The Exchanges

Q How does that translate to what you're trying to achieve in terms of the risk return profile relative to your peers?

A So we have always been very focused on DPI, and that just drives everything. I can't tell you why more people don't sell, frankly, and I think we had five or six companies direct list in the 20 and 21 just because that was a way to exit them very quickly. We want to make two to five X, three to seven years, slap it into a fund, make two to two and a half X net funds, and not lose freaking money. Our loss ratios are very strong. We've only lost all of our money on one of two companies ever. I'm sure we will again, but if you back companies that grow on average, 30% a year, don't have leverage, you own preferred stock in 70 or 80% of the time, and the vast majority recur, You may have overpaid, but then preferred stock helps you. And less than a third of companies, I think, have any debt on them. What gets the buyout fund in a lot of trouble is just leverage. The companies still survive. They just over lever the business.

AI assessment note: “We want to make two to five X, three to seven years... not lose freaking money.”

Q How did you think back then about the investing path compared to joining the family business and the operating business?

A Oh, I actually wanted to join the family business, and my dad sold it in May of 2007. Family dynamics. I really wanted to run the company. I thought there was a huge opportunity to run M&A. They since sold the business to a private equity fund out of Milwaukee that made a ton of money, who then sold it to a big industrial holding company out of Philadelphia, and the business, I think it's two hundred million to be with that now. It was probably 75, a hundred million of revenue when they sold it. So I actually really wanted to go work at the company, but my dad has told me managing capital is a lot less work than managing people. He's like, you run a very high margin business and have a lot less people than I had to deal with every day, and so it worked out, but my partners and I always joke, let's go find a business that just makes something and buy it, because we're in the picks and shovels businesses buying software businesses, but it's funny, you talk to every executive or entrepreneur that runs a business that makes things, they all want to be in the picks and shovels businesses, and so you never know.

AI assessment note: “I actually wanted to join the family business, and my dad sold it”

Q So at that point in time, you had that entrepreneurial instincts, you had a little bit of banking experience, you had a little bit of venture experience, and you're doing the cold call part of venture. Where do you take it from there?

A I left Bessemer, and I learned a tremendous amount, and it was like a apprenticeship. The guy I worked for, Jeremy Levine, who's been one of the most successful venture capitalists over the last 1520 years, was the guy who trained my now partner Brian and I. And he's like, what you are learning here is gonna be fundamental for your career going forward. And so, I was also convinced, though, that if you put the top 20 venture or growth equity funds in a room, you could whiteboard out All of the companies. And I didn't frankly think there was much difference between Bessemer and Sequoia and Kleiner at the time, and General Atlantic and TCV, other than some people wrote bigger checks and smaller checks. But since 2004, if you were an investor in 20 of these funds, you as an LP have made a ton of money. And I just couldn't figure out what the differentiation was. And so I was like, you know what? I've always really wanted to do public investing. I lived and died reading Wall Street Journal Pages in the nineties growing up and in the late eighties. I've traded stocks since I was seven years old. I was like, why don't I go work for a hedge fund? And so a family friend lived in New York and he's like, hey, you should meet this guy who is the number two or three at a hedge fund seeded by Julian Robertson at Tiger. This guy, Scott Booth. And Scott had started a fund at Tiger late oh thr…

AI assessment note: “I left Bessemer... why don't I go work for a hedge fund?”

Q So when you set out to form Lead Edge and said you were going to play around with this other 75 cents, how did you think about what you were going to do?

A The same thing we did at Bessemer. I knew the companies were out there. Let's build an outbound cold calling program. They're all cold call companies. We were looking for companies that meet very specific criteria. So today, we have the lead edge eight, which are these eight criteria that we look at. Every company that we source goes through these criteria. At the time, we had the lead edge six. At Bessemer, it was the Bessemer five. Every Monday, we'd pitch to partners at Bessemer, Our best companies of the week. And two weeks in, we found this great company. It's going to be the next Google. And they're like, no, it's not. This company sucks. Like, what do you got next? Oh, we found the next Amazon. No, this company sucks. They're like, okay, find this companies that meet ten million plus of revenue. So we find a company that's like twelve million of revenue growing eight percent a year. No. Find these things that are growing 50 plus percent a year. You find a company that has three customers. No, it's got to have diversified customer base. Then you find something with eight percent gross margins. They'd be like, no, find me companies that have ten million plus in revenue growing 50% a year that have diverse customers that have 70 plus percent gross margins. I'm like, well, I can't find any companies. They're like, perfect. When you start the conversations on Monday, you're g…

AI assessment note: “The same thing we did at Bessemer. Let's build an outbound cold calling program.”

Q When you went from the Bessemer five to the Lead Edge six and now the Lead Edge eight, what were those incremental one and then two more criteria?

A The additional one was from an EBITDA line was actually profitable, and then the additional two were 90 plus percent gross dollar retention. It's very simple. Are your revenues greater than your historical cash burn? Not how much you raise burn, and this is probably what's kept us out of the most trouble over the most number of years. Warren Buffett and Charlie Munger would say we were idiots, but this is our version of return on equity. The world is littered with twenty million dollar revenue companies that have burned a hundred million to get there. They might be great businesses. They might be the next snowflake. They might be the next data dog. They might be the next Google. They're not efficient. So we define an efficient business as anything that's a one to one ratio or better. And the reason we like that is we just think if you build a business with 20 of revenue, you're growing 30. And you've only burned three million bucks. You're doing something right. And if we can get in there and own preferred stock at the top of the cap structure, and it's recurring and has 80% gross margin, the probability to lose all your money is really, really low. So you're basically buying one-way call options. We make money by having companies reasonably hit our numbers that we set out in the future.

AI assessment note: “The additional one was from an EBITDA line was actually profitable, and then the additional two”

Q When you start with that criteria, you're getting to a company that probably lots of people would be interested in. How do you find the competition from there to winning a deal?

A The biggest competition is doing nothing because almost 60 plus percent of our companies were the first institutional investor in them. They've raised less than ten million dollars. They don't have real venture investors. They have a bunch of angel investors or nothing. To go from 10,000 to a thousand, they meet five or more criteria down to a 150 due diligence. The most common reason is, is nothing to do. Judges doesn't need to raise capital. He's got a profitable business and grows nicely, and why do anything? It's fiercely competitive, which is why when we find a company we really like, we need to bear hug it, and we need to be like, ok, I know you're not raising capital, how do you need help? Oh, you're looking for a CFO? Oh, you should talk to these 10 LPs of ours that are CFOs. They may know people in their network. Oh, you're looking for intros to these 20 companies. Do you know anybody? I'll give a great example. So Benchlane, which we were an investor in, we're still small investors in it, was backed by Benchmark, world-class firm. Everybody was trying to get into the company. It was twelve million in revenue, growing a 150 plus percent a year. Very capital efficient business, burning very little money. Had amazing net dollar retention. It didn't lose customers effectively. It wouldn't return our calls. We leverage our network to get introduced to them. And we said, ho…

AI assessment note: “The biggest competition is doing nothing because almost 60 plus percent of our companies”

Q What's your playbook for the value add once you invest in a company?

A One size doesn't fit all. So about seventy-ish percent of the time we're on the board. You should think about it as 30% of the time we're not on the board. By the way, we're invested in ByteDance. We own Alibaba. We're not really involved in ByteDance on the board and value creation. Now, look, we go on TV and talk about them and say good things about them, which I think they appreciate when nobody else is really sticking up for them. So that's one extreme. So the other extreme is we're the only investor in a company. We own 80% of the company and we have three board seats. And then you might have in the middle, okay, we're on the board. We're a minority investor. We're the only institutional investor. And then you might have minority investor, but benchmark or Sequoia is in there or batteries in there. And we're minority investors too. Two thirds of the time. It's, we're the first institutional investor. That is where we're going to engage more value creation playbook. Frankly, if you've already got one or two VCs on the board, you don't need one of us. Put one of our operating partners on the board. We'll engage LPs. We'll put LPs on the board. We'll have LPs work on specific projects. We send out emails to our LP base being like, hey, XYZ company is looking for a female audit chair. They're looking for customer intros to these If they say, I need help thinking about how to e…

AI assessment note: “That is where we're going to engage more value creation playbook.”

Q Why don't you take me all the way back to where your initial interest and path to finance came from?

A I'm from Grand Rapids, Michigan. I was a nationally ranked ski racer. My father ran a manufacturing company of which was a third or fourth generation family business. They actually invented the bread slicer. Unfortunately, you don't get paid per slice of bread or I'd be running my old family's money. I was interested in business as a kid. I used to look at stock tickers in the Wall Street Journal. My dad's father ran the municipal bond department at Payne Weber. Then when he retired from bond trading in the early to mid eighties, He became a stockbroker, and a stockbroker in the mid-eighties was what we call hedge fund managers today, so I got really interested in investing in finance because of that, so I Always was interested in making money. In fourth grade, I had a paper route. By fifth or sixth grade, I had three paper routes, and I had commissioned my mother to do the bagging of the papers. I turned 18. I started working in our family's business, actually in the manufacturing floor. I was definitely the only kid at Williams working in a factory floor. You learn very quickly why you go to college, and unless you want to do the same thing every day of the year, It builds a lot of perspective. I also think it actually, to this day, helps me understand weird things like inflation and why Trump's been so popular, and a lot of people in the coast can't understand it. I started …

AI assessment note: “so I got really interested in investing in finance because of that”

Q So, what was that history? You're coming out of school, you have this job, but the hedge fund's clearly having trouble. Where did you plant your flag?

A I told everybody in the SPV, it had to be two and 20, and a bunch of people were like, I'm not paying two, this is a single asset, and it should be no management fee or 50 basis points. No offense, if it's not two, I can't eat. So I did an SPV, we closed the first one in May of oh nine, I think it was eight million bucks, and then I became the cap table janitor at Bizarre Voice, and just bought up any share lots I could find. I would email our LPs, hey, Bizarre Voice needs an intro to the NFL, to Coke, to Pepsi, to Nike. Do you know anybody? And one of my LPs who runs an NFL franchise would be like, I could introduce them to the NFL, and I'll do it because I see the company's doing really well. You're being super transparent, sharing all the financials with your LPs, which tons of funds do not. I mean, I have tons of transparency, and I'm going to ask for help. So then a few quarters in, people would see the company continuing to do well. I'd send customer win emails when they won big deals to all our LPs. So then an LP would be like, hey, if you get more stock, tell me, I'll introduce you to my friend. Who were their friends? Successful executives, CEOs, wealthy people. And I just kept doing it. So I think we started with eight to ten million in Bizarre Voice, and by the end, I bought 18 to 20 from spring of oh nine to late 2010. I did a second SPV in a software company called…

AI assessment note: “So I did an SPV, we closed the first one in May of oh nine”

Q The concept of going through these cold calls To hit out 10,000 dollar companies, narrow the filter so you find a hundred great ones to do work on. What do you actually say in those cold calls when you pick up and call a company?

A So, let's use Refinery 29, which was a bootstrapped five, six million dollar revenue business. Think of it as we were trying to build the next generation of Vogue magazine online. We basically cold called the company. And email them and said, hey, we see you're a bootstrap business. We have some LPs who've got a bunch of experience around the media industry. We'd love to come in and talk to you. And they probably, I'm sure, didn't respond. So we emailed them again. And then we emailed them again. And then we get them finally on the phone. And what we do is, at the time, it was called Eastern Advisors Private Equity Fund. And it was, hey, I'm Eastern Advisors Private Equity Fund. We're different than any other funds that will call you. All of our capital are all these executives, XYZ people, former CEO of Xerox. She's on the board of Target. We'd love to come in and talk to you. And by the way, when we invest in things, we get our LPs involved and try to help you. So tell us among our LP list who you'd want to meet. We'll be happy to make an introduction for you. And then you're like, oh, by the way, how big are you guys? I see you're 50 employees on LinkedIn. What are you guys, 75, 80 employees? And then you start to talk about the competition. You're like, oh, I read an article. I see that you compete with ABC company. How do you think about them competing? And then you call t…

AI assessment note: “hey, I'm Eastern Advisors Private Equity Fund. We're different than any other funds”

Q What have you learned about engaging and continuing to engage with these important people in your network that you teach your team? This is how we're going to continue to keep this flywheel spinning.

A Treat people like you yourself want to be treated, and your mother and grandmother were right. Thank you notes matter. I actually have a handwritten thank you note tracker that I get for every employee at the firm, and I assure you, if a twenty-two-year-old analyst wants to get called out in front of 85 people, I have no problem doing it. I get my monthly report, which I'll get in a couple days for November, and somebody's written three thank you notes, and I know they've spoken to 30 CEOs that month. I'll be like, what, are you too good for it? And again, you just don't know when you're gonna need the person's help in the future. And so just treat people the way You yourself want to be treated. That's how we run this entire business. I want transparency. By the way, we will go on calls and be like, we screwed up. We were wrong on this investment. It is not working well, very well right now. We're in the growth business. Every given quarter, one company is going to not be performing. It can change quarter to quarter, but we just believe in being just ultimately transparent with people.

AI assessment note: “I actually have a handwritten thank you note tracker that I get for every employee”

Q What do you think makes Lead Edge special?

A I think it's a culture. I sit down with every employee at Lead Edge every February for 30 minutes, and I got the idea from the founder of a giant private equity fund to basically ask him three questions. Before the meeting, you have to come in in red, green, or yellow. What do you do in your job? Let's figure out what those things are that you do that you don't like doing. Let's figure out how we can do them better. Who else could be doing them? How can we make the process more efficient? Two, if you were me running the firm, What would you change? Last question, how can I make your job easier? The feedback you receive is incredible. I've talked a bunch of people. I'm like, nobody who runs firms does this. Our public fund does a quarterly call. I'm invested in 15 hedge funds. I'm the only public fund that does a call. I can't explain why every fund doesn't do a call.

AI assessment note: “I think it's a culture. I sit down with every employee at Lead Edge every February”

Q When you think about your reputation in the market to being able to really add value for portfolio companies, and you go through this hardcore cold call effort to find the companies you want to do diligence on, how do you then do the diligence when you're marrying that to an opportunity that you think right out of the box based on your criteria you're going to want to pursue?

A That's a great question. How do you get the data for something that everybody wants information on? We have passed on a bunch of companies, especially as they become bigger pre-IPO companies, and this was more a thing that we saw a lot in two, 1920, and 21, where people were like, well, I'm not gonna show that much information with you. XYZ firm's already an investor, so you should trust it. Yeah, sorry, that's not the way we work. If you don't want to engage in a full diligence process, by the way, if it was your capital in our fund, we would be wanting you to expect the same level of diligence that we're going to do on you guys. So it actually caused us, in 19, we shifted the portfolio away a lot from Silicon Valley towards more bootstrapped entrepreneurs in Ames, Iowa, or Sarasota, Florida, or Niswa, Minnesota. And by the way, we'll do minority deals, we'll do control deals, But we're only doing deals where we're engaging in full diligence processes. We've prided ourselves with, we're really creative and flexible. We'll buy LP stakes out of old funds where 90% of the NAV is in an asset. We'll do secondaries. But the type of work we do, we pride ourselves, would look like KKR or Blackstone or General Atlantic or Leonard Green. We pride ourselves on doing really hardcore diligence. And I would credit Bessemer and Insight with that because the Bessemer guys, while they were ear…

AI assessment note: “It was more about market work there and the thesis and customer reference calls”