Vinny Pujji on Leveraging 3rd Order Analysis to Pick Winners for Left Lane Capital

Welcome back to Turpentine VC, a podcast where we discuss the art and science of building successful venture firms, VC to VC. In today's episode, I sit down with Vinny Pujji, the managing partner of LeftLane Capital. Up ahead, we discuss LeftLane's unique positioning and how they can identify non-obvious companies to invest in. We cover their in-depth analysis process, as well as LeftLane's approach to fund construction and team building. Let's dive in.

Vinny, welcome to the podcast. Thank you for being a part of it.

Thanks for having me, man. I'm excited.

So Vinny, let's first dive into LeftLane. Talk about how LeftLane positions itself in the market. There's a lot of funds out there. You guys are doing something interesting. How did you think about where you wanted to play in the market and where is there opportunity?

Are there other funds? I didn't realize it. Exactly. I say that half in jest, but half in a serious way. I think it's really odd and frankly a bit backwards when you see funds look at who's in the market and just think about how to pitch to LPs, probably more than anything, and then how they can position to be different. And then last of all, what they're good at actually doing. We sort of started with stumbling into something, which is the phenomenon of internet companies rather than enterprise companies. And if we went back in time 30, 35 years ago, the tech investing industry was a real industry, but it was investing in a huge variety of stuff. And you saw a lot more of the semiconductor type of investors than the enterprise software investors. And then 20 years ago, you started seeing more and more enterprise software investors. And 10, 15 years ago, it was hard to find anyone who wasn't just doubling and tripling down on enterprise software. And our group, our partnership was at Insight Partners, and they're some of the best in the business in enterprise software. And I had done a bunch of enterprise software deals, including some more private equity style deals, but we saw a new wave of companies popping up just coincidentally where they were oftentimes being built on this thing. And this was a pretty new thing 10 years ago. And at the same time, we saw even more traditional application software businesses being built in a different way where it was a lot of what most people would call product-led growth, but it was marketing and product-fueled growth rather than boiler room enterprise software, top-down, whatever you want to call it. And that required a different type of thinking and a different type of investor. And I have a ton of respect for firms like Vista, but that Vista playbook of, hey, here's where we're going to cut, here's how we're going to scale sales, it was not as relevant to this type of company. And so not out of some genius or strategy decision, we stumbled into this and we started helping these companies. And after a few years of doing it while at Insight, those founders started coming back to us saying, hey, you know, nobody actually is running this type of analysis or making these recommendations. And that's when we sort of knew we had both product-market fit, but also something that we deeply cared about. And I think it's very odd when people decide to start a firm when they don't have a moment like that.

Say more about the type of analysis or type of recommendations that you were doing that's unique, because don't other great, you know, the a16zs, the IVPs, the Thrives, you know, what are they not doing that you guys are doing?

It's a great question. Listen, we, we don't have any crazy, uh, ego in this. We don't think that we are smarter and better and more capable than other firms. We do think that we've been specializing for about a decade in a certain type of company, and I think specialization, like everything in life, compounds. And so when you've been specializing for a decade, we did 20% more correct, better, whatever analysis for every year for 10 years, and now we are sort of in a different league in the type of analysis we do. And I'll give you an example. I'll split it into First-order, second-order, and third-order analysis. I think every firm with a pulse hopefully is doing first-order analysis. That means looking at an income statement, taking what the company gives you, and saying, hey, is this a good business? Is it healthy? Is it growing fast? Whatever your mandate might be. Now, second-order analysis is what most people would call unit economic analysis. And hopefully, if you're doing that level of analysis, you're also doing something to verify that the data is correct. And when I say that, I mean actually collecting some, you know, let's say a raw transaction file, and you're building from that raw transaction file into a unit economic analysis where you say, hey, how much are you spending to acquire a customer? At what point are you paying back or breaking even on that spend? And how much life after payback do you have? And that'll tell you, you know, sort of green light, red light, if you can keep pushing or if you sort of need to back off to maintain a healthy business. And I'd say that almost the entirety of the top quartile investors are doing that. Now, a lot of folks that are capital cowboys or they're running around doing SPVs or they're family offices without a ton of specialization, they're not actually doing that analysis. They might be taking the companies LTV CAC analysis, but they're not doing that analysis from scratch. But I think people have learned how to do that. And, you know, maybe it's not best split into quartiles, but I know a lot of groups that do that type of work. Now, the third-order analysis, this is where we either create data that others don't have, or we ask for data that others don't know how to use. And an example of that is we will look at usage data. And usage data might be 50 or 500 million rows of data. Let's say I'm a mobile app company. Every time my users have opened my email, opened the app, what did they click on? How long was the session, et cetera? And we will actually crunch and analyze that usage data internally and then find patterns of some significance within that data. And it's not ever one size fits all. Trust me, we've tried to automate it, but there's a lot of nuance in that because for one app, it might be the time that I open the app at that becomes the most predictive factor of if I'm going to retain or not. For another app, it's just what I click on in my onboarding survey that's going to be the most important predictor of am I going to retain or not. And so it's different company to company, but we always find fascinating things. If you look at a company like Calm, it might be, hey, if people are using you for a sleep meditation, they're going to retain better than if they're using you for a morning meditation. And for a company like Truebill, it might be, hey, if users are opting in to more than 3 bank connections, then they're going to retain way higher than people who just do one bank connection. And then that can help inform the company's roadmap. But most importantly for our underwriting, it's actually helping us see around that curve. Like, I could give you a bunch of data, you could do a bunch of analysis on it, but who knows if it's correct? Who knows if it's meaningful? We've done it enough times with a similar type of company that we know it's correct. And the other type of creating data is we'll actually run surveys, both third-party surveys against potential customers and first-party surveys against your customers where we have the customer ID. And then we'll say, here's what this specific customer does. By the way, here's how often they open the app. Here's what they're using it for. And we're cutting this data in such interesting ways that we can actually help companies target the right customers and lean into the right types of growth rather than, as you're growing faster and faster, what you usually do as a company is you just blindly broaden to wider and wider concentric circles of the market. And what do you know, the cost to acquire keeps going up, the retention keeps going down, and eventually you've acquired a bunch of customers at too high of a price and you get into dangerous territory. So that's the goal of our analysis, and that's what we've gotten the confidence to do over the past decade.

That's a good explanation. Give us another example of a company you identified earlier than other investors via your methods. Like you identified this company was really working and it wasn't obvious?

Oh gosh, probably half of our investments would fall under that. And as far as identifying a company, there's 2 completely sets of what we do. One of them, what I was just describing, is on the analysis of the company and making the right decision. The other side is how we find the company. So we speak with, I don't know, 7,000 or 8,000 companies a year, and we have a very lean-forward culture And we try to get as close to 100% market coverage as we can. We spend millions of dollars on data and infrastructure to help automatically source these companies, but we are still a very human-centric model. So first of all, we have to find the company before we get the opportunity to even analyze it. And we have a company, an investment that we just closed in India called AstroTalk. AstroTalk is an extremely unique business. A, they bootstrapped their business to over $100 million in revenue, extremely profitable. And I love to see things like that because what they did is almost scoffed at by the typical tech coastal elite. This is a managed marketplace for astrologers, and a lot of people don't know this, but there's a huge percent of the global population that before they get on a plane, before they change jobs, before they enroll in school, before they break up with someone, before they date someone, before they marry someone, they consult an astrologer. And if you look at the actual content of what they're doing, they're really just sort of talking to someone, right? And at the very base level, it's kind of like therapy is how I would put it. I think a lot of investors, first of all, overlooked the company. It was so big that people absolutely knew that the company existed. And at the same time, we— I guess when we see investors just drive Right back past something and say, hey, I'm interested in companies that'll help me live to 1,000 and, you know, help us all be robots. We usually put the car in park and say, well, hold on, we're still humans. And this is a really important thing for a lot of the world's population. Let's spend more time with it. And in that case, what we spent time is, is we looked through the chat logs. And of course, this is not me reading every single chat log, But this means that we took tons and tons of data to make sure, one, there was nothing salacious or nefarious or, you know, stuff like that, and figure out the incident rate and how good the company was at policing that, because that's the first thing we want to check on. But after that, we said, again, what makes good customers? How long of sessions? How many sessions? Where did you acquire that customer? And potentially even the content of that session. what makes for a good customer versus a bad customer. And I think what we saw in the data is that people have surprisingly recurring needs, and they almost have a team of astrologers that they want to go to, not just an individual, which gives the platform some real defensibility where we actually surprisingly saw minimal leakage. And that's a super unique example that only was relevant for this company, But it gave us the confidence to say, okay, these are actually really stable annuity streams. This is clear behavior being formed. And since we closed that investment, it's continued to perform every single month, getting more and more customers and keeping a high retention rate.

Yeah, that's a good example. Talk about what types of companies are in your sweet spot versus what types of companies you say are best for some other firm. Like, we don't really focus on that here.

Sure. I'll give you the boilerplate definition and then we can iterate from there. So Left Lane exists to invest in early growth companies and we have a global mandate. Now, if we zoom in and see what does that actually look like, it's usually Series A and B companies. Our checks are ranging anywhere from $3-4 million all the way up to $60-70 million on the very high end. And we're investing in real categories of spend. So it's oftentimes companies that are taking, whether it's healthcare or education or financial services or insurance, something that's a very core, oftentimes multi-trillion-dollar category, and they are driving digital adoption there. We're usually not investing in categories where digital adoption is 90% and it's a completely, you know, B2B market and relatively penetrated, and this is like 20% better than the next thing. Now, when we look at geographically, where have we invested? It's about 60% US, 25-30% Europe, 10-15% rest of the world.

Say more about education and healthcare, because there's a lot of dead bodies in those spaces. So, how do you think about where in education and healthcare you're excited to invest?

So, listen, whether it's education, healthcare, financial services, or really anything else, We are investing in a customer relationship. So our philosophy is simple. When we see something that is high trust, high spend, and habitual, that's where we get excited. I think where people have had very high loss rates in these categories is when one of those 3 things is not the case. If I paid $10 for something and I used it once, that's not a left lane investment, right? This, this needs to be habit-forming, extremely high-trust, proven annuity streams to be a good left-lane investment. And then we beat that up. And when I say beat that up, I mean, hey, if you lose your job, are you cutting this? One of our team's old investments at Insight was a company called The Farmer's Dog. The Farmer's Dog scared me personally. I didn't grow up with dogs. And we looked at this company where people were spending, give or take, $2,000 a year on their dog food. And I was like, well, hold on, guys, this is clearly just for really rich people. And so we ran our survey, we did our work, and we were shocked. I mean, if you look at the curve of just income in the US, this was barely offset from that curve. And then we got into the qualitative side. Basically, people said, hey, my dog's my kid. And even if I lose my job, I'm not going to screw with my kid's health or, you know, their stomach and, and risk that. I'll eat McDonald's myself, but I'm going to feed my dog the same food. No chance am I messing with their food because of something going on in my life. Now that's the type of thing where you go, okay, that's pretty interesting. I thought that this might be a lower quality business, or I thought that it might be for a smaller audience. But what the survey data told me is this is a really good annuity stream and it is a rock solid retention curve. And that's proven to be the case at scale now.

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What are examples of education or healthcare businesses that you've invested in or might invest in?

One example is we have a company here in New York City called Talkiatry in the healthcare space. And Talkiatry aims to solve a very simple problem. We have— well, I think we have a few epidemics going on in the world and the United States, but one of them is a mental health epidemic. epidemic. And the shame is there are— there's a shortage of healthcare professionals to serve this problem. And so what happens, whether you're in Los Angeles, New York City, or anywhere in between, if you're a psychologist, the second you open your doors, good news for you, you're going to have a pretty full book of business in no time. But it is— and what I— the reason why I say that is just to give an example of how this is a supply-constrained market. And every market's different, but in this case, it is certainly supply constrained. And Talkiatry said, hey, these folks, they love treating patients. They don't really like the business side of what they do. Can we bring them onto our team, handle all the insurance side, basically the business building side of this, and have them instead be, you know, our own sort of in-network providers for people to give affordable, oftentimes in-network care. people for their mental health issues? And the answer was yes. And so now they have hundreds of psychologists and even therapists on staff. And that's a very high trust, very high retention relationship. And the business just raised another round of capital, but we backed them about, I don't know, 3 or so years ago. And that was a perfect left-lane investment because we had a lot of littles to look at. We had sort of a managed marketplace dynamic. And we had very clear annuity streams, and that sort of held up at scale.

And what's your— what's an example of an education business that fits the criteria that you mentioned, whether or not it's in your portfolio? An example of an education business that fits the 3 criteria you mentioned?

Oh, I think there are a ton of businesses in the education world that fit our criteria. Now, I split education into typically 2 buckets. There's the L&D-type education, Right? So that's typically for adults to upskill themselves. And then there's things that fall under K through 12 or your college education. And we've invested in both. The first investment that our team broadly made in that world was a company called Udemy. And I think we learned a lot through that experience. And Udemy has both a B2C and a B2B business. So I think we've learned interesting pros and cons. The tough thing because you referenced that it's tough to invest in edtech. The tough thing about education is depending on what society you're in, people sort of have beliefs around education, like it should be free or, you know, provided by the state, or you just, you don't need past a certain level. And I'll give you some examples. In India, it's typically been a great market for for-profit education because Societal importance put on education, really high. Quality of public education varies based on where you are, but relatively lower. And that gap is what people are willing to spend. And so households are willing to spend a huge percent of their income on education. If you look at the US, still quite a good market, but that gap is a little bit smaller. And if you look at, depending on the European country, it might be a little bit smaller. And so we have companies in our portfolio, actually the first investment we made out of Fund 1 is a company called GoStudent. And with GoStudent, they said, you know what, we can build a really big business in Europe. We have no formidable competitors and we're going to go build. And they've now built a multi-hundred million dollar business just in Europe where they basically said, hey, we are going to take this marketplace model, this managed marketplace model. We're going to sell subscriptions on the demand side. And on the supply side, we're going to take people who maybe wouldn't have otherwise been able to tutor, and we're going to make it really convenient for them. And oh, by the way, on the demand side, we're going to make it that much cheaper, that much more convenient. And, you know, we always do these surveys. When we did our survey on GoStudent, we found that the vast majority of customers had never done for-profit tutoring before. But this was just cheap enough, convenient enough that they did it. When you see a marketplace business that is bringing people into the market that weren't previously in the market, that's where Uber comes into play. That's where Airbnb comes into play. This is something that through price and convenience disruption or accessibility disruption is actually increasing the size of the market. So those— that's one example of many in edtech where we've gotten super excited because we see something that's just better. Most of what we see in edtech is frankly not interesting because students have wildly high adoption and fast adoption rates of technology, and they just churn through it. So we see a lot of interesting edtech companies grow like this. And then just like that next new social media thing that you only log into for 5 minutes a day, it just drops off a cliff because summer, it freezes, everybody forgets about it, new school year, new product is out. And so there are a lot of things that fall under that bucket that have looked interesting. And don't get me wrong, we've missed a lot of things in that world, but that's not exactly where we feel comfortable.

Yeah, that makes sense. Let's zoom back out to fund construction and how you think about fund construction at Left Lane. So you mentioned you get in at Series A or B. Why there instead of C or D? Or how many companies do you have per fund at Left Lane? Talk more broadly about the fund portfolio construction?

So, uh, we invest in about 15 companies a year, give or take. And so what the funnel looks like is speak with 7,000-8,000 companies, um, do a deep dive on, I don't know, 300 companies, put down 17 term sheets, ultimately invest in and win 15 of those deals. That's basically what the funnel looks like. Um, we think about it based on time rather than based on fund, because our team's resources aren't really constrained by fund. It's just based on like, hey, how many new investments are coming in? And then over time, how many positions are we exiting, or are we stepping back from whatever it might be? And ideally, those sort of reach a point of harmony where they're roughly one-to-one. And, and if not, we'll make sure that we're staffed accordingly so that, you know, none of us is on like 20 boards or something crazy like that. Now, what we think is something really interesting for our investors, which is an extremely high amount of diversity in the industries that we play in. So I think something we saw over the past few years is a steep correction in enterprise software markets, where the vast majority of enterprise software companies were suddenly hit with people cutting software budgets and pushing harder on price, Or slowing down on their growth and not needing the same amount of software. And I think it was fascinating for us to see because we didn't realize how sort of incestuous that industry was. So much of software is just sold to other software companies. And so when that little market takes a hit, it really takes a hit. Now, when we look at where we're investing, we're investing in everything from coffee companies to pet food companies across really all major buckets of spend. And so we feel that we are diversified across sectors. So that's the first thing that we very purposely make sure we are offering our investors. The second thing is that because we are early growth investors, we are still doing that growth underwriting that I was describing, where we're getting in the weeds granular and opportunistically will position build in a lot of our portfolio companies. We basically want to go to the market and say, hey, we can offer you the best of both worlds. We can be your venture upside with your growth equity downside. And that's sort of how we were trained growing up at Insight Partners as well.

And share more about team construction as you think about what is the right amount of partners, or share more about how you think about, okay, how do I architect a team to perform back the strategy?

Yeah, team, I care tremendously about. I've always been and I will always be involved in our analyst recruiting. And we are unique in that we hire people junior and we have a promote-from-within culture. And we've, I think as a result of that and the training and the care that we put into that team, we have had an incredibly high employee retention rate. And I hope that that continues to be the case for many years in the future. We have about a 40-person team. So it is definitely a lot bigger than our peer group and we're split mostly across Brooklyn and London. Now, the goal of that team is coverage, right? So majority of that team, 25 people or so, is on the investment team. And to a certain extent, we all have the same job, right? Go out there, hustle, find companies, evaluate companies, decide on investments, and win those deals. But of course, within the team, we have analysts, associate, senior associate, VP, principal, And then the managing partners. Principals on up take board seats regularly, and it's sort of the expectation if they're on a deal that they will probably be taking that board seat and at the very least be categorized as a check writer within the firm. And so right now we have 7 people with one of those 2 titles. And so I'd say the firm has 7 check writers. That said, we grew up in a culture where Insight was 50, 60 people when we joined the firm. And it was very entrepreneurial, and they enabled us to, to do that from a pretty young age. And that's frankly why we were able to start Left Lane and, um, and have the confidence to do so. So if you're a senior associate on our team and you have a great thesis and point of view, you are absolutely on the board with me. You are just as, if not more active than I am on helping that portfolio company. And one day you're going to take that board seat over from me. And that's how we think about scalability, because a lot of junior folks are sitting as an observer on 4, 5, 6 board seats, and then they start taking their own, or they start taking over the seats where they're observers. We want to make sure nobody's just thrown into a board. That happens a lot with the displacement in the industry. We want to make sure people both know the left-lane way and have great context on the company before they take a board seat.

Yeah, that's a good overview of the team construction. Let's go back to the funnel. You mentioned, you know, 7,000, 8,000 companies. leading to 17 term sheets. How does a company become a term sheet? Like, talk about, you know, what are the company— the difference between the companies that make it all the way to a term sheet versus ones that you, you know, don't quite get to conviction in, and even though they make it to the sort of final round, so to speak.

And I had to remind myself of this when we were raising capital, because you can imagine raising a few billion dollars your first time around, you got a lot of nos. I mean, we got a lot of nos, and you take it personally. And I had to remember the advice that I give founders that I work with, which is, This has nothing to do with you potentially. It may just be outside of their mandate. And so oftentimes we speak with fantastic companies. It's a little early for us. It's a little late for us. It's outside of our growth mandate. It's not in our core sectors, or, and this happens later in the funnel, we sort of decide that there are better partners out there for the company. So if we do a bunch of work and we find a company's interesting, but when we look at the amount of risk on the business, we say, this is kind of a very typical venture profile where I'd say it's 50/50 if we lose all of our money or make money. That's an amazing fit for so much of our industry. That's not really a fit for what we've told our investors we're going to do. And sometimes we look at a great growth company, we say, gosh, this thing has high moats, it's a compounder, I think someone's going to make a 2.5x with their eyes closed, and it's only going to take them, I don't know, 4 years to do so. That's an amazing investment for anyone who's a private equity, growth equity family office, but it's also not what we're here to do. And so very often, I'd say probably 10% of the companies we speak with are really interesting businesses, but the number one reason why is one of those things where it's just, for some reason, it's just not interesting for Uh, left lane. And then when we really go down to that side of the funnel, maybe there's 50 companies a year, no more than 100 certainly, where we say it's a great company, it could be a really good fit for us, now let's figure it out. And the truth is that very few people admit is I think all of those 100 companies are great, right? And I think you could invest in all those 100 companies, but ultimately we have to find where people have passion. And where people have passion is not always predictable, I'd say. I mean, that's why robots haven't replaced my job yet, right? It's that gut feeling on the founder. It's maybe you had an experience in the market or you didn't or whatever it might be that's deciding, I think, that last rung. And that's the toughest one, right? We agonize over it. We debate these things ad nauseam and we get passionate about it. That's where the job gets really fun from. Uh, intellectual and just a, a, and an energy standpoint.

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Let's close by talking about the future of LeftLane and the future of the asset class. When you think about LeftLane 5, 10 years from now, do you think it's rinse and repeat, similar fund size, similar portfolio construction, just continuing to crush it?

So the advice that I give portfolio companies, and I try to think through this lens a lot, is you have 5, let's call it key variables in your business. You need to hold 4 still and move 1 at a time. If you're moving all 5, that's a Rubik's Cube that nobody can solve. And to a certain extent, I think that we as a firm have found a great team size. We've found a great number of deals to look at. We found not the specific ways inherently, but the mentality in which we want to look at deals. And we've sort of found the types of companies where we feel we are specialized. And so that means we can only play with one of those things. So over the next 5 years, you might not see our— or even 20 years, you might not see our fund size change. You might not see our team size change, but maybe you'll see we focus on certain countries a little bit more, and maybe we end up raising a separate fund for that. Maybe you'll see that we go a little bit later stage or a little bit earlier stage, but holding all those other variables the same. These are things that we've considered. The honest truth is, and I'm an open book type personality to the chagrin of our compliance team, but I have no genuine answer other than we sprinted to get where we are because we had a very clear vision in mind. Having worked together as a team at Insight Partners, we knew the amount of resources we needed across technology and team and just general bandwidth and the type of analysis we want to do, we're really happy where we are. If you talk to me in 10 years and I said, yeah, we do 15 investments a year, we raise billion-dollar funds, I'd be thrilled. We really like where we are because we have, we have so many other complexities with our job. I'd absolutely love to have minimal complexity in other sides of our organization.

What about the asset class? Do you think there's going to be more money in venture or a thinning out? Like, what do you predict from the LP side?

The LP side is a funny thing because LPs, when you are speaking with the less sophisticated groups, they're always the last ones to the party, right? So they're the ones that just started putting money into this asset class a few years ago. And they just— LPs always sort of lag what the actual trend is. And to a certain extent, that's part of their job. But it's funny when We're deploying and we're doing some great deals now and over the past couple of years. And at the same time, what have been the trends in, you know, LP new commitments in the asset class? They went off a cliff when our market did as well. And I think that's— I think it's fascinating. But the truth is, as I've spent enough time now with the LP side of folks, I think there are groups who I consider to be the highest quality groups that are ultra dedicated to this asset class. and they're going to keep investing in it no matter what. Maybe they end up downsizing by some 10%, 20%, 30%, but those fair-weather groups sometimes who can be extremely big checks are probably saying, wait a minute, I just started investing in this asset class in 2020 and it lost me all this money. I hate this asset class. I'm going to go put all my money back into whatever they were in before, oil and gas or you name it. And you're always going to have those folks that lag by 5, 10 years, and they're eventually going to get so much FOMO in 5, 6 years that they come back to the asset class. And who knows, maybe there's another crash then, right? That's just, that's just the, the downside of being the last one into the party. I think in general though, when you have a high interest rate environment, the bar gets higher. So the question I ask is for third quartile venture firms or Growth equity firms or totally average private equity firms where they have been producing returns and they're actually very good at what they do. They've been outperforming public markets for the most part. Are they appealing to LPs? Because now when I speak with LPs, they're saying, hey, I'm either going to have my money in something that's near zero risk and is making me a steady return, or I need you to make me 25%, 30% returns. there's no room for the private equity firm that's yielding me 12%, because I can get 12% income-producing. I don't need 12% illiquid, right? So just naturally, I think that's just going to change where people allocate their money. And then, of course, I mean, when I graduated college, nobody talked about or worked in VC or growth equity. And now half my friends from that same graduating class are either at companies backed by that asset class or investing in that asset class. So of course, I mean, it overgrew itself. I think the number of professionals in the VC industry grew by 10x in the last 10 years. So it's absolutely outgrown itself and it has some rightsizing to do.

Let's segue into Chargebee. Okay. What makes that company so interesting? What's innovative about it? Where does it sort of fit into the broader competitive landscape? Let's get into it.

Let's get into it. I think stories are always more fun than bullet points, but maybe I can Give you the best of both worlds here. So Chargebee is a platform for billing. It is predominantly focused on recurring revenue businesses, and we've acquired 4 businesses over the years to expand from just being your billing solution to also being your analytics and your accounts receivable automation and your revenue recognition, and even to a certain extent, your financing solution. So we're trying to expand from that initial entry point. But when I met the guys at Chargebee 8 years ago, it was at the very first SaaStr, I believe. And it was, it was, uh, I met the CEO Krish, but they were a team of 4 co-founders and they had wandered in the woods for 5 years to get to $1 million in ARR. And then in the next year, as we continue to speak, they went from about 1 to 4. So first of all, I'm, you know, I can't outsmart numbers. If a company grows by 4x with good efficiency, we found it interesting. But the bet we made, and I'll bring this back to your question, the bet we made was not against Recurly. It might have been a little bit against Zuora, and I'll offer some perspective there. It wasn't against Recharge or any of these other recurring billing providers. The bet was simple. More and more businesses are building on recurring revenue business models. Nobody wants to build billing software because it's extremely important and extremely boring to build. So no engineer wants to build it, just like no engineer wants to build an SMS platform, right? They want to use Twilio. And the bet was very, very simple. This market's growing. Nobody wants to build this stuff. And that worked. All their competitors have done well. New competitors popped up. They've also done well. Now listen, we moved a little bit more quickly. We kept focusing on developers while scaling up. And when we made that investment, we were about 1/80th the size of Zuora in terms of revenue. And today we're about 1/3 the size of Zuora in terms of revenue. So I think we've done a great job also entering the enterprise side of the market. And we went from having zero public companies as customers to having a ton of public companies. as customers. So all that to say, I think Chargebee has not stayed still, but they have always both stayed focused on developers but also raced to build best-in-class product parity with incumbents like Zora.

Can you say more about why Zora or other competitors didn't kind of seize this opportunity?

Or you said they weren't interested in it, or they weren't able to, or what kind of enabled Chargebee to So Chargebee can be used for a really wide range of businesses, but most businesses that use them are either recurring revenue agencies or tech-enabled services companies, or of course, software companies. And so they built a ton of tooling integration specialized around an asset class that frankly performed really well for the past 10 years. And so they rode that wave and they always had that customer in mind. When we made the investment, we spoke with not only a ton of Chargebee customers, we spoke with a ton of Recharge customers, we spoke with a ton of Zuora customers, et cetera. And the Zuora customers would tell us pretty interesting stuff, which is, hey, I just paid $200,000, $300,000 for this piece of software. We're like, wow, that's really high spend. That's your second biggest spend bucket. They said, yeah, we bought it 18 months ago. We spent another $300,000, $400,000 on implementing it, but we're still not live. We said, you're kidding me. You spent half a million bucks on getting this thing live 18 months ago and you're still not implemented. And so when I say, you know, there was some sort of bet against Zuora, and Zuora is, by the way, a profitable, over $400 million ARR business that's, you know, growing slowly, but they're still growing. If I had just looked at Zuora's performance, I would've said this is a bad market. But in this specific case, I said, this is a 20-year-old piece of software that's not really software. It's actually a collection of software and automation tools that needs heavy consulting professional services to be implemented and go live. And so that gave us comfort that Zuora, for better or worse, wasn't either what we were playing for and it wasn't going to kill us at Chargebee. So then it became more a question of looking at our peer group. And here's where it gets tricky. That peer group was all doing well. Recharge was doing well in the Shopify space. Recurly was doing well in media and internet company space. And we sort of made the bet that they're all going to do pretty well. And again, like, you know, these companies have all done pretty well. And I think that's okay. I think it's okay sometimes as an investor to say, okay, there are 3 companies that are pretty good. There are a handful of things here which make me most excited about this one, the developer focus, the freemium, business model, the fact that, you know, their revenue retention was a little bit better. But the truth is, if we're being honest, we made our bet, and it was a bet because we could have bet on any of those players.

What were the risks at the time that you identified? And more broadly, when you think about investing, what kind of risks are you okay taking, and what kind of risks are you not okay taking?

So when you're investing in a $4 million revenue company, There's no shortage of risks. And so it's a great question of what kind of risks are you okay taking and what kind of risks are you not okay taking? We were okay taking risk around this market getting competitive. We were, and we saw that risk. We were okay taking risks around, hey, you know what, the founding team doesn't have every skill needed to scale this company up, but We felt that we could help them build out a management team. And I think that's been done to a great degree, building out the C-level team. We were okay taking the risk that this was really just a bunch of developers coming inbound and then sticking with them. They weren't actually winning bigger companies at all. Like even $10 million revenue companies, they were seldom getting A $10 million revenue company. And to give you an idea, the average customer contributed about $2,000 a year in revenue to Chargebee. And Chargebee, give or take, was making about like 1% of revenue. So these were really small companies, put simply, using the platform. So we didn't have any promise that they could go upmarket or that they could even retain companies as they were growing. Now, We knew all these risks. We, you never know at what point are they going to go live. And about a month or two after we made the investment, Stripe, who was our biggest partner, the vast majority of our customers were doing their billing through, or Stripe was their PayFac. That was their way of collecting revenue. And we had a deep integration with Stripe. They were our sort of like premium partner. They came out with their billing product. And our new customer adds in that freemium segment, which was basically the whole company, just went off a cliff. We used to offer something like $100K in processing for free, and they said, hey, we'll give you $1 million in processing for free. And that really hurt. And what we did was shrank or didn't grow for the next few quarters. And over the next year and a half, we rapidly tooled to build for slightly more upmarket companies where it mattered that we had an interface and it mattered that we had certain integrations. And instead of capturing people as they were starting their company, which we still do, we started capturing people maybe when they were a million in revenue. And then even capturing people once they were sort of a growth company and they had a CFO and they were thinking about maybe going public or raising a growth round, something like that. Because there's really only 3 entry points when someone's going to even think about Am I going to change my billing software? We did that. So if you look at the average revenue per customer today, it's well over 10x the point at which we invested 6.5 years ago. So it's grown considerably. I would have not expected that so early in the investment, but it's because we had an oh shit moment and something that we thought might happen happened immediately.

Yeah, that's a good overview. I want to go back to something you said about customer references and ask you more broadly how you conduct customer references. What's your process for doing that? How many do you do? How do you think about that as part of your—

All right. So we conduct customer references in 3 ways. One of those ways is we just ask the company for introductions to customers, and we don't just say, introduce us to customers because then they just introduce us to their best friends who happen to be customers who will never say anything bad about them. We say, introduce us to these specific customers that we see in the billing file. We want some old ones, we want some new ones, we want some that have churned, some that have upsold, and so forth. Then we leverage our network and we beg, borrow, and steal to get our own direct sort of backchannel customer references. And one of those ways of getting that, by the way, is just using the expert networks. And so we, like every firm, we do pay and we use those expert networks. And then the third way is we actually survey. So we will run, assuming it's not a company with 10 customers, because that would be impossible, but if you have thousands of customers, we'll run surveys and we'll go out there and we'll— it depends on which provider, which market we're looking for data in. We'll decide which provider we're going to use on the survey front, but we'll run those surveys to sort of get some sentiment. And oftentimes we're running surveys against not your actual customers, but your potential customers. Because sometimes we'll think a company is the coolest thing. And then we'll speak to a bunch of their potential customers. And they'll say, I guess that's interesting, but I don't really think about that. And we'll say, okay, this is not a big enough problem to go after solving.

Yeah, that, that makes sense. Another question I want to ask is how you think about liquidity? Or how do you think about taking money off the table? Fred Wilson has this famous idea of a third, a third, a third. You know, how do you— what's sort of the Left Lane philosophy on when to sell versus when to hold?

That's a great question. And I should clarify, by the way, that we did, and I did that Chargebee investment back when we were at Insight Partners, and Insight's answer to this question is likely quite different from Left Lane's. With our strategy, we pretty aggressively re-underwrite companies when we're looking at investing more money. And sometimes we will re-underwrite. We'll say, oh my gosh, we think this is a 5x return. And we will raise our hands and try to lead this round. All right. And try to make it as easy as possible for the founders to say yes. Sometimes we'll re-underwrite a company and we'll say, okay, this is an okay return. This is solid. But we're not going to be tripling, quadrupling down here. So we're just going to be supportive. And sometimes we'll underwrite a company and we'll say, we don't get it. If we're ever saying we don't get it, or gosh, this is going to be 5, 6 years and we're going to make 2x from here, that's when you have the discussion on when to sell. The unique thing about where we sit, or our heritage, is there are firms out there that were created by traders, people who came from public markets, and they are really quick about saying buy, sell, buy, sell, buy. We are still maybe a little bit human and company-centric, and if it's going to significantly hurt a company if we were to sell or kill a relationship, I'd say our discussion is a bit more nuanced and thoughtful than just, you know, hey, I think this is a good trade. At the end of the day, we make the trade, but we make it in a way that's appropriate and timed in a way that it's not going to kill the company.

Yeah. Gearing towards closing here, what else has surprised you about how the Chargebee story has evolved, or what other lessons do you think we should take from the, from the Chargebee story?

There are a lot of lessons in that. There's no such thing as one founder archetype that's going to work. I think that some of my former bosses will never admit this, but when they met the Chargebee team, They kind of said, hey, you know, these guys are from Chennai, India. They're relatively introverted and soft-spoken. And when you're, when you're so trained to invest in like the classic arrogant American loud persona, you can oftentimes undervalue, I think, a different personality. And in this case, I think a lot of the folks around the table, certainly not the people on the deal team like me, said, hey, we don't, we don't think these guys, you know, have the ambition or anything like that. And there's one thing that Krish, the CEO, but also the rest of the team have, which is an incredible amount of curiosity. Krish wants to get better. He is super curious and dedicated. And ultimately, I think most people will tell you on what was the biggest predictor of if a CEO kept scaling and building the company bigger and bigger past $100 million in revenue and so forth, Is sort of, are they just one way or another a cockroach, right? Like, do they just refuse to give up and they, they have something driving them? Now, most of us, most of the time, have fear driving us because that's our, our most primal, um, and, and powerful, uh, emotion and driver. And that's, that's okay for fear to drive you sometimes. Hopefully some of us have joy driving us, just absolute joy. And I find curiosity to be like a cousin of joy. where Krish is just studying and learning, and every conversation with everyone, he goes in with no ego and he's just humbly learning. And he— when I talk to him, he's like, man, this is so interesting. I never thought we would have a $100 million revenue business. Now I get to learn how to take a business public one day. And it's just joy and curiosity that's driving him. And I think that that was a great lesson for me because I had a good gut feeling But I couldn't quite put my finger on, hey, why do I trust this person as someone who's young in my career where it was kind of the first investment where I really laid it down and said, no, I think we have to do this deal and you're going to regret if we don't do it and so forth. That's one of 100 lessons that can be learned from Chargebee. I think the biggest one that I take is you need to be able to explain what you do in one sentence and people need to react in an extremely positive way. Right? So when we would tell companies in our portfolio about Chargebee, we'd say a one-sentence line about they handle all your recurring billing, right? Not rocket science, nothing crazy, nothing fancy. And we would hear, oh my gosh, I need someone to do that. I'm wasting so much time. I'm building this stuff. I have all these exceptions in my pricing and so forth. And we said, okay, it's a good problem to solve. When you take those same 10 sentences I just said and you have to use them to explain, you're going to hear one sentence back, which is, I don't really get it, or like, I don't think I really need that, or something like that. And that's sort of become my personal investing philosophy of, hey, I need to be able to explain this in one sentence to someone and they need to react in a resoundingly positive way. And I know that sounds simple, but usually that's probably the best predictor of is this going to be something that's for some reason not been done before well, but is really needed by the customer? Or is this going to be something that's just a bloodbath where you're trying to create a market, but you're not solving that big of a problem?

Yeah, that's a good place to wrap. I want to be mindful of time. Vinny, thank you so much for coming on the podcast.

Yeah, man, my pleasure. Anytime.

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