Episode 51: Brian Neider of Lead Edge Capital on
How Boards Can Add Value to Portcos

Episode Transcript  

Shiv: All right, Brian, welcome to the show. How's it going?

Brian: Going great. Thanks. Thanks for having me.

Shiv: Yeah, excited to, excited to have you on and learn more about yourself and the firm. So why don't we start there? Why don't you give us a background and then we'll take it from there.

Brian: Yeah, sure I could share a background on myself and on the firm. I think that they're very specifically intertwined. So the background on myself, I graduated from college and quickly got a job in venture capital, got a job with the firm called Bessemer Venture Partners. And they're a wonderful group of people, great firm. And they basically were looking for someone to do some cold calling. And the concept was they'd always done deals more or less through relationships, evaluated whatever came across their desk, probably ended up looking at a thousand different opportunities every year and doing 10 or 15 per year. At the time, they said, look, there's a bunch of different firms that are doing cold calling, trying to find opportunities where maybe the companies don't necessarily need our capital, but if we could convince them, it would be an interesting inroads and it would lead to more deal flow. They hired me and then very quickly thereafter, they hired one other guy who sat in an office with me. And for a couple of years we shared an office and we both had the same job. And ultimately that job was to talk to entrepreneurs, learn about their businesses, figure out how we could be helpful and figure out if there were opportunities for Bessemer. And so that's what we did. That was like between 2005 and 2008. The guy who shared an office with me is guy by the name of Mitchell Green. He's now my partner at Lead Edge. And years later, here we are.

And so ultimately what happened was I left, went to business school during the financial crisis. And then when I got out, I worked for another private equity fund for a little bit of time, Mitchell started setting up Lead Edge. And I think that the concept for our firm was really smart, which was most venture capital funds and most private equity funds or growth equity funds raise their capital from a disparate group of pensions and endowments and charitable foundations. We took a different approach, which was we said, let's raise capital from individuals and we'll find people who can be strategically helpful throughout the deal lifecycle. So folks who could help us find deals, folks who could help us diligence deals, help us win deals. And then ultimately once we're involved in a company, have a set of people that could be really helpful to the portfolio companies through sitting on boards or making strategic introductions to partners, to customers, and give guidance. And we'll talk today a little bit more about value creation within various portfolio companies. But that was the concept. So today, when we started, Lead Edge had a small fund. Our first fund was $52 million back in 2011. And I joined shortly thereafter. And really, all that we had was a bunch of individual investors. And we told them, don't invest into the fund unless you're willing to help the portfolio companies and help us through the deal lifecycle. That concept ended up becoming, I think, something that was really special and very unique. And today, we're on our sixth fund. We have a $2 billion fund. We invest exclusively in the areas that we've always invested in, which are software, tech-enabled services, internet companies. And we manage over $5 billion in aggregate. And our fund sizes have grown sequentially. We now have a $2 billion fund that we're investing out of that we raised just about two years ago. So we're really proud of all of the scaling that our firm has done. But most proud of the returns that we've made and being involved in some great companies along the way and providing our investors, our LPs, with exactly what they were looking for and more as it relates to returns and transparency and information flow and getting involved in the companies. So we continue to strive to do that. It's different now. We have, you know, 80 or so people at the firm and it's not just three of us running around. Early on, was myself and Mitchell and our third partner, Nimay, who is an unbelievable engine within the firm as well. We were all looking for opportunities and now there's a lot more management and really making sure that we have the right folks in the right places to continue to capitalize on the right opportunities and retain our creative culture.

Shiv: Yeah, that's a great background. Something you said there just in terms of how you went about raising capital, which is very different, is in a lot of PE firms, they are raising money from LPs that are endowments or these retirement funds and things like that. And I think that's a very different dynamic because then you also have to go out and build an ops team and it's becoming more popular to build operations teams inside these PE firms now. And I think in a way what you're describing, you, you already have that with your LPs and investors that are kind of giving that into the fund. Maybe they're not as operationally involved, but they're able to at least guide the companies a little bit better.

Brian: Absolutely. I mean, I think that there's elements of it and there's different ways in which more of a full-time value creation team can work with the company to add value relative to maybe the LP base. But each of the various stakeholders have their place and each of them are uniquely and unbelievably helpful. And if, sort of work through the right way, I think that it could add tremendous value to the companies and continue pushing the fly or spinning the flywheel that we've created.

Shiv: Yeah, and how do you go about, because we have a lot of other PE firms that listen to this podcast and in terms of finding these kinds of individuals, it is a different breed of or type of investor that you're looking for, right? Somebody that's not only willing to allocate their capital to your firm, but also their time. So how do you go about vetting those types of individuals and even sourcing people like that?

Brian: Well, early on, think most of the credit goes to my partner Mitchell because the first fund was largely him going out and meeting people. And I think that what happened early on is probably different than what happens now. But I think it's worth telling the story, which is early on, really, people bet on you because you have a strategy and you're engaging. And we were pretty young. I mean, when Mitchell was starting out the firm, he was like 27 or 28 years old. And so ultimately, it's just you meet people. We had met a lot of people along the way at Bessemer. Some of our earliest LPs were the GPs we had worked for at Bessemer and then a bunch of the entrepreneurs that we met along the way when we were cold calling at Bessemer. And those people we knew that had exits and maybe had made some money and wanted to bet on us. So at first I would say it's just, you're just talking to people and you're pitching them on a strategy and talking through specifically what types of things we were going to invest in and how that was going to work. Today, I think we're much more methodical about how we think about the LP base, which is we have about 700 LPs today. And we do have about half of almost half of our capital comes from big institutions now, because in order to scale, you kind of need that. can't have thousands upon thousands of individuals. But what ends up happening is you need to figure out a framework for how you think about your LP base. And the way that we think about it is along three specific axes.

One axis is, what is the sector that the LPs are from? And so each LP might have a primary sector of the world that they've worked in in the past. So we've got a lot of people in healthcare and in retail and technology, manufacturing, sports, entertainment. The second axis that we look for is geography. So we look for LPs that are in all major cities and that's throughout the US and we've pretty much built that out at this point and then throughout Western Europe and we're starting to build out in the Middle East and in Asia. And the third vector, third axis that we look for is what's the functional skill set of that LP? So we have LPs that are primarily chief marketing officers, heads of sales, CEOs, CIOs, CFOs, security officers, whatnot. And the goal really is to have as much coverage as you possibly can. And the reason why we do that and why it's important is you don't know exactly where you're going to need to help the portfolio of companies. And so ultimately, when you have a company that you're either courting or where you're already an investor and they say, look, we're trying to build out our office in an office in Europe. We don't know exactly how to do that. We have to think through it. If we could turn and say, hey, you should go talk to these five people that have started offices in Europe for companies of your size. They’re investors with us, they'd be delighted to talk. That becomes a very relevant and very important way in which you could quickly add value. Similarly, and that's geography based. Similarly, if you have a situation where somebody says, we're starting to sell into the retail sector and we're selling our software into retail, we'd love to talk to some retail execs to pick their brains, to understand how these things get bought and who are the decision makers and how can we position our story? We like to do a dry run. That's great if we can introduce them to a bunch of retail execs. And so it just kind of depends upon how the companies might need our help or want our help. And ultimately, the better that we could build out that LP network to heed that call, that's what we're trying to do. And I think that we've done a really nice job of building it out, but it's an everlasting work in progress as we continue to grow.

Shiv: Do you ever get any of these LPs to join your boards based on where the gaps are?

Brian: Absolutely. And we could talk a little bit more about like the how I think about building up boards and whatnot. But absolutely many times the LPs will join our boards. And then what has happened over time is we've had a number of LPs that have said, you know, I love being an investor in your fund, but I'd really like to get even more involved than just, you know, a call here or a call there with your portfolio companies or helping them with one or two contacts. And in many cases, they have joined the boards or we have an operating partner program where they'll become operating partners. They'll help us evaluate deals within their sectors and then, you know, we'll similarly potentially join boards.

Shiv: Yeah, and so talk about that piece about building out boards. Like how do you approach building a board and drawing from your LP base versus your core team and versus what the company might need in their particular instance?

Brian: Yeah, I mean, it's a really important question. And let me tackle that in a couple of different ways. So I think that building out a board, part of the issue is making sure that that board is well balanced. And I think that there's a lot of companies that fall flat here. They probably have too many of one type of board member. And I'll get to that in a second. So really, it's about what are the different personas that a board might be looking for and how could those different personas help the company and the executives achieve whatever objectives they're trying to achieve. So let me first try by breaking down some of the different personas that we think through at Lead Edge and how we think through the construction of the right type of board. So the first persona that we would think about is like an investor persona. And the investor persona is relatively obvious. We typically might fill that role and presumably, why an investor is important on the board or why that could be useful on the board is that the investor has a lot of familiarity across lots of different software businesses. Let's say it's a software business that we're investing in. And because that investor is constantly diligencing different software businesses, might have had multiple board seats, they generally will have a good sense of benchmarking. They could understand relative success across various companies. And these types of board members usually will have an appreciation for the types of metrics, ratios, capital allocation policies, paybacks, investments and whatnot to help guide sort of like structured decision-making. And oftentimes these board members are ones that are gonna tell executives things that they might not wanna hear, they'll deliver tough messages. And it sort of varies upon stage. I think very early stage investors, when a company is first starting out, oftentimes they're you know, they're optimistic. They're going to cheer things on. There's not that many metrics actually to grab onto. And then as you scale, you might get investors who care more about certain ratios and payback periods and growth metrics. And then at some point, you're probably no longer as much of a growth company. And then you might have a set of investors who know a lot about managing costs and cost efficiencies and things like that. And so for different life cycles within the company, you're going to have potentially different types of investor personas, but having the investor persona there and the right investor persona at the right time is important. 

The second persona that I'll sort of allude to or touch upon is sort of like what I would call a scaling executive persona. And this would be someone who's on the board, who's kind of like been there and done that, as it relates to the particular stage that that business might be at. Scaling a business is really, really hard. Employees will come and go, team members are going to hold you up for compensation. There's going to be issues that come up around employee morale and infighting, and it's hard. And so having an executive on the board who might have dealt with things like this at a similar size company and properly engaged and has the war stories and can sort of have the clout to discuss these types of issues. That's really important. And honestly, like nobody wants to hear, no entrepreneur wants to hear my view on how to handle a customer dispute or an employee dispute about sales compensation. I've never dealt with that on the ground. I've never managed a company in my life. So I'm pretty like open about that. But an exec that has experience there that surely dealt with it, those are the ones that you want to listen to. And the main role of this type of board member is to serve as kind of like a sounding board to the executive team for like real on the ground issues. So when you think about that, you've got an investor persona who might know every metric and whatnot, but hasn't run companies. You might have a scaling exec persona who has run the company, but doesn't necessarily know each metric. And a third persona would be like an industry persona. And so in many cases, you might have a software company that's selling into a particular vertical. They're only selling into their software for the real estate vertical, their software for the healthcare vertical. And so what might be useful is to have another board member that's from that industry, that's sold into that industry in the past, or maybe has worked in that industry in the past. And so that you're trying, when you're trying to get into the head of what the customer might want and how a customer might think about things and how to navigate that market ecosystem, having someone in that field is like of particular importance. And so that's how we break down the world in regard to kind of like different personas at the board level. And there's other sort of like nuances and sub personas and whatnot. But I think for a good board, you'd probably want one, if not more of each of those things. And like I said, I think a lot of companies fall flat and they have too many of one type of board member. And so oftentimes it's like, investors, there's like all investors on the board because companies have like multiple rounds of funding and it's like they're required to bring them on the board. And then other times I just see companies that select the wrong people because they're enamored with big names. So I think that that's oftentimes a waste. So you like you could imagine a company it's like, you know, we're we sell into small businesses, we sell into, you know, software into yoga studios and spas. you know, somehow I ran into this guy who was the former CFO of pick your company, McDonald's, Burger King, Exxon, whatever it might be. And you say, that person must be a genius, I'm going to put them on the board. And that would add a lot of clout and that person's going to help me build this business. Frankly, like being the CFO of McDonald's or having experience with that has literally zero to do with selling software to yoga studios or spas. And the job function that that person had to do at McDonald's as an example had nothing to do with the scale of your company. And so what could that person possibly offer other than sort of an attractive name and title, probably not as much. And so maybe the company's, once your software company that's selling these spas and yoga studios is 500 million of revenue and you're public and you have material governance and audit concerns. Sure, that guy who was the CFO of McDonald's is great, but until then you've kind of got a square peg in a round hole. And so thinking through what you want the shape of the board to look like, the different personas, and then filling that methodically with the right folks is, I think, a key to enabling success from the board.

Shiv: Yeah, those are great insights. And actually, like on our side, the private equity firms that we work with and we get involved with, we are more on the value creation side, especially with marketing and the boards that we encounter. We've completely agreed. We see too many investors and not enough folks that are familiar with either growing growth in general, whether it's sales, marketing, product pricing, et cetera, or even just industry level expertise. So all of that, all of that rings quite true. In terms of the types of avenues available to board members. I want to touch on this a little bit. Like what are some key decisions that can make or break a company's growth trajectory and what can board members do to help those companies make sure that they're on the right path?

Brian: Yeah, I mean, there's a lot of key decisions throughout the sort of life cycle of a company. And some are like really, really big ones. And some are a series of tiny ones. But if I were to sort of take a broader view of the world, I would say there's a couple of things that boards could be particularly helpful with and ultimately try to drive value. One is helping to hire the right people. And so a lot of that is, you know, how do you make sure to instill the right recruiting processes? How do you help identify who might be doing well, who's scaling out, where there's holes that need to be filled and seeing around that corner and seeing that, you know, that in the future, that's a particularly strong, important thing, I guess, that a board can do and helping guide that CEO is, of course, of the utmost importance. But you can't necessarily always do that without the second thing that I would say, and maybe I should have said this first is, it's really the board sets the right metrics to focus on and then stick with them. So how do you identify what are the relevant KPIs, not only for the company, but for each of the various leaders within the functional areas of the business? And then how do you stick with them and use those to objectively judge people? So there's a subjective aspect of it also, who's a great team player, who's a good locker room guy, who's the right person for that moment in time, what's going on with the rest of the business. And then there's just a whole set of KPIs around each one of the different divisions or functions. And how do you make sure that people are hitting those? so the board's definitely, you know, can help with that. And it's setting the right agenda, setting the right framework, setting the right North Star. and then hiring the right people and sometimes removing the wrong people to achieve those objectives. The other thing that I think, and I think that those two answers, like probably most people will give you, I'd say that the answer that maybe would be slightly more unique. And I just think I see it all the time at a growth stage. So it's worth discussing what we would call like the act one versus act two phenomenon. And what does that mean? A lot of businesses start with their first act and they have a particular product and that product gets some product market fit and things are going well. And for us, we invest in companies that are like usually between 10 and a hundred million dollars of revenue. so typically once you hit that stage, like you have something that's working, it's not pure early stage. so you end up with a situation where like act one is sort of like doing its thing and it's working and it's doing nicely. But at some point. Act one can become difficult because you have this one product and it's done really nicely and it's gotten initial takeoff and there's a bunch of people that are interested in it and customers that are using it. And it becomes much more of a mechanized function that you're dealing with. And so now instead of a situation being, I've got this great idea for a new product. It's the product kind of exists and the market is somewhat interested in it. And now the problem is, how do I mechanize my sales team to sell the product properly? How do I mechanize my product team to orient around the issues with the product that the customers care about the most? How do I prioritize help to incentivize and prioritize my engineering team to build those things that the customers care about the most and set the product agenda? And those are very operational sort of tasks. And they come with a tremendous amount of managerial responsibility. And so that becomes a different function. And so oftentimes what we see is that that first act starts getting harder. It requires a lot different of a muscle that you have to flex in order to be successful at it. And you end up with a situation where a lot of entrepreneurs, their whole life was like sort of clawing around trying to figure out how they could find product market fit, they finally kind of found it. But the things they need to do to scale from sort of point B to point C aren't necessarily the same things that they needed to to scale from point A to point B. So a knee-jerk reaction oftentimes is, ok great, act one seems like it's working. I think that what the most important thing to do is jump on to act two. Let's figure out the next great thing. Because what they love to do and what they're familiar with doing is scratching along and finding product market fit. And so they say, I've got this great idea for a second product, or I've got this great idea for a second region we should sell into. And you're like, look, we've barely scratched the surface of the addressable market here. We have $10 million in revenue in a market that you yourself believe is a, I don't know, what is it? $500 million market, a billion dollar market. You are already ready to start getting into the second, third and fourth product when we barely scratched the surface here and all the indicators seem to suggest that it's working. I'm not against sort of figuring out the next thing and always experimenting. Make no mistake, I think you should put resources and investment against that because it's the right thing to do for almost every company. You have to remain innovative. Absolutely. But you also have to finish the jobs and you have to continue to push when you have something that's working. And I find that all too often, CEOs oftentimes will prioritize act two or act three prematurely. And that's something that a board can set straight to say, look, here's our objective. We all determined that this is a $500 million market and we have $10 million of it. There is so much room to run. We just need to mechanize ourselves. Let's keep doing that. And once we hit up to 20, 30, 50, pick the number, then let's start making additional more significant investments into Act 2 and Act 3. And it's really a matter of prioritizing how you stage that and what's appropriate. And it's all a matter of interpretation. But I do find that oftentimes in growth companies, that's one of the most discussed things or themes at board meetings and one of the most important things and critical things to get right.

Shiv: Yeah, it's about distraction, right? There's a book I like to talk about a lot. It's called The Profit from the Core. And it's this idea that you need to first understand your source of market power and differentiation. You need to strengthen the core and then expand the core. And what you're talking about here is expanding the core before you're ready to do so or expanding to an area that's not connected to the core business. And I think especially entrepreneurs and founders, we all have a tendency to like this shiny object syndrome. and you want to just go to the next thing when the current thing has so much more opportunity. So how much of that is just the entrepreneur versus the team that they've built? And how much of that is about professionalizing the team around them? And you mentioned people at the starting point. And yes, that's an answer I hear from private equity investors all the time. But how much of that is the people side of the business?

Brian: I think that the people side of the business is important. I think that most of the time, like good executives could sort of shift between stages of a business and seamlessly integrate. And sometimes it's harder. But I really think that actually the origin of this section of our conversation really had to do with what are the things that the boards can do to kind of add value and where can they help? And I'd say that really it's about setting expectations and having a conversation and then sticking everything to task. Because what I see all too often is, having a $10 million revenue company and half the board meeting, you're talking about, you know, 12 different things that you're trying to do in, you know, Europe and Asia and, you know, 15 different product ideas that you have that have nothing to do with your main thing. And a lot of that is the board's sort of guidance to say, don't really, this is not what we want to discuss. This is not the agenda that the company needs to set. And then coming to a meeting of the minds with the CEO and the rest of the management team to say, here's what we're trying to do. And these are the things that are to your point. This is when we believe that our core is going to be strong enough to start expanding and let's set that framework rather than doing it sort of willy-nilly. Otherwise you're going to spend all of your time talking about AI initiatives and driverless cars and whatnot and things that are to happen in 15 years.

Shiv: Every company's an AI company right now. That's a thing.

Brian: 100%. Maybe that's why the CFO of McDonald's can be helpful because McDonald's is an AI company too. knows?

Shiv: Yeah, exactly. how do you as a board, how do you make sure because there's the board meeting and maybe you get some alignment there. But then there's three months between board meetings. So how do you ensure that the company is sticking to the plan and you're not having like this recurring cycle of needing to refocus the team and making sure operationally, month to month or week to week that the plan is still being stuck to?

Brian: Usually that's just a cadence that the board is going to set with the management team in regard to communication. And so for us and a lot of our companies, we’ll have bi-weekly or monthly calls with the four or five key members of the management team to kind of understand more tactically what they're doing in between meetings. So board meetings oftentimes are, are, you know, largely their readouts. And then there's a lot of deliberation around strategy. But I think that a way to do it is really to design your KPI frameworks and design your dashboarding and reporting so that that's what people are focusing on. And then once you have that, it ends up being what people are looking at in the board meetings, what people are looking at in the monthly calls. And that then dictates the tone and sequencing of the conversations. So it really all comes down to communication in my mind, which is, yes, you talk about we should do X and Y at the board meeting. You don't want to let it go three months and then three months later you're talking about it and it's, know, nobody's done anything. But I think that those bi-weekly or monthly check-ins can help things along for sure.

Shiv: As you think about, let's say the structure set, the plan is set, what are some of the value creation areas that you focus on when you're thinking about growing your portfolio companies?

Brian: Can you re… sorry, I broke up for a second.

Shiv: Yeah. Yeah. Yeah. What are some of the most common areas or the places where you look to drive the most value for your portfolio companies as a board member? In terms of all the different companies that you've seen, what's the right order of operations and how companies should be thinking about this?

Brian: Yeah, well, I think that there's a lot of different nuances to those conversations, or piece of nuance to that conversation. so part of it is from a board perspective and then also through the lens of a private equity investor. The first thing is, are you a majority investor or minority investor? If you're a minority investor, there's only so much that you could do because you can't tell anybody to do anything. There's no control that you have, you're a non-control investor by definition. so there oftentimes you're working with the board on the whole to make suggestions. And it's really on the management team to figure out how much they want to take from you or not. When you're a majority investor, I think that the reality is you have slightly more influence on the companies. You never want to be in a position where you're running the company completely. You don't want to feel that way and you don't want the company to feel that way. But because you technically have control, there's just a different level of communication that you could have and a different level of cadence that you could put in place. And so that's like the first thing that I would point to. But overall, would say that value creation is important overall. And it really starts with a plan at the outset when, for us, like when we're making an investment. And so going into an investment, should think through the various things that a company is gonna need to do and then list those things out. And so really before we make an investment, the first thing that we try to do is we like have a heart to heart with the entrepreneur before we write the check so that we're on the same page with them. And we show them our modeling and our returns projections so that they understand the shape of what we think that the business is probably gonna look like going forward. And I think that that helps a lot of things along because people will remember that conversation. We generally email it to them and it sort of dispels the myth that like you're not on the same page because ultimately you're saying, we're starting out or a $15 million revenue company. We're trying to get to 50 over our hold period. And if we get to 50, this is what we think they'll exit at. And so let's work backwards from there. And there's a lot of entrepreneurs that like sometimes if you don't have a conversation with them, they're like, we're just going to be a $5 billion company. And every company thinks that they're going to be worth $5 billion. And that's not really the right way to go about things. The right way to go about things is to say, if you're going to take our money, this is generally the way we think it's going to look. Do you sort of agree with that? And then have a conversation about how you can mechanize to get there and make sure that you're relatively on the same page. And that reduces any type of friction potentially along the way. I think that like, we've been investors in a lot of companies and I've seen a lot of different sort of working relationships. And I think that the best relationships are ones where there's some set of push and some set of push and some set of pull where the companies sometimes are asking for your help. You're sometimes asking to get involved and vice versa. And I've seen it at the extremes. I've seen companies that we are involved in where they want you to be involved in every single decision. And it's like, they won't go to the bathroom without asking your permission. That is not a good situation. It's terrible. I've seen the opposite. I've seen situations where they take your money and they tell you that they're excited. And actually, they just want your money and they barely return your phone calls. Neither one of those is a good situation. And so you want that kind of like middle ground. But once you sort of have that, there's particular areas that I think that private equity funds can be helpful in. then, by extension of private equity fund, a properly constructed board can be helpful in. And so the first thing, and we talked a little bit about it earlier, is creating the right reporting and templates. So there's a famous quote that says, what's measured can be managed. And so we need to create the right type of tracking. A lot of times what we see is when we get involved in a company in particular, if they're like a bootstrap business or don't have other investors, you'll see like board decks that are either completely incomplete and don't really have much information on anything. Or sometimes you see board decks that are like a hundred pages long with every piece of data you could imagine, except for the five pieces of data that you actually think are the most important. Those are somehow conveniently omitted. And so in those cases, either the company doesn't really know what they're looking for, or they're deliberately deluging their board or stakeholders with information to make it look like they're showing you data, but that inundation is sort of like deliberately missing a lot of the key pieces. And so for us, first things first, where could you help? Let's align on what the right reporting should look like and what the right metrics should look like so that we're rowing in the same direction. So that's kind of thing number one. 

Shiv: Got it. Yeah. I was just going to jump in like in terms of metrics and we have a perspective on this, but I'm just curious, like what are some of the core metrics that make effective or, or informative board deck that helps you understand where the business is like, what are some of the key things that you're looking for there?

Brian: Sure. Well, I I think each business is different. So anything I'm to say here is a generality, but let's just take a typical software business. You want to come to a conclusion as to how you might measure certain metrics like gross and net retention. And what does that look like? And there's different ways actually to calculate those numbers and they're non-GAAP sort of like, you know, metrics. Let's sort of unionize or work together to figure out how we're calculating those numbers and stick with that calculation. Let's have a typical P&L and let's have the data items on the OpEx be broken out by sales and marketing and by G&A and by R&D and probably look at it instead of lumping costs together in some haphazard way. Let's all get an agreement on how we might want to look at sales and marketing paybacks and things like that. Let's get agreement on whether or not we want to look at contracted annual recurring revenue or live annual recurring revenue and what the difference is between those numbers and how true those numbers might be because it's very, very easy to fudge those numbers to make things look good or bad in any particular point in time. And so from a high level metric standpoint, it's just sort of coalescing around what it is that you're looking for and then reporting them. And then it goes beyond that into each functional area so that each of the different functional areas has their own set of KPIs and whether that's product or engineering. And those could be all different things. That could be the number of bugs that they've debugged. It could be the number of lines of code. It could be a hundred different things. But really it's a matter of working with the management team to say, do you think is important? And us saying what we think is important and then coming to some type of agreement and tracking it. But it's not the exact same for every company.

Shiv: Yeah. And then I guess as you look at those metrics, it's easier to kind of figure out at least where the highest focus or priority areas should be, where you'll drive the most value for the business. And then you're building value creation plans against that. And that'll be different in every company's case. 

Brian: Absolutely.

Shiv: Well, as, as you work with all these companies and looking through your portfolio, there's some leading brand names and companies that everybody would be aware of. Like what are, what are some trends that you're seeing in the marketplace and, especially in the SaaS world and what's your perspective on how things are evolving?

Brian: Well, I mean, there's a lot of different trends. I would say that we're - at Lead Edge, we're not necessarily like pontificators or trend chasers. I think that there's certain themes that we're definitely seeing more than others. I wouldn't necessarily say that in our world, a trend, it wouldn't be a thematic trend, but I would point out kind of like a deal related trend, which is we're seeing much more in the way of secondaries-type deals. We're seeing much more in the way of continuation vehicles. That's become a very important aspect of the private capital markets, because what's happened is you had a tremendous amount of capital come into the market, invested into companies in 2020, 2021, early 22. And that amount of capital is sort of like tapered off in terms of investment. Concurrently, what's happened is that you had a tremendous amount of exit in 2021 and 2020, early 2022. Those exits, exited investment that was made in 2015, 16, 17, 18. The question is, what happens to all of that money that was invested in 2021, 2020? Where does it go? And there've been very few exits over the last two years, 2023, 2024, late 22. I mean, virtually nothing. And so there has to be some type of pressure release valve on that. And then how does that inform how you go about sourcing opportunities? So if historically a company was raising a series A and it would be a $4 million round, and then they'd raise a series B and it would be a, you know, it gets a $4 million revenue and there is a $10 million round, then they get to 10 million of revenue and there is a 20 million round. 2020 and 21 upended everything. And all of a sudden it's like, you got to two million of revenue, here's a hundred million dollars. It was insane. So what does that mean? Well, if you roll that forward, what that means is you've got a lot of companies that are flush with cash. They have money on their balance sheet and you've gotten into a lot of investors who are in things and haven't had exits in a really long time. So the companies are not the stakeholder group that necessarily needs the capital because they're oftentimes overfunded.

Shiv: Yeah, it's the investor that needs liquidity.

Brian: The investor, the former employee, the angel, all different types of people. And how do you structure the appropriate types of deals with them to create the right incentives and figure out how to dislodge so much of this investment that went into the market? And that opportunity.

Shiv: Yes, especially when the assets are kind of marked down, right? Like you raise it a higher valuation than maybe what they're worth today or in this market. And so how do you sort through that if the company hasn't reached that level of growth or valuation today?

Brian: Totally. Yeah, it's very difficult. And so you see a lot more bankers involved in these types of things. There's a tremendous amount of misalignment potentially at a board level or within a shareholder based level, because you have one board member who is a shareholder who might've gotten into the company at a $30 million valuation 10 years ago. You have one person who put a lot of money into the company at a $3 billion valuation two years ago, three years ago. And now maybe the company with a straight face is worth a billion dollars. The guy that put in money at 30 still has a tremendous return on their investment. The guy that put in money at 3 billion, he's the one that's supposed to make, take less risky bets and actually is now losing money. So person number A is supposed to lose money a lot of the time and has made money. Person B is supposed to not lose money and now is. And now you've got a lot of dissension amongst the board as to what the company should be doing, how they should be spending their capital, what the opportunities are. And you get a lot of voices in the CEO's ear. And then you've got a lot of people speculating at the company as to what the state of play is. And that becomes quite difficult. And so ultimately, what you're going to see, we believe, or our house view is, is a lot of secondaries, a lot of shares changing hands, pieces of companies selling. And the question is, how do you, as an investor, you know, take advantage of that or invest into that trend? And that's what we're trying to figure out and certainly something that we believe that we've successfully done over the last couple of years.

Shiv: So how do you do that? Like we had somebody on that specifically helps secondaries and other types of transactions happen by raising debt financing or finding other investment vehicles. But is that how you clean up the cap table to bring more alignment at the board level? And where's the opportunity for investors to take advantage of this dynamic?

Brian: Well, I don't want to share too much of our secret sauce as to exactly how we did, but I will give you some thoughts. In all seriousness, I think that it comes from a different type of sourcing potentially than we used to do. So historically, we have a big cold calling engine. We talk to a lot of companies every day. That's how I started my career, Mitchell started his career, and Nimay started his career. And that's very important to us. And historically, most of our deals would have been sourced through that mechanism. But remember, that would have been in a world where most of the money that was being invested into growth companies was into the company itself, onto the balance sheet, right? And in a very organized fashion. What ends up happening and how you could properly and effectively source opportunities in this ecosystem is you have to have a multi-pronged sourcing approach. And so you have to not think about it only from one direction. And so the way that we oftentimes describe it is, if I'm walking down the street and there's a lot of different houses, I'm trying to figure out what's the house that I'm the most interested in getting in, which house meets the criteria, the metrics of what I want to do. And that's sort of like the same thing. I'm looking at a company with a variety of metrics. Now I could get into that house through the front door. And that's probably the way that most people are going to try to get in the house. And you knock on the door and you say, Hey, could I get in? And that's the least friction way to do it. That's probably the equivalent of we're going to lead your series C or series D round. We're going to just buy the company. It's an organized thing and it's the way that most people look to get into a house. But there's other ways to get into the house. There's other ways to be part of the family. And one way could be like going through the side door. You find shareholders that, you know, ex-employees that, you know, used to be there. They're no longer there. Maybe there's a former CEO or founder that's no longer active. How do you get in touch with that person to potentially buy their stake? And that requires a different sourcing muscle. That's not cold calling the company. That might be looking on LinkedIn and trying to find all the former employees and then reaching out to them. Then there might be presumably a backdoor weigh in. And that backdoor weigh in could be, hey, look, there's a fund that owns 30% of this business and they've been in that company for a long time. And that fund has one asset left. And the only asset in that fund is that one business. What if you could buy out the LPs from that fund and on a look through basis, now all that you're doing, you end up owning a piece of the business by virtual your LP stake. And so that's how we look at the world. It's like you shouldn't stop at the front door. You should go to the side door, go to the back door, figure out how to get in. And then the question is, what do you need to do to source against that? And it's not only cold calling and talking to the companies. It's having a multi-pronged strategy where you do cold calling to companies. You speak to other GPs in earlier stage funds as well as in similarly sized funds. You speak to a lot of different bankers who are in many cases sort of refereeing a lot of these opportunities. And then we speak with, for us, with our LP base as to what they're hearing from their friends and people in the market. And you start to piece together deals. And oftentimes for the secondary stuff, it's not a single touch point. A lot of times it's, we'll talk to a company, we'll find out that they're interesting, we'll believe that they're interesting. And then we'll say, okay, well, there's nothing really to do there. And then we go and we look on, you know, pitch book or whatever. And we're like, okay, there's 12 different investors in this company. Let's go talk to each one of those. And then you find out that of the 12, like nine are not interested in talking to you, but three might want to sell their stake. And maybe one of them wants to do a continuation vehicle or something like that. And then there's conversations to have. And it's just a matter of mechanizing those conversations. The first things first is typically having a framework for what type of company you're looking for. And then once you have that, it's about identifying that there's multiple ways to get into the deal and having the dexterity to evaluate each of those different types of opportunities from a deal perspective.

Shiv: Yeah, we've had a couple of distress types of funds come on the podcast and they go to companies that they know are going to be written down or are not doing as well as expected. And they go through the lenders and that becomes another way to source deals.

Brian: Yeah, that's totally, that's a different world from where we play. Most of our companies don't even have any debt. But yes, it's clever and it's smart and would love to be an LP in those types of funds because they sound pretty good.

Shiv: Yeah, exactly. They're seeing a lot of activity, which other funds are like struggling to find deal flow and pipeline, but those guys are swamped with work so it's kind of interesting.

Brian: Yeah, in our world, by the way, if you were just a growth equity person and you said, all that I do is to do series C's and series D's, that's my world, you would be very slow for the last two and a half years. If you say, what I do is I invest into growth companies that meet a certain set of metrics and I might buy direct stock, I might put money on the balance sheet in primary, I might buy direct stock in secondary, I might buy interest in certain other entities that have looked through ownership of this thing, that's a totally different ballgame. And if you're doing that, you're busy.

Shiv: Yeah, it's almost like, well, it is like different products. It's like you're running a company and you have different product offerings that are like, packaged offerings of the same product that you're going after. And just thinking about it creatively versus just like this, we only sell one type of product in one type of package, which would only apply to a limited set of customers. So I think that's a really great insight. Unfortunately, we're up on time. I feel like we're to go on for a couple more hours here, but. As people are listening, what is the best place they can go to learn more about you or Leading Edge?

Brian: Yeah, I mean, just go to our website, leadedgecapital .com and there's a lot to learn. My partner Mitchell has done a bunch of different interviews and podcasts and things like that. Absolutely should look out for him. My partner Nimay has done the same and others of our partners, Tim, Dan, Zach, Avery, Suzy, they've all done different things. And so I would really encourage people to just keep an eye on us and read up about some of the deals that we've done, but really appreciate you having me on and collaborating and sharing some insights.

Shiv: Yeah. And from my side, yeah, thanks for coming on and sharing your wisdom. I think a lot of the investors that are listening as they think about their funds and how to source deals and how to be great board members will learn a ton from this episode. Thanks for doing this.