00:15:50 · Brian Neider
[00:15:50] S0: I think that you're right insofar as that there are ways in which to ask questions that are more acute or more specific so that you get to the answer that you're looking for. But I think that it's more of a philosophical approach that's not necessarily as much about asking a specific question or not. It's just really having the confidence to say, I don't understand, and then have somebody go back to the beginning or continually kind of asking the question why over and over again until you get to the core. Oftentimes, people don't actually have the building blocks that they need to understand things. And I've been on boards with people who are far more successful than than me, who have had illustrious careers, and they sort of assume that they're supposed to know everything. And so a CEO is rattling off metrics about their business, and they're nodding their head. And I know that if I ask that person, hey, you know, x amount of bookings or y gross retention or whatever it might be, can you explain it to me? That that person wouldn't exactly be able to explain it. And a lot of that is because when they first started learning about those metrics or contextualizing them, they didn't really ask why, how does this work, what is this, explain it to me like I'm a grade schooler, and get the basics down. And then all of a sudden, it's like you're so far past when you're supposed to know the basics that it's almost impossible to get back to the, you know, one zero one level class. You're already at the eight zero one level class, and you've got a problem. So I actually think in many ways, the LLMs, ChatGPT or Claude or any of these things are helpful to people like that because they really wanna learn. They actually have sort of a place to ask the right questions and not be embarrassed. Now as it relates to dealing with diligence and asking questions to management teams, a lot of that really just has to do with, let's go back to the beginning, explain it to me again, having that confidence, almost restating it to them. So oftentimes what I'll do is I'll ask the questions, and then as we're going along, each step of the way, I'm gonna recite back to the entrepreneur or to the management team, okay. Here's what I'm hearing. Do I understand this correct? Great. Let's move on.
00:17:59 · Brian Neider, CJ Gustafson
And by me explaining that, I find that it puts us on the same page, and my own articulation allows me to sort of contextualize it in my own brain. And then if I do understand, we can move on. And if I don't understand, then I'm happy to have them dumb it down without any embarrassment. And I think that that's, like, one of the first things that I learned, you know, twenty plus years ago when I was hired for my first investing job at at Bessemer Venture Partners. What we needed to do was we needed to cold call and find companies to to learn more about. That was my, like, mandate, my remit, what I was supposed to do. I had a friend who had done that job at another firm, and the one thing that he told me was never feel silly asking somebody to explain something again. That's kind of, like, how I try to do it. And so there's definitely ways in which to ask the question. You start with a 100 customers. You sold nothing. How many of those customers do you end up with? How many of those dollars do you end up with? There's ways in which to do that, and you have to be kind of crafty to get the right answer and make sure that you ask it in a logical way. But a lot of it is the fortitude to to tell somebody when you don't understand and make them explain it again rather than just nodding along. [00:19:12] S1: What separates a good company from a good investment?
00:19:15 · Brian Neider
[00:19:15] S0: I think that you really have to separate the two. And when you think through what makes for a good investment, that's sort of at the center. And on one side, you have the quality of the company, and on the other side, you have the quality of the valuation or the structure by which you're investing. And the nexus of those two things makes for a good investment. So each of those dynamics come into play. I'll give you like an analogy that'll probably dumb it down a little bit, but but bring it to life that I think anybody could really understand. Right? Which is, let's say that you're looking to buy a new house, and you're walking down the street, you're trying to identify which house you want to buy, and you know that that's a street that you want to be on. You sort of look around and you say, oh my gosh, look at this. I've got this house on the right. It is the most beautiful house I've ever seen. It's got exactly what I want. It meets all my criteria. It's got a white picket fence. It's on an acre. It's got a big flat yard. It's got a swimming pool. That would be the equivalent of like a great company. It's exactly what it is that you might be looking for. The problem is, let's say that on that block, all of the houses were, you know, roughly similar to that, not quite as good, but roughly similar. And in the last year, five of those houses on the block all sold for, I don't know, $1,000,000 each. So, okay. Fine. Well, what should this house that I'm looking at be worth? But let's say that that house was for sale for $10,000,000. Herein lies the issue. Right? The house should be attainable. It should be around the price that everything else sold for. It's probably worth a million, million and $0.5, but it's grossly overpriced. And so you have a situation where you have kind of like an a plus company with an F minus valuation, which makes for an investment that's probably not all that great. So for us at Lead Edge, what we end up doing is we try to pick where our quality bar is. For us, it's like kind of B plus or above type companies that meet a certain number of the metrics that we care about. And then based off of that, we're evaluating the potential valuation and structure that we could get into those investments at. And we want that to be kind of pretty solid too, such that if you combine the two, you're in a good place.
00:21:23 · Brian Neider, CJ Gustafson
It's not to say that every time you do that, it's gonna work, and it's not to say that there can't be outliers on either end. So you can have a situation where you have a company. It's the best company you've ever seen. The valuation feels insane and nuts, but it just works. It just keeps getting better. But on the whole, probably it'll be difficult. You know, you could have difficult situations, of junky companies that might be unbelievable investments. So you can have, like, an f minus company. Let's say an f minus house. You could have a house on that block that you love where it's totally dilapidated. Nobody's lived in the house for a really long time. It's just completely run down. But you're willing to do the work. You're willing to do the remodeling, and now all of sudden it could be pretty compelling. And so in that case, maybe I have sort of like an f minus asset, but you're getting in an a plus price and you're willing to sort of do that because that's the type of investment that you're looking for. And so really what it is is it's a framing of what is generally the quality bar that you wanna get over in terms of the quality of the company that you might be evaluating, and then where does that need to intersect from a value standpoint to get you excited? [00:22:33] S1: Which of those two offsetting scenarios where you may have really good on one side, really bad on the other? Are investors or even yourself more willing to get into bed with and take a chance on?
00:22:33 · CJ Gustafson, Brian Neider
[00:22:33] S1: Which of those two offsetting scenarios where you may have really good on one side, really bad on the other? Are investors or even yourself more willing to get into bed with and take a chance on? [00:22:46] S0: Completely depends upon the investment firm and their mandate. I would say more often than not in the growth equity ecosystem, you're gonna see funds that are willing to take on really high quality businesses and just pay up for them. I think that if you go into, like, the industrials ecosystem or, you know, you look at some of the buyouts that were done in, the nineteen eighties and, you know, businesses like that, you're gonna see a lot of interest in doing deals that are... There's a lot of hair on the asset. There's a lot of problems with it. But, man, there could be some excellent underlying value there. And then, you know, imagine you could throw some leverage on it. You could make some really, you know, exciting returns. [00:23:25] S1: How has your own definition of expensive changed over the last fifteen years?
00:23:25 · CJ Gustafson, Brian Neider
[00:23:25] S1: How has your own definition of expensive changed over the last fifteen years? [00:23:29] S0: It's hard. I think that we've maintained relative consistency, but it vacillates. Right? There's points in time, like, you look at how the market's traded, where, you know, the multiples were for SaaS companies in 2020 or 2021 relative to where they might be today. There are periods of time where things get really expensive all at one time and then get really cheap all at one time, and you have to have some opinion as to where you are on the continuum to be, you know, ultimately investing. But for us, I think we've been relatively consistent underwriting an investment opportunity. You could pay a lot higher price if you're gonna assume that on the back end five years from now when you're exiting the investment, you're gonna exit at 25 times revenues or something like that. If you keep it consistent and, you know, no matter what the market looks like, you're kind of underwriting to a six, seven times outcome because that's what it's always been. You feel comfortable that that's where it's gonna be in the future. I'm not making any proclamations in that regard, but if you felt that way, you might have a more consistent underwriting framework and a more consistent view on value.