20VC Roundtable: Are IPOs Back? Is Growth Dead? What Does it Take to Raise a Growth Round Today? How Do VCs Solve The Liquidity Challenge? Will We See a Massive Resetting of Valuations? AI Hype Growth Rounds?

24:40And will you guys because there are macro impacts still we're not over these macro impacts Will you take a lower growth rate with an azois and daggern assume it will reaccelerate if we have a very efficient model, right? Will you settle for a slightly lower growth rate today than maybe two or three years ago because of macros or is there no credit for is it the Harvard AP biologist? Jason, I think the problem is it I think it's kind of very important to generalize the answer, right? Because take a consumer growth company, right? I think there's lots of examples and TCV as examples and I'm sure we have examples where or he did a consumer of growth company whose growth rate was really just driven by a payback theory that just didn't make any sense.

25:17And if you say, okay, I'm gonna change by payback theory, I'm making up numbers from 24 months to 18 months or 12 months based on kind of the gross margin and what my add costs are. That growth goes slow down, it might not re -accelerate, you were just acquiring customers that were not gonna long -term be profitable. Now that's one example. Another example might be kind of an enterprise software company whose customer acquisition costs got really expensive because they bought too many seats during COVID. and they overbought. But the fundamental macro of that market for the next 10 years is great.

25:45They just got an overbought period. So you cut some of the expense, but that business will probably re -accelerate once they get over the hump. So I think the problem is people always want like the easy here's the one rule and just follow this rule. How it depends on your business model depends on kind of what's changing about your income statement, what effect did your growth rate? I mean, I guess if it was an easy rule, none of us would be making much money doing this. It is a little bit dependent and on the business. It's a good question, Jason, but I think you spend a lot of time on product, understanding where the product is, understanding how the customers are excited about the product.

26:17David mentioned one of the things that you certainly have seen, which is folks overbought. So understanding what the core value of a product is, what should the pacing of a customer relationship look like, all of the metrics of gross retention and net retention, which are really important. But if you think about one of the things that drives net retention, obviously besides gross attention, that never attention is what are some of the other products and features that you can add to the customer. And to me, the thing that we spend time on is if you are really embedded in a customer. And by the way, this is whether you're talking about a consumer or whether you're talking about a small business or an enterprise.

26:52Are you valued enough because of what you provide? You're in a really strategic position. So as you build more functionality, you have a right to win that for someone else. And the magical companies are the ones that when you're three years into your home or more, the opportunities that you're talking about are product initiatives that won't even be discussed when you made the investment. And that's companies that are really, really focused on innovation and iteration. There is no math problem that can do that. This is to Devon's point that like, that's the thing that you really have to understand.

27:21What is the opportunity? What are the problems that the end customer has? What are the solutions? And why is the company that you're getting excited about? Why can they take advantage of that opportunity over the long term? And some of it may be a numbers issue, but the inputs that are most important are tell me how good the product is and how it can be extensible over time, you know, given your position with the customer. We've spoken about revenue multiples quite a lot. I do have to ask Jason that said to me before about how he, bunny believes in the broken nature of kind of a stas venture investing.

27:50And I'm probably butchering this Jason. So do correct me if I'm wrong. But if we assume that, you know, 6XARR is kind of the trading price for public sas companies days, chasing thought that maybe is that really high enough to sustain a true growth market? How do we feel about that if six X's is the new normal and not just an adverse time? Look, I think Cliveo is trading at eight times forward, growing at 50 % with, I think, profitable. Shopify concentration, maybe that's an offset. But look, if 50 % growth with great economics or eight times forward, there's a lot of companies that have less good economics.

28:25What I would say this, the least active part of the growth stage market is late stage growth. And I'm defining late stage growth as what you speak all pre -IPO. You know, however you want to define it, right? I'm going public within a year. But I think frankly, it's the least clear of how you underwrite your return. Because those companies are looking for valuations that is some cases are north of the public cops. It's very different when you're investing in a $20 .000 revenue company or $15 .000 revenue company. You're making a different bet. You're making a bet that's four or five years out.

28:55And your revenue multiple assumption is more based on how fast can you kind of grow over that period of time. Totally different for what the parry you do and what Jason does, like that doesn't really matter in my view where all that is trading. So I think the market that's the most stuck right now is that late stage growth and is probably where you see the least amount of deals in now. It's data bricks would be the one exception of a big late stage deal that's gotten done. Okay, so it says the least activity there, Devon, I'm improving a bat to Jason here So I've got a lot of money on the table.

29:25This is the least active area is that late stage growth Does that not mean that we're gonna see a further delayed IPO window opening Jason things age to 2024? I'm saying with the as you said kind of frozen nature of late stage growth. It's gonna be age to 24 No, I've cool nose. Let me start by saying since the chairman of the said can't predict the economy me, I'm certainly not going to try. But I'm probably a little bit more optimistic. I'm probably closer to Jason. Back half of 24. I don't think the activity in the late stage market is necessarily a driver. You pointed out correctly earlier that there's tons of software companies with a hundred or 200 million dollars of revenue.

30:04Some subset of those are potential public companies. And there's no need for them to do a late state round to go public. It used to be that people would do these rounds just to kind of get a third -party validation of value. Let's take Instacart as an example. What would have been the value for them to do a late stage round before they went public just so that they could tell their employees, yes, let's definitively tell you the worth less than our last round. Now, the public market became the late stage round. And so I think that that's really what you're going to see. I think you're going to see companies that have a good economic model, that have the predictability, that the public market's crave, that have got the balance between revenue and path to profitability or profitability, and the public market's going to determine what they are willing to pay for that.

30:44And over a three to five year period, they'll trade based on the underlying economic value that they can drive Which is kind of the way markets should work So I don't really see a relationship between a slowdown in the late stage market and the IPO market I think they're kind of right now disconnected Yeah, I'd look at it as that's gonna be up to the companies Do you want to bet on yourself? If you look at the three IPOs that happened, I believe they all sold less than 10 % right? So that's a small percentage what they were doing was you know, we referred to it as putting the puck on the ice The only thing that's going to determine ultimate valuation is your execution.

31:16Press loves to write about IPnode price compared to last price and everything. It doesn't matter. It literally doesn't matter. And by the way, it matters less when you sell 6 or 8 % of your company or something else. Put the ball in play. You can give your shareholders, if you know, or shareholders need to get some liquidity great. Put the ball in play. Reasonable price. Over time, the long -term public managers will find the best position businesses will build positions over time, I think it's only goodness. And you're betting on yourself in the sense of you're like, I can grow my business at 20 % you know a year for the next five years or maybe my profits will grow faster and you know that's one of the things that the markets are interested in and there's benefits for me being public maybe I want to do some M &A it provides liquidity for shareholders and you know and employees.

32:04So to me I actually think the markets are open but But you have to rip the bandaid off and not be wed to, oh, but in 2021 I was valued at X. It doesn't matter. If you're a public company today, that's in the rearview mirror. The public companies that do that same analysis, rip the bandaid off, they can go public if they want you today. Can I ask a related question, just to you guys, neither of you did the last round. I mean, I'm a super fan of Klavio for many years, right? Neither of you did the last round, right? We're not in it. We're not in it. So the last round I think was at nine and a half billion.

32:33I didn't look up the S1, but let's assume it's trading slightly down for purposes. behind the scenes at the late stage investors. What are they talking about? Have they already adjusted it? Is there stress around it being slightly down? Just tell us, because I just don't have that visibility about what those conversations happen behind closed doors at the late stage. There shouldn't be. I mean, it's not a surprise. Like, I can already look up with markets since the Q4 of 2021. Yeah, what I'd say Jason is that I think, I push it off the top of my head. I don't remember who the late stage investors are in Clivea, but let me make a slightly different point.

33:04but I think Summit did the one before and bought like 40%. So I think they did. Summit made like seven times their money. So they're just fine. But we have like say two companies right now that I know of that are looking at doing kind of a late stage round sometime at the end of this year. But here's why they're looking at doing it. They're looking at doing it because in both cases, companies have executed unbelievably over a very long period of time. They have a very clear path to real margins. neither management team has really ever taken any meaningful liquidity at all over a very long period of time.

33:37And they're kind of looking to do around to provide some liquidity, Pringy and IPO, because I think we're also in a market where investors or management teams selling it to an IPO is a challenge. Right? It's not what people want to see. And I think that the most likely investors that are already talking to them are the same people who are going to buy stock if the companies go public in the public market, some of the mutual funds is an example. And why is that? Well, these offerings are getting very small. So if you are a growth manager, you actually need growth product over time, right? Like you're not a value manager, you're a growth manager.

34:10We need to find growth stocks to buy. And once they're so little inventory and the amount they're selling is so small. And the size of the fidelity or vanguard of Wellington fund is so big, their ability to buy a position in the public market is actually not that they can't get much allocation. These actually even become ways for them to build a position in a company they want to probably hold for five or ten years. Now that might be separate from a hedge fund that might want to flip it in a week. That's probably not who you want in your late stage round either. Again, I don't know the specific answer on Claday out because I don't know who it is.

34:44But I think the people who are looking at these right now are looking at these in a rational way. They're not expecting to make a massive return to IPO. They're kind of building a position in a company that they're probably going to stick with. If you did the Insta Cart round at 38 or 39, whatever it was, right? What happens behind the scenes? If you already marked it down so long ago that no one cares, do you just fire the partner that went on the deal? I mean, you think I'm kidding, but in my limited experience adventure, I've seen folks kind of get shown the door on deals, right? What happens behind, I mean, it's a wildly successful company Insta Cart, right?

35:17Yeah, no, look, thanks to the guy who said, either, what are you right or not, or one of the deals you're talking about? But what do you think? What happens in those partner meetings? and Harry or Jason did the deal. Harry and Jason together, we split the deal. We're in a risk business. If all of a sudden you start smacking people on the hand, if they make a mistake in a risk business, what are you gonna end up with? You're gonna end up with a risk of risk set up of investors and your next fund is gonna be like a 1 .6x. That's not exciting. Yeah, that makes sense. Yeah, obviously somebody, I guess, did it 20 times like at some point, but I think that I don't.

35:49I don't think anybody's gonna escape 21 without having made mistakes. Right? I don't sure if they didn't. Right? After no matter who they are, no matter what their reputation was, no matter where they are on the minus list or some other list, you know, they've made mistakes. What he's made of, I've made them. But I would tell you that the one is that we've made in 21, a lot of them are marked down substantially. So if they did a follow -on round or they went public, it's not gonna be a surprise. It's all been internalized at this point, right? Yeah, but this is the point, Jason. It should have been.

36:16And yes, there are people that may be living in the past saying, well, you know, gubbing still doing well. I will be changed that the multiples just will get up on with markets. So anybody that has a methodical valuation process, things are marked to market or as much to market as you know the prime can be. I had dinner last night with a manager who manages close to a trillion dollars, one of the largest asset managers in the world and he said, I look to the three IPOs Harry and you won't get it young, young one, but this is not good. These were not good I'm not optimistic when I think about this is the opening that are of that basically was at the concert.

36:52They're all flat. There were no big buyers in the books. No one was stepping up going, oh I'm excited. I want to buy 10 % it was widely distributed amongst the institutional buyers and then performance post has been lackluster. Do you think that's fair and do you share that? I don't. I think this is the same when you have small offerings things like that. Small changes in volume can have massive impacts. What's happened since all those guys went public? You had the Fed comments 10 years now over 4 .5%. I think a lot of it's macro. I guarantee you, and I'm not a trader anything, but I guarantee you that the short interest is probably off the charts on every one of those.

37:31So I wouldn't say at all that the stock performance is indicative of the underlying companies, but as much about trading volumes and how certain people are approaching them, those opportunities, small float, you're going to have lock up releases in the future. We'll short against those distributions in the future. So I understand the comment, you know, we have to start somewhere and I personally think, let's see how the company's report. I would expect that the companies will have been thoughtful about this and they will, you know, continue to report solid numbers. But the fundamentals again is valuation is only determined by your performance and going public in a market like this you're betting on yourself so yeah be great when there's more volume and more liquidity but I don't look at this as a failure again you may not have as many people that are lining up to do this because everybody thought maybe these all the stocks would shoot up by 40 % and then there'd be a blind out the door it's just gonna be a little bit harder and I think the macro is at the consideration yeah I also say how you look I look you can wake up in the warning and decide the glasses have empty or you can decide the glasses have full.

38:37We went over a year without any tech IPO. We went about a year without any kind of meaningful, large strategic M &A. And we went through 12 months where every infrastructure software company was talking about cloud optimization which was driving down their volumes. If you look at the last quarter, that's kind of bottom to start moving in the right direction. Cisco just bought Splunk. You had three companies go public at real scale, which are real business models. companies that don't have business models. These are companies that are profitable, good companies. Maybe it's the car's out there yet, but it's on the path to getting there.

39:09And so look, I look up and say that to me is a glass half full. But if somebody wants to wake up and say it's a glass half of them, do that's their broad angle. But I actually look at it much more like what he is. My question to the group is this, for the sake of the larger, this is the flip side of the Bill Gurley point about direct listings and efficient pricing. What if Clevio had decided to, I'm just looking today, Clevio is at 36, okay? I think going to Devonsport there's nothing to knock Clayview other than the Shopify dependency. Okay, maybe a few other things. It doesn't get much better folks than 600 million growing 60 % profitable with almost 120 % NRO from SMBs.

39:45I mean, you can't find a better company, but I think it was price to perfection the round or price to optimization. Should it have IPO to 25? A company leaves a bunch of money on the table or takes some delusion, not cool, but the market's restarted, right? Should Did you take one for the team as the question? Because if everyone made 40 % on Clavio, would people be rushing for another 30 or 40 SaaS IPOs? Maybe, but you made the right point. Because if it had that happened, we would have five articles about the billions of dollars that were left on the table by Clavio Cheryl. Cheryl, there would be four editorials about the IPO market scam, right?

40:18So, like, would it be better as growth investors, would it be better for you guys? Because would it help the rest of your portfolio sort of create liquidity in the market? What, right? Other companies leave money out of the table and have great aftermarket performance. I'm not complaining if that's your question. Sure, that creates more sizzle and institutional investors, mutual funds and other drawer buyers are sitting on a portfolio that's up, which gives them more confidence to buy the next issue. But at the same time, you have to expect the companies are going to try to be reasonable about their pricing.

40:49But I also think don't underestimate Woody's point. There's a lot of macro uncertainty. even over the weeks that these deals were getting done. In a different world, that level of macro uncertainty, these deals weren't of gun done at all. For sure. Yeah. You're gonna go public? It's gonna be volatile, but I'll still stick to my point, which is ignore the noise, focus on your business. The only thing that's gonna determine your ultimate valuation is how you perform. You put the puck on the ice, you're gonna start being able to, you know, to public market wants. Oh, here's the new CEO. Let's see how he does against his guidance.

41:21Like, does he understand his business this is a communicated well, start the process. What do you say ignore the noise? One thing I do have to ask is, lady stage market is pretty frothy for AI deals. How do you think about the lady stage frothy market for AI deals? Haha. Haha. If you step back, this is a remarkably fundamental trend that's going to have significant impacts. We have not made any specific investments, although I would say 100 % of our companies are leveraging AI in lots of different ways, whether it's, you know, I attached the end customer or how you make some of your processes more efficient.

41:57This is the positives and negatives of the business that we're in. We can say it's a frothy market and this is crazy. People are going to lose their money. They're going to boot some of the bets that are made today that will all look back on and say, God, we shouldn't know that. It was, AI was, you know, at the beginning, why didn't we put out of money in there? We could have made, you know, X return. That is the nature that's not an area that we have made any direct investments in. But a good reminder, the reason that people get excited about technology is it can have remarkably fundamental impacts on consumers and businesses alike.

42:27Devon, how do you think about it? We have the active in AI, but I wrote, so if you look at fun 12 or most recent fun, like I think about 7 or 8 % of it is invested in AI companies. Ironically, almost zero of it was invested in 2023. Almost all of it was invested in 2021 in more AI infrastructure companies as opposed to the LLMs. and it might be the one category where pricing in 21 was better than the pricing in 23. I'm glad the only category to that. It's a good quote. So I think that, and like Woody, all of it, every portfolio company is implementing it within their portfolio. Look, we think right now in 23, the valuation were in a hype cycle and the evaluations are way ahead of where companies are.

43:07You're seeing companies who've raised money as recently as six or nine months ago who are already being impacted by something developed six months later. So while we're spending a ton of time on it and we're getting smart on the space we're being cautious this year Just given we're evaluations. Can I ask a real life example? But I literally had a board meeting this week Here's a question about efficiency today SAS startup SMB over 100 % NRR from SMB so pretty good 50 50 zero 50 million NR 50 % growth no burn okay, but not 100 % growth not 90 is that growth? Fundable what's it worth can you give us?

43:41I know you don't want to but can you tell us is it fundable for growth? Yes. And what's the most it would be worth if it's not AI? What's a 5050 zero worth in today's world? Certainly probably worth the club A .O .B .L. Right? That's an interesting insight. Yeah. And so certainly worth the club A .O .B .L. If you have those net retention characteristics in a big tam, like, you know, there's a lot of ifs, which I don't know the answers to, what I would say is that deals will get done at even north of that multiple for a high -quality company that has a lot of runway in a big market, because I don't think investors are gonna assume that everything's gonna trade for six -time revenue until the end of time.

44:15Now, I don't think people are gonna also assume they're gonna trade at 17 -time revenue. Any... You have to have some rationality to what you can assume from an exit standpoint. But at some point, the real question, Jason, is how long is this 50 % growth compounding for? Because my guess is that, but in year five, is it compounding at 50 or is it compounding at 20? If it's compounding at 20, then maybe eight's not a crazy multiple. If it's compounding at 50, it's really undervalued. I don't know the answer, I haven't studied. For good, a good answer. Okay, we're gonna do a bat, me and Jason love a bat.

44:44And now we, there's a Jason there. If you have a bat suggestion, then I'm happy to take it. The two that I'm kind of interested in is like, over and under, and we can choose the company on arm or clavio. None of us are investors then, Annie, so we get. If you know, he's a question, which one I don't know, oh, that one clavio. No, the question is clavio in a year, will it be over 15 billion market cap or under? Well, let's do stock prices because market cap can be there's like ADA calculations for market caps aren't there But it's 36 today so you're asking will it be plus 50 % in a year? Is that the bet?

45:16Yeah, that's it So it's gonna be what is that? The question to me is what should be the underlying return in growth? That's really the question the companies public in theory their growth rate unless the market really inefficiently priced them she's got a compounded kind of where the market compounds and I don't have a differentiate knowledge to say it should compound lesser or more, but I'm probably not going into any company assuming that I have a 50 % IRR. Like I would have to really know something specific that would make me feel like there's something I know the market doesn't know that would make me have a conviction that something was gonna have a 50 % IRR.

45:51I don't know anything, that doesn't mean it won't, but since I don't know anything, I'm gonna assume that it won't have a 50 % return because I'm not gonna assume the public market is gonna have a 50 % return. Woody, the only thing that I would think about it is, If the company's execute, I think there's probably more upside in some of the multiples than downside. I don't necessarily look at some of the multiples in, you know, certainly with some of the newly public guys. I don't think they're remarkably overheated. Okay, here's my bet. I'll let me simplify. Maybe they're on e -takers. All bet 10 grand, anyone that takes it.

46:20The clavio 12 months from when this episode goes out or today, whatever it says, trades at 20 % or higher from where it is today. All bet 10 grand, it's 20 % or higher. I'm going to take Devon's point about Matt. I can't figure out everything I wouldn't bet against that you won't take that bet 10 grand I wouldn't bet against that either. I bet 10 grand would always trade 40 percent 40 pro Oh, you're pretty bowling my investment committee on personal we're on the same side of this bed is the problem Not my investment committee on personal vets is my wife and she would not allow when you take any Suspension thousand dollar bed so I'm not gonna take a bet But you know, I'm certainly comfortable with 20 % assumption not 40.

46:56I don't think okay. We're all betting Who's gonna pay the other side? We're all betting, we're all betting, we're all betting, Clayvios is gonna be 20 % or higher. We're all hoping, we're all optimistic, 20 % or higher in 12 months, right? Okay, that means we're one more out of that. Where's that? It's $877 billion now. I have that. No, I do not follow that market. It's not even growing, is it? Is an arm shrinking? The only thing is that you have one thing, which is you have a massive shortage of chips, generally. And there's massive demand because of what's going on in AI. I'd arve it everybody else or trying to come up with some way to position their chips for that market.

47:28I remember all these things. It may not be fundamentals. They trade off those. It may be the fact that very little liquidities out there. And if people are trying to get liquid that have been long term investors, arm is very closely held. That could impact, you know, the stock price more than anything else. What can I say? I tried. I'm glad we're all on the same side of Clavio. Devon, I'm glad that your wife rules the rules. Yes. Guys, I've loved doing this. Thank you so much for being so accommodating. and it's been fantastic. Oh my god, I just love doing the round tables. They are so much fun, Stu.

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