SaaStr 824: VC in the AI Era - Exactly What's Getting Funded, Why & When with SaaStr CEO and Founder Jason Lemkin

0:01Welcome to the official Sastr podcast where you can hear some of the best Sastr speakers. This is where the cloud meets. Up today on the Sastra podcast, you've got to be number one at something to stand out today. Now, maybe if you're the number one fastest growing anything, you will stand out. But be honest, what are you number one in? And I certainly see way too many decks. Others, everyone else sees way too many decks where it's interesting. Hey, we're an AISDR tool. Great, okay? Some folks don't believe in it. At Sastra, we do believe in it. We have four of these running around being our SDA.

0:35We believe. What are you number one in? We're going to do this and the other guy. No, like you got to be because we're just seeing these. Every number one has always been the most important adventure, but people are obsessed with it now. They're obsessed with finding the next open AI, the next category winner.

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2:23I thought I would do something pretty simple this week. Show you some data. And certainly what I have learned talking with a lot of founders this year, running, we've actually launched a new tool on Sastra.ai where we can review your pitch decks. We should cross 1 ,000 VC pitch decks reviewed this week and almost 400 ,000 startup valuations on Sastra.ai. What I've learned from that, what I've learned from companies I've invested in at Sastra Fund that are raising money or have raised money. and a lot of stuff I've certainly learned doing the new 20 VC with Harry and Rory, which is a lot of fun.

3:02It comes out every Thursday if you guys want to watch. So I want to talk about just what's happening in VC funding so folks could know. Some of this may be Captain Obvious. Some of this you may get if you read Sastra content or watch our pods or others. But I thought I would just summarize everything happening in the market. And again, this is not profound, but I do think it is important. So Iconic's one of the leading growth funds originally funded by Mark Zuckerberg's money and others, but it's got many, I think tens of billions that are management. They just put up a great set of metrics as of September 30th.

3:37I just wrote them up on Sastra this week. Amelia will probably have them out in a newsletter this week. It's pretty good. I summarized a 70 some odd page report and just a few key points to them. But I pulled out a couple slides for folks to understand what VCs are thinking about. And I know almost everyone knows this, but I think it's good to summarize this to understand what's investors' heads and why it means a lot of B2B VCs, a lot of classic SaaS investors, B2B investors that might have been interested in investing in you 18 to 24 months ago will not be interested today. They're just not interested.

4:15I would say 80 % might not be interested in you that would have been interested 18, 24, 36 months ago. And this chart summarizes it. I'll show this, these benchmarks in a minute. So you know them. And then we've actually built a new tool on Sasser that will do it dynamically for you. It's pretty cool. Hopefully it'll come out in about a week. But if you look over here on the right top quartile SAS benchmark, so this isn't all SAS companies. This is all the venture funded ones in Iconics universe. So this is already, these are pretty good ones, okay, that have gotten in most cases to the growth stage.

4:47So the very best ones, the top quartile, these are basically the ones folks want to fund, have gotten from one to a hundred million in 20 quarters, 19 quarters, 1920 quarters. So five years, it's pretty crazy to get from one to a hundred million in five years. And it's far better than I did. And it's far better than most of us will do. But look at the folks want to fund today. Glean AI Enterprise Search got there in almost half the time. 11 labs. We use 11 labs. You probably use 11 labs for AI speech and more. They went from 100 to a million in two years, eight quarters. Perplexity, faster. Cursor, we all know, anthropic and lovable replet.

5:30They can do it in less than a year from one to 100 million. And so it's not the same as we'll chat about in the next slide or two. some of these hyper growth AI native companies don't have the same margins. They do have token costs. They have other issues, but they are just growing so quickly that if you are a VC, especially a post seed stage VC, and you have a hundred million, 500 million, a billion, 2 billion, 8 billion, like Andreessen's new growth fund to invest, where on this chart are you going to put your money? Where are you going to put your money? You're going to go on the left. and it may not be fair to folks that are already in the top quartile on the far.

6:08It may not be fair, but just think about it for a minute. These companies just didn't even exist 24 months ago. So you couldn't invest on the left side of the chart. It just wasn't possible to invest over here. So the ones on the right were about as good as it gets. And I started having these meetings with a lot of the VCs that have come to Saster events over the years, about 18 months ago. And they kept saying, you were like, why are you doing anything but invest in the companies on the left? Why are you even bringing them to your events, even talking to them? And I challenged it and I disagreed with it.

6:38And so do many. If it takes you a decade to get to a hundred million or it takes you three years, what really matters is how quickly you scale after that. But this is where all of the money is going to the left. And you can see why. You can challenge it if you want. You can pick at it if you want. But at the end of the day, it doesn't really matter what you or I or anybody thinks. This is where 90 % of the revenue is going. And in fact, why you can see a massive amount of revenue is really only going to tens of different startups. The ones that are furthest to the left and are growing the quickest.

7:13Bessemer, another great classic SaaS and cloud investor now doing a lot in AI. They put this together maybe a month ago or so ago. It's on their website. You can go find it. Just search for Bessemer Venture Partners AI. And they broke it down into the two types of startups they're investing in. And these are, it's a high bar here. Okay, guys. And again, don't shoot the messenger, but it's helpful and pragmatic to see this. What are the two types of customers that startups that Bessemer wants to fund? They really talked about two types, shooting stars, which in many cases are classic software companies, as you note on the bottom right, with gross margins of 60 % or higher.

7:49This is a lot of classic B2B stuff, high margin stuff. We write a little bit of code. There's not a lot of token or other AI costs. Even there, they want to see you go better than triple level. They want to see you go from one to a hundred million in interestingly in about that same five years as iconic has. And that means going from something to 3 million, then to 12 million quadrupling, then 12 to 40. Okay. That's 3.5 X. And then more than doubling from 40 to a hundred million. That's what they think best of breed is. And still somewhat, interestingly, somewhat inefficient, 164 ,000 of revenue per employees.

8:27That's the bar to get them excited to invest. And it is for a classic South Africa company. And that is as high as it's ever been. It is much higher than triple double, which was always high. Then on the left, you're like, this is how we think about AI native companies where they really want to put their money in supernovas. You'll see the gross margins are often 25 % or even negative and even negative. Even open AI is burning far more cash than it's bringing in. So is Anthropic. So are lovable and replant as they've been clear on. I don't know if their gross margins are this low, but they're burning a ton of cash to build these cool tools for us.

9:00But in one year going from one to 40 and in year two, 125, some of them faster. All right. Gamma, which we use for our slides, they already hit 50 million in one year. Um, replant level or others. And so again, you can pick at these and you can say, oh my God, these are just wrappers around AI tokens and these models aren't sustainable. Maybe that's true. Maybe it won't be true, but this is what people want to fund. Okay. They want to fund one of these two categories, depending on they are. And just as a side note, what's really interesting, and I'm writing more up on this on Sastra, and we're actually going to talk about this on the 20DC this week with Harry and Rory.

9:39But yes, these super fast AI companies, their gross margins often aren't as high as software companies, at least to start. But interestingly, they are efficient. The ARR per employee, over a million dollars in revenue per employee. A lot of these companies are well under 100 employees as they approach 50 or 100 million an ARR, which doesn't necessarily mean they don't burn a lot of cash, but it does mean that they're pretty headcount efficient and something to reflect on. So these are two very different flavors of B2B and non-B2B startups on the left, but this is how VCs are looking at it. I know it's soul crushing, but at the end of the day, VCs basically distill you down to the quality of the team, the traction and the market, and that's it.

10:19And this is the middle section. This is traction. Okay, next slide. And this one is a bit of a, it's almost a bit of a paradox because it's interesting, even though VCs, maybe it's not a paradox, but VCs only want to put the money into these even faster growing companies today because they can't because they exist. What's interesting is that in some ways for the public companies, the public B2B companies, the bar's gone down. And what do I mean is the growth rates on average, two interesting things. The second one you wouldn't expect. Growth rates on average for public software companies, B2B software companies are the lowest they've ever been.

10:52They've fallen lower. Now, there is some reacceleration in 2025, not just for OpenAI and Anthropic, but for B2B companies that are getting with it with AI. Palantir is the most extreme example in terms of its growth rebounding, but we've seen it at MongoDB. We've seen it at other leaders as well, that other folks are growing a little bit more because of AI pull, Twilio, and others. But still, it's pretty low. So for the public companies, for startups, you have to go faster. The fastest growing bucket is 30 % growth. The middle bucket is 20 % to 30%, and the lowest is minus 20%. We actually calculate this now for you in real time.

11:28If you go to SaaS for AI, you can just click market data in our nav. It will show you the real-time multiples and who these companies are. But what's interesting is high growth is only 30 % for a public company. It was twice that in 2021, more actually, more than twice that, about 70%. But you get 20x error multiples. You get really high multiples. So the public markets, as long as you're profitable at these numbers, they're actually not expecting extreme growth. So there's some irony here. It's hard to figure out because some of our public comps, we're looking at their growth. It's good, but it's not that impressive.

12:03HubSpot's growing 19%. When we all use HubSpot every day, it's not growing at these insane rates. Now it is approaching$3 billion in revenue. But there's almost a paradox here that we're expecting less from our public companies, but giving them higher multiples. but we're expecting even more from our startup. So it's almost a paradox, but it's something to be aware of that will confuse you. You might be like, goodness gracious, you look in the middle, if a data dog's growing 20 something percent, why do I have to grow 250 %? Them's the breaks. Okay, them's the breaks. Okay, next one. And this is just another way of looking at some of the data, but I think this is one to freeze on and we'll share the slides and we'll publish them to Saster.

12:45Again, from this almost 100 slide, iconic report. This distills all the top B2B companies they've invested in. And what is the top quartile? And of course, we'd all love to invest in the top 1%, the top 10%, but this is of the good ones. What does top quartile look like? And I really like this chart because look at these columns, figure out where you are, less than 10, 10 to 25, 50 to 100, et cetera, figure out where you are and just go down this and realize this is, probably if you're above this, you're going to get funded. This is if I could simplify all of VC funding today, I think this table is maybe even better than Iconic realized because this really ties to all my data.

13:22So let's just slow this down for a minute. And this is a high bar, again, the whole point of this convo, this is a high bar to get funded today. If you're in the 50 to a hundred million dollar phase, this is beginning the growth phase. Top quartile is 90 % growth and 120 % NRR, 120 % NRR And fairly efficient payback, 1.5X magic number. I won't go into all of that. 220K in revenue per employees. You can see this. And you can see that scale. That means as you get into this growth phase, VCs are still going to be wanting you to grow almost 100 % in it, 25 to 50, over 100%. And I see plenty of really good B2B startups that are just dancing below this line.

14:05They're at 25, 30, 40 million, growing 60, 70, 80%. And look, maybe you can raise venture capital from a lot of the funds that we know and come to Sassarvance, maybe, but I think it's tough today. It's just going to be really tough. You better talk to every single one because this is what they're going to be. One or another, they're either literally looking this in their partner meetings or this is how they approach the world. This is the line to get funded today. And look back below 10 million. This is just top quartile. Again, this is not top 1%, but top quartile of venture back. 515 % growth below 10 million and 170 from 10 to 25.

14:39And I can tell you my own portfolio, it's Astrofund. The folks that are above this, like no matter what anybody says, if they have good founders in an interesting space, they got multiple term sheets. Below this, it's really hard. And there is a zone. If you're below some of these numbers, but you're doing something really important, or you have really strong market share, or you have insane NRR or something, there is a zone below this where VCs will lean in. They'll lean in. You'll be at 50 million ARR, not growing 90, but growing 70, but you're dominating an important market. And they can see that you could grow faster.

15:14They will lean in if there are reasons to lean in, but there better be some special reasons to lean in other than you being likable if you're not meeting the numbers on this chart. So slow this down, we'll share it. But I think this summarizes so much. This is the bar that you have to meet to get funded by most, maybe not all, but by most VCs and especially to get the kind of valuation expectations which founders have, which is a topic we may not get into today, but we can. But it's not just that these numbers have gone up and the bar has gone up, but founders' expectations are higher. Like founders want higher prices too.

15:51Not always, but often some of the expectations, if you talk to folks that have been around for a little while, are utterly insane. A lot of the founders in the latest Y Combinator batches have had revenue for days and are raising it$25 or$30 million post-money valuation, sometimes as high as$60 million post-money valuations, and then hoping to triple that in another round within a year. If you think about it from the other side, that's a big ask to your VCs. Maybe it's market. Maybe you can do it because YC is a hot brand or you're a cool AI startup. But for VCs to make money off that, that's pretty hard.

16:26So not only have VCs expectations in general gone up, even though the public companies are growing more slowly. Founders are asking for higher prices and lower ownership, which pressures the VC model. You just need to be aware of it. It just is a reality. You don't need to have any pity for VCs, but realize when, in many cases, startup valuations have doubled over the last four to five years and maybe tripled or quadrupled for AI companies, it's not free. You might get the term sheet, but the expectations are equally as high. And just lastly, and then we'll move on to the next slide. It just is interesting.

16:58Across all of the Iconics, it's just interesting to watch how efficient the companies are getting. So they're going from 90K in revenue per employee up to 400K, which is the standard to go public. But I do see, as a side note, but for folks that just want to get funded or otherwise, I see too many folks as they're scaling these days that still have too many employees. There's just too many. I think the number one root cause is They bring in new VPs, new CMOs, new CROs, new C-whatever-Os, and they bring in folks from the 2021 era who want to just have large teams, teams of 10, 20, 30, 40 million, 40 people, not million, to build out their function.

17:38They need 12 people in finance and 21 people in demand gen. And it's just, that's becoming increasingly dated and hard to support. But it's interesting to see the ramp here. But yeah, this is the bar, like it or not, to be in the top quartile. And a couple other quick things, and then we can open it up to questions. So on Saster Dead AI, which is our new platform, Saster.com still hosts most of our content, but Saster AI is where we're building all of our tools. There's so much stuff if you click on this little AI VC at the top right. And one of them, I'm going to promote this more, but we've taken, we've done 300 and something startup valuations, which you can get for free in our tool and almost a thousand DC decks and we have so much data, aggregate data, we don't retain the debts, but we retain the aggregate data that we can show you trends.

18:27And so I think the iconic slide summarizes it all. If you want to get funded, you want to hit that. But do you want to see how you really compare to your peers? You can go to AI DC and just compare it across here. It's 108.5 thousand calculations. And so across everyone that's used our AI calculators, how do they look at Series A? So this chart's just a little bit interesting. On the left, you can see traditional SaaS, AI-enhanced SaaS, and AI-native. Their average growth is 180 % at about$5 million for AI-native, 100 % for AI-enhanced, and 75%, which means you're not going to get funded for traditional.

19:07They're all around$5 million ARR,$5 to$6 million ARR when they go out for the Series A. A lot of folks will do a series A at two to three million. We can answer that in the Q &A, but this is an average number. Some folks will take longer, but the average B2B startup is at about five to six million when it raises a series A, but the AI ones are growing 180 % and the non-AI are growing as low as 75. It's just the reality out there. It's different worlds. And you can see why the VCs want to invest in the ones with the higher growth. Okay. And maybe just two more things. Then we will, again, we'll open up to questions.

19:40We have another tool, which you can get all the data that you just saw on Saturday on AIVs. And then we have something that I think is pretty cool. It's been used. Again, we'll cross a thousand times. I think later this week, we just launched it where if you upload your VC pitch deck, we will give you an incredibly deep amount of feedback. These are just the summary scores. We'll tell you how a VC will see your traction, how they'll see your deck. And overall, we'll give you a grade and your odds of getting funded. We'll compare you with all other founders. We'll tell you what looks good in your deck, where you should improve, what you should edit.

20:11And if you want, we can, not only can we give you incredible detail, but we can even write an entire, use AI to write an entire investment memo to see, tell you how VCs will see you. Like, it's pretty cool if you go to AI VC and just upload your deck. Look, you could, maybe don't do it like 500 times because it costs us like 10 cents each time you do it, but do it as often as you want. I don't, we don't literally see them, but we see the activity. I know multiple folks use this again and again. They'll upload their deck and they'll get a B and what do you want? At least a B plus or an A minus.

20:38and they'll tweak it or they'll go next month or others. And don't go into, I see way too many founders confused, optimistic, ignorant, getting bad advice. Don't, we will do this for you. We have incorporated all these valuations, all these decks that we've ragged in 800 plus VCs that have spoken to Saster. And in just a couple of minutes, we can tell you, we can give you an honest, you don't have to tell anybody, you don't have to share it with anybody's score of how your pitch deck looks and how your company looks for funding. So don't go in blind. just use our free tool. And then yeah, use the metrics.

21:13And you can see this is interesting on our tool. We've graded 932 decks in two weeks again. So we'll cross a thousand soon. We've done 387 ,000, 378 ,000 valuations. 1500 founders used it in the last seven days. 17 % are top tier. So 17 % got an A minus or above and B minus, as you can see, is the average. When we first built this, We've inflated the grades at first to make people feel better, but quickly decided that was a bad idea. This is an honest grade. So if you're in the B's, here's a way to use our tool. If you're in the B's, you might get funded, but you better talk to everybody. It's going to be a lot of work.

21:49And so most folks, if you think that the average grade is a B minus, there's quite a few F's. These folks are screwing around. And maybe that's helpful too, because people are delusional that we just tell you you're not going to get funded at that growth rate or what type of company. But the fact that most people, if you look at this distribution are B minuses, it's probably summarizes a lot of what I feel too, which is founders, they have something, they're in the zone. It's just not enough. It's just not enough. A B minus is not enough to get funded. So at least we'll tell you. So you don't have to be blind, especially if you don't have anyone helping you.

22:23If you don't know a lot of VCs, if you haven't been through it, if you don't have a great board, we will do that all for you with AI. Okay. My last summary, and then one more little show you our next tool, and then we will open up to questions. How do you deal with this market? How do you deal with the bar where it is? How do you deal with the fact that 80 % of VCs want to put 80 % of their money into replete, lovable, cursor, and friends? What do you do? The first one, and this may sound basic, but man, I see so many founders don't do this. Ask your existing investors. If you have any investors, seed investors, pre-seed angels, devils, um, seed, ABC, whoever, ask them to be honest and just put them on the spot because VCs won't volunteer this.

23:10Your angels won't volunteer this. How on a scale of one to 10, how good a startup are we? And more importantly, what are the odds we can get funded for our next round? Ask what the odds. And if you have any experienced investors, they will exactly have their opinion on their odds. Now, they may not be perfectly right. but push them. Tell them you want to know an exact number. What are the odds I can raise enough around? Give me a percentage number. I think actually our AI tools are better, but use them both. Use the humans you have and use our AI tools. So ask. The second one, and this was a big deep dive on our 20DC conversation this week.