412. The Hierarchy of Bullsh*t, The 8 Criteria that Matter Most, Why Boiler Rooms Win, and the Key to Raising Capital (Mitchell Green) | The Full Ratchet

• Citations
• Transcript segment

Key takeaway

• For entrepreneurs: Understanding and aligning with the 8 key screening criteria used by investors can significantly enhance your chances of securing funding.
• For investors: Employing a structured set of screening criteria can streamline the evaluation process and improve the quality of investment decisions.

Summary

In the podcast episode "412. The Hierarchy of Bullsh*t, The 8 Criteria that Matter Most, Why Boiler Rooms Win, and the Key to Raising Capital," Mitchell Green of Lead Edge Capital discusses the 8 critical criteria his firm uses to screen potential investments. Drawing from his experience at Bessemer Ventures Partners, Green reveals his firm’s investment framework called the ‘Lead Edge Eight’, a set of eight criteria that provide a simple yes or no answer when screening companies. The eight criteria are:

1. $10 million plus in revenue: Growth stage investors look for companies that have product-market fit and that they can help scale with larger amounts of capital.
2. 25% plus YoY growth: Strong growth shows increasing demand for the solution. Green noted that this benchmark used to be 50%, but they would accept lower growth for a more profitable business.
3. 70% plus in gross margins: High gross margins make it easier to generate profitable unit economics and scale the business, while providing a greater margin of safety when things go wrong.
4. 1 plus ratio of revenue to cash burned: This compares current recurring revenues to cumulative cash burn since inception as a measure of capital efficiency.
5. 90% plus gross revenue retention: High gross retention makes it easier to run efficient sales and marketing operations, reducing pressure on customer acquisition to fill a leaky bucket.
6. No one customer over 10% of revenue: This reduces customer concentration risk and the dependency on a single or a few large customers if they were to churn unexpectedly.
7. Recurring revenue: This indicates a preference for predictable and stable revenue streams.
8. EBITDA profitable: This indicates a preference for companies already profitable on an EBITDA basis.

The Lead Edge Eight is a pretty high bar. Only 80 of the 8000 companies (1%) contacted each year meet all eight. At minimum, the team looks for at least five of the criteria, focusing on a subset of 800, running diligence on 150 and ultimately investing in 5-7 companies (0.1%).

Insights

• Market Size: The potential market for the startup's product or service must be large enough to support significant growth.
• Product-Market Fit: The startup should demonstrate a strong alignment between its product and the needs of its target market.