Investing in growth tech with Lead Edge Capital's Evan Skorpen

Episode Summary

Executive Summary: Andrew Walker interviews Evan Scorpion of Lead Edge Capital about his concentrated public-tech investing approach, the challenges facing SaaS amid AI and valuation resets, and how Lead Edge works constructively with management teams. Evan argues many software “air pockets” reflect maturation and capital-markets pressure more than AI disruption, and that companies should communicate multi-year value-creation plans and choose metrics that match their business model.

Main Topics: Lead Edge’s concentrated growth investing model (Priority: 5/5): Evan explains Lead Edge’s public-tech arm as a concentrated, long-only growth investor focused on high-quality software/internet businesses that have suffered valuation dislocation or an 'air pocket.' The firm owns about 10 stocks, holds for ~3 years, and aims to build sizable stakes to work constructively with management. Why software stocks got hit: AI vs. business maturation (Priority: 5/5): Evan argues the selloff in SaaS is only partly about AI. He says many companies are in an awkward adolescence phase—slower growth, not yet fully mature margins, changing capital allocation needs—and are now forced to navigate that transition in public markets rather than being sold privately as before. How companies should communicate with public investors (Priority: 5/5): He emphasizes that investor-day messaging and earnings narratives must match valuation reality. A company trading on low EBITDA or cash-flow multiples should focus on near-term free cash flow and the specific value-creation framework investors actually care about, not just a long-dated growth story. Constructive engagement and board/company relationships (Priority: 4/5): Evan describes Lead Edge’s style as relationship-driven and empathetic: sharing research, building credibility, and working with boards on compensation, capital allocation, and strategic planning rather than showing up with demands on day one. Incentives, externalities, and metric design (Priority: 4/5): The discussion covers how compensation metrics can create unintended behavior. Evan argues revenue growth, incremental margins, ROIC, or free-cash-flow metrics can all be appropriate depending on the business model, but they must be chosen thoughtfully and with awareness of side effects. AI opportunity and risk in enterprise software (Priority: 5/5): Evan says AI will be profound but incremental for many deeply embedded system-of-record software businesses. The biggest risk is being layered by a new AI interface on top of existing systems, while the biggest advantage is customer stickiness and a strong installed base that takes years to unwind. Public vs. private outcomes and takeover decisions (Priority: 4/5): He argues small public companies should think explicitly about whether they can become large public winners or whether a sale is the right endpoint. Staying in the Russell 2000 indefinitely is not a strategic goal; companies should proactively consider the best home for value creation.

Key Arguments: Lead Edge’s edge comes from history, relationships, and access to management teams across private and public markets, allowing it to evaluate current dislocations in a long-term context. Many SaaS drawdowns are not just AI disruption; they also reflect the difficulty of moving from hypergrowth to maturity while public-market investors demand discipline. Companies trading at low revenue multiples should communicate in terms of free cash flow per share, EBITDA, or other value metrics that match their current valuation regime. Investor days are useful less for the stock reaction and more for forcing management teams to define a multi-year value-creation strategy and right-size shareholder expectations. Constructive investing requires trust, which is built by sharing research, traveling to companies, and approaching management teams with empathy rather than immediate prescriptions. Executive compensation should align with how the business actually creates value; different metrics suit different sales models and cost structures. AI is more likely to reshape user interfaces and workflows than to instantly replace deeply embedded system-of-record software. The best way to avoid bad 'value traps' in tech is to determine whether customers get clear ROI and whether the company has a differentiated, durable position versus a commodity offering. Small public companies face a difficult governance environment because they lose private-market mentors, inherit imperfect boards, and then face short-term pressure from public shareholders. A company should not aspire to remain a small public company forever; it should either scale into an SP 500-quality business or consider a strategic sale when appropriate.

Data Points: Public portfolio size: 8 positions (effectively ~7 after rounding a tiny position) - Andrew frames Lead Edge as highly concentrated; Evan confirms the public portfolio is compact. Typical holdings: 10 stocks - Evan says Lead Edge owns about 10 stocks at a time. Average hold period: about 3 years - Used to describe Lead Edge’s public investing horizon. New positions per year: about 3 - Derived from the firm’s 10-stock portfolio and 3-year holding period. LP network size: over 750 LPs - Evan describes Lead Edge’s broad individual LP base as a differentiator. Capital from individuals: more than half - He says more than half of Lead Edge’s parent-company capital comes from individuals. Shareholder base in software: 80? actually described as brittle; no numeric figure - No exact number provided; Evan characterizes software shareholder bases as unusually fragile. Remitly gross profit: close to $1 billion - Evan cites this to illustrate the company’s scale and long-term vision. Remitly trading multiple: about 9x EBITDA - Used to explain why the investor message should focus more on near-term FCF than on 10-year growth stories. Remitly trading multiple (other framing): about 2x gross profit - Evan contrasts the valuation with the kind of narrative investors expect at much higher multiples. Clearwater comp plan metric: PSUs vest on revenue growth targets - Evan discusses Clearwater Analytics’ incentive design as a product-driven-sales business. Small company cost of capital: around 8% for the S&P 500 - Evan uses this to explain why staying public can be attractive for potential large winners. Public-market capital allocation goal: maximize free cash flow per share in three years - Evan cites this as a good framework for mature software companies. Revenue growth compensation threshold: 30% incremental margins - One of several example frameworks he says companies may choose for evaluation. Portfolio company ownership example: about 50% - He says Appian CEO Matt Calkins owns roughly half the company, strengthening alignment. Board member economic exposure example: $150,000 annual board fee - Used to criticize financial board members with little economic skin in the game. LP geography example: Boise - Evan used Lead Edge LP relationships in Boise to create a warm introduction to Clearwater. Investor base preference: three-year ownership horizon - He says Lead Edge wants to recruit shareholders aligned with a multi-year thesis rather than quarter-to-quarter traders.

Pivotal Quotes: "The escape cause to sell to private equity is no longer there." — Evan Scorpion: Explaining why many software companies are now forced to work through their maturation in public markets instead of being taken private. "I want to partner with management teams that have a bunch of options." — Evan Scorpion: On why Lead Edge prefers lower entry valuations that allow multiple paths to create value: growth, margin expansion, buybacks, or capital allocation. "No one should aspire to run a Russell 2000 company for the next 10 years." — Evan Scorpion: His framework for small public companies: either become a larger public winner or consider a strategic exit.

Implications: Investors should separate AI hype from genuine business deterioration, and software CEOs should align strategy, metrics, and shareholder messaging with their valuation and business model. For small public tech companies, thoughtful capital allocation and long-term communication matter more than quarterly optics.