actually inhabit, honestly, Michelle. Like, what does that deal look like in terms of price?

A So, we, ah, we are able to buy businesses. We are able to buy bootstrap companies at, you know, I think we bought the business for, like, fifty million dollars or something like that. We own the company. Like, we bought the business for fifty million dollars. And by the way, it grows like 50, 60% a year. Now, by the way, it will never be an IPO. In a million years, it will never be an IPO. Um, we want to build a business. So, I'll give you an example. We just sold a company, and I don't want to talk about returns on here at all, but I'll tell you about, like, websites. There was a company called SafeSend that makes, um, it's like a verticalized version of DocuSign for tax returns. Um, There's a bunch of reasons DocuSign is not very good at it. It also is like the tax organizer that people get that like, you know, did you get married this year? Did you have kids? Did you move? And all this sort of things. When we invested, when we bought, we bought about 60% of the company in 2021. My partner Nime did the deal and my partner Brian, um, that business we met through cold calling. It was based in Ann Arbor, Michigan. It was a bootstrap business that had never raised capital, had been around for six or seven years, and it was COVID enabled. And what do I mean by that? Well, it turns out before COVID, a bunch of people, like, used to literally go to their accountant's office and, lik…

AI assessment note: “I think we bought the business for, like, fifty million dollars or something”

Q I'm just intrigued because it's a very different world to the one I actually inhabit, honestly, Michelle. Like, what does that deal look like in terms of price?

A So, we, ah, we are able to buy businesses. We are able to buy bootstrap companies at, you know, I think we bought the business for, like, fifty million dollars or something like that. We own the company. Like, we bought the business for fifty million dollars. And by the way, it grows like 50, 60% a year. Now, by the way, it will never be an IPO. In a million years, it will never be an IPO. Um, we want to build a business. So, I'll give you an example. We just sold a company, and I don't want to talk about returns on here at all, but I'll tell you about, like, websites. There was a company called SafeSend that makes, um, it's like a verticalized version of DocuSign for tax returns. Um, There's a bunch of reasons DocuSign is not very good at it. It also is like the tax organizer that people get that like, you know, did you get married this year? Did you have kids? Did you move? And all this sort of things. When we invested, when we bought, we bought about 60% of the company in 2021. My partner Nime did the deal and my partner Brian, um, that business we met through cold calling. It was based in Ann Arbor, Michigan. It was a bootstrap business that had never raised capital, had been around for six or seven years, and it was COVID enabled. And what do I mean by that? Well, it turns out before COVID, a bunch of people, like, used to literally go to their accountant's office and, lik…

AI assessment note: “I think we bought the business for, like, fifty million dollars or something like that.”

Q We spoke about ByteDance a little bit. Everyone for years has been like, oh, the ByteDance discount, it's so cheap. ByteDance is insane, because there's the China discount, and ByteDance is the China discount on the China discount. That sounds great, but it's only good for you as an investor if that discount chasm shrinks. What's it gonna take for the discount chasm to shrink?

A I think it already, it to some degree already is. So private market implied valuation multiples should be, should be, you know, determined by public market investments. So like, you should argue a software company today, like, should be getting down in the private markets cheaper than public markets. It's definitely doesn't always occur like that. Look, Byte, so Alibaba and Tencent should be, you know, two giant, um, you know, Chinese companies should represent roughly how ByteDance should trade. I haven't looked at them in the last, like, couple weeks or month. They were trading, like, mid-teens, earnings multiples, not EBITDA, not revenue, earnings multiples, and they don't really grow. Now, this is a business that, you know, grows, grows Grows to 25, 30% plus a year. Generates a tremendous amount of earnings, and you can stick, like, an earnings multiple on those companies, on this company, and get to a very, very big number. Like, fundamental earnings. Um, and I think Facebook's trading, like, 25, 30 times earnings right now. Like, stick that multiple, but maybe that's too high, because it's a Western company, so then pick, like, put the China company multiples on it. I think it is possible to see in a few years that this company's doing, you know, 70, eighty, hundred billion of earnings in the next five years.

AI assessment note: “I think it already, it to some degree already is.”

Q Or just choose not to think about it or push it to one side. But if that is the realization, how does that impact your go forward mindset on investing?

A That's why we own a lot of, well, that's why we own a lot of ByteDance. Um, but it's not, like, winner take all. It's not that ByteDance wins and, like, Google and Facebook and, you know, loses. A year ago, when I was probably on the show, I don't, I don't know if we had talked about, like, Google. Everybody thought Google was going to lose. They're like, ah, Google's dead. It's done. Like, nobody's going to search it. You seen the stock in the last year? The stock's, like, doubled. Now it's going to win everything. Now it's going to beat OpenAI and all these other things. No, like, they're both, they're both going to be fine. The, the, the biggest question for us on these LLM model companies is, Is can they ever turn, like, a real, can they ever turn, like, a real profit? Like, I just don't know the answer, and I don't think anybody really does right now. Um, but again, I think another thing you're gonna see in the United States as it relates back to power, and you really haven't seen much of it yet, is local communities getting, like, really upset. Like, you're the, you're the small local town in Iowa, or the small town in, you know, Kansas, or Ohio, or wherever, and Virginia, And, you know, they built this giant data center. They employed all your people. They employed a ton of people locally to build it. They then built it. Now it sits there and has 50 local people that wor…

AI assessment note: “That's why we own a lot of ByteDance. Um, but it's not, like, winner take all.”

Q Okay, is, ah, outdated in a world of AI and in the next generation, and that a kind of banker-led approach will not work in the next generation. Is that fair, and how do you think about that? Because I am concerned That that is the case.

A Look, we speak to 10,000 companies a year. We have a team of 20, 18 to 22 year olds. So that's right, 20 to 20, we haven't gone pre-college yet. So you're like 20, 22 to 24 year olds that are speaking to 10,000 companies a year. If I say I need to meet all eight of these criteria, it's about a one percent yield, which is, you know, to all 10,000 companies, a hundred meet all Eight criteria. And to do five to seven deals a year, that's like too small of a pond efficient. Like you, you, you wouldn't end up doing anything. So what we find is if you say I need to meet five or more of these criteria, it's just objective. Like you're 23 years old. Was the company four million in revenue or eighteen million in revenue? You find about 10%. And this is after speaking to probably 70,000 companies over the last decade. It's about a 10% yield. You get five or more criteria. We do diligence. That's gets you 10,000 to a thousand. You do diligence on a 150 to a 175 of them. How do you go from a thousand to one 50 to one 75? Most aren't looking to do anything. You're calling them. They're not calling you. And by the way, the good ones don't call you back. The good ones you call every two days for a month. That one 50 to one 75 leads you to do five to seven deals a year. In terms of the AI response, and so like we find the companies, 70% of what the stuff we invest in, the guys at Spark have ne…

AI assessment note: “Look, we speak to 10,000 companies a year. We have a team of 20”

Q I agree, but what happens, Mitchell? It's getting worse.

A That causes revolutions, to be clear, um, but the thing that I actually worry about more near-term that's solvable is social media for teenagers. It's absolutely horrible. Um, we need, but I am a ByteDance investor. To be clear, ByteDance and the vast majority of their market is highly regulated. Like, kids in China go on, bite, go on TikTok to read about, like, science experiments and math projects. Um, you know, in the States, I assure you that's not happening or in England. Um, social, the media companies are regulated. There's a reason, like, the BBC or the Discovery Channel Or NBC can't say a lot of the things that get said on social media. They're highly regulated. They're, like, regulated by the government. You get massive fines. Um, social media companies need to be held accountable for the content. There's, there's a law. I'm just forgetting.

AI assessment note: “That causes revolutions, to be clear, um, but the thing that I actually worry”

Q What makes you say they'll be one of the most foremost AI companies?

A I mean, they just, the amount of tech, I mean, there's a reason when, the amount of AI they have already embedded in the product, ah, I mean, in India, when they were kicked out several years ago, nobody's really been able to build a competitor in India. I mean, Facebook's trying, you know, by the way, you know who hates ByteDance, right? Mark Zuckerberg. And by the way, so would I, to be clear, I would be, if I was running Snapchat or Instagram or Facebook, I would be all over, like, politicians in, in, in, in Washington being like, oh, this is horrible. This is all propaganda. This is like, you gotta get these guys out of here. It's the biggest threat to these companies. Um, it's, it's absolutely incredible what these, what these, the Chinese have built. The Chinese are like, I mean, like if you look at all these stats, like number of PhDs and science spend and all these things, like it is a, it is an incredible country that is like, They're not worried about what happens next quarter or next year. They think in 50 year blocks.

AI assessment note: “the amount of AI they have already embedded in the product”

Q I agree, but what happens, Mitchell? It's getting worse.

A That causes revolutions, to be clear, um, but the thing that I actually worry about more near-term that's solvable is social media for teenagers. It's absolutely horrible. Um, we need, but I am a ByteDance investor. To be clear, ByteDance and the vast majority of their market is highly regulated. Like, kids in China go on, bite, go on TikTok to read about, like, science experiments and math projects. Um, you know, in the States, I assure you that's not happening or in England. Um, social, the media companies are regulated. There's a reason, like, the BBC or the Discovery Channel Or NBC can't say a lot of the things that get said on social media. They're highly regulated. They're, like, regulated by the government. You get massive fines. Um, social media companies need to be held accountable for the content. There's, there's a law. I'm just forgetting.

AI assessment note: “the thing that I actually worry about more near-term that's solvable is”

Q Of course, completely agree, but he always says, like, reputations are made in the bad companies. And then you also have the realization that I have a limited amount of time, and I have to manage your portfolio and invest in new companies. Is it possible to bluntly cut your losers elegantly to concentrate on your winners?

A It's a lot easier for me to do it than it is for Fred, because he was there when it was, it was nothing. And I, I came in as it was a bigger company. And so, but again, there, I think are some VCs that are like world-class VCs that cut their losers. And I think there's some of, or like cut, like there are, there are firms that are known. There are firms that are known to, if you're a CEO and you don't perform, you probably won't be the CEO. Like, I think if you just, the founder coming in, You should just be, like, I have no problem. I tell all my employees, if I'm not the right person to run lead edge, like, throw me out. Like, that's fine. Or put me on the side. You, you come and run the business.

AI assessment note: “there are some VCs that are like world-class VCs that cut their losers”

Q When you think about your takeaways from those experiences that shaped how you operate and run Lead Edge today, what are the one or two that really shape how you think about Lead Edge?

A What I would tell you is my time at Bessemer was very, like, formative for why and everything we do here at Lead Edge. So a little bit of context. When I joined Bessemer, Bessemer, this was 2005, Bessemer is this legendary early stage venture fund that is very Shark Tank-esque. And what I mean by that is every year, you know, a thousand entrepreneurs would walk in the door, And at the time, they had five partners, and it was very, like, Shark Tank-esque. And they were wondering why, why Insight was calling, finding these fifteen million dollar revenue companies growing fast that had never raised money, and they were, like, personal friends with the guys that ran, you know, Jeff and Devin and the guys at Insight. And all that Insight was doing was replicating what Summit and TA did, which was hire 22 to 24 year old knuckleheads, which my now partner Brian and I were, and pound the phones calling companies all day long. And you realize if the company calls you back, the company sucks. It's the CEO you talk to every two days for a month. And you know, and you know how you know what a good company is over two years, talk to 10,000 bad companies. And so when we got there a week into the job, they're like, okay, next Monday, you're going to come and present your best companies. And we got there. We're like, oh, we found this great company. It's two minor revenue. It's going to be the…

AI assessment note: “my time at Bessemer was very, like, formative for why and everything we do”

Q What should happen? Like, if you're a Snap holder, Evan is running a gifting program right now.

A Yeah. Like, I don't know. It's, look, we're not activist shareholders, and I, um, at all. You would, like, I have a lot of respect for entrepreneurs like Larry Ellison, who effectively did a levered recap of Oracle. You know, he, he basically was like, I have all this, I have all this Get free cash flow. I'm gonna borrow debt and buy back an enormous amount of stock. And what did he do in the process? He didn't sell any of his own, so he just kept making the, he made sure it can't go down, not up. Um, people forget that in companies there's, you know, it's market cap equals number of shares times price of shares. Um, and so like, you know, and to companies that respect, you know, that have discipline on that, I think are powerful.

AI assessment note: “we're not activist shareholders, and I, um, at all.”

Q If you're a Toma Bravo, and you've got your Coopers and your Anaplans, where the companies are kind of growing at best mid-teens, what happens to this generation of growth equity P investors in tech?

A So, I think growth equity And, like, buyouts are very different. I think even buyouts are very, like, I think, like, people like Hellman and Friedman, like, if you want to go to the large cap, people like Hellman and Friedman and, um, people like Primera are probably slightly more growth-oriented, and there are probably, there are other firms that are probably more, like, margin-focused. I think it's probably a function of how much debt they have on their companies. To be honest, I have not looked And spent tons of time, like, studying the financials of Coupa Software, or, you know, Anaplan, and things like that. If I was them, like, I know that all these companies, they drive EBITDA margins from five percent to 40%. The question is, how are they doing it? Which I don't know. Um, I would hope that they've done it mainly through, like, cutting really inefficient go-to-market and sales marketing and GNA. I would hope they haven't taken the engineering sales headcount from 200 to 20. I suspect they have not, but, like, that would worry me. If, if they had done that, but I suspect they have not. Like, by the way, these people are really smart people. Like, and the question is, if, if those companies have been bought with no debt, then they, they would be investing hugely, I'm sure, in AI and stuff like that. They probably already are, but like, for me, that's why, what I said at th…

AI assessment note: “To be honest, I have not looked And spent tons of time, like, studying”