By Polina Marinova
This article originally ran in Term Sheet, Fortune’s newsletter about deals and dealmakers.
For someone whose portfolio includes Uber, Bird, Spotify, Alibaba, and Tencent, Lead Edge Capital founder Mitchell Green has managed to largely stay out of the VC spotlight. And that’s by design.
“I don’t need to be out there writing long blog posts pontificating on certain things,” Green says. “All we want to do is help entrepreneurs build big companies and make our LPs money.”
Green’s Alibaba investment helped put his growth-stage investment firm on the map. “We returned about a billion dollars,” he told The Wall Street Journal. More recently, Cisco bought Lead Edge portfolio company Duo Security for $2.35 billion in a combination of cash and stock after the firm had co-led Duo’s $70 million round at a $1.17 billion post-money valuation.
Lead Edge gets into deals through aggressive cold calling, deep research, and a star-studded network of limited partners. The Lead Edge website prominently features the firm’s LPs with the headline, “Who can we introduce you to?”
“We have 8 or 9 associates whose job is very simple — they pound the phone and send emails every day to entrepreneurs. In a given year, each associate should have made 750 calls to companies. Multiply that by 8 associates, and that means our team is talking to about 6,000 CEOs per year.”
And that’s exactly how Lead Edge got into Duo Security. They contacted the company more than 40 times with no response. Then, they leveraged their robust network for a way in. Finally, a Lead Edge board member offered to make an introduction to the CEO, and the firm ended up getting in the deal.
“I may not be the smartest person in the world, but I am the most persistent,” Green told me.
In a Q&A with Term Sheet, Green discusses his investment strategy, why he chose Uber over Lyft, and how the venture landscape is evolving.
TERM SHEET: Tell me about your investment thesis and what you look for a company before you invest.
GREEN: We have eight criteria, and we’re trying to find companies that meet five to seven of our eight total requirements.
The 8 criteria are:
— Are you $10 million+ in revenue?
— Are you growing your revenue 50% or more a year?
— Do you have 70%+ growth margins?
— Do you have a recurring business?
— What’s your retention? Do you have 90%+ gross retention?
— Are you profitable or break even?
— Do you have a diversified customer base?
— And this one is really important: How efficient are you with your capital?
The reason capital efficiency is so important is because in a world where there’s so much money being thrown around, we want to invest in companies that are growing really fast and not burning tons of capital.
Let me give you an example. The world is littered with $25-million software companies that have burned $60 million to get there. What we want to do is find companies like Duo Security that got to $200 million+ in revenue and burned about $40 million.
The reason capital efficiency is so important is that if there’s an economic downturn, we believe that the entrepreneurs who can build businesses without all that much money can just float on their burn rate and grow a little slower during a downturn.
Uber hasn’t turned a profit and has been losing money for years. How does this fit within your thesis around not investing in fast-growing businesses that burn through cash?
GREEN: When we invested in Uber, it met our criteria of being capital-efficient. When we invested in late 2014/early 2015, the company had raised about $1.8 billion of capital previously. We focus on the cash burn versus net revenue. Just because a company has raised money doesn’t mean it’s been spent. Also, keep in mind that sometimes there are specific reasons why we invest in companies that aren’t capital efficient (again, a company doesn’t need to be capital efficient since it’s only 1 of 8 criteria), and we’re looking to invest in companies that meet five to seven of the criteria.
Why did you choose to invest in Uber over Lyft?
GREEN: It’s funny — I didn’t even really know [Uber founder] Travis [Kalanick]. I actually know [Lyft co-founder] John Zimmer way better than I actually know Travis. John’s a great guy. So why did we choose Uber over Lyft?
Ann Miura-Ko from Floodgate is a good buddy of ours, and she told us we should look at Lyft around the time it was at a $400 million valuation. Look, we’re idiots — we should have looked. We ended up investing in Uber much later at a $40 billion valuation. There was actually a very big debate at Lead Edge around this. Some partners thought we should do both Uber and Lyft. Other partners felt we should only do Uber because the vast majority of the value accrues to the market leader, and the No. 2 gets much less capital.
How do you think their 2019 IPOs will compare?
GREEN: I think they’ll probably both do well. It all depends on the market, and I have no idea where the market’s headed, but we do think Uber will trade somewhere between $100 and $150 billion. A Lyft IPO will be well-received by the Street, but I believe if you like Lyft, you’ll love Uber. For one, Uber is global. Two, it has stakes in a bunch of different assets around the world. Three, you’ve got UberEATS, which is a rocketship.
Companies have access to a lot more capital these days. As a growth investor, how do you see the venture capital landscape evolving?
GREEN: There’s a lot of money going into venture capital and private equity now, and I actually think there will be even more money that comes into the asset class. It’s a great time to be an entrepreneur — you have so much more access to capital. But I think it does dilute returns. The best quote I ever heard was, “You can pay as high a price as you want for a deal, you just better be right.”
A lot of people are predicting a market downturn in 2019. Do you see any signs of a slowdown?
GREEN: In the private sector, we have seen our portfolio companies’ Q4 numbers and they’re all in line with our expectations. I do think growth will slow down a little bit in Q1 and Q2 in the U.S. just because a year ago, we had tax cuts. But overall, we don’t see anything in our portfolio that would indicate a recession in the U.S. is coming in the next 6 to 12 months. Could it happen in a few years? Sure, it’s bound to happen at some point.
I also find the following — the crowd is usually wrong. Ask 100 guys in private equity and hedge funds what they’re doing, and then do the reverse, and you’ll probably make money.
Why’d you come to that conclusion?
GREEN: Because I think the crowd is usually wrong. The best investors in the world are lonely.
Interesting. What’s the most unpopular bet you’ve made that supports the “crowd is usually wrong” framework?
GREEN: Alibaba went public in 2014. In September of 2015, Alibaba’s stock price was $63 a share. I stood up at my annual meeting and gave a presentation that I thought Alibaba was the most no-brainer investment on the planet. The stock was at 63 bucks. It then goes from $63 to $70 to $80 in November. Then by February of 2016 — when the world decided it hated China — it went to $58. The stock, at its high, was $205 in 2018. It is now at $150, and I think it’s a screaming buy.
Alibaba is like a combination of Amazon, eBay, PayPal, and Netflix. It’s a juggernaut. This is a business you want to own and give to your grandkids.
