Using a more focused version of crowdsourcing, $5 billion Lead Edge Capital taps the expertise and connections of its 700 individual investors to produce superior returns.
By Hank Tucker, Forbes Staff
When Lead Edge Capital was considering investing in Toast in 2017, Brian Neider, a partner who has been at the firm since 2012, asked its network of limited partners to connect him with people in the restaurant industry that could help him evaluate the business which makes point-of-sale payments software for restaurants.
“We got about 50 responses—when you ask a lot of wealthy people if they know folks that run restaurants, you get a lot of responses,” says Neider.
One of Lead Edge’s investors who owned a chain of restaurants in Connecticut even set up a demo with a Toast salesperson and had Neider sit in on it. He was instantly sold on changing his legacy systems to Toast’s software, and his enthusiasm convinced Neider to make the investment, co-leading a 2017 $101 million funding round at a valuation of around $500 million. It became a big winner when Toast went public four years later at a valuation of $20 billion.
Private equity firm Lead Edge has used its network of investors as its secret sauce since Mitchell Green, 43, founded it in 2009 and separated himself as the firm’s “superconnector.” The growth equity firm invests between $25 million and $300 million at a time in a portfolio of software and internet-focused businesses, and most of its $5 billion in assets comes from more than 700 individual investors.
Lead Edge’s unique approach is more work than answering to a smaller number of large institutional investors, but most of Lead Edge’s clients readily commit additional funds once the rewards of the model hit their bank accounts. Lead Edge targets annualized returns in the mid-20s in its funds, expecting to make two to five times its money on each investment over a span of three to seven years. Their returns have been good enough to attract hundreds of limited partners, and GP stakes buyers Blue Owl Capital and Bonaccord Capital Partners have also noticed. Both have acquired minority stakes in the firm since 2022.
Lead Edge’s LPs include billionaires like Steve Cohen, Adam Foroughi and David Blitzer and C-suite executives at dozens of major businesses like Dell, Target, eBay or Bank of America. Green and his team bug their investors incessantly for help getting introduced to companies or for mentorship and advice for businesses already in their portfolio.
“We met all of these people through one another. It’s all been word of mouth,” says Green. “If you do what you say you’re going to do, you generate a lot of trust with people, and they introduce you to their friends.”
Mitchell Green grew up in Grand Rapids, Michigan, the grandson of a bond trader at Paine Webber who later became a stock broker and the son of the CEO of a manufacturing business. He was a competitive downhill skier as a kid and competed for Williams College while studying economics.
He talks quickly, racing between thoughts on a never-ending supply of adrenaline, and the first job he loved out of college after a short stint in investment banking was at venture capital firm Bessemer, where he arrived in 2005. Green says at the time venture capital was “Shark Tank-esque” in that most entrepreneurs came to pitch them. Bessemer hired Green and Neider to be its first cold callers, working the phones in one room, leaving some 20,000 voicemails over two years to various startups.
“We learned very quickly that if the company calls you back, it sucks,” says Green. “It’s the CEO you called every two days for a month, that’s the CEO I want to get on the phone.”
By 2007, Green had built a healthy Rolodex of CEOs when he left Bessemer to enroll at the University of Pennsylvania’s Wharton School, which he attended while working part time at a hedge fund Eastern Advisors seeded by Julian Robertson from Tiger Management. After the fund hit a rough patch during the financial crisis, its founder Scott Booth staked him with some starting capital to buy out some private assets to start Lead Edge.
Green raised special purpose vehicles for one deal at a time in the beginning, tapping into the entrepreneurs he knew from Bessemer as well as board members at Williams or Penn, business school classmates’ parents and anybody he could persuade to invest with him. He pulled together $17 million for Lead Edge’s first deal for Bazaarvoice, which powers product reviews on ecommerce websites, and later took it public in an IPO that raised $114 million in 2012. It has since raised six funds, including a $1.95 billion Fund VI that closed in April 2022.
Today, Lead Edge finds companies to invest in with an army of around 20 analysts who reach out cold to roughly 10,000 businesses a year, searching for companies that meet at least five of its eight rigid criteria. The “Lead Edge 8” includes basic stipulations like at least $10 million in revenue and 25% year-over-year growth to more nuanced concepts like at least 90% gross dollar retention and capital efficiency, ensuring that annual revenues are greater than or equal to its cash burn since inception.
“The world is littered with $20 million revenue software companies that have burned $80 million to get there,” says Green. “Capital efficient CEOs understand the value of $1 better than people that just light money on fire.”
Requiring a company to meet five of eight criteria filters out all but the top 10%, and after doing further diligence, the firm winds up making just five to 10 investments each year. Each decision to invest has to be unanimous among the voting committee of Green, Neider and Nimay Mehta, a partner who joined the firm in 2011 after working at Insight Venture Partners.
If a company isn’t responding to Lead Edge’s outreach, the firm often enlists one of its more well-known investors in a similar region or sector to make an introduction. And once it makes an investment, it frequently taps into its network for help.The ask could be a request for advice in expanding into a new market or as simple as soliciting suggestions to hire a new CFO.
“It takes me five seconds to say, I had three finalists. I picked one of the three. The two others were pretty great. It saves so much time and so much money for the portfolio company,” says Stephan Dietrich, a longtime Lead Edge investor who was the cofounder and CEO of Neolane, a marketing tech company bought by Adobe. Dietrich is one of five operating partners who Lead Edge employs as contractors to coach its portfolio companies—others include former Dell CFO Jim Schneider and Lorrie Norrington, a former president at EBay.
Lead Edge’s 39 current portfolio companies are scattered all over the U.S. and some in Europe and Asia as well, from little-known tax and accounting automation firm SafeSend, based in Ann Arbor, Michigan, to Chinese TikTok parent Bytedance. Green has been connected to a few Chinese companies since getting into Alibaba before its IPO through Eastern Advisors, and Lead Edge first invested in Bytedance in its 2022 funding round at a $180 billion valuation. President-elect Donald Trump has pledged not to ban TikTok, reversing course from his stance on the app during his first term, but Green doesn’t think its U.S. business is significant enough for the political backlash to matter much anyway.
“We’re buying this thing at like five times earnings,” Green says. “It’s as big as Facebook, and grows three times faster, and it’s a fraction of the price.”
If there’s anything slowing Lead Edge down now, it’s a sluggish IPO and M&A environment since a flurry of dealmaking and fundraising that peaked in 2021. This could change under a new Trump administration, and new FTC chair, especially if the stock market remains lofty.
The firm has gotten more active in the growing secondary market for private company stakes, and Mehta says the predominance of its deals in the last two years has been in the form of exits providing liquidity to early investors or founders rather than investing directly in the company. Green, an excitable optimist, isn’t particularly concerned about the future.
“The IPO market’s fine. I just think too many companies have too much money and if you’ve got $300 million cash on your balance sheet and grow 50% a year, going public sure seems like a lot of work,” says Green. “Eventually investors are going to demand it.”
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