投资增长型科技公司：Lead Edge Capital 的 Evan Skorpen

With me today, I'm happy to have on for the first time Evan Skorpen from Lead Edge. Evan, how's it going?

Hey, it's good. How are you?

Congrats, by the way, on fatherhood. Second fatherhood.

Second fatherhood. You're joining me in the near future in second fatherhood, aren't you?

My wife is due in May—May 4. May the fourth be with you.

I like that. I hate to tell you, but welcome to hell, buddy, because sleep is out the window the moment the second one comes.

Yeah.

Anyway, as a disclaimer, having a second one is hard. But another disclaimer: Evan is here, and we're going to have a more wide-ranging conversation. We have 1 overlapping portfolio position. Evan sits on a public board, and he files a 13F. We're going to talk about it, so just keep in mind that we might have positions. Nothing on this podcast is investing advice, and I'll try to disclaim as different names pop up.

Evan, the reason we're having you on is that you and I were shooting emails back and forth, talking about random things, and we wanted to hop on and talk for 60 minutes about random stuff. Let's start here: your 13F is public. For people who don't know Lead Edge, it has 8 positions, though given that 1 of the positions is like a 20-basis-point position, we can round it down to 7. You practice concentrated growth-value investing in names that I've had on the podcast and that I think a lot of my listeners are going to be familiar with or interested in. There's Clearwater Analytics, Remitly, and all sorts of other things.

Before we dive into all the different things we're going to talk about, I just want to toss it over to you. Do you want to frame Lead Edge and your concentrated style of investing?

Yeah, Andrew, thanks for having me. I appreciate it. Let me spend a moment just to orient the conversation for folks.

I joined Lead Edge 8 years ago, in 2018, to build up the public arm. Lead Edge is its own entity as a big, established growth-equity firm. It invests in growing internet and software businesses, primarily, and is known for investing on the private side.

What differentiates us is that, if you go back to the founding in 2011, Lead Edge put a huge emphasis on building an LP network of individuals. Today, we have over 750 LPs. More than half the capital of Lead Edge's parent company comes from individuals, and it's an incredibly powerful network for us. We're very well connected within the tech ecosystem.

Starting in 2018, one of the things we realized is that the venture community views the public markets as a place to get liquidity. You see the venture community sending these companies public, and it is hard to be a young public company. I came from ValueAct, which is known as a long-only activist fund working behind the scenes, with a private-equity and public-markets mindset, trying to make chunky investments in a concentrated, long-only portfolio. They spent their time on large businesses.

What we realized is that the same toolkit could be brought to the world of young, growing tech businesses. It's challenging to be a young public company, and it's challenging to go public as a $2 billion or $3 billion company. We were able to find what we're looking for: great companies, great management teams, and aligned management teams. We spend our time looking at companies where there's been some sort of air pocket and valuation has become dislocated for one reason or another.

We'll build a position. Our average holding periods are about 3 years. We own 10 stocks at a time, so think of us as having 3 new positions a year. We focus on companies where there's been this air pocket in valuation, where we can build a chunky stake and work behind the scenes with the management team to hopefully get the story back on track. That's us. Hopefully, that's a bit of color on who we are.

That's perfect. Let me jump off there. I was going to save this for later, but let me jump off here. You mentioned companies that run into an air pocket, and this year—we're recording this at the end of 2025—has been a big year for air pockets in anything tech-related that is not directly AI or maybe crypto, but really AI. If you're not AI, there are all these narratives that software is dead.

I just want to start there. How do you think about the “AI is dead” narrative for software? There's been an air pocket for 85% of the tech universe, especially the small, growthy tech universe. How do you think about investing in that rapidly evolving AI world?

Yeah, it's a great place to start. I think there are a couple of things you're seeing within—let's really talk about SaaS software to start with. We spend a lot of time in SaaS. It's not all of us, but let's target that ecosystem first.

If you go back in time, all of these businesses have an evolution. Early on, they're making growth investments, and the core decision in a young SaaS business is: How hard should I hit the gas pedal on sales and marketing? There's a pretty simple lever. We're trying to build the best products we can, and we have to decide how much gas to put in the engine.

You then get to a point where—and honestly, that's the VC ecosystem—there are typically companies being invested in at that stage. It's like, look, there's a good product. How hard do we have to hit the gas? Should we be running at a money-losing level? Should we be running at breakeven? Should we be profitable? We can have that debate.

There is an awkward adolescent phase in all SaaS businesses where the business is naturally maturing. Growth has come down. It's no longer a hypergrowth, 20% or 30% growth business; it's maybe a high-teens-growth business. But you're at this phase where margins have yet to really ramp to profitability.

We could debate whether profitability is free cash flow per share or GAAP EPS per share. There are debates to be had either way. You're not there yet on a free-cash-flow or EPS basis, but you're still early in the growth. Margins are—it's really hard to navigate in that moment in time.

First off, you're going from having just 1 lever to add value—how much to invest in sales and marketing—to all of a sudden having to ask: How much do I invest in other things? How do I manage margins? Do I show linear margin progress, or do I show a step-change in margin progress?

There's capital allocation. When you're a money-losing private business, you sit on a mound of cash as a rainy-day fund. All of a sudden, now you're a profitable business, and you need to have a capital allocation philosophy. The idea of having a rainy-day fund maybe doesn't make sense if you're now a profitable business, so you have to totally change your capital allocation philosophy.

Often, as this is happening, you're also going public. You have employees who are thinking about that as an exit opportunity, and so you get turnover in the executive team. It is a challenging moment in a lot of businesses' evolution.

If you go back to 2020, pre-2021, what you saw a lot was that some businesses had just enough growth that they powered right through software adolescence and got to maturity, just because the growth was so powerful. They powered through. You saw lots of businesses, actually pre-2021, stumble.

What inevitably happened was that the supply-and-demand environment in take-privates was such that there were a lot of people desiring to take companies private, but not a lot of public companies for sale. Any company that was in that awkward adolescent phase could wave the white flag and sell the business. Relatively speaking, it was not as hard to sell the business at a good valuation.

What's happened today is that I think a lot of people are trying to correlate the challenges in SaaS with AI. I think there certainly is some correlation, but a fair amount of it is uncorrelated. What really is happening is that the escape clause to sell to private equity is no longer there—or it's not there in the same way. It's harder to get a deal across the finish line.

Instead, you're seeing businesses struggle through this awkward adolescent phase in the public markets. That's just a very different skill set for management teams. It's a whole different thing. We often try to say that what's happening to SaaS is all AI. I think some of it's AI, but some of it is that we're forcing these businesses to grow up in the public markets, and it's challenging for a young founder or young founding team to navigate that transition.

I think some of it is just the maturation of their categories, and we're being forced to do that as a public company.

Can I say 1 quick thing there? This might transition us nicely to working with boards and everything. One CEO we have in common—we both know him—I remember he said they were doing a retrospective of the past 5 years. He said, “Look, during 2021 in particular, it was growth at all costs. The market was rewarding companies for growing. The music was playing and we were dancing. We were growing, and we might not have been really looking at, ‘Are we growing profitably?’”

Are we spending $1 of marketing cost to get more than $1 of after-tax free cash flow net present value? In some cases, are we spending $2 of marketing cost to get $1 of after-tax free cash flow? That’s what he was saying.

I want to ask: When you're working with these companies and they're a public-market company, how much are they responding to the signals that the market—the stock market, their literal public price—is sending? If the markets were in growth mode, are they just thinking, “Way more growth”? Then, when the market pulls back because the Fed increases interest rates, are they all of a sudden thinking, “Now is the time to cut costs and get cash flow”?

How much are they thinking countercyclically? It strikes me that every company has followed the same trend over the past 4 years, right? Interest rates go up, Meta's “Year of Efficiency,” and everyone's doing a Year of Efficiency. AI comes along, and everyone's rushing into AI. How much are your companies thinking more holistically about the process?

Good question. Look, there's no 1 answer. Every company has a different situation.

One of the things is that we tend not to buy businesses at huge prices. We tend not to pay double-digit revenue multiples. One of the reasons why is that if you're the management team or board of a company in the public markets trading at 15 times revenue, you have to create a budget for next year, and that budget has to create value for shareholders. You can't create a budget that's just destroying value for shareholders.

I think one of the things you saw in 2022 and 2023 is a lot of companies promising a growth acceleration in the future. They were saying, “Things are slowing in 2023, but don't worry. It's another growth air pocket, but things are about to get better.”

Sometimes people read into that as the company knowing that growth is coming in 18 months and just needing to get through this. Sometimes they do, but other times I think they're looking at their shares trading at 14 times revenue while Microsoft is at 10 times revenue, and they're saying, “Mathematically, I can't create value for my shareholders unless there is a growth-rate acceleration.” So, they start planning for a growth-rate acceleration.

We tend to want to partner with companies and management teams that have options. I want options to create value, and I want to partner with management teams that have options. If you're in at a lower starting valuation, in my mind, you have multiple options to create value.

Ideally, you can accelerate growth. That clearly creates the most value if you're accelerating growth in a profitable way and the unit economics work. But if the world changes and the macro gets worse for your business, if you're in at a lower gross-profit multiple, you can ramp margins and get to a free-cash-flow-per-share story that's pretty compelling.

All of a sudden, capital allocation becomes a lever. You can buy back shares, and that creates value. One of the reasons we like lower valuation entry points is because I want to partner with management teams that have a bunch of options.

When they're creating a budget for next year, they can say, “I can create value for my shareholders one way or the other. I'm going to think through what the macro is giving me and what the best way is to create value for my shareholders in that macro.”

That is a luxury you only have if you're in at a lower entry valuation. It's just harder to do that at higher prices.

You mentioned 1 other thing, and I'm going to mention Remitly here.

Okay.

It's been on your podcast before, and we have a position in Remitly as well.

There is a challenge. Your question was about whether companies respond to what their shareholders are saying. One of the things that I think Remitly got in trouble for earlier this fall was that Matt had a big product day where he was pitching a growth story—a 10-year vision for how he was going to grow the business.

Meanwhile, the stock had traded precipitously down earlier this year and was trading at around 10 times EBITDA on forward estimates. There's a disconnect. When you're trading at 20 times revenue, people want to hear your 10-year growth story because that's what's in their model to create value.

When you're trading at 9 or 10 times EBITDA, all of a sudden, your investors' number-one variable in their model is not the 10-year growth story. It's what your free cash flow is going to be next year. I think one of the things that happened—and we're still thinking about this—is that there was a disconnect between Matt telling a story that was like the story you tell if you traded at 10 times gross profit, while he trades at 2 times gross profit. The narrative needs to change.

When Remitly came out with Remitly for Business over the summer, I think Matt said, “Hey, this 10x's our TAM.” I was like, “That's great, and your stock trades at 9 times EBITDA. I don't think anybody cares about 10x'ing the TAM right now.”

Yeah, but it's challenging. One of the things that we try to lead with is empathy. Matt has built an incredible business—close to $1 billion of gross profit. He is focused on his 10-year vision simply because a bunch of people happen to be trading his stock at a price that I believe is undervalued.

Why should his narrative change? I get that this is a hard challenge for companies to have, and I think Matt did a really nice job of meeting his investors where they are.

Hey, I get it. You guys are focused on incremental margins. You're focused on free cash flow conversion. You want to know what free cash flow per share is going to be in 3 years. I also have a base that's on a 10-year journey, and they've got stock lined up for years. I also want to recruit the type of shareholders who aren't just here for the path to $1, $2, or $3 in cash flow. I need to recruit shareholders who are with me on a 10-year journey.

I think different companies are better or worse at meeting investors where they are in the journey. One of the things we always told them is, you start from the bottom: What are you trading with today? Let's check the box that meets the most important questions for your valuation, and then we can build from there. But you've got to start with a great foundation.

Let me start there. I did have this on my list. Remitly, again, as you talked about, is a company I've looked at. It's been very popular on the podcast, so we're hitting it. They had an investor day last week that was pretty well received. I think the stock was up about 10% in the 2 days following the investor day.

You are in public filings, right? I went and looked it up on Bloomberg. You're the 20th-largest shareholder of Remitly, excluding some index funds and things like that. I don't think I'm crazy to say you're basically the 10th-largest shareholder of Remitly. It's not like you're the activist there, but you're also someone who does a lot of work and works with companies, so obviously they're going to listen to you.

When Remitly says, “We're going to have an investor day,” how do you work with them? Do you help craft slides for them? How do you talk to them about what you've already said—that an investor day when you're trading at 9 times EBITDA is different from one when you're trading at 9 times revenue? Are you working with them at all? What are you talking to them about?

Yeah, good question. Well, look, it starts with the fact that we have a long history with Remitly. We've known Matt for well over a decade. We were investors in Wise on the private side going back to 2018. We actually owned Wise again as public shareholders starting in 2022. So we've known the category for a while, and we've also known Matt for a while.

I can't remember if we did a testing-the-waters meeting with him before we went public, but we were definitely cheerleaders for Matt for years as private investors. That helps, because when we came in, we started building a position in the fall of last year. We've been investors here for a little over a year, and we've added since last fall.

One of the things is that I think it takes time to build a relationship. We view it as, we're going to be shareholders here for the next 3 years. We want to get to know them and build a long-term relationship. Early on, frankly, it starts with building credibility with the company that we have aligned interests and that we're not just here for 1 quarter.

A lot of that starts with sharing our work. We did a customer survey and sent the survey along to the team. We fly out and spend a lot of time in person with these companies. We view it as building goodwill with the management team. If you come in guns blazing on day 1 and say, “Let me tell you what to do on your investor day,” it's very hard to get people to listen. You first need to lay a foundation of goodwill.

We love investor days. The reason I love investor days is not because I think they're a great way to get the share price up tomorrow. I actually think the day itself is often overhyped and a trap for a lot of companies. But the 2 or 3 months leading up to an investor day is a really pivotal moment for many companies, where they're setting the strategy upon which they're going to run the business for the next 3 years.

Companies can end up having blinders on and living quarter to quarter. An investor day is a chance to widen the aperture and say, “How are things really going? Am I recruiting the right types of shareholders—the shareholders that I want? Am I telling a story? Have I communicated a multiyear shareholder-value-creation story that I feel like I can deliver?”

A lot of companies forget all of those things and live in the mindset of, “Can I survive another quarter?” We've been spending time with Remitly over the last 9 months, thinking that there was probably going to be an investor day. They have a new CFO. It starts with asking: Are you communicating well? First off, do you have a value-creation story—a 5-year plan for how you're going to create value for shareholders?

A lot of companies are laser-focused on, “Can I beat consensus for next quarter?” They don't have a plan.

Yeah.

So our first question is, what is your plan? What is the variable that determines how you think about value? How do you think about a successful year?

Our view is that we try not to go in myopically with, “Here's the Lead Edge way to do it.” We try to meet the company where it is. Our first question is, what are the KPIs that you're looking at to determine whether you had a good year and whether you're on track to create value for shareholders?

I love free cash flow per share. I think it's a great metric. If you want to say, “My goal is to maximize the free cash flow per share number in 3 years,” great. I'm with you. If your goal is, “I want to run the best Rule of 40 business,” great. I'll meet you there.

If you want to tell me, “We care all about incremental margins. We want to deliver more than 30% incremental margins while growing as fast as we can,” great. We'll meet you there. I think there are a variety of frameworks that can work.

The first question is, do you have a framework? That's important. The second is, have you communicated that framework to investors?

I think too often in software—I think software in general has one of the most brittle shareholder bases in the public markets. It's silly, because if you think about the software business model, it's one of the best business models in the public markets. It's highly recurring, you've got a secular growth trend, and these businesses—for all the discussion about AI—the secular growth trend to the cloud is still in the early innings.

There's a massive trend of growth in software spend. Ignore AI; we can get to it. That secular story has not changed, and there's still a lot of on-premises software that needs modernizing. The business models are naturally cash-efficient, so you generate a lot of cash. They don't need to consume cash to grow. These are great ROIC businesses.

Software should have the best shareholder bases, but instead we see that industrial companies are much better suited to holding through volatility. Why are we seeing these massive swings? Some of it is that the software ecosystem is so tied up with revenue, revenue beat-and-raises, and consensus numbers. That's not really true across every sector of the economy. It's really a small- and mid-cap software problem.

I think part of the problem is that companies have not done a good job. There are a whole bunch of people to blame. I think investors are to blame. We reward companies that beat and raise, so they naturally focus on it. I think the sell side encourages it.

Even today, 4 years after 2021, you see way too many companies where the sell side is putting a multiple on them. They're ascribing a revenue multiple to them, and I'm saying, “These businesses are quite profitable. Why aren't we ascribing a free-cash-flow-per-share multiple to them?” The sell side is encouraging it.

I think companies could do a better job of saying, “If I want to recruit shareholders who are here for 5 years, I can't just keep doing this beat-and-raise thing. It's not going to work forever.” You can only beat and raise so many times in a row before you have a natural blowup. You can't beat and raise for 15 quarters in a row. Mathematically, it's impossible. Consensus numbers will get too high.

One of the things we spend a lot of time with companies on is ripping the Band-Aid off. That's it—you're just kicking the can down the road. You often see companies get into the habit of beating numbers, raising consensus, and then going on the road for the next 2 months to try to lower expectations so they can beat the next quarter.

Our view is that this is 2 steps forward and 2 steps back. You end up not going anywhere. One of the things we're trying to tell companies is that it's a losing game, and you're recruiting lower-quality shareholders—more fickle shareholders.

And instead, what you need to do is say, “That’s a game that is an unwinnable game. What I want to do is tell a story that recruits great shareholders who are going to be with me along it for the next 3 years.” And that’s really around, “Yeah, tell me how you’re going to do it.” If it’s free cash flow per share, which is what I think Remitly is doing, I think they’ve done a nice job laying that foundation.

There was so much there that I wanted to talk about, but I rant a little bit.

No, no, no. It was awesome. It’s awesome. Just one of the things that I love is, if you’re doing beat and raise, if that’s what the company is doing, it’s very short-term. It’s all this sort of stuff. But what I liked about your investor day is they put their heads together for 2 months, and instead of saying, “Hey, how do we beat next quarter?” they talk about doing 3 years of something that’s actually going to deliver value.

But then I’ll call a company up and they miss numbers, and the stock went down 10%. I’ll be like, “What the fudge?” I don’t know what to tell them, right? They’ll say, “Hey, we had 1 customer delay.” I can’t tell them anything. But if they go and do an investor day and say, “Hey, here’s our 3-year plan,” now not only do you know what the plan is, but you have something you can hold them to, right?

It’s not, “Oh, we missed revenue by 5 basis points this quarter.” Now you say, “Hey, you said 3 years from now your free cash flow per share was going to be $4 per share. We’re 18 months into that process, and I don’t see a path for you getting to $3 per share. What’s going on? Do we need to replace someone? Is it me?” But now you’ve actually got something that you can hold them to that’s value-creating and not just trading every quarter.

I just love that thought of getting them to step aside and think longer term than just, “Hey, what is sell-side pushing you on? What are the traders putting you on? What are the pod shops that are trying to long or short you against something else pushing you on?”

So, we have an investment in a company called Appian, another software company, and the CEO, Matt Calkins, owns, let’s say, about 50% of the company. They’re in the process of changing their priorities as well. One of the things that we spent time with Matt on is—I said, “The narrative we use is, I have a fiduciary duty to my investors to maximize their returns.”

They evaluate me on a quarterly basis, an annual basis, or whatever, and there’s a way that they assess me. One of the things I told Matt is, “I need a way to assess you.” Growth has things that are out of your control. They sell to the government, and DOGE hit earlier this year. I can’t really hold you accountable to just a revenue-growth number because some of that is out of your control, right? The government shutdown can impact them. There are things that are out of their control.

So I said, “How can I tell my investors that I’m fulfilling my fiduciary duty if I don’t have a way to assess you, my CEO?” If you think from first principles, I have hired him. I am an owner of Appian, and I have hired Matt. How do I assess whether he’s having a good year or not?

I was like, “Look, if you’re going to change your philosophy, fine, but you need to choose a framework upon which you want to be evaluated. Set a goal, and then let me hold you accountable to it.” They’ve now released their goal: an adjusted Rule of 40. They have a certain number they’re marching up, and we can now do a performance review with Matt Calkins every 12 months: “Hey, how did the year go?”

I’m being a little bit facetious, but I think it is important with all of our companies to say, “We’re working together, and just like I have a performance review with my investors, we need to have a performance review. How was your year?” The nice thing is, I let them choose their criteria. You get to choose the metric upon which you want to be evaluated, but we need to have a metric to determine whether the business is making profits or not.

Evan, you have 8 public-company longs, and 2 of them have founder CEOs named Matt. Do you think you have any bias toward the name Matt?

You’ve got a second kid on the way. That might be the favorite of the clubhouse.

Okay, let me switch to the part of the conversation I most care about. I literally just read and come on this podcast and rant every now and then, but I read all day. People can hear that from this podcast so far. You work a lot closer with companies than I think I do. You get a lot more involved with them, and that’s awesome. I think that’s spectacular.

You sit on the Yext board. I’m long Yext there; there’s our disclosure. You sit on a public board, and you work with these companies a lot more deeply. I want to ask about some misconceptions I might have about public companies as somebody who’s just trading stocks and reading. But let me start here: You mentioned how you let CEOs set the scorecard that you’re going to evaluate them on, with metrics and everything. As you’re getting to know these companies more deeply, do you ever come to a company and think, “Oh, I like this business, but the CEO is trying to set me on revenue per share”—let me choose a crazy metric—“trying to set me on revenue per share”? Do you eventually just have to disqualify them because the CEO isn’t seeing value creation in the metrics the same way you do?

Totally. Look, one of the gating items upon which we make an investment is: Is it a good business? Is this a business that I would like to own for the long term? Could I own it in perpetuity? Could I put it in my kids’ retirement? Is it a high-quality company with recurring revenue? Can I see a path for the company existing for a number of years? We’re very focused on business quality first.

Second, though—which is a huge gating item—is this a management team that I can work with? We think about it as the world being uncertain. COVID could happen again. Who knows what’s going to happen? Is this a CEO, CFO, and board where I believe we have the right team and think similarly about whether, if something crazy happened, we would make all the same decisions?

I try to be really mindful that there’s a lot I don’t know. There’s uncertainty in businesses. We can underwrite growth, but it may not happen. It can happen. Is this a team that I trust to make big decisions in moments and times when I may not have a say? That’s really a gating item for us.

We view the world similarly, so we end up self-selecting the kinds of teams and boards that we want to work with. That’s not to say that we’re always right. Sometimes we’ll have a disagreement. We don’t have to disagree on everything. Capital allocation is something that we spend a lot of time on. Companies can disagree with us on it, and I love those disagreements.

Your roughly 3 largest positions—Yext, Clearwater, and Remitly. It’s not lost on me that all 3 have active share repurchases going on. If you looked at the growth of your SMID-cap tech holdings, I’m going to tell you that you couldn’t pick 3 random ones and hope to have more than 1 with active share repurchases. So it’s not lost on me that, yes, they can assess it, but clearly these companies are, at least in my opinion, listening to you a little bit if all of them are doing this.

What matters a lot to me is that companies are thoughtful around a lot of these topics. They’re thoughtful around how they structure executive compensation and the inevitable consequences that come with any plan—the pros and cons—how they think about stock-based compensation, how they’re managing their share count, and, third, capital allocation. Do they have a thoughtful policy?

We can disagree on what the minimum amount of cash a company should run with or what the right amount of leverage is. As long as companies have a really thoughtful plan that they can articulate and that we can debate, I’m happy to work with you.

Some companies are like, “We have an executive compensation plan. It rewards revenue growth. Don’t worry about it.” To me, that is harder to work with than, “I’m okay if you want to reward revenue growth in your plan, but there are consequences to it. Let’s have a conversation about the positive and negative externalities in each plan.”

We spend a lot of time on this, but it starts with: Is there a team that’s really thoughtful and thinks these things matter?

And that’s what companies do, and that’s fine. They’re just not externalities. As a public-company investor, one thing that I’ve been hit over and over again with is externalities and incentives. I want to talk a lot about your insight, but how much have you—I'll give you one on externalities.

You mentioned revenue growth, which is one of my least favorite things to reward people for, because then all of a sudden you see them investing in growth at any cost—bad acquisitions. But ROIC in a software business, where ROIC is naturally really high—I mean, I can't remember the exact company, but I've had examples of companies where they get rewarded for higher ROIC, and I'm like, “Guys, your ROIC is 50% plus. I want you to grow at all costs. I don't care; just grow.”

And they're turning down 30% IRR projects because they would dilute their ROIC. So that's another example. I mean, they're turning down hugely accretive projects. How have you found, when you're on the inside, how those externalities or the incentives play with management teams and everything?

Yeah, it's interesting. Clearwater Analytics, where we have a position, has an exec comp plan: their PSUs vest based on revenue growth targets. And you're right—in theory, I would say, “That's weird. There's no profitability component to it.” The reality is that Clearwater Analytics is a business that has a really efficient sales cycle, right? Sales and marketing, relative to comps within software, is a very low percentage of spend. It's a product-driven sales cycle, not a sales-and-marketing-driven sales cycle.

We've chatted with the board about this, and I probably would tweak the plan if I was on the comp committee. But they were really thoughtful around, “Hey, in any year, what I really want to reward is bookings growth,” because that business already has very high incremental margins. It's already a very, very profitable business, and sales and marketing is a relatively small and fixed percentage of our opex budget.

We do want the management team hyper-focused on revenue growth because our view is, if this can be a high-revenue-growth business, the margins will inevitably come. I think that's okay for a business like Clearwater that's very much a product-driven sales model. It's probably less okay for a business that's a very sales-and-marketing-driven sales model.

The reality is, these things are nuanced. We're okay with the nuance. What was important is that they were pretty thoughtful about it. They were like, “Look, we get that there's a consequence here, but we'll deal with that consequence and we'll make sure that the margins are there, and we understand the externalities we're creating.”

Speaking of nuance, as you know, Evan, I obsess over these filings, right? I read every word. I look for changes from earnings call to earnings call in how people talk about things. I look for, “Oh, this director is selling stock for the first time in 10 years. Oh, this director is buying stock.”

You've been on the inside. You work with these companies. How much, when I'm looking for every little signal, am I picking up random noise versus these things being very intentional?

The answer is both, right? I'm sure that there are times when companies are doing something and they're very aware of what's happening behind the scenes. Other times, a board member or a CEO is building a house or whatever, right? I think people sometimes read too much into the exact timing of things. We all make random decisions in our lives; we're not perfectly rational actors in everything we do.

And remember, one of the things that we spend time thinking about is the major shareholders in a business—the major private investors in a business once it's gone public. One of the things that I spend a lot of time thinking about is what return profile they're sitting on.

If you're a venture guy, you've invested in a business, and the company's going public, if you're sitting on a 10x return on your initial investment, your decisions about when to sell and how to sell are very different than if you're sitting on a 2x return. It shouldn't be that way, but the reality is that anything in private equity land above a 3x return is a home run.

People sometimes are like, “Look, whether it's a 10x or an 8x, it's going to go down in history as a home run, and I just need DPI. I need to return cash to my investors.” People forget sometimes that they may not have a view on what's happening in the next quarter, and they may not be signaling that something nefarious is happening. It may just be that they're about to raise a new fund and they need DPI. They need to show a return.

There are a million different factors, and sometimes people think that everyone is feeling the share price as much as you are. One of the things we look for is, for the people who are buying or selling, what is their overall return profile? The second one we look at is what percentage of their economics it represents—is it a big position for them?

We talk to companies all the time. We manage a portfolio of 10 names; you should think about it as roughly each position being 10% of my holdings. That's a lot, so I live and die by every company; they all matter to me. But if you have a very small 2% position in something, your decision process around buying or selling can be very different based just on the amount you hold.

Dude, it drives me absolutely crazy. I'll talk to companies and I'll be like, “Hey, I think this board doesn't own enough stock, or it could use some financial expertise.” And they'll be like, “Oh, we've got that hedge fund guy over there. He owns 3% of the company. We're buttoned up.”

And I'll be like, “No, you have that hedge fund guy over there. This is a 10-basis-point position in his fund.” He does own 3%, but it's because his fund is huge. He sits on your board and collects $150,000 a year. I know for a fact he is your worst board member because he views this as kind of his bond portfolio and his ability to tell people, “I am a public company CEO.” He does not care what happens to this company. All he cares about is that they don't go bankrupt and that you maintain them.

It drives me crazy. I'm not saying every board needs to consist of 9 board members, with each board member owning 10% of the company or something, because you need diversity of skills and all that. But the worst board members are financial board members who have no economic exposure, or whose economic exposure relative to their net worth is extremely limited. They're absolutely the worst. And it's one of the red flags when I look at companies.

Yeah, I think it's fair. Look, it is hard. Everyone wants to be on the board of a large, well-run S&P 500 company. It's hard to build a good board if you're a small public company, particularly one that's struggling a bit or where it's not smooth sailing. It's very easy to recruit people to the board of Datadog and the winners, but it's hard if you're a smaller business to recruit a good board.

I think the expectations are also really high, where people want to fill their boards with grizzled veterans who've done it before. And the problem is that grizzled veterans who've done it before led big businesses. The reality is, they don't necessarily want to be on the board of a small public company that's struggling in the public markets. And I'm not sure that, for them, the $150,000 or whatever it is they get paid is enough.

I think U.S. corporate governance overall is fantastic, and I am a big bull on capital markets in the United States. I think they're fantastic, but I think it is a challenge in smaller businesses to recruit a great board. We spend time on it too: What is the quality of the board? Are there a couple of people who are really engaged? Are there checks and balances with the CEO?

It's so interesting because, in the private markets, your large shareholders—your large venture and growth investors—are really, whether you're on the board or not, the CEO's brain trust as he's thinking through big decisions. We see it: My partners on the private side spend a lot of time talking to their CEOs. Even if we're not on the board, we're a small shareholder on the private side, and we have conversations all the time: “What should I do? How should I manage this?”

What's interesting is, all of a sudden you go public, and many of those investors who are really kind of the mentors to this founder CEO put their guards up and say, “I no longer want to talk to you because I don't want MNPI, and I need to get out.”

It's really lonely. All of a sudden, you're asked to run a public company, deal with quarterly earnings, and you've got all of the people who advised you for the 10 years that you were private now no longer wanting to talk to you. Who wants to talk to you? You've all of a sudden kind of cobbled together a board, which can be challenging, and then you have a bunch of hedge fund investors who really just want the shares to go up next quarter, right? They're yelling ideas in your ear.

So, look, I think it's hard to be a small public company. I have a lot of empathy for our CEOs.

Let me step back. At the beginning of the conversation, you mentioned that a lot of the companies we're investing in are tech companies that have hidden air pockets. I think one of the things a lot of investors find is that value investing in tech companies is very difficult.

A lot of times, somebody will email you and say, “Hey, look at this tech company. It trades at 6 times price-to-earnings. Let’s go.” I’ll say, “Yeah, it trades at 6 times price-to-earnings because they’re dying. Facebook is taking all of MySpace’s share. You can buy MySpace at 6 times trailing earnings, but earnings in the future are 0. You’re buying at an infinite multiple.”

When you’re investing in these companies that have hit an air pocket, how are you determining, “Hey, this is an air pocket,” versus, “As I said, this is value investing in tech, and this is dangerous”? The company trades cheaply because it’s dying, and we’re buying the proverbial melting ice cube.

Yeah, this is a great topic. I think value investing in tech is challenging for a couple of reasons. One is what people think is cheap in tech. There is a long distance between a cheap revenue multiple and a cheap GAAP P/E multiple.

One of the challenges that you see in tech is that if the revenue multiple of a company was high and it’s down 50%, now the revenue multiple is lower. Sometimes, if you live in revenue-multiple land, you’ll say, “This is trading at a discount,” but you can still be years away from a cheap GAAP P/E multiple. That chasm of what is cheap within tech is wide, and it’s much wider than in other sectors, where everything trades on a kind of GAAP P/E multiple. In more traditional sectors, a lot of businesses trade on a GAAP P/E multiple, so what’s cheap is fairly uniform between companies.

You can end up calling the bottom on things that are way too early within tech because you’re used to valuing revenue multiples instead. The second thing that’s hard is that we started this conversation by saying tech is one of the best business models out there, and I think that’s true. It’s one of the best business models because there’s secular growth and great cash-flow dynamics.

One of the challenges, though, is that there’s a lot of competition. One of the best business models breeds a lot of competition, so, generally speaking, there are too many software companies serving the same end markets.

Yep.

So, that’s challenge 1. Challenge 2 is that it’s a dynamic space. If you’re not winning, all of a sudden you can be falling behind.

To your point, you could say, “Look, if something is cheap on whatever basis you want to use—cash per share, whatever—is there a terminal value?” I think in some other sectors of the economy, there’s less competition and less terminal-value risk, so it’s easier to say things are cheap.

We don’t think of ourselves as value investors. We’re trying to buy the best, greatest companies. We’re buying growth businesses for the most part, and we’re buying businesses that have dominant market-share positions in what they do. We’re trying to get in at a value price, but we’re trying to buy winners in big markets. We try to find them when there’s been some air pocket in the story.

What do we look for? The challenge is determining what is a business that’s secularly at risk and what is a business that just has a hidden air pocket, as I use the term. It really comes down to talking with customers. Are they selling something of value to customers that they find a real ROI in, and are they uniquely capable of selling something of value to their customers?

If you really think about the core principles, the question is whether they’re uniquely capable of selling something of value to their customers. We’re pretty myopically focused on that. If the answer is no—either it’s not obvious that there’s an ROI for their customers in what they’re selling, or there are 7 companies all selling the same thing and it’s really hard to tell the difference—those are hard fits for us, mostly because our view is that the perpetuity value can be at risk. That’s the core of how we avoid those value traps.

One off-the-wall question: We’re talking on December 17. Clearwater Analytics—I mentioned it; it’s public, and on the public 13F you can see that it’s probably the 3rd-largest position. They’re in lots of deal rumors right now, right? I can’t remember who the first private equity firm was that was going to come in, and then Thoma Bravo came in and lobbed in a bid. There are a lot of deal rumors right now.

How do you think about investing in one of these potentially great growth businesses that has hit an air pocket, and then a private equity firm comes along and lobs in a bid at a premium? Let’s just say it gets taken out—I’m not even going to speculate on a number, and I’m only using Clearwater as an example. I’m not saying you’re specifically referring to them.

How do you think about, “Hey, it’s great. I got a nice premium. I got a nice multiple,” versus, “The private equity firm sees what I’m doing. They’re going to slap some leverage on it, run the playbook I want, and probably IPO it at 5 times in 3 years”? By the way, you mentioned 3 new ideas a year. That’s a new idea that I have to replace, and that ain’t easy.

How do you think about that process? For me, if I’m trading the crappy companies I run into, I’m like, “Go with God.” But for you, I’m wondering how you think about that.

Yeah. Look, we spend time with our management teams on this early on, when we’re building positions. One of the things we spend time on is whether we have alignment that no one should aspire to run a Russell 2000 company for the next 10 years. The reality is that sitting as a small public company forever is not a great way to create value.

If you’re a small public company, ideally you have 1 of 2 aspirations. One is, “We’re on a path to becoming a big public company.”

Yep.

The other one is, “We’re public today and we’re trying to create as much value as we can, but if we’re not going to be a large company—if we’re not going to be in the S&P 500 in the future—then we probably shouldn’t be public forever.” That’s okay, but my job as Mr. CEO is to figure out how to create as much value as possible and find the right home for our business.

We’re okay working with either camp. Too often, you see CEOs who don’t even think about it. They’re just like, “I’m just running this business.” The reality is that I think you should be more mindful: If you’re a small company, there are 2 paths. There’s a third path, which is just sitting in the Russell 2000 for a decade, but that’s a path I don’t want to partner with.

That is the best answer I think I’ve ever heard on that thought. You said it, and it makes it click for me. I love that answer. I absolutely love that answer.

So then let’s talk about it. We have companies in our portfolio where I hope they can stay public forever. The reason is the cost of capital. I think they’re leaders in huge markets, and I think they can make great S&P 500 companies.

If you’re in that bucket, where you could be a great S&P 500 company, the best ways to create value are either that you get an offer from a strategic buyer at a price that’s crazy, in which case, great—you should take it. Or, the nice thing is that in the public markets, the cost of capital in the S&P 500 is around—I don’t know what you want to say—8%.

Staying public should yield a valuation that is a premium to what my cost of capital is, and also a premium to what private equity’s cost of capital is. A lot of our winners over the years stay public, and they rerate to prices at which I can’t underwrite an attractive 20% return. By the way, neither could a private equity fund, because the cost of capital in the S&P 500 is lower. That’s great.

If you’re not in that camp and you’re not going to be an S&P 500 company, first off, I think some people perceive that as a negative, and I’m like, “No, no, no.” Building a great small company, or even a medium-sized company, is heroic. The smallest company in the S&P 500 is $20 billion. Building a $10 billion, well-run company—that’s heroic.

But you should think about where and when you sell the company. I think it should be a strategic conversation around how to get the best possible price, understanding that a lot of my investors have a higher cost of capital, there’s a time value of money, and it’s nuanced.

I think selling a company when you’re going through turmoil—when you’ve lost a big customer, you’re doing a CEO transition, or whatever it is—is probably not the right time to do it. Selling in uncertain times, I would argue, rarely creates the most value.

And vice versa, though. But if you've got a great plan, I think that running a sale process and finding a home, if you're not going to stay public forever, can create a lot of value. If there isn't a strategic bid, then the bid is probably from a financial buyer. So, again, the answer is nuanced. I'm not answering about Clearwater specifically; I don't know what's going to happen.

Look, I think Clearwater has the potential to stay public. I would argue Clearwater is a business that could be a large S&P 500 company. Anytime the private markets kind of steal a potential S&P 500 company, it's a bump because we need great public companies. And I think some of these could be, but there may be things that I don't know, right? There may be different things in the business that I'm not aware of. So, I don't have a strong answer, but that's at least thematically how I think about it.

Let me hop somewhere completely different because we're well over an hour. I've really enjoyed that. Let me ask you one thing: most of my podcasts are single-idea focused, and my favorite question is, “Hey, the market's a competitive place. What are you seeing that the market's missing that makes this a risk-adjusted alpha opportunity?”

You guys, Lead Edge Growth—I'm just going to describe you as growth tech into air pockets, right? Concentrated. What do you think Lead Edge's edge is when you're doing investments? What do you think your edge is that makes your investment, your process, or your style a risk-adjusted alpha opportunity?

Yeah, good question. Look, the alpha—the edge that we have—is that we're attached to Lead Edge, and that gives us 2 very valuable things. One is that we have a lot of history with these young public companies. A lot of public investors, the day they go public, have only seen a couple of quarters of performance. Many times, we get to evaluate them based on many years of performance, sometimes decades of performance. We've evaluated the businesses over the years. That just helps. We have a long history of these businesses, and so we can put these air pockets, when they occur, in a 10-year context instead of in a 1-year context.

The other one is that you see a lot of investors these days claiming to be constructive activists, right? Activist but constructive, right? That's a popular term, and that is what we say as well. The challenge is that, to be a constructive investor, you need a relationship with the team, you need a relationship with the board, and you need a relationship with the leadership team. Building relationships just takes time. It is a time-intensive thing.

If you're going it alone and trying to have influence on businesses, the amount of effort you have to put in to start building those relationships, to get even the ear of a team, and to get them to listen to you on capital allocation—I think it's a huge amount of time. We benefit, as the Lead Edge public team, from inheriting relationships.

Yeah, that's helpful in a variety of ways. Some of them are just companies we've evaluated when they were private, so we've seen them that way. Others of them—I'll give you an example. We talked about Clearwater; I'll give you an example. We were interested in Enfusion on the public side, one of the businesses Clearwater bought. We had a small position in Enfusion when Enfusion was acquired earlier this year by Clearwater.

We never spent time with the Clearwater team, and so I didn't know them. Clearwater's based in Boise. We've got a number of LPs that are based in Boise. So, the moment that deal happened, rather than email investor relations and go through the channel, I emailed our LPs in Boise and said, “Hey, do any of you guys know the Clearwater team? They just acquired one of our businesses. We've respected Clearwater from afar, but I don't have a relationship there.”

I said, “Look, I'd love to come to Boise and spend some time. Is there any way you can make a warm introduction?” We ended up not even getting to Boise, but we did get a warm introduction from L.B., the CFO, and it just enabled an easier conversation. I think that is a little bit of a head start in building a relationship and having some influence. When we can talk to them about executive compensation and the structure of it, we're coming in as a friend through an LP rather than just a random investor-relations email.

Perfect. Let me come back to one thing we said at the beginning. I just want to make sure, because it's like the headliner—it's probably where I'm going to leave the podcast. I just want to make sure we hit it. We talked about air pockets, but we also talked about AI and software and this huge fear that—

I just want to make sure we fully kill the piece. People are scared about AI, and I think for some industries and businesses, rightly so. I think people who think AI is going to replace McKinsey don't really get the point of McKinsey. But there is a lot of software. As a personal example, all my fitness trackers—I unsubscribed, and I don't use them anymore. I just toss everything into ChatGPT and use it.

Now, that's a personal use case, but there are going to be things in software and business that get replaced by it. So how are you thinking about the AI risk? It's definitely hit a lot of software stocks. It's created value. It's created air pockets, but there are going to be some terminal zeros from it. So how do you think about the AI risk or opportunity?

Yeah. First off, I don't know the answer. I think that we are in the early innings of what will be a many-decade-long story. The impacts will be profound. It goes back to first principles of companies and their relationship with their customers.

I'm going to talk about Workday as an example. We don't own it, but I'm going to use it as an example. If you're deeply embedded with your customers, you've built a lot of trust over years and years and years, and you've got this really sticky, fundamental relationship where you're deeply embedded in everything your customers do, the reality is that those relationships just take years to build, and they will take years to dismantle.

Now, if you think about what Workday is—your HR system—I think of it as 2 things. There's a system of record, which is kind of like a database that plugs into a million different things. That system-of-record database that plugs into different things is not going away. Companies will still need a database and all this.

What will change, what could change profoundly, is the front-end way—the user interface through which we interact with that. I don't know how that's going to change. When a computer mouse came out, everything about the user interface fundamentally changed, and it's hard to even envision what it was like before that.

That was my first thought. It's hard to envision using a computer without a mouse.

I don't know. But what I would say is Workday has—they don't need to be a first mover here. People are going to come up, and there are going to be challengers to HR systems. They're going to exist. But Workday has such an embedded relationship with its largest customers that no one's going to replace those overnight.

The reality is that Workday has the benefit of an enormous amount of goodwill and relationships that it can leverage to say, “Look, we're going to have to update our front end.” The risk would be that if they don't, people are going to build an AI shell that sits on top of it.

If you go back to banking software, core banking software—Fiserv is so sticky it didn't go away, right? Still today, every bank is run on the same Fiserv general-ledger systems as they were 30 years ago. But they didn't modernize. So what happened is people built a shell of a kind of user interface—a SaaS user interface—which a lot of our businesses, where we've invested in a bunch of banking software, sit on top of that shell.

That's the risk. First off, I don't think the risk is that Workday is going to be totally disintermediated. Maybe. But the risk is that you get layered. But I also think, unlike that, the reason Fiserv didn't modernize—and I'm not picking on Fiserv—is they're not one piece of software. They're hundreds of different pieces of software that every bank runs on, their own custom thing.

It will be much easier for Workday to modernize than it would be if you go back to the last transition from on-prem to SaaS, because Workday is already multi-tenant, single-instance software for the most part. So it will be a lot easier for them to modernize and not get layered.

But that's the big debate to me: there's going to be a new user interface, and are you going to get layered? And then, for some businesses—for businesses that are, I'd call, the highest echelon of quality, where you're a system of record—that's great.

I think the odds are very good that these new AI user interfaces are not even going to bother trying to change the core system. In the same way, by the way, none of the modern banking software businesses have gone after Fiserv. If you go to edtech, there's an SIS system, and no one is going after modernizing the SIS system. The reality is, if you're so embedded as a system of record, no one wants to displace you. It's too painful and too slow, and that's a really nice place to be.

I think you have a bunch of those deeply embedded systems. The question is, there's going to be a new user interface: are you going to capture it, or is someone going to capture it on top of you? It comes back to, first off, are you really as sticky as you think you are?

One of the problems that I think a lot of software investors have is that they look at gross retention as a definition of whether you're sticky, and I don't think that's the right metric to look at. Gross retention is one metric, but what really determines stickiness is—I talk about Oracle-level sticky—what's sticky to me is when you've raised prices every year, your customers hate you, and no one still leaves. That's sticky.

If you've gotten to really good gross retention, but the way you've gotten there is by offering a really low price and excellent customer service, you could be ripped out, right? It goes to the unit economics of, structurally, how sticky are you? If the answer is that you're structurally sticky, I think you've got a couple of years to try to build that AI user-interface layer on top. I think that can be a real opportunity for a lot of businesses if they pull it off. I think it's going to be profound in many areas, but you've got to win it.

If I can just—I mean, you were at ValueAct. I think the other interesting thing is the SaaS, the on-prem to SaaS switch, and everybody switching to SaaS and subscriptions. That was hard, right? Investors didn't know how to model that. Companies had to look forward, and they had to take a hit.

They probably needed a big shareholder in their shareholder list who was supportive and saying, “Hey, go take this pain because it's going to result in a better long-term business.” With the AI risk, all the stocks are screaming, right? They're down. All the investors are saying, “What's your AI strategy?”

So yes, you might lose in AI, but one thing I kind of take comfort from is that there's not a single public company CEO in software—or at least none that I know of—who's just like, “AI is not a risk,” right? They're all at least aware. Their investors are asking, and they're thinking about it.

If they say, “Hey, we need to increase tech spend by 2% of revenue this year to accelerate the AI switch,” none of their stocks are going to take a hit from that. I'm a little relieved because it's so obvious, and the pain is so apparent, that they can make the switch. Whereas in 2015, if you came out and said, “Hey, this software we sell for $500 a seat, we're going to switch it to $30 per year,” stocks were tanking, right?

A lot of them were saying, “Hey, this is a much better business in the long term.”

I'm totally with you. Oh, by the way, the gross-margin profile of that new user interface may be very different.

But again, I think investors know that if Workday added a new revenue stream—AI agents—that was additive to the core system of record and came in like that, I think people would be thrilled and would be happy to understand. We already understand that professional services are lower-margin, so I'm not worried about that. I think we can manage through that.

Part of the problem, though, is that everyone is expected to show progress on AI immediately. For a lot of these big enterprise software systems, we're still early in the actual buildout of AI products. But you're expected to show progress on a quarterly basis.

The reality is that for a lot of these segments of the economy, we're just not there yet. The challenge companies are facing is that they're being forced to either say, “We're not there yet. There's nothing on AI quite yet in our sector.” That's not a very satisfying answer for investors. Or they have to play up this AI thing when it's a little bit of an emperor-has-no-clothes situation. There's nothing—it's not quite there in the numbers yet. Both of those are really challenging. It's a lose-lose.

That'll get better as we work through it. I think it will be real, and I think there will be opportunities. I think you'll start to see it, but we're in that early phase where investors are really anxious to see progress, and at the enterprise level, I think we're still early in the days of seeing progress.

I can keep going, but we're starting to run up on time. I just want to take a second. I think we covered a really wide range and hit a bunch of different things we should be talking about. What are the takeaways you want the audience to have?

No, this is fun. I appreciate the time.

I appreciate you hopping on. We're going to have to do it again. I've got Nick, your analyst, who put us in touch. I've got a lot of respect for him. Every time I've looked at a growth tech company, if I had listened to his words of wisdom and the risk factors he identified, I'd be a much richer man. I've got a lot of respect for him.

I appreciate you coming on. We're going to have to do this again in the near future, and we'll just go from there.

Awesome. Thanks so much.