Lead Edge Capital closes $3.5B Fund 7, dismisses 'SaaS apocalypse' narrative

let me also tell you about Vanta, automate compliance and security. Vanta is the leading AI trust management platform. Up next, we have Mitchell Green, the founder and managing partner at Lead Edge Capital. The news, Lead Edge has closed a $3.5 billion 7 fund.

What's going on, Mitchell? Great to see you.

How's life? By the way, somebody likes Diet Coke. I like Coke Zero. I got Coke Zero better.

Coke Zero guy. Coke Zero. Did you go through a diet Coke phase or you

I did in the I did back in the day and then Coke Coke Zero came out and I started drinking that. I'm pretty sure both of them are going to kill us, but that's fine.

Well, you and John are running the AB test. I'm I'm having the podcast in a can from Andrew. Um, congrats on the new fund. Uh, big big number. Take us through it.

Yeah. So, no, it's good. So, it's just a continuation of uh fund six uh you know, fund 7 three and a half billion. We uh really raised it late last fall. Raised it raised it late last fall. Uh but no, it was uh it was good. Look, the I we really didn't know what to expect about the fundraising market. Everybody had said it' been really really hard, but then you see these big giant funds get raised. Um and so no we had we had a lot of uh interest from existing LPS and some new LPs and things like that.

What is contrarian about lead edges stance as a fund or or messaging to LPs? You know this is a software focused fund. Uh some people at least on X would would say you guys are crazy to have that positioning. Uh but certainly the the results have been fantastic. Yeah, look prior history means nothing about the future. Uh as well I think the things that make us contrarian and like different in the world. One um our LP base and how unique it is. We have all these like you know while we do have big institutions 95% of our capital comes from people that are like you know world-class exeacts and entrepreneurs. You guys probably had a bunch of our LPs on the show. You could look on our website and see examples of a bunch of these people and then how we leverage these people throughout the investment life cycle, whether they help with diligence, whether they help with um you know helping c customer intros, recruiting, advisory for companies. I think that makes us different than most people. um what we invest in is you know look we just take a very um focused approach and we're just like listen you have to meet x number of our eight criteria five criteria and and it's like are you 25 million in are you 10 million plus in revenue where you're growing 25% a year are you profitable you know are your revenues greater than your historical cash burn cumitively like and again you have to meet five of of the eight and so that just that kills a lot of companies we might otherwise guys. Um, you know, see, and again, we just find companies that meet those criteria. And so, you know, a first couple deals in the fund, you know, without naming the companies, you know, one is a $500 million, you know, last year did 500 million of ARR software business. Um, growing 50 plus% a year. We funded another private equity fund that owned it. their like continuation vehicle cuz we what makes us contrary is we're very unique in that way. We're like we'll buy 10% of a company in a minority deal, put money on the balance sheet, we'll buy, you know, secondary from an early investor, we'll buy 80% of the company, you know, we'll do everything. It it's it's really kind of just we just want to get into the best businesses. And look, we invest in businesses that grow, that have super high gross mar that have 70 plus% gross margins, that are hopefully capital efficient, that have like really happy customers with high gross prot gross dollar attention. Software is one of those buckets.

Yeah.

As well as, you know, financial financial information technology companies, information services companies, payments businesses, internet marketplaces. We've invested in logistics businesses. If it meets the criteria, we'll invest. There are still the whole idea that software is all going to zero is a bunch of complete utter nonsense.

Yeah. We were talking to uh Carl Echinbach uh on the day he rejoined Sequoia last Thursday about the SAS apocalypse and he was just stressing the the the fact of how sticky these relationships are and the fact that people buy things from other people. they're not just going to overnight switch everything and how they do their business. Uh what are you actually seeing? How have you processed the SAS apocalypse? Have you processed uh this idea of all these uh legacy systems just being upended overnight? I

mean, it's like complete utter nonsense. That was a buddy. I'll see him if actually

that was great.

I think we're fine. I think we're I I think I'm literally going to go back with him from the board meeting. Um

no, no, he's fantastic. I mean,

let's not forget that the US government still runs I think like I think we think the huge opportunity we do some public stuff as well. So, we actually own own workday. Um, and by the way, I think a 99% gross dollar retention business. Yeah.

Um,

the US government still runs on Peopleoft and most banks that people use in America run off of mainframe computers.

Yeah. So, you know, open-source when people say the apocalypse, SAS apocalypse, all software is going to zero. I think what people fundamentally get wrong is is that they think like R&D is the is like the most important thing in these companies like writing the code.

Yeah.

It hasn't been for decades. Like open- source software is a big industry. Yeah. companies like Graphana, Datab Bricks, Elastic, Hashi Corp, Red Hat, there's there's 20 more of them. You can get that stuff for free.

Yeah.

The reason that enterprises pay for it is they need somebody to deal with with, you know, customer support, security patches, user authentication, this stuff's like very complicated to do.

I think I think with software companies are going to become and by the way, there's there's going to be ones that survive and there's going to be ones that don't. All that we see you see in periods of technological change is like things can happen really fast and it's not only software companies but it could be like automotive companies. If you're Stellantis and you have tons of debt and you're I'm totally making this up and you're Ford and you have no debt. Well, if you believe AI and robotics are going to come to to manufacturing well like

Ford can invest, Stellantis cannot

and like they very well may disrupt you know Ford may completely disrupt Stalantis. It's going to happen across industries here. By by you saw at 99 in 2000 with like, you know, e-commerce companies. Some traditional retailers like Walmart and Home Depot did great. Some people did not. The same thing is going to happen with, you know, with software companies. By the way, the same thing is going to happen with accounting firms. The same thing is going to happen with banks.

Like this stuff is going to completely revolutionize the world. It won't do it as fast as people think. It was funny. I I asked uh Claude yesterday to try to like book me like an appointment like I to get a haircut and I could do it online and had no idea how to do it. Like I you know literally could have just picked up the phone and made a phone call and you know I saved myself 15 minutes.

Yeah. What what has your interaction been with private credit throughout your career? There's a lot of headlines around the the debt load for some of these software companies and if the business model changes if that retention does shift that those private credit funds could be in trouble. How have you been processing the stories around private

so look about a third of what we do is control buyouts.

Okay.

A buyout tends to have debt on it. um you know that being you know what I would say is now again the buyouts we're doing are not big enough and they tend to be growth buyouts like our average portfolio company grows 50% a year so we might just happen to find a company that's 25 of revenue owned by owned by one guy that wants to sell 60% of his company

but still wants to run it so we're not our deals are not big enough where we need to go to the private credit funds

I agree with Jamie Diamond though but

it's a canary in a coal mine but it's software.

Yeah.

This is what people are getting wrong.

Yeah.

You don't think the private equity firms overpaid for industrial companies or services companies?

Yeah.

Or anything like I tend to believe where AI is going to be disruptive is if a private equity firm bought a company, put a ton of leverage on it, and it's been running it for margin because they need to drive margins to pay the debt load because they put too much debt on it. They won't be able to innovate. So their competitor that doesn't have a lot of debt

is going to um you know could win. I think that is that doesn't apply to software companies. That applies to everything.

Um I suspect that we're in an in any unregulated industry where you take a bunch of people to Wall Street, a bunch of people have done probably stupid things. It's probably not the people getting it's probably not the people getting blamed for it. It's probably the ones doing the blaming, frankly. um if you kind of learn, you know, from uh from history on Wall Street. Um

but again, it's if the the private credit guys get paid, like they're going to get they'll get paid before the private equity funds. I think we're going to sit here

in 2030 and there's going to be a ton of these deals that were done in 2019, 2018, 2020, 2021 that screw just software. It's like everybody at all the industries where like you're going to be looking at like very low

singledigit, you know, low singledigit IRRs.

What's the oldest company you've ever bought or or invested in? Have you ever looked at anything that's like over 50 years old? Or I mean, I've just seen some of these like that are like, you know, oh, like you'll see like AOL is transacting now and we're and I'm like, oh, we haven't heard that name in a long

that's only 30.

Well, then I'm actually I'm looking to see what a company Okay. Yeah. So, we own a business.

Okay.

Um called Growth Zone.

Okay.

That makes like Chamber of Commerce Association Management Software. It's a new business, nicely profitable.

Um we the company was founded in 1996.

1996. Okay. We own we own another

we own another business um

that it's so like that business started in 96 a different name

in 2019 it was bought by like a small private equity fund

we then bought that um

but no we own a business um that we bought through an interest in a fund

called um work human

and this is a huge business super profitable big company

it's an anti-ag AGI AGI bet.

Yeah. Yeah. And so Workhuman used to be called Global Force. It's a big like HR software company. Um and like a employee benefits company based up in Boston. But I think the venture fund we bought out.

It was like a 2002 vintage venture fund. Wow.

And the investment was made in like 2004. And the company has never raised capital since. And it's a very large, you know, nine figure type like profit business. That's remarkable. Uh, well, thanks so much for taking the time to come and hang out. Congratulations. We got to hit the gong. Congratulations.

Congrats to the whole team.

See you guys.

Great to see you.

We'll see you soon.

Cheers.

Goodbye.

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