Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Mitchell Green
[00:00:00] S0: Okay. [00:00:00] S1: To do 5 to 7 deals a year, it just doesn't work. And so for us, what we say is it just like must meet 5. That's about a 10% yield. We're trying to get to a set of companies that we can then actually do work on. So you have 900 companies that meet 5 or more criteria. You do diligence on about 150 to 175 to do 5 to 7 deals a year. And you're like, why not more? I'd love to, but like, we're cold calling entrepreneurs. They're like, "Oh, I'm sorry, I wanna sell my business tomorrow. You just happened to call me on this day." No, the sales cycles can be a decade and it's about staying in touch as an entrepreneur because we're not the only ones calling them. There's great firms like Summit or TA or Insight or Bessemer or Battery and they're great firms. And so it's like, well, ask the entrepreneur, how do they need help? Try to tease information out of them. Oh, you sell into the consumer space. You want to meet the former CEO of Colgate-Palmolive? And you're doing that to try to build a relationship with somebody. [00:00:00] S0: If 5 criteria companies don't outperform 8 criteria companies, doesn’t that imply the criteria aren't predictive? So then why have the criteria? [00:00:00] S1: Because you need to set a framework for what to focus on and what not to focus on. [00:00:00] S0: So they're not predictive necessarily.
· Patrick O'Shaughnessy, Mitchell Green
[00:00:00] S0: So they're not predictive necessarily. [00:00:00] S1: It's not predictive, but it's getting us to a small enough pool. It's like knowing your strike zone. My partner, who's a big baseball fan, uses a baseball analogy. Ted Williams knew in the hitting zone exactly where to swing and what his probabilities were swinging the ball. Yes, you can hit a ball 2 inches above home plate and it could be a grand slam and you hit the ball the farthest you've ever hit it. But if you do that over an entire career, your entire career won't be very long. And so it just enables us to know what pitches to swing at. Our biggest mistakes have honestly been not swinging at the pitches when they were in our strike zone. And I think that's what we've learned over the last 15 years to get more comfortable and when it's in our strike zone, swing at it. [00:00:00] S0: How do you train these young people to be able to get all this information, to know whether or not it's an 8 point score or whatever, out of an entrepreneur? What is the art of getting someone on the phone and then actually getting them to tell you the information that you need?
· Mitchell Green
[00:00:00] S1: It is incredible what people will tell you on the phone. People are like, listen, you just call people and they talk. People love to talk. It's investigative journalism with sales. We tend to hire people that are former athletes. Getting a C or a D on a test is not your biggest failure. Dropping the ball at the Rose Bowl or not making the Olympic team, that's failure. And so you're looking for people that are insanely persistent, people that are really inquisitive. And then it's just, hey Patrick, pretend you're Toast. "We're doing work on the restaurant point-of-sale system space. I read a bunch of articles, sounds like you're kicking butt. Oh, by the way, I just talked to like Square and Clover and set our company up, we'd love to talk to you on the phone. And oh, by the way, I'm sure you're getting bombarded by other people, but we're different than a lot of firms. A lot of our capital comes from world-class execs. Oh, by the way, one of our LPs is the former CEO of Wendy's. We'd be happy to talk to them if you don't wanna meet these people." Huh? Sure, love to chat. By the way, we used to get to cold call people when Brian and I and Nimay were doing this, literally cold call people. And you'd be like, you feel like the person who calls you at 6:00 PM. 20 years ago that you like slam the phone down on. Today it's like, oh my God, you guys get to send emails to people. Give me a break. We actually try to now encourage some of the analysts to start cold calling people. The biggest issue is it's hard to get people's cell phone numbers versus work phones. And it's just once you get the person on the phone, you just have to show knowledge. That's where, by the way, AI is incredible. It's like you give every analyst and associate, you give them the power of knowledge and you can sound super smart and you won't get everything. It's like, hey, I saw on LinkedIn you have like 80 employees. So what are you like, 10 million revenue, 15 million revenue. Oh, I see like your employee count's growing like 80% a year. What are you growing like 150%? Eh, not that fast. Oh, what, like 100%? Yeah, around there. So it's triangulating numbers.
· Patrick O'Shaughnessy, Mitchell Green
[00:00:00] S0: If you think about this machine, so we've got this very unique LP base. We do 9,000 calls, 5 to 7 investments per year. [00:00:00] S1: We just raised our seventh fund. It was $3.5 billion. [00:00:00] S0: Okay, so $3.5 billion fund, 2 to 2.5% net MOICs to your investors. So that's the machine. Where do you feel the most tempted to go tinker on the machine for the next decade? How do you hope the machine improves? [00:00:00] S1: As the firm gets bigger, how do you build a culture of teaching people to still be creative, the scrappy hustlers? That's the most important thing. How do we get creative and do CVs? We were doing CVs when nobody wanted to do CVs. We didn't know they were called CVs. We just thought it was paying somebody a profit share. It's continuing to innovate on that. What's really interesting is the secondary markets now for some of these names are so liquid, so actually you almost don't even have to underwrite to this thing going public. It's like, can it just get big enough with enough escape velocity where I can then sell out? [00:00:00] S0: If you think about all the investments you've made in the last 5 years or something, how often are you personally excited about the company and its product?
· Patrick O'Shaughnessy, Mitchell Green
[00:00:00] S0: If you think about all the investments you've made in the last 5 years or something, how often are you personally excited about the company and its product? [00:00:00] S1: Frankly, this is what drives me nuts about a lot of people in the venture capital ecosystem, is they think they're actually changing the world. Which they are, but they think they should tell everybody about it, and they're like doing God's greatest gift to mankind. We don't think that. We love helping entrepreneurs. That is actually what gets me excited and gets us up in the morning. Helping an entrepreneur try to bend the curve and make that customer intro and help find that great CFO, the audit chair, or whatever. We love making customer intros. That's what gets us the most excited. And I think we are still actually just scratching the surface on how we can leverage our LPs. [00:00:00] S0: How often do you control the business? [00:00:00] S1: We are in a control position about a third of the time. [00:00:00] S0: When that's the case, how different is that?
· Patrick O'Shaughnessy, Mitchell Green
[00:00:00] S0: When that's the case, how different is that? [00:00:00] S1: It hopefully should be no different at all, but there's less knuckleheads around the table. There's less people around the table. And what's really interesting is, when you have a lot of different people around the table, you can have a lot of different competing interests. And so it's about building consensus. And you have people that are in one cost base – that's why there's all these 2020, 2021 companies that haven't sold. There's these late-stage guys that are like, "Oh, just get me out. I own the pref, I'll make a 1x today or I'll make a 1x in a decade." But we don't go into companies and say we're replacing the entire management. That's just not what we do. When we invest in a business and when we exit, it's something like 75% of the time, the person who was running the business when we invest is still involved in the company. They may not be running it, but it's like, back people who just want to build awesome businesses and great companies. And it's like, "Listen, if I'm not the right CEO, well then make me the chairman of the board or make me the chief customer officer or make me the chief product officer or whatever." That's what's really important. [00:00:00] S0: I want to go back to the culture thing, the Lead Edge culture I mean. What have you learned about culture in the many years now that you've been doing this, especially given this is the thing that you want to keep nurturing?