Lead Edge is increasingly steering its 700+ investors away from VC deals

Mitchell Green worked variously in investment banking, as an analyst with Bessemer Venture Partners, and for a hedge fund backed by Tiger Management before striking out on his own in 2011. Going it alone was seemingly the right move. Green now manages money for more than 700 individuals who have committed $5 billion to his firm, Lead Edge Capital.

How has he persuaded so many people to jump on board, including prominent individuals such as former Xerox CEO Anne Mulcahy, former Charles Schwab CEO David Pottruck, and former PayPal CEO Dan Schulman? Nabbing stakes in Alibaba, Bumble, and Duo Security certainly helped. But Mitchell suggests the appeal also ties to an all-weather strategy – one that has him increasingly steering the bunch away from “overvalued” venture capital deals and into buyout-like “control deals” of companies that many VCs might look past, like a Sarasota, Florida outfit that makes cardiac-monitoring software, and a tax-planning software outfit in College Station, Texas.

Lead Edge, long an investor in major Chinese companies, is also continuing to invest money into ByteDance, where it unsurprisingly foresees a huge exit, even with the assumption that TikTok could go to “zero” if it’s ultimately banned in the U.S.

To get his newest take on the market, we talked to Green – a former nationally ranked alpine ski racer who mostly lives in Santa Barbara –  from his hotel room in Las Vegas during a recent F1 racing event staged in the city. Excerpts from our chat follow, edited for length. You can also listen to our interview via TechCrunch’s StrictlyVC Download podcast.

When we last talked, you were really leaning into the Ant Group [the Alibaba affiliate that was expected to become the world’s largest IPO in the fall of 2020 before that offering was completely derailed by China’s securities regulator]. 

I think it was around the timeframe that General Atlantic [became] a big investor. Silver Lake invested. GIC invested. We put some money in that deal. Yeah, it was three days away from going public, and the Chinese government stopped it. Fast forward to today and look, it’s a giant business still, but it hasn’t gone public. We get the financials, and I can’t talk about that kind of stuff.

You can’t say if you’re buying or selling?

We’re not buying or selling Ant Financial. We made an investment in it, and we’re holding and we’ll see what happens. 

Do you have any plans to invest in any other Chinese companies at this point? 

The only other Chinese company we own is ByteDance. 

We invest in a lot of [other] companies. Like, almost two thirds of the companies we invest in, we are the first institutional investor. Not so long ago, we invested in a company called Pacemate in that hotbed of technology: Sarasota, Florida. Only 9% of our companies are actually in the Bay Area. We were the first investors in it. It’s a business at scale, growing nicely, you know. We came in and bought 54% of the company. 

How did you source it?

We have a team of 18ish analysts and associates that are all zero to two years out of college. And that group of people speaks to about 10,000ish companies a year. We have eight criteria that make a perfect Lead Edge company, and if you were to call 10,000 companies, maybe 1,000 meet five or more of that criteria, and [you do] diligence on about 150 of them [after counting out those that] may not want to raise money, may not want to sell their business, [may be in a] market size that’s too small, [or whose] founder may be crazy. [These analysts] have to be smart and persistent to get these companies on the phone and to ask the right questions . . . I sure as heck wouldn’t get a job here now.

It sounds like you’re turning into a PE shop.

We’ve always [done control deals]. About a third of our deals are control deals. But to us, we don’t really care if we own 21% of a company or 75% of a company. We’re growth investors. [If] you’ve got a $20 million revenue company, we’ll be happy to be 20% shareholders or we’ll be 60% shareholders. But let’s get that company from $20 million to $100 million in revenue, it doesn’t matter. We literally don’t think about percentage ownership.

Going back to ByteDance, what are you expecting under the Trump administration?

Our thesis in ByteDance is very simple. You have a business that grows like 30ish percent a year, [and] trades at, like, five times earnings. And we can zero out the US business, and we [still] think we can make three to four times our money in the next few years. [I have] no idea when it’s going public, nor does anybody else, at all, nobody. Not [Coatue founder] Philippe Laffont, not Bill Ford at General Atlantic, not the guys in Susquehanna who own a bunch [of its equity], not all the funds in China. The founder is going to take it public when he wants to, at the right time. But it’s a giant business. I mean, giant is an understatement. It’s one of the biggest companies in the world. And our base case assumption is that the U.S. business gets shut down, though Donald Trump said on the campaign trail that he’s not going to ban it, so who the heck knows. Your guess there is as good as mine.

What are your cash-on-cash returns thus far?

I’m not allowed to talk about returns at all. We’re registered with the SEC; I can’t talk about returns.

We’ve talked in the past about platform companies. Did you have a shot at investing in any of the large language model companies like OpenAI or Mistral?

I’m pretty negative on first-generation AI companies. I believe that a lot of these AI companies will turn into donuts and that a lot of firms are going to lose a lot of money . . . because costs are going to plummet. In 1997, if you built a website, it would cost you, like, $30 million in Sun Microsystem servers; now you can build a better website than that for $20 at GoDaddy. 

The same thing is going to happen with AI. AI is going to revolutionize the world, but it’s going to take a lot longer than people think. I am sick of looking at companies growing crazy fast that have 50 percent, 60 percent plus gross dollar retention rates. And why do they have those? Because every company on Planet Earth talks about experimenting with AI, and they all then try the software, and sometimes it’s great, oftentimes it’s fine, and most of the time it doesn’t do what it says it’s going to do perfectly well. I also refuse to invest in companies at 100 times or 200 times or 500 times revenue. That game will end badly.

A lot of venture outfits are using non-traditional products to boost their returns right now. Are you?

We’re boring. We make an investment in the company. We call capital for it. We exit the company and return money back to our LPs. We have not used nav loans or debt or any of these things . . .

One of the biggest deals in our fifth fund is a buyout called Safesend that makes tax accounting software.

What do deals like that say about your take on the venture market?

[There’s] too much money chasing too few companies that are overvalued. That’s it. So why did we start looking for more bootstrap businesses? We thought valuations were completely silly. The problem with the venture ecosystem is that [VCs] sit around and listen to each other, and Twitter and social media just makes it all worse.

I have an appreciation for some of the venture funds [because] they go out and do completely different things – like what Chris Sacca is doing at Lowercarbon or what Josh [Wolfe] does at Lux Capital. And then I think there are a handful of funds – the Benchmarks, Sequoia, Index – that have an unfair competitive advantage in early-stage venture. And if you try to compete with these firms, it’s like, good luck. But there’s too much money in the space.