20VC: Linear's Karri Saarinen How to be Grow Capital Efficiently in a World of BS Growth | How to Fundraise with Leverage | How to Select Investors and How to Give Them Homework in the Raise Process & Growth Lessons from Airbnb and Coinbase

0:00I've never been happy with a 20 % delusion that was rather see it at like 10 % or less than that. The only real protection you can have as a startup founder in your business is to be successful. If you're not successful, there's a lot of ways investors can exert their control. This is 20VC with me Harry Stubbings. Now the show state is a special one. In a world of fake growth, bullshit fun raises and hype, Carrie Sarenan has built the most most incredible, sustainable and most importantly, capital efficient business in linear, where he prioritizes long term, profitable growth, rather than falling for the raised big, spend big mentality that we've seen so much of, of all the companies I'm an investor in, I would say I get two times the number of intro requests for linear and carry, then all others combined.

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2:37You have now arrived at your destination. Carrie, I am so excited for this dude. I've wanted to do this since we first started working together, so I'm thrilled that you join me today. Thank you for joining me. Thanks for having me. Now, I was chatting to Miles at Excel beforehand. He said, you've just got to start with Contas. And so I don't want to do like the, oh, how did you come to found linear? He told me I had to ask about potato farming in Finland. Why? This game to be, I think, Gleanair also came to be from my frustration. So I think my frustration living in US or in California at the last decade is that the potatoes here are not very good or there isn't that much of a variety of things.

3:18So when you go through a closest story, usually have four different kinds. You have the large one, the golden one, the small one, and like a red one. And growing up in Finland, that's not the case. Those are the main categories, but then within these categories, you might have different kinds of varieties. And some of them are more seasonal and some of them are more specific to a region in Finland where they're grown. So in doing summer and Finland you go to a crosses store There might be like five different kinds of different varieties of the same kind of potato like the same category And then like some of them might be picked this morning and they're like really fresh and that tastes and the Texture is very different.

4:00It's they're like very buttery that potato flavors much more stronger Even if you just boil them you can taste a lot versus like if you boil normal potatoes. I think you get on a grocery store, they don't generally taste that much anything. I'm so sad that there isn't good potatoes in the US, so at least I haven't been able to find. So I like going to Finland in the summer, to buy some of these potatoes, but I've been also growing my own. We have a little cottage and it has a space to farm things, so I've been growing my own as well. I've never met a potato nerd. That is the nerdyest description of potatoes I've ever heard.

4:39All I say is I hope you didn't use that when you were dating your partner. Clearly you didn't, because it converted well. But moving the potatoes forward, before linear, you worked at Airbnb and you worked at Coinbase. Two of the most transformative kind of product talks in the business. When you think about like, impact, which one had a bigger impact on how you think about product? With Coinbase, I was there much earlier. So it was when I joined, it was only like 12 people or so. And then when I left, there was less than 100 people. also, it was more of their early stage experience. I think the main thing I saw there and learned there that how much you can do with very small teams.

5:18A lot of the features we built and they were used by all kinds of companies and large groups of people or very much revenue went through them and those features were maybe built by one person or two people or three people. For example Coinbase exchange, which is the trading platform they have, that initially was built by one guy. He was in a room and then he was building it for maybe six months, but he was built by one guy. And then when it went live, it already transacted maybe millions or tens of millions of dollars, and today it's probably transacting billions of dollars. That was one lesson I learned there.

5:55And I think with Airbnb is much more about, I think Brian Chesky is very driven or a passion about the experience, like how does this feel and like how we want the company or the product to feel. That was really great to see that you can run company that way, that you can actually focus on the experience and you don't have to focus on some of the other things like metrics or I don't know, something else that people tell you to, but the experience is the most important thing you can focus on. Can I push you? Which one's a better leader? Chaski or Armstrong? I don't know if I want to answer this.

6:30And again, I would say they're very different kind of personalities. I also think that they're probably like a really good fit for the company. They're operating. If both of them would have started company again and you have one angel check, which one would you invest in? If I really had to choose, I would really choose Brian Chesky. I think he's really this power of nature. He can try to do anything. I think Brian Armstrong is as well. If you put Brian Chesky to do something like he will really do it, then he will have all the energy to do it. So I would bet on him. Are you kidding me? Have you seen his weightlifting days?

7:05This is a man who when he sets his mind to something, he goes for it. Unbelievable, totally understanding, get you there. It listening, he was the inspiration behind founder mode. I have to start giving your answer there. I had Zach on from Plaid. And he was like, actually, I think founder mode is gonna be incredibly dangerous for a cohort of founders. And it's gonna allow for a lot of bluntly bad behavior. How do you think about an assessed founder mode given your contacts with Brian and also now being one of the hottest founders in the valley? Yeah, I mean I agree with you, it's a fact that it can be dangerous or the essay itself.

7:40It's not very clear what it means and like the standard advice is like you hire really good leaders in the company and then you let them do the things. The thing with the founder mode I believe was about that you should do that. You should hire some leaders. it's not that like as a as a founder you should be operating everything, like doing everything, operating everything by yourself. But you shouldn't also sit on the bench while everyone else is on the playing on the field. But you are allowed as a founder still be on the field, you can still play some roles in there, like some position there.

8:15You said about kind of sitting on the bench when someone should maybe be on the field. If I would have pushed you and say, where did you sit on the bench too much and you should have been on the field more. Well, the first or the last two years, I was maybe too much on the bench when it came to the quarter market function and the marketing or the sales function. And now maybe last last six months or the last year, I've been focusing on it much more. We have weekly chats about it with the, like, the leadership team there. I think the reason for that is that my background in design and for example Airbnb on Coinbase, they weren't very like Gold and Market driven companies.

8:55You didn't have sales people in the company, but when you are building more of an enterprise business and selling through enterprises, it can be the Gold and Market function can be more complicated or it can be more nuanced or there's something more in there. To me, I have to learn about it, I have to learn about these things and in order to be more effective there. You know, we mentioned kind of growth in different periods of growth there. I have to start. You said something to me before the show about quality growth over hyper growth. What do you mean by quality growth and how does that differ from hyper growth?

9:28So with linear, we've been growing much more this sustainable way or like I like to call it more like a quality growth way. And what it means that the growth is based on something real that is working in the company and it's not something that is artificially choose store or it's not like the crocis on steroids. It's like the crocis coming from the fact that you go to the gym. That's more sustainable than using steroids. You should probably shouldn't use steroids, but maybe you could some people might use it at some point, but it's not sustainable. So similarly, I think startups, we have this culture of growing fast, scaling fast, trying to hack our way to the croc.

10:08And to me, it feels dangerous because it's artificial. Some companies is they put a lot of money into their growth. They can get the growth, but they also spend more than they're making. And eventually, that functions doesn't work. Like, you need to keep raising more and more money, and it might be really hard to actually turn the function now to actually make money versus like spend it. So for us, the quality growth has always been the product that we almost spend no money in marketing. We didn't even have sales for the first three years. We just wanted to see that the growth is coming from the fact that people find out a product better than anything else out there and they will pick it up and they will buy it and that's like what the real cross to me means and not something like you you spend your money on.

10:54Founders listening will be going great I get it but I need to raise money again I need a series A I need a series B whatever that is I am looked at in a comparative stack of companies and if my growth rate is 2x and there are companies who are growing 4 5 6x AI my revenues are unbelievably different to what we've seen before. I'm just not going to raise money. So it almost feels like quality growth is a luxury product. And I need hyper growth because that's the only way I can get the next round. What would you say to that thought process? Well, I think that's exactly right that you need to crawl through to raise the round.

11:33But there is the other option if you just think about this problem is that what if you don't need to raise the round? like what if you can sustain without raising around or you raise some round and then you just try to focus on making the business function work that actually try to make money and not spend that much money and then you're no longer gonna tie to those metrics because you don't need to raise and if you can get to profitability then you probably you don't necessarily need to raise ever again you can if you want to, but you don't have to. So it definitely depends on your market dynamics, like how hard or fast you need to go.

12:13But what I advise founders is that you should think about what game you're playing, what market you're entering, what you need to do there, what's the dynamic there. Like our market, it was kind of clear from the beginning that the way we win in this market, it's not like a fast moving market there. It's basically one solution every company uses. and it's been there for 20 years and it's kind of the legacy solution. And it seems like nothing has happened in the last 20 years. I don't think there's a lot of happening the next five or 10 years unless we make it happen. So for us, it creates this market where we think it's not necessary to go the fastest as we can, but we actually need to focus on being the best as we can.

12:56There is that cost of trying to grow too fast or growing too fast, the cost there or what you sacrifice is the quality or the not actually focusing being the best in class for the product. And for any founders listening, do not listen to Carrie. You should absolutely get on the VC treadmill. Otherwise, I will be unemployed. But no, I completely agree with you. I think the thing is so interesting. You mentioned kind of bluntly making money from your customers as well there and being more proactive in doing so earlier. You made money year one. You were profitable year two. How do you think about shipping feature products that can be monetized quicker versus the founders that say, well, that's fine, but I need to do a platform approach and actually it's not possible to do that until 24 months in.

13:44I think startups should always speak at more focused annual or like some kind of niche that you hit first, like some kind of smaller group of people that you can serve as soon as possible. Even if you have this idea of a platform, you might also find some use case which you can do today with a simple feature that get people into that platform and you can start building the platform with them. So I don't think it's just going to find a way to do it. Either you build a platform or you build this like feature product. There is always a way to focus what you're doing to some group of people, build something really great for them and then expand from there.

14:23And I think generally that's the right approach for any startup. You shouldn't try to boil the ocean. You need to just boil the pot and get someone in the pot and I cook with them. But I think the biggest reason why companies are what would don't find product market for this fund is get really nervous pre -launch. They expand the ICP too much and then it doesn't resonate with anyone. They don't get a thousand true fans and no one really gives a shit about it. Until your point exactly like find the 1000 people who will really care and pay and love it and expand from there. Totally agree with you and get you that profitable in year two.

14:55This is a very rare thing carry being profitable. What is wrong with you? My my my questions around that is the counter argument will be why didn't you spend more on acquisition? Have higher cacks the retention is great people love linear as a product Just pay more and get more people faster. I mean there again like it goes to the Strategy we have is we want to be the best tool and there's sort of certain beliefs what we think get us there one is that the team should be more like smaller and more focused than if I look back to different jobs and different companies I always felt that the smallest teams made the best results not like not all the time but usually when you put put this special team together that are really talented maybe it's only three people or five people or something they could make really big impact in a company very fast that's something we believe in so one of the main sources of expenses is obviously it's hiring.

15:52If you have a large team, you spend a lot of money every month. We took the different approach where let's us find, try to find highest quality people we can, and then not grow the team too much because it can cause additional problems. It can do a little to culture. You spend more time managing things and you have to own board people more. So with generally our growth rate on the team size has been 2x per year. So part of that, the So like, hitting profitability is that the revenue grew faster than we were able to hire the team. And then like, when it comes to the marketing expense or some other expenses, again, part of it, it is that I want to see the growth is there even without the spend.

16:34And then secondly, the product hasn't been ready for everyone from the day one. Again, like going back to the focus of like finding your first group of customers,

16:47like small startups, early -state startups. Those people don't even look at ads. I don't think they big products because they see ads out there somewhere. They big products because they hear about it from their friends or other founders. I think the word of mouth and connecting with those founders is much more important than spending money on ads. By the time of SeriousB, we only had spent like $30 ,000 in advertising and 30 ,000 I think went to I think to your podcast at some point and then it went to another podcast so we basically did two podcasts sponsorships with that money and nothing else.

17:25But now we are spending more money and advertising because now the products is actually working for a wider audience and it's working for larger enterprises, larger companies and those people need we need to influence them a little bit like they need to see that we're there we're around we we're like a serious company so there I think they advertise and makes more sense but in the beginning I don't think it made sense. Do you wish you'd gone more enterprise earlier? Not really the way I look at this is that you have the product and you have marketing and then you have sales in order to move to the next segment of the market each of these functions just gonna have to elevate at somewhat equal pace.

18:04So when you're selling to enterprises, obviously you need to have the sales team to figure out how to do that, how do you work, like an enterprise account, how do you talk to people there more and how do you influence them. And then the marketing has to be there that people have to know about you. They're not gonna engage in a sales process if they're never heard of you and they don't understand what you do or why it's better or something. And then the product has to be there that eventually, to live, they actually buy the product, it actually has to work to them well. So we started getting some of this enterprise customers, like maybe a year ago, like just before our serious B and that was kind of the story there.

18:40It's like, hey, we are seeing now that enterprises are buying this product. It just doesn't happen very often right now. It's a little bit special companies do this that they see the value earlier than some others. And now one year later, we have the switchers every month. So it's like it has gained a little attraction, but we need it this year to figure it out and improve the product and get Few of those customers in so we could see like where the product breaks down and then we can fix it and then we can see like in our sales Conversations, what do we need to do on the marketing side and then on the sales side?

19:13We need to obviously see like what do we need to do on sales side? So I think there's this like you need to kind of keep elevating each of these functions and you can just jump in and like hope for the best You mentioned the series B there. I mean, treat. When you're profitable, why raise another round? Why dilute more? I think it's still something like we have definitely, I would say, like I'm still figuring out or and I've been talking to people about this, like, do we need to raise more money? Like, is that what happens? I think there are some basic reasons. Like, one is that it is useful to mark up the company every now and then like we were, we raise serious B maybe almost three years after the serious A and it's annoying when you talk to candidates and you say like you're a serious A company and they think that your technically a serious A company but technically you're a more like serious B company in terms of your revenue or something.

20:03And then like there's this like disconnect of Hey we can't give you like one percent of the company like a serious A company could because we aren't just like much further along. So there's this like disconnect between the equity value and so marking up the companies is useful. You can do it other ways to you don't necessarily need a round for that but I think there's also like signalling with the customers as well. You're no longer a serious A company. If you are a serious B company, it sounds more serious because there is a lot of C or serious A companies, but not that much serious B companies.

20:36How impactful is having Sequoia for hiring? It's going to hard to tell, but I would say the thing, let's say we didn't have Sequoia or any of them. We didn't have any VCs. We would be just push -strap. I think what you're signaling with VCs or Sequoia is that you are really aiming high. Like you have a high ambition, you want to make this big. And for the candidate, it can feel like it's, I don't think it's a major thing that people big companies just because they have this VC invested in them. But it can be one of those like safety things that at least the company is not horrible. It's only terrible what they do because someone believed in them and like a tier one VC believed in them.

21:15So I have like a little bit of signal there. So I do think it is meaningful. I wouldn't say it's the main driver, but part of this raising around is about the signaling with the candidates and the markets. And then I think there's each time we raised around, there was definitely some level of uncertainty. With the serious B, we raised it at the time when the market was quite bad or looking to be quite bad. Companies were doing layoffs. They were shutting down. It was hard to tell, is it going to get better or worse? It's one of those safety things that we, again, we want to be here for the long term and we want to be a sustainable company.

21:53So raising around now versus waiting until we are kind of the market is really tanked then everything is bad. And we have to then go out there to raise because our revenues drop, then we are no longer profitable and such. How much did you raise in the B? It's about 30 million. Why did you decide that was the right amount? So usually with the rounds, I always focus on the dilution obviously. I think that's like the main thing you want to control ideally and what dilution you happy with per round? Well, I think it changes per round, but I think it's as low as I can get it or as low as it makes sense.

22:30So I've never been happy with the 20 % dilution for example. I was like even in the earlier rounds, I was rather see it at like 10 % or less than that. Can you get the Sequoia for 10%. I mean, I would say, I don't know what you have to ask for that, but I think it's possible if you have the leverage to do that. The thing with Sequoia is that they did invest in seed on serious A. And like one of the reasons we did the serious A with them is that we could push the dilution lower because they already have ownership. So it's like one of those things you can optimize for. But I don't go super hard on optimizing on any of these things.

23:07So often it's a matter of like, what do we think is like reasonable valuation in terms of our progress? So I'm not trying to get the highest valuation possible. I think it's dangerous. And what we've seen in the past couple of years that it can lead to down rounds and those are really annoying or unmotivating to people. So I want the valuation to be good, but not not something that it adds like overly a lot of pressure or like we get ourselves kind of locked into this valuation gauge and we can't do anything anymore. But I rather see like a good progress on the valuation and then like push down the delusion to the level that it makes still makes sense to the investor.

23:45I want the investors still to be engaged in the business and not just like well I bought 1 % I don't really care. But I think it's depending on around it. it should be enough for them to care, but as low as possible we can get it. Should founders have a board from seed from A? I would say like personally I think you shouldn't have a board at seed and I think you can raise a price round. I don't think you need to. You can do a say from that seed. At a series A, you can think about it. I do think it's like we added a board to the series A. I feel like it's It's kind of like a standard thing where I think it's, in some ways it feels good governance to have someone outside or there.

24:24And then I think with the serious B, we added another board member to kind of get two different perspectives in the board meaning so we just don't have us. And then I want to invest there, but we now have two investors and then us. But I would say like on the board, seats, I would definitely think about controlling them or having a little bit more a feel of solo founder. you probably should have more seats or more voting on those seats. We have three founders, so it's been like kind of working out that way. We can have three, we negotiate it. The hub three seats from the beginning and the VZ can have one, and so we can like retain the control of the board.

24:58But me and like even our legal counsel, I don't think some of these tricks don't really work that well anymore, and I don't think I saw this interview from Barker Conrad, and I think he said that the only real protection you can have as a startup founder in your business is to be successful. If you're not successful, there's a lot of ways. It's not about the board control. It doesn't really matter. There's a lot of ways investors can exert their control. They have much more experience in that than you have as a founder. The real protection you can have is to be successful and not overthink these different terms or controls you can have in the legal framework.