Yet Another Value Podcast - Investing in growth tech with Lead Edge Capital's Evan Skorpen

Episode Date: December 22, 2025

A wide-ranging conversation with Lead Edge Capital's Evan Skorpen talking about applying a concentrated, long-term strategy to growth tech investing. Key topics include capital allocation, executive incentives, and investing in "air pockets."[00:00:00] Podcast and guest introduction[00:02:59] Lead Edge strategy overview[00:07:16] AI’s impact on software[00:13:32] How CEOs react to markets[00:24:29] Investor days and messaging[00:30:40] Remitly’s capital allocation shift[00:36:09] Importance of long-term KPIs[00:44:07] Aligning shareholder and board goals[00:46:37] Incentives and externalities discussed[00:51:17] M&A risk versus growth[00:57:49] Lead Edge’s unique investing edge[01:01:53] AI risk to software moatsLinks:Yet Another Value Blog - https://www.yetanothervalueblog.com See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimer

All right. Hello, welcome to the yet another value podcast. I'm your host, Andrew Walker. Today's podcast, we have Evan Scorpon on from Lead Edge Capital. Evan is, you're going to hear it. This is a different podcast, but he is a really, really thoughtful investor. He practices more growthy tech investing, very concentrated. As I'll say several times through this podcast, their 13F is public. You can go look. It's eight to ten positions, quite concentrated. Look, I just think he's very thoughtful, and we're going to talk through a lot of things. We're going to talk through growth tech investing. The reason he came on the podcast, we were kind of talking about, hey, you know, a lot of software has been crushed by this AI thesis. How does AI affect tech? How does

AI affect software? We're going to talk about, hey, Andrew, you're just a dumb, dumb, who reads public market filings all days, and every now and then hops on a Zoom and talks to himself on a podcast. Evan sits on a public company board. Evan works with a lot of companies, lead edge invests in a lot of private companies. How do, you know, somebody, with more of an internal view? How does he work with companies to create value? What are some common misperceptions among more like kind of stock jockey types like me on companies? What they're signaling when they put out things, how they're thinking about creating value, all sorts of stuff. So I think you're really going to enjoy it. We're going to get there in one second. But first,

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Evan Scorpin from Lead Edge. Evan, how's it going? Hey, it's good. How are you? Congrats, by the way, on our fatherhood, second fatherhood. Second fatherhood. You're joining me in the near future in second fatherhood, aren't you? My wife is due and met.

May the fourth be with you. I like that. I hate to tell you, but welcome to hack, buddy, because the sleep is out the window the moment the second one comes. Oh, yeah. Anyway, I'll disclaim having a second one is hard, but another disclaimer, Evan is here. We're going to talk today about more wide-ranging conversation,

but we have one portfolio position overlapping Evan sits on a public board, and he files a 13-n-f. We're going to talk about it. So just keep in mind, we might have positions, nothing on this podcast investing advice, all that sort of stuff, all tried to disclaim as different names pop up. But Evan, anyway, the reason we're having you on is you and I were shooting emails across and we were just talking about random things and we wanted to hop on and talk for 60 minutes about random stuff. So let's start here.

Your 13F is public for people who don't know lead edge. It is eight positions, though given one of the positions is like a 20 basis point position, we can round it down to seven. So you practice concentrated growth value investing in names that I've had on the podcast. I think a lot of my listeners are going to be familiar with or interested in. You know, there's Clearwater Analytics, there's Remitly, all sorts of stuff. Before we dive into all the different things we were to talk about here, I just want to toss it over to you. Do you want to kind of frame lead edge and kind of your concentrated style of investment? Yeah. Thanks for having me. I appreciate it. Let me send a moment just to orient the conversation for folks.

I joined Lead Edge eight years ago now, 2018, to build up the public harm. Lead Edge is a known entity as a big established growth equity firm. So invests in growing Internet and software businesses, known for investing on the private side. What differentiates us is if you go back to the founding in 2011, Leedage spent a huge emphasis on building an LP network of individuals. And so today, we have over 750 LPs, more than half the capital, all of Ledge kind of parent company comes from individuals. And it's an incredibly powerful network for us where, you know, we're very well connected within the tech ecosystem.

We, starting in 2018, one of the things we realized this is that the venture community views the public markets as a place to get liquidity. And you see a, you know, you see the venture community send to these companies public and it is hard to be. a young public company. I came from Value Act before where we're kind of known as a long-only activist fund, working kind of behind the scenes with a private equity in the public market's mindset, trying to make chunky investments concentrated long-only. And they spent their time on large businesses. What we realized is, is that same toolkit could be brought to the world of kind of young, growing tech businesses. And it's challenging to be one of, you know, to go public as a two or three billion dollar company. And so we were able to find, you know,

What we're looking for is great companies, great management teams, aligned management teams, but we kind of spend our time looking at companies where there's been some sort of air pocket. Valuation has become dislocated for one reason or another. We'll build a position or average hold periods are about three years. We own 10 stocks at a time, so kind of think of us as three new positions a year. And it's really that. Companies that there's been this air pocket evaluation, we can build a chunky stake, work behind the scenes with the manager team to hopefully get the story back on track.

Yeah, so that's us. Hopefully it's a bit of kind of color on who we are. That's perfect. Let me jump off. I was going to save this for later, but let me jump off here, Air Pocket. You mentioned companies that run into an Air Pocket. And this year, you know, we're recording this at the end of 2025. This year has been a big year for Air Pockets on anything tech related that is not directly AI or maybe crypto, but really AI, right? If you're not AI, there's the software is dead, all these types of narratives. So I just want to start there, I guess. Like, how do you think about the, I know as I say this,

I realize we said we're going to save this for later, but let's start here. How do you think about the AI is dead narrative for software? And like there's been a almost air pocket for 85% of the tech universe, especially the small and growthy tech universe. How do you think about investing in that in the like AI rapidly evolving world? Yeah. It's a great place to start.

This is a great place to start. I want to start. I think that there's a couple of things you're seeing within. We're really, let's talk about SaaS software to start with. We spend a lot of time in SaaS. It's not all of us, but we're kind of, let's target that ecosystem first. I, if you go back in time, there is a all of these businesses have an evolution from early on their growth investments and the

decisions to make is really 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 like there's kind of one lever and the lever is we're trying to build the best products we can and we have to describe how much gas do we put in the engine? And you then get to a point where, and that is, honestly, the VC ecosystem, there are typically investing companies that are at that stage. And it's like, look, there's a good product. How hard do we hit the gas? It's a debate to be had. Should we be running in money losing? Should we be running at break-even profit? Like, we can have that debate. There is a awkward adolescent phase in all SaaS businesses where the business is naturally maturing.

growth has come down. It's no longer a hypergrowth, 20, 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 kind of profitability. We can talk about it as profitability for cash flow per share or gap EPS per share. And there's debates to be had. But either one, you're not there yet on a free cash or EPS basis. But you're still early in the growth, margins are ending. It is really hard to navigate in that moment in time. you're, first off, you're going from, instead of just having one level to add value, which is how much do we push on sales marketing, you all of a sudden have how much to invest

in other things, how do I rent margins, do I show a linear margin progress, do I show kind of a step change margin progress? There's capital allocation. When you're a money losing private business, you sit on a mound of cash for a rainy day fund. Well, all of a sudden now, you're a profitable business. You need to have a capital allocation philosophy. and the idea of having a rainy day thumb maybe doesn't make sense

if you're now a profitable business and so you have to totally change your capital allocation philosophy often as this is happening also you're going public so you have employees that are thinking about that as an exit opportunity and so you've got turnover on the exact team

it's hard like let's just start with like it is a challenging moment in a lot of businesses evolution if you go back to 2020 pre-2020 what you saw a lot is that some businesses had just enough growth that they powered right through

the software adolescence and they kind of got to maturity just because the growth was so powerful they power to you saw lots of businesses actually pre-2021 stumble and what inevitably happened is that there was a the supply demand environment intake privates was such that there was a lot of people desiring to take companies private not a lot of public companies for sale. And so any company that was in that awkward adolescent phase, you could kind of waive the white flag and you could sell the business. And it was relatively speaking, not as hard to sell the business at a good valuation. What's happened today, one of the things is I think people put a lot of people are trying to correlate the challenges in SaaS with AI.

And I think there certainly is some correlation. But there's a fair amount of it. that is just uncorrelated and what really is happening is that the escape cause to sell to private equity is no longer there or it's not there as there as it's less of a it's harder to get a deal across the finish line. And so you're instead seeing a businesses kind of struggle to this awkward adolescent phase in the public markets. And that's just a very different skill set on the management teams. It's a whole different thing. And so I think we often are kind of trying to say what's happening to SaaS is all AI. I think some of it's AI, but some of it's that like we're forcing these businesses to grow up in the public markets. And it's challenging on a young founder or a

young founding team to kind of navigate that transition in the world markets. And I think some of it's just the maturation of their categories. And we're kind of being able to force to do that as a public company. So one quick thing there. And this might transition us nicely to working with boards and everything, but, you know, one CEO that we have in common that we both know, I just remember they said they were doing like a retrospect of the past five years. And they said, look, during 2021 in particular, it was growth at all costs. The market was rewarding, rewarding companies for growing. And we were kind of, you know, the music was playing and we were dancing. We were growing and we might not have been really looking at, hey, are we growing profitably? You know, are we spending

$1 of marketing costs to get, you know, more than $1 of after-tax free cash flow, net present value? Or in some cases, are we spending $2 of marketing costs to get $1 after-tack? But that's what they're saying. So I want to ask, when you're working with these companies and they're kind of a public market company, how much are they responding to the signals that the market is, that the stock market, their literal public price is saying, right?

If the markets were in growth, are they just thinking way more growth and then when the market pulls back because the Fed increase in the rates, are they all of a sudden thinking, oh, now is the time to cut costs and get cash flow? Or how much are they thinking counterstically? Because it does strike me that every company has kind of followed the same trend over the past four years, right? Interest rates go up, meta's year of efficiency, everyone's doing year of efficiency. AI, everyone's rushing into AI. So I want to ask you, like, how much your company's thinking more holistically about the process?

a good question uh look there's no one answer i think right like i think every company has a different thing um one of the things that we often um we tend not to buy businesses at huge prices and one of the reasons we tend not to buy things at huge prices is uh you know like double digit type revenue multiples we tend not to pay and and one of the reasons why is if you're a manager team or a 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 like destroying value for shareholders. And so inevitably, I think one of the things you saw in like 22 and 23 is a lot of companies promising a growth

through acceleration in the future. They're like, ah, things are slowing in 23, but don't work. worry, it's just a, let's use the air pocket word again. It's another, it's a growth air pocket, but things are about to get better. And I think sometimes people read into that as the company knows that there's a growth coming in 18 months, just they need to get through this. And sometimes they do. But other times I think it's their, they're looking at their shares and they're trading at 14 times revenue and Microsoft's at 10 times revenue. And they're like, look, like, mathematically, I can't create value for my shareholders unless there is a growth rate acceleration. And so, Okay, like, let's start planning for a growth rate acceleration.

We tend to want to partner with companies. We want to partner with management teams that have options, right? I want options to create value. I want, like myself, I want, and I want to partner with management teams that have options. And if you're just in at a lower starting valuation, in my mind, you have multiple options to create value. You can ideally accelerate growth that by death, that clearly creates the most. value. If you're accelerating growth in a profitable way, right, the unit economics work,

that adds the most value. But if the world changes and, you know, the world changes somewhat, the macro gets worse for your business. If you're in a lower gross profit multiple, you can rent margins, you can get to a free cash flow per share story that's pretty compelling that way. All of a sudden, capital allocation becomes a lever. You can buy back shares. That creates value. So one of the reasons we just like lower valuation entry points is because I want a partner with manager teams that have a bunch of options. And so when they sit there and look and they're creating a budget for next year, they can kind of, they have an ability to say, I can create values from my shareholders one way or the other. And I'm going to think through

what is the macro giving me and how is the best way for me to create value for my shareholders in that macro. That is a luxury that you only have if you're in at a lower entry valuation. And it's just harder to do that at higher prices. You mentioned, one other thing. And I'm going to, let's talk about, I'm going to mention remitly here. Okay. Because it's been all your podcasts before. We have a position in Remitly as well. There is a challenge. Your question was about shareholder, do companies respond to what their shareholders are kind of saying? And one of those that I think remitly earlier this, you know, earlier this fall got in trouble for was, you know, Matt had a big product day where he's pitching a growth story of a kind of a 10-year vision for how he's going to.

to grow the business. And meanwhile, the stock is trading, you know, precipitously down earlier this year and is now trading at, you know, whatever the, you know, 10 times EBITDA or 9 times EBTA currently on forward estimates. And there's a disconnect. One of the things that we've spent some time in Madeline is that 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 9-10s EBITDA, all of a sudden, like, your investors, what's the number one variable in their model is not the 10-year growth story? It's, what is my free cashier going to be next year? And I think one of the things that, well, we're reading Matt is amazing. We love what he's doing it really. But I think there

was a disconnect between him kind of telling a story that was like the story you tell if you traded at a 10 times gross profit, but he trades at 2 times gross profit and the narrative needs to change. Over the summer, Remittly came out with Remitly for business. And I think Matt said, hey, this 10X is our TAM. And I was like, that's great. And your stock trades for nine times, even I don't think anybody cares about 10xing the TAM right now. Yeah.

But it's talent. And look, one of the things that we try to lead with is empathy, which is, you know, Matt has built an incredible business, right? It's close to a billion dollars of gross profit. He is focused on my 10-year vision just because a bunch of people happen to be trading his stock at a price that that I believe is, is undervalued. Like, why should his narrative change? And I do, so I get that it's, this is a hard challenge that it accompanies to have.

And I think, you know, I think, you know, ahead of the investor, I think Matt did a really nice job, both kind of meeting his investors where they are. Hey, I get it. You guys are focused on, you know, incremental margins. You're focused on free cash flow conversion. you're focused on what's free cash over share going to be in the next three years. I also have an base that's like on a 10-year journey

and they've got stocks lined up for years and like I want to also recruit the type of shareholders that are not just here for the path to a dollar or $2 or $3 in free cash show. I need to recruit the shareholders that are with me on a tenure journey. And so I think, but it, I think companies, different companies are better and worse the kind of meeting investors where they are.

in the journey. And one of the things we kind of always told them is this, like, you start from the bottom. Where are you trading with for today? Let's check the box that meets the kind of, you know, four-year evaluation. What are the most important questions? And then we can build from there, but you've got to start with a great foundation. Let me start there. So I did have this on my list. Remittly, again, as you talked about, it's a company I've looked at, very popular on the podcast that we're hitting it. Yeah. They had a investor day last week, pretty well received, right? I think the stock was up like 10% in the two days following the investor day. You are public filings, right? You are, I went and looked up on Bloomberg. You're the 20th largest shareholder of Remitly,

start excluding some index funds and stuff. And I don't think I'm crazy to say you're basically like the 10th largest shareholder of Remitly. So it's not like you are the acts there, but also you're someone who does a lot of work, works with the companies. Obviously, they're going to listen to you, how do you, when Remitly says we're going to have an investor day, how do you work with them? Do you, Do you help craft slides to them? How do you talk to them about, you've already said about, hey, an investor day when you're trading at nine times EBDA is different than nine times revenue. But how are you working with them to craft?

Are you working with them at all? What are you talking to them about? Yeah, good question. Well, look, it starts with, we have a long history with Remedley. We were, we've known, you know, Matt for, I think, well over a decade. We were investors in WISE on the private side, going back to 2018. We actually owned Wise, again, as a public shareholder's, you know, kind of starting in 22. So we've kind of known the category for a while. We've also known that for a while.

And, you know, I think we, I can't remember if we did a testing Waters meeting with him before we went public. But, like, we definitely, you know, we were like true leaders of Matt for years as a private, you know, as private investors. And that helps because when we came in and when we started building a position in the fall, like a year ago. last fall. And so we've been investors here for a little over a year, you know, added less fall. We've added, you know, since then. So one of the things is, I think it takes time to build a relationship. And we very much view it as we're going to be shareholders here for the next three years. We want to get to know that, you know, we want to build a long-term relationship. And so early on in it, frankly, it starts with, we need to build credit.

with the company that we have aligned interest and we're not just to hear for a quarter and a lot of that starts with we share our work we so we you know we did a customer survey we send a survey along to the to the remotely team we fly out we spend a lot of time in person with these companies um we we view it as you're building some goodwill with the management team that you know we i think if you come in guns blazing let me tell you what to do on your investor day on day one it's it's very hard to get people to listen and so um You first need to lay the, you know, a foundation of good one. We, we love investor days. The reason I love investor days is not because I think it's a great way to get the share price up tomorrow.

Like I think actually most, the actual day itself is often overhyped and a trap for a lot of companies. Like I don't, but we think that the two or three months leading up to an investor day is a really pivotal moment for many companies. where they are setting the strategy upon which they're going to run the business for the next three years, right? I think companies can end up having blinders on and live quarter to quarter. And I think an investor day is like just like I need a,

you know, we do a year and review every January and it's helpful for me to wind my aperture, how are things really going? I think companies can use an investor day to kind of widen the aperture and say, you know, am I recruiting the right types of shareholders, the shareholders that I want? Am I telling a story that I think is, you know,

Have I communicated a multi-year shareholder value creation story that I feel like I can deliver? I think a lot of companies forget all of those things. And they're living in the like, oh, am like, can I survive another quarter? So we have been spending time with Remitly really over the last nine months, kind of thinking about, hey, there's probably going to be an investor day here. We have a new CFO. It starts with that. It starts with, are you communicating? Well, first of, do you have a value?

you creation story, a five-year plan for how we're going to create value for shareholders. And I think that that's like a lot of companies are kind of laser focused on can I be consensus for next quarter and they don't have a plan. Yeah. So our first question is what is your plan? What is the variable that how do you think about value? How do you think about a successful year? Is it? And our view is we try not to go in myopically like here's the lead edge way to do it. We try to meet the company with our first question is, what are the KPIs that you're looking at to determine if you had a good year and if you're on track to great value for shareholders? And I love free cash flow per share. I think it's a great metric.

If you want to say I've got a late, my goal is just to maximize the free cash flow per share number in three 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, right? I think if you want to tell me it's we care all about incremental margins, right? And so we're not, we're just, you know, I want to deliver more than 30% incremental margins while growing a fastest again. Great, we'll meet you there. Like, I'm, I think there's a variety of frameworks that can work. But first, it's this, do you have a framework that's important?

The second one is, have you communicated that framework to investors? And I think too often in software, I look, I think software in general has one of the most brittle shareholder bases in the public market. it's so silly because if you think about software business model it's one of the best business models in the public markets right it's highly recurring you've got a secular growth trend these business you know I know we're talking about AI but like this secular growth trend to the cloud we're still early innings on and so there's a massive trend of you know growth in software spend period that we're still ignore AI we can get to it like that that that secular story has not changed and there's still a lot of on-prems

software that needs modernized. The business models are naturally cash efficient. So you generate a lot of cash. They don't need. They don't consume cash to grow. These are great R.OIC businesses. Like, software should have the best shareholder basis, right? But instead, we see kind of like industrial companies are way better suited, that kind of like holding through volatility and all this. These, you know, why are we seeing these massive swings? And some of it's that the software ecosystem is so tied up with revenue and revenue beat and raises. and, like, what is consensus numbers and all this? That's, like, not really true across every sector of the economy.

It's really, like, a small and mid-cap software problem. But I think part of the problem is that companies have not done, you know, I think that there's a whole bunch of people to blame. I think investors are to blame. It's what we, you know, we reward companies that be raised, and so they do, you know, companies naturally focus on, I think, the sell side encourages it. You still today, you know, four years after, 21, you see way too many companies where the company is putting a multiple, they're ascribing

a revenue multiple to it. And I'm like, look, why aren't we, these businesses are quite profitable. Why aren't we ascribing a free cash over share multiple to it? So the sell side is encouraging it. But I think companies could do a better job of saying, if I want to recruit shareholders that are here for five years, I can't just keep doing this, like, beaten, raised thing. It's not going to work forever. And I need to articulate, and by the way, you could only beat and raise so many times in a row before you have a natural law. Like, you can't, you can never beat and raised for, you know, 15 quarters in a row.

Just mathematically, it's impossible, right? Consensus numbers will get too high. And so one of these we spent a lot of time with companies on is this kind of rip the band-aid off of that. That's it. All you're doing is kicking the can down the road. And you often see a lot of companies get in this habit of they'll beat numbers, raise consensus, but then they go on the road for the next two months and try to lower expectations so that they can beat the next quarter.

And our view is that that's this like two steps forward, two steps back, you end up not going anywhere. And one of the things we're trying to tell companies to do is that that's a losing game. And you're recruiting kind of like lower quality shareholders, right? Yeah. were fixed shareholders. And instead, what you need to do is to say, that's a game that is an unwinnable game. What I want to do is I want to tell a story that recruits great shareholders that are going to be with me along it for the next three years.

And that's really around like, yeah, tell me how you're going to do it. If it's a free customer per share, which is what I think Remedy is doing, I think they've done a nice job, kind of laying that film. There was so much there that I wanted to talk about. Yeah, sorry, I ran a little bit. No, no, no, no. It was awesome. It was awesome.

Just one of the things that I love is, you know, if you're doing beat and raise, if that's what the company is doing, A, it's very short term, all this sort of stuff. But what I liked about your investor day is they go, they put their heads together for two months. And instead of saying, hey, how do we beat next quarter? Like, they talk about doing three years and something that's actually going to deliver value. But then, like, you know, I'll call a company up and they miss numbers and the stock went down 10%. And I'll be like, what the fudge. I don't know what to tell them, right? Like, they'll say, hey, we had one customer delay.

I can't tell them anything, but if they go and do an investor day and say, hey, here's our three-year plan. Well, now, not only do you know what the plan is, but now you have something you can hold them to, right? And it's not, oh, we missed revenue by five basis points this quarter. But now you said, hey, you said three years from now, your free cash flow per share was going to be $4 per share. We're 18 months into that process. I don't see a path for you to getting to $3 per share. What's going on? Do we need to replace someone?

Is it, 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 like kind of 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 who are trying to longer shorten you against something else putting you on? It's such a good. So we have an investment in a company called Appian, another software company.

And the CEO, Matt Hawkins, their owns, let's say, about 50% of a company. and they're in the process of kind of changing their priorities as well. And one of the things that we spend time with Matt on is I said that the narrative we used is I have a fiduciary duty to my investors to maximize their returns. And every, you know, they evaluate me on a quarterly basis or annual basis or whatever. And they, you know, there's a way that they assess me. And one of the things I told Matt is I was like, I need a way to assess you. And, you know, growth, there's, you know, like Doge hits.

earlier this year like there's there's things that are out of your control right they sell to the government there's a dope yeah yep yep and i was like i can't really hold you accountable to just a revenue growth number because some of that is out of your control right their government shut down can impact them there's things that are out of their control so i said i need like how can i tell my investors that i'm doing you know i'm fulfilling my fiduciary duty if i don't have a way to assess you my CEO right if you think first principles i have hired him my I am an owner of Appian, and I have hired Matt. How do I assess if he's having a good year or not?

And I was like, look, you know, people forget in the public markets, but I am an owner of the business, and Matt works for me. And I need a way to, to, just a one ends we told him is I was like, look, like, if you're going to change your philosophy, fine, but you need to have a, like, give me a, choose a framework upon which you want to be evaluated, set a goal, and then let me hold you accountable to it. And it's interesting. I mean, they've now released their, like, his goal is a, you know, adjusted rule of 40.

And so he's, you know, they have a certain number. They're marching it up. And we can now do a performance review with Matt Hawkins 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, you work, you know, the CEO, like, we're working together. And just like, I have a performance review with my investors. Like, we need to have a performance through how is your year and are you fulfilling your

And the nice thing is I let them choose their criteria. So, you know, you get to choose the metric upon which you want to be evaluated. But let's, we need to have a metric to determine if the business is making problems. Evan, you have eight public company longs and two of them have founder, CEOs named Matt. Do you think you have any bias towards the name Matt? You've got a second. Get on the phone. That might be the favor in the college.

Okay. Let me switch to the part of the conversation I'm most of the time. So you, I mean, I literally just read. and come on this podcast and rant every now and then, but I just read all the day. People can hear from this podcast apart. You work a lot closer with companies than I think I do. You get a lot more involved with the, and that's awesome.

I think that's spectacular here. You sit on the Yaks board. I'm Long Yax. There's our disclosure there. So you sit on a public board. You work with these companies a lot more deeply. I want to ask some stuff about like kind of, as somebody who's just like trading stocks and reading some misconceptions that I might

have about public companies. But let me start here. You mentioned how you let CEOs kind of set the score. work hard that you're going to evaluate them on with metrics and everything. As you're getting deeper to know these companies, do you ever come to a company and you're like, 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 send me on revenue for share. And I eventually just have to disqualify them because the CEO just isn't seeing value creation and the metrics the same way I do.

Totally. Look, I, one of the gaining items upon which, you know, what are we looking for when we make an investment. One is, is it a good business? Underlying, like, is this a business that I would like to own for the, like I could own in perpetuity. I could put in my kids' retirement to a high quality company, right? Recurring revenue, I can see a path for the company existing for a number of years, right? So 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? And we think about it as in the world is uncertain. COVID could happen again. Who knows what's going to happen. Is this a CEO and a board, frankly, CEO, CFO, and board

where I believe we see the, we have the right, we think similarly about if something crazy happened, would we make all the same decisions? And I try to be really mindful about, like, there's a lot I don't know. There's uncertainty in businesses. I, you know, whatever. We can underwrite growth. It can not happen. It can happen. But like, is this a team that I kind of trust to make big decisions in moments and times, you know, that I may not be, have a say. And we're really like, that's a gating item for us. We view the world, you know, so we, we end up kind of self-selecting the kind of teams and boards that we want to work with. That's not to say that we're always right. Like sometimes we'll have a disagreement, you

know, by the way, we don't agree on everything. Like I, you know, capital location is something that we spend a lot of time on. Companies can disagree with, you know, us on it. And I think it's not lost to me that you're roughly three largest positions. Yes, Clearwater, and Remittly, it's not loss of me that all three have active share repurchases going on. And if you looked at like kind of growth of your smid cap tech, I mean, I'm going to tell you that you couldn't pick three random ones and hope to have more than one. So it's not lost to me. Like, yes, they can assess 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 structured exact compensation and the inevitable consequences that come with any plan, pros and cons, how they think about stock-based comp dilution and how are they managing their share count, right? And the third, application, do they have a thoughtful policy? We can disagree on what is the minimum amount of cash that a company should run with? What's the right around the leverage? Like, it, and as long as they're, 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, right? But some companies kind of are like, oh, like I don't, you know, we have a, we have an exact company and it rewards, you know, revenue growth, and don't worry about it. And to me, that is harder to work with. Then I'm okay if you want to reward revenue, go through your plan. But there's consequences to it. And let's have a conversation about what are the externalities,

the positive and negative externalities in each plan. So we spend a lot of time on this, but it starts with this, is that a team that's really thoughtful and thinks these things matter. And that's good. And that's fine. They're just not true.

As a public company investor, I mean, one thing that I have been hit over and over again with is externalities and incentives. And I want to talk a lot about your insight. But how much have you, like, I'll give you one on externalities. You mentioned revenue growth, which is one of my least favorite things to reward people on, because then all of a sudden you see them investing growth at any cost, bad acquisition.

But at 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, you know, like 30% IRR projects because it would dilute their ROIC. So that's another example. I mean, they're turning down hugely a creative cost.

How have you found when you're on the inside, like those externalities or the incentives play with management teams and everything? Yeah, so, I mean, it's interesting. I mean, Clearwater Analytics, where we have a position, has an exact comp plan that is, you know, there are PSUs best based on revenue growth targets. And you're right, in theory, I would say, ah, like, that's a weird, you know, there's no profitability component to it. The reality is that Clearwater Analytics is a business that has a really efficient sales

cycle, right? And sales and marketing is relative to comps within software, sales and marketing is a very low percent of spend. It's a product-driven sales, not our sales-marketing-driven sales cycle. and so we've chatted with the board about this and i you know we i probably would tweak the plan if it was if evan was on the comp committee i would but but i'm they were really thoughtful around hey in any year what i really want to reward is bookings growth because the sales marketing spend is the incremental margins for that business it's already a very very profitable

business and sales marketing is a relatively small and fixed you know percent of our of our opex budget And so 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. And I think that that's okay for a business like Clearwater that's kind of very much a product-driven sales model. It's probably less okay for a business that's a very sales and marketing driven, right, you know, a sales model. And so it's these things need just, the reality is it's nuanced. And we're okay with the nuance as long as there's someone, what was in the business. 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 that the externalities we're creating. Speaking of nuance, as you know, Bogart, I obsess over these violence, right? I read every word. I look for changes in, I look for earnings call to earnings call 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, how much am I picking up random noise versus these things are very intentional? The answer is both, right?

I'm sure that there is, you know, there are times when companies are, you know, doing something and they're very aware of what's happening by the scenes. The other times is like, sometimes a, you know, sometimes a board member is, or a CEO is building a, sea house or whatever, right? Like, I think people sometimes read too, too much into the, you know, the exact timings of things. And, you know, we all make kind of random decisions in our lives, right?

You know, we're not perfectly rational actors and everything we do. And so, but it is funny. I do think you hold, you know, and remember also, we, we, one of the things that we spend time thinking about is, is the major shareholders in a business, the major, private investors in a business when it's gone public. One of things that I'm very, I spend time thinking about is what is their, what is the return profile they're sitting on? And if you're a, if you're a venture guy, you've invested in a business, the company's going public, if you're sitting on a 10x return on your investment, your decisions about when to sell and how to sell

are very different than if you're sitting on a 2x return. And it shouldn't be that way. But the reality is, anything in private equity land, anything that's above a, you know, a 3x return is a home run. And so people sometimes are like, look, whether it's a 10x or an 8x, I'm going to go down in history as a home run. And I just need DPI. I need a return cash to my investors. And people forget sometimes that, like, they may not have a view on like what's happening in the next quarter and they may not be calling some nefarious thing happening. It may just be that they're, or they're about to raise a new fund and they need DPI. They need a, you know, show return. So there's a million different factors. And sometimes people think that everyone is

feeling the share price as much as you are. And what we, one of the things we look for is the people who are buying or selling, what is their overall return profile? You know, and then the second what we look at is, of their, of their economic, is it a big position for them? So we talk to companies all the time. We have, you know, we manage a portfolio of 10 names, so you should think about it as roughly each position is 10% of, you know, of my holdings. And that's a lot. So I live and die every company, right? They all matter to me. But if you're a, you know, if you have a very small 2% position in something, your decision process around buying, you know, selling can be very different based on just based on the amount you hold. It drives me absolutely crazy.

I'll talk to companies and, you know, 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 bundled up. And I'll be like, no, you have that hedge fund guy over there. This is a 10 basis point position in his company in his fund. He, yes, he owns 3%, but it's because his fund's huge.

He sits on your board and he 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 is they don't go bankrupt and you maintain him. And it drives me crazy. Like, I don't know about you, but I'd rather, I'm not saying every board board needs to consist of, you know, nine board members with each board member owning 10% of the company or something, you know, because you need diversivity of skills and all that. But the worst board members are financial board members who have no economic exposure or versus their net worth extremely limited

economic exposure. They're the absolute worst. And it's one of the red flags when I look at companies. Yeah. I think it's a fair. Look, it is hard to everyone wants to be on the board of the, you know, a large well-run S&P 500 company. It's hard to build a good board. If you're a small public company that's particularly one that's kind of like

struggling a bit or not, you know, not smooth sailing. It's very easy to pay. We're good people to the board of that at all be the winners, but it's hard if you're a smaller business to recruit a good board. And look, I think the expectations are also really high, where people want to fill their boards with, you know, grizzled veterans who've done it before. And the problem is, grizzled veterans who've done it before led big businesses. The route is, like, they want to, you know, they don't necessarily want to be on board of a small public company that's, you know, struggling in the public markets.

And I'm not sure for them, the 150 grand or whatever does they get paid, it's not enough to. So it's, the board, I think U.S. corporate governance overall is fantastic. And I think it's, you know, I am a big bull on, I think, you know, capital markets in the United States, I think are fantastic. But I think it is a challenge in the smaller businesses to recruit a great board. And we spend time on it too, which is, you know, our. What is the quality of the board? Are there a couple people who are really engaged? Is there checks and balances with the CEO?

Is there, you know, what, it's so interesting because in the private markets, your large shareholders, your large kind of venture and growth investors are really like, whether you're on the board or not, they're, you know, the CEO's mind trust as he's thinking through big decisions. And we see it our private, you know, my partners on the private side spend a lot of time. talk to their CEOs. Even if we're not on the board, we're a small, you know, shareholder of the private side, we have, we have conversations all the time. What should I do? How should I manage this? What do I? And what's interesting is this all of a sudden you go public and many of those

investors who are, you know, really kind of like the mentors to the CEO, who's, you know, founder, they all of a sudden kind of put their gates up and say, I know what I want to talk to you because I don't want NMPI and I need to get out. It's really lonely. And 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 kind of no longer want to talk to you. And, you know, the who wants to talk to you, you know, you have a, 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 court, right? And they're yelling ideas in your head. So look,

I think it's hard to be a small public company. I have a lot of empathy for, for our CEOs. Let me step back. So at the beginning of the conversation, you mentioned, hey, a lot of the companies we're investing in are tech companies that have hidden air pocket, right? And I think one of the things a lot of investors find is tech companies that value investing in tech companies is very difficult, right? And I say this in a lot of times you'll have somebody email you and be like, hey, look at this tech company. It trades at six times price to earnings. Let's go. I'll be, yeah, it trades at six times price to earnings because they're dying, right?

Facebook is taking all of MySpace share. Cool. MySpace had six times trailing earnings. Earnings in the future are zero. You're buying an infinite. When you're investigating these companies that have hidden air pocket, how are you determining, hey, this is an air pocket versus, hey, as I said, this is value investing tech. This is dangerous.

This company, it trades cheap because it is dying and we're buying the proverbial melting ice cube. Yeah, this is a great. Okay. Good. I think it's a great topic. I think value investing in tech is challenging for a couple reasons. One is what people think is cheap in tech. There is a long distance between a cheap revenue multiple and a cheap gap PE multiple. And one of the challenges that I think you see in tech is that the revenue multiple of a company was high, it's down 50%, now the revenue multiple is lower, that does not necessarily, like, sometimes if you live in revenue multiple land,

you'll be like, ah, this is trading in a discount. But it can, you know, you can be still years away from a cheap gap P.E. multiple. And, you know, that chasm of, like, what is cheap within tech is just, it's kind of wide, and it's much wider than other sectors, where everything trades on and kind of, like, if you think about more traditional sectors, a lot of businesses trade on a, you know, gap PE multiple. And so what's cheap is kind of uniform between companies. So one is this, I think you can end up kind of coaling the bottom on things that are value way too early within tech, because you're, you used to own or no value revenue multiple in a step. The second one that I think is hard is,

And we started this conversation by saying tech is one of the best, you know, business models and, you know, out there. And I think that's true. One of the challenges, though, and the best business model, because there's secular growth and great cash flow dynamics. One of the challenges, though, is there's a lot of competition, right? One of the best business models breeds a lot of competition. And so there's, you know, often speaking, there's too many software companies serving the same end markets. Yep. So that's challenge one. And challenge two is it's that dynamic space. And if you're not, if you're not winning, all of a sudden, you can be falling behind. And so to your point, you could say, look, something is, is cheap even on a whatever basis you want to say, if you cash or share, whatever, is there a terminal value, right? And I think in some other sectors of the economy, there's just less competition and less terminal value risk. And so it's easier to say things are cheap. We don't think of ourselves as like 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, you know, dominant market share positions in what they do with great, you know, and so we don't think of our social value. We're getting into the value price, but we're trying to buy winners in big markets. We're just, we try to find them

when there's been some air pocket in the story. And so what do we look for? The challenge is how do you determine what is the business that's secularly at risk and what is the business that's just hidden air pocket, as I use the term? It really comes down to talking with customers. It's are they selling something of value to customers that they find a real R-O-Ion? And are they uniquely capable of selling something of value to their customers? If you really think about the core principles,

are they uniquely capable of selling something of value of their customers? This is really what I think comes down to. And we're pretty myopically focused on if the answer to that is no, either it's not obvious that there's an ROI to their customers for what they're selling or there's seven companies all selling the same thing

and it's really hard to know the difference. Those are hard fits for us. And mostly because our view is this, the perpetuity value can be at risk. So we like kind of, more kind of, so that's the core to avoid those value traps. We are talking, one off-the-wall question, but we're talking December 17, clear-border analytics.

I mentioned Public 13F, you can see it, probably the third largest position, according to it, they are in lots of deal rumors right now, right? I think there was, I can't remember who the first public firm was going to come, and then Tom Bravo came in and lobbed in a bit. Like, there's a lot of deal rumors right now. How do you think about when you're investing in one of these, potentially great growth businesses that is hidden air pocket and a private equity firm comes along and lobs in a bid at a premium. And let you say it gets taken out and 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, right? How do you think about, hey, it's great. I got a nice premium. I got a nice multiple versus, hey, the private equity firm sees what I'm doing. They're going to slap some leverage on it. They're going to run the playbook I want and they're probably going to IPO it at 5X in three years. And by the way, you mentioned three new ideas a year. That's a new idea that I have to replace any and easy. How do you kind of think about that? Because for me, if I'm trading the crappy company as I'm concerned into, I'm like, go with God.

But for you, just wondering how you think about that process. Look, we spend time with our manager teams on this early on building positions. And one of these we spend time on is that do we have a line moment that no one should aspire to run a Russell 2000 company for the next 10 years? right the reality is it's like sitting as a small public company forever is not a great way like that's just not a great way to create value so if you're if you're in if you're a small public company ideally you have two one of two aspirations one is we're on a path to becoming a big public company yep the other one is hey we're public today and we're trying to create as much value as we can

but we're probably not, if we're not going to be a large, if we're not going to be the S of B 500 in the future, then we probably shouldn't be public forever. And that's okay. But my job as Mr. CEO is to figure out how do I create as much value as possible to find the right home for our business.

And we're kind of okay working with either camp. As long as I think too often you see companies, CEOs who don't even think about, who don't even think about it. And they're just like, I'm just running this business. And the reality is, I think you should be more mindful around, if you're a small public company, those are, there's two, I mean, there's a third path,

which is just sit in the Russell 2000 for a decade. But that's a, I don't want to partner with that past. That is the best answer. I think I've ever heard on that thought. You said it in amazing, look to me. Like, there's no, I love that answer. I absolutely love that answer. Yeah, and so let me, so then let's talk about.

So, and we, by the way, we have, we have companies in our portfolio where I hope that they can stay public forever. And the reason why is the cost of capital, you know, A, I think they're leaders in huge markets, and I think they could make great S&P 500 companies. And if you're in that bucket that you could be a great S&P 500 company, the best ways to create value is either you get an offer from a strategic that's at a price that's crazy. in which case, great, you should take it, right? Or the nice thing is, is the public markets, the cost of capital in the S&P 500 is around,

I don't know what you want to say, 8%. And so the staying public should yield a valuation that is a premium to what my cost of capital is, and so I'm not going to own it forever, but also a premium to what private equity is cost of capital is. And so a lot of our winners over the years, you know, stay in public and they re-rate the prices upon which I can't underwrite a, you know, attractive return.

But, and by the way, neither go to private equity fund because the cost of capital in S&P 500 is lower. And that's great. If you're not in that camp and you're not going to be S&B a company, first off, I think some people perceive that as a negative. And I'm like, no, no, no, like building a great small company, even medium-sized company, right, that's like the lowest smallest company, the public investment company is $20 billion. building a $10 billion well-run company, that's heroic. But you should think about where's the, you know, whether you, when do you sell the company?

I think it should be a strategic conversation around how do I get the best possible price. Understanding that, you know, a lot of my investors have a higher cost of capital. There's a time value of money. And we, I think it's nuanced. I think selling a company when you have, you're going through a turmoil, right? You've lost a day customer and you're doing a CEO transition. Whatever is, that's probably not the right time to do it, right?

I think selling in uncertain times, I would argue rarely creates the most value. You know, and vice versa, though, but if you've got a great plan and this and like this, 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. And if there isn't a strategic bid,

then the bid is probable I'm a financial buyer. And they're, you know, I don't. So again, the answer is it's nuanced. I'm not answering about Clearwater specific. I don't know what's going to happen. I mean, look, I think Clearwater has the potential to stay public. Like, I would argue Clearwater is the business that could be a large S&P 500 company. And I think any time the, anytime the private markets kind of steals a potential S&P 500,

company, it's a bump because we need great public companies. And I think, you know, 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. And then, you know, 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 now. I've really enjoyed you. You know, one thing I like to, most of my podcasts are single idea focus, right? And my favorite question is, hey, you know, the market's competitive place. What are you seeing that the market's missing that makes this a risk, a risk-adjusted alpha opportunity? Let me just ask you, because this is something I've actually been

introspecting with myself a lot. You guys, lead edge, I'm just going to describe you as growth tech into air pockets, right? Concentrated. What do you think lead edges, like when you're doing investment, what do you think your edges that makes your investment or your process or your style a risk-adjusted alpha opportunity. Yeah, good question. Look, the edge that we have is we're attached to lead edge. And that gives us two very valuable things. One is we have a lot of history with these young public companies, right?

And so a lot of public investors, the day they go public, they've only seen, you know, you have to evaluate it based on a couple quarters of performance. Many times we get to evaluate them based on multiple, you know, many years of performance, sometimes decades of performance. We've evaluated the business over the years. That just helps, right? We have 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 one-year context. And that's the whole. The other one is, is that you see a lot of investors these day claiming to be constructivist, right? So activist, but constructive. It's a popular term.

And that is what we say as well. The challenge is, is that that playbook, to be a constructive investor, you need a relationship with the team. You need a relationship with the board and you need relationship with the leadership team. And building relationships just takes time. Like, It is a time-intensive thing. And if you're going off alone and trying to, you know, have influence on businesses, it's just the amount of effort you have to put in to start to build those relationships to get even any, you know, the ear of a team and to them to listen to you on capitalification, I think it's a huge effort in time.

And I benefit, you know, we benefit as the lead-edge public team from, in-house. inheriting relationships that, and it's helpful for a variety of ways. So, like, we were, you know, A, some of them, just are companies we've evaluated when they were private, so you know to see it that way. Others of them, I'll give, what we talked about, Clearwater, I'll give you an example. We were used in Infusion on the public side. So one of the businesses Clearwater bought, we had a small position in Infusion. When Infusion was acquired earlier this year by Clearwater, we'd never spent time with the Clearwater team.

and so I didn't I didn't know them but clearwater is based in Boise we've got a number of LPs that are based in Boise and so the moment that deal happened rather than email investor relations they go through the channel I emailed our LPs in Boise and I 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 and I was like look I'd love to come to Boise and spend some time can we you know can any way you can make a warm introduction and I are our our view is that, look, we ended up, we didn't even get to Boise, but we did get a warm introduction from an LP to the CFO, and it just enabled an easier conversation. And I think that is a little bit of a head start in building a relationship and having some influence. And so then when we can talk to them about, you know, exact compensation and their structure of it, we kind of were coming in as a friend through an LP rather than just kind of a random investor relations, you know. 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 what I'm going to lead the

pocket. I just want to make sure we had it. We talked about AirPods, but we also talked about AI and software and this huge fear that AI. I just want to make sure we fully kill the piece. Like, you know, people are scared about AI. And I think for some industries and businesses, rightly so, like 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, like a personal example, all my fitness trackers, I unsubscribed and I don't use them anymore. I just toss everything into chat, GPT and use it. Now, that's a personal use case,

but there's going to be things in software and business that get replaced by it. So how are you thinking about the AI risk? Because it's definitely hit a lot of software stocks. It's created values, 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, I, it goes back to first. So first off, I don't know the answer.

I think that this is, we are early innings in 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. If you're, I'm going to talk, let me just talk about work day as an example. We don't own it, but I'm just going to use it as an example. If you're, you know, I would say 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, you know, relationship where you're kind of deeply embedded in everything your company, 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 HRIS system, I think of it as kind of two things system. 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 a different things is not going the way. Companies will still need a database and all this. What will change, what could change profoundly is the front end way, the user interface upon which we interact with that.

And I don't know how that's going to change. Like, we are all the, you know, like I think about it, go back in time when, when, you know, a computer mouse came out, everything user interface fundamentally changed and it's hard to even envision what it was like before that. I mean, that was my first thought. It's hard to envision using a computer without a bell. Yeah, I don't know the answer. But what I would say is workday has a, they've got, they don't need to be a first mover here. People are going to come up, there's going to be, there's going to be, there's going to be,

challengers to HR systems, and they're going to exist. But Workday has such an embedded relationship with their largest customers that no one's going to replace those overnight. And the reality is that Workday has the benefit of these, like, an enormous amount of goodwill and relationships that they can leverage to say, look, we're going to have to update our front end. And the risk would be is that if they don't, people are going to build an AI shell that sits on top of it, right?

which is if you go back to like banking software, right, core banking software, what Pfizer of sales, so sticky, it didn't go away, right? Still today, every bank has run on the same Pfizer or, you know, general ledger systems as they have, you know, were 30 years ago. But it did, they didn't modernize. And so what happened is, is people built a shell of kind of user, you know, SaaS user interface, which, you know, a lot of our businesses, you know, we invested a bunch of banking software, sit on top of that shell.

that's the risk. So first of, 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 Pfizer didn't modernize is, and I'm not picking again on Pfizer is, they're not one piece of software, right? So I think the problem is that what Pfizer is is hundreds of different pieces of software that every bank runs on their own custom thing. It will be much easier for Workday to modernize, then it would be kind of, if you go back to the last transition from kind of on-premise SaaS, because Workday is already multi-tenant, single single instant multi-tenant software for the most part. So it will be a lot easier for them to modernize and to not get layered.

But that's the big debate to me is, like, 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 kind of like, I call the highest echelon of quality, where you're like a system of record that's great, I think 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, that like all of the modern banking software businesses, no one is going after Pfizer. And if you go to ed tech, like there's a, you know, an SIS system in Ed Tech, no one is going after modernizing the SIS system. Like 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 so that's a really nice place to be. And I think you have a bunch of those deeply embedded systems. The question is, there's going to be a new user interface and are you going to capture it or someone going to capture it on top of you? And it comes to me, it comes back to, first off, are you really as sticky as you think you are? And one of the problems that I think a lot of software investors do is they look at gross

retention as a definition of already sticky. And I think that's not the right metric to look at. Gross retention is one metric, but what really determines stickiness is, if you, you know, is like I talk about Oracle level sticky, where what's sticky to me is when you've raised prices every year and your customers hate you and no one still leaves today, that's sticky. If you've gotten to rate really good gross retention, but the way you've gotten there is by offering a really low price and kind of offering excellent customer service, well, that can

you could be ripped out, right? So it goes to kind of unit economics of like structurally, how sticky are you? And then if the answer is you're structurally sticky, I think you have a, you've got a couple years to try to build that AI user interface layer on top. And I think that that can be a real opportunity for a lot of businesses that they pull it off. I think it's going to be profound in many areas. But it's, and you've got to win it. So, if I can just, I mean, you were at Value X. I think the other interesting thing is the SaaS, the on-prems of 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 and they probably needed a big shareholder in their shareholder list who was supportive in saying, hey, go take this pain because it's going to result in a better long-term business, right? 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 an AI, but one thing I kind of take comfort from is there's not

a single public company CEO in software or something I know of who's just like, AI is not a risk, right? Like, they're all at least aware their investors are asking, they're thinking about it. If they say, hey, we need to increase tech spend by 2% of revenue this year to accelerate AI switch, like none of their stocks are going to take a hit from that. So I'm kind of a little bit, I don't know, relieved just by, it's so obvious and the panes are there 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.

I mean, stocks were tanking, right? Even though a lot of them were saying, hey, this is a much better business for the long term. People are totally with you. I, by the way, also the gross margin profile of that new user interface. may be very different. But again, I'm not, I think that investors know that. If you added a new revenue, if worked added a new revenue stream, which was, you know, AI agents that was additive to the core system record and it came in a little, like,

I think people would be thrilled and would be happy to understand, but we already understand professional services to lower, like, I'm not worried about that. I think we can manage through that. I think part of the problem, though, is everyone is expected to show progress on AI immediately. And I think for a lot of these big enterprise software systems, we're still early days on kind of like the actual buildout of AI products. But you're expected to show progress on a quarterly basis. And I think the reality is that for a lot of these segments of economy, we're just not there yet. And so you're seeing the challenges that I think 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, but that's not a very satisfying answer for investors. Or you have to kind of like play up this AI thing. When there's a little bit of emperor has no clothes, there's not quite there in the numbers yet. And both of those are really challenging, right? You're kind of like it's a lose-lose.

That'll get better as we start to, first of all, that'll just work through it. And I think it will be real. And I think there will be opportunities. And I think you'll start to see it. But we're in that little early thing. where investors are really anxious to see progress. And it's not, you know, at the enterprise level,

I think progress, we're still early on in the days of having progress. And I can keep going, but we're starting to run up on the time stop. I just want to take a second. Anything else? I mean, I think we did a really wide-ranging hit a bunch of stuff. Anything else we should be talking about or take away you want the audience to have? No, no, this is fun. This is fun.

Appreciate the time. I appreciate you hopping on. We're going to have to do it again. You know, I've got Nick, your analyst who put us in touch. I've got a lot of respect for him. I'd be, 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. So I've got a lot of respect for him. But I appreciate you coming on. We're going to have to do this again in the near future. And we'll just kind of go from there. Awesome. Thanks so much. We'll get a great having.

A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a podcast. financial advisor. Thanks.