20VC: The Memo: The State of the VC Market: Why Seed Funds Can't Invest in "Hot Startups" Anymore, Why Series A & B is Terrible, Why the IPO Market Will Explode in 2024 & Why VC DD is BS & Every VC Has More Fraud in their Portfolio with Jason Lemkin

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Podcast Summary: The Twenty Minute VC (20VC)

Episode Title: 20VC: The Memo: The State of the VC Market with Jason Lemkin Hosts: Harry Stebbings Guest: Jason Lemkin, Founder of SaaStr

Episode Overview In this episode, Jason Lemkin shares his insights on the current state of the Venture Capital (VC) market, focusing particularly on seed funding, the challenges in Series A and B rounds, and his predictions for the IPO market in 2024. He delivers a candid analysis of why seed investors are struggling to engage with "hot startups" and shares personal anecdotes from his career in venture capital.

Key Topics Discussed

The Current Seed Market
Active Seed Market: Contrary to popular belief, Lemkin argues that seed investing is thriving, driven by high liquidity and the influx of new angel investors.
Party Rounds: He believes party rounds are not over; rather, they are just beginning, despite some perceiving them as a fading trend.
Investment Viability: A startup with $1M in Annual Recurring Revenue (ARR) and a strong founder is unlikely to fail, enhancing the confidence in seed investments.
Challenges for Seed Investors: Seed investors face difficulties in participating in high-demand rounds, as the pricing has increased since the downturn.

Series A and B: A "Dead Zone"?
Investment Climate: Lemkin analyzes the current challenges in Series A and B funding, identifying a disconnect between what investors expect and what founders are providing.
Product-Market Fit: Many companies that raised pre-emptive Series A funds lack a clear product-market fit, leading to potential failures.
Advice for Founders: Lemkin suggests that founders should consider returning funds if they aren't meeting expectations, emphasizing ethical responsibility.
Market Recovery: Predicts a potential recovery in Series A and B funding within the next 18 months if founders align expectations with market realities.

Growth Stage Investments
Positive Outlook: Lemkin argues that growth investments are more active than perceived and outlines the key ARR benchmarks for securing favorable growth terms.
Due Diligence Concerns: He expresses skepticism about the effectiveness of traditional VC due diligence, suggesting it often leads to overlooking potential fraud within portfolios.

Outlook on IPOs and M&A
Upcoming IPO Boom: Lemkin believes 2024 will be a landmark year for IPOs, particularly for companies like Stripe and Databricks that could ignite market interest.
Market Drivers: The health of the IPO market hinges on the performance of key players and the overall economic climate.

AMA with Jason Lemkin
Generational Work Ethic: Lemkin reflects on why he believes today's workers may not exhibit the same work ethic, indicating a cultural shift in attitudes towards hard work.
Advice for Seed Funds: He shares that seed funds can succeed through serial entrepreneurs who have a proven track record.

Key Takeaways

Seed Investing Is Thriving: There is significant liquidity in the seed market, and demand for good founders persists.
Series A & B Challenges: A mismatch in expectations between investors and founders is hindering investment opportunities in Series A and B rounds.
Growth Potential: Despite a seemingly negative outlook, growth investments in SaaS are still viable, contingent upon efficient management and reasonable valuations.
IPO Predictions: The pathways to a successful IPO market revival are contingent on strong performing companies leading the way in 2024.

Conclusion Jason Lemkin provides a thorough analysis of the current state of venture capital, offering insights that challenge prevailing narratives about the struggles of seed funding and the challenges within Series A and B markets. His predictions for an IPO resurgence in 2024 reflect an optimistic outlook on the overall market recovery.

For further details, listeners can access the full episode on platforms like YouTube and the 20VC website.

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Transcript

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0:00Anyone that thinks seed isn't happening, they're out of their minds. I don't think seed investors can participate in hot startups anymore. The reason there's a huge slowdown at AMB is not because the money isn't there. Everyone that's good has a fund, but it'll be an IPO week in the back after 24. I'm reasonably calm. I'll bet you whatever you want, five to one, that this is right. It'll be an IPO week in the back after 24. My word, what a show we have in store for you stay. This is the memo with me, Harry Stebnings. Now the memo is the monthly show where we deep dive on a specific topic or company.

0:28and state it is the state of the market themselves, from seed to IPO and M &A. What is happening, what is not happening, and what can we expect? And joining me is Jason Lankin, founder of ASASTA, one of the best performing early stage van chiffons focused on ASAS. In the past, Jason has led investments in Algoly, a pipe drive sales loft, talk desk, and revenue cat to name a few. And prior to ASASTA, Jason was an entrepreneur selling Echo Sign to Adobe, for $100 million, or it is now a $250 million ARR product. But before we dive into the show's day, we need to talk about Sona. Sona is an AI -powered learning and knowledge -sharing platform.

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3:32You are now arrived at your destination. Jason, I am so excited for this. I always so enjoy our chat, so thank you so much for joining me, stay my friend. Thanks for having me back here. It's always a pleasure. Now you know the normal start of it. How did you get into venture, Malaki? I wanted to start with, if you could call yourself up. then the night before you started as a venture investor and give yourself a piece or two of advice. Yes. The advice would you give yourself knowing what you do now? It's an interesting question. The first one I tell everyone that's a new manager, especially anyone above the analyst level.

4:03And what I was told when it went into venture, I think you might have been told the same thing, was don't worry about doing a deal your first year. This is what the traditional GPs tell you because the last thing they want you to do is to meet with 28 pretty good companies and burn the fund, right? They know how rare the outliers are, right? And so this is advice I got to invest your first year and I did five Real unicorns in my first 13 months. I did pipe drive which exited for a 1 .25 billion then I'll go It was my second that's worth 2 .5 billion will IPO next year. I did talk to us worth 10 billion I did parkly greenhouse, which will IPO next year there are 200 million I did sales off which sold for two and a half billion of cash those are my first five deals and I tell everyone if you have something.

4:44If you have a hot hand, if you have a brand like like a 20 VC or anything behind you or a great network, if you came out of data dog or stripe or wherever, MongoDB and you have a network, go do those deals like you may not know venture, but that's what the other guys are for, right? They will teach you ownership, leverage it. It's interesting how many great VCs had a great investment their first six or 12 months, right? I remember talking with the first friend I had that became a VC was David Hornick, right? Who's now at lobby was at August and he tells us to read how this first deal he like blew 10 million which back in the day was like a career ender right as a kid going into venture but his second was Splunk that he did bill right which was Renee's second one so the first one exited for 100 the second ones worth 20 billion I think Splunk was his third and he did those all the first year in a downturn in a massive downturn I mean you talked a lot more VCs and I kept I wouldn't be surprised if a lot of the best VCs had at least one big winner their first 12 months and so that canonical advice is great for the fund trust me it's great for the fund don't below it all kid, right?

5:41And I say to them also because even if it's not perfect for the fund, it's great for you to get into a winner your first year. That winner lasts forever. The great thing about Venture is your winners last year, you can talk about them for a decade. You can literally, and so the earlier you get a winner and a winner really being like the person on the board, the first investor, like an iconic winner where the founders will back you, the earlier you get in your career, you could probably raise three funds on the back of that, even if they all the rest of your investments are dogs, right? So you only live once, so that's the main advice, that's the number one.

6:10And the second one is the opposite, which is, I tell folks, unless you're starting your own fun really from scratch, right? If you're joining someone else's on the other advice that you have folks is BZN because it's not yours. This is the biggest mistake I made. The biggest good thing I did was ignore the advice and I did all those deals immediately, right? All of them, right? Now I'm a 10x investor for life, like that was worth it, right? But I wasn't Zan enough about joining someone else's fund and all the friction to start yours, right? It's not yours. Whether you join someone else's fund at 15 or 50, you're an apprentice, you're not running the management company.

6:42You probably don't know what the management company is. You don't know how the economics work. They used to say, it's your second start -up you make money. And maybe your second stint inventory you make money. You know what I ask you, when you look back on your first five, has anything changed from that style of investing? And to what extent do you think that was a lot? That five in a row. It's not, obviously, it's not luck, Harry. I mean, like, I don't think I'm any Keith Roboi or the node co -sub, but it can't be luck if it's five or five, can it? Exactly. So what would you put it down to? First of all, one thing, which is only a small amount of it, but is having time, right?

7:15And I remember I bumped into Byron Deeter at the airport when I just started investing. I had no Byron because he gave me a term sheet as a founder, right? At Running Bessermers Cloudprax. It's like I'm jealous of you. I mean, what do you mean you're jealous of me, Byron? He's like, you actually have time. All you have to do is work on new investments. Not only do you not have boards or down rounds or workouts to deal with, you just don't have the emotional baggage going into venture as an adventure fund. All you have to do is hunt and meet founders. I think that's underestimated in the industry.

7:44Ultimately, you have large teams working under you in many ways, Harry. You need that adventure to scale. You can't be this rogue artist going out and hunting deals your whole career. A few people do that, right? But it's rare for a variety of reasons. If not only do we get tired and age out of our networks, but we have too much to manage, we have too many investments under them, right? And then I think just really sticking to your sweet spot is core, right? And I knew I only wanted to do a certain type of founder at a certain stage doing products. I intuitively understood search. I intuitively understood context center.

8:18I intuitively understood. I thought how to build a better version of Salesforce. And so I only did this narrow overlap of things. I already understood before the meeting and were exactly in my sweet spot, right? And if I did that, with founders that were better than me with good growth, 100 % hit rate, right? Once we're out there, there's not many people actually know what is their type of deal. It's a very precise art to know exactly what is adjacent land in Kentucky and other many investors I know 10 years in. Still don't have that clarity on what is their type of deal. Yeah, and if you don't, you also can get into trouble in terms of how much you deploy into what, right?

8:53If you know your type of deal, you're probably gonna almost inherently get your risk profile right, right? I know my valuation ceiling and I know the different types of valuations I'll do for different companies and so I can only lose so much. It just distresses things a little bit Can you give me an example of that? Just so I understand that you said your risk profile on the valuation side and how that is Is that because outcome scenario planning for contacts and to software might be a very different outcome scenario plan for salesforce competitive. One, eight. No, I don't do outcome planning.

9:24I remember when I invested in talk desk, the best comp was five nine, which is public today. They were stunning $150 million as a public company. So, the comp was horrific, right? It was terrible. I think five nine is worth six billion today, and on paper, talk desk is worth 10 billion. So you have to be careful with comps as markets change, right? Yeah, no, it's more just some of it. You have to back into your fun size, right? What's 2 % of the fund per check. And so for me, I learned there were two types of investments I wanted to make, like traditional seed where you had at least a little bit of revenue, at least 10 customers, 15 customers, 20 customers.

10:00And then I wanted to do what used to be called late seed, which is hard for me because it's been obliterated, but late seed was sort of approaching a million in revenue, right, with real traction, no management team, but getting to a million in revenue. And I wanted to do one of each. So I did, you know, talk to us get a million, but Al Golea at 10, you know, 100 ,000, right? in terms of annualized revenue, right? I did pipe -drive it a million, but I kind of ping -ponged back and forth between the two and I was able to write smaller checks to try to get at least 10 % ownership in the others, and then the late seed ones I would write up to a four to $5 million check to get doubled of a digit ownership.

10:34And that if you're able to invest it a million and the founders are great, you'll never lose money. If the founders are great at a million in revenue, the problem is that's become a Series A, B -Deal, even today. So that part of my model has partially been obliterated which is the hardest part for me, but it still happens with outsiders. It's just impossible with insiders. I have a $600K or a day all done at $750M. Yeah, so that's tough for my fun size. Sorry, because let's do the math. How much would I have to invest to get 10%, I'd have to invest 70 million to fund 68. Let's see. It's tough.

11:08That's my honestly, Harry, within a range I simply don't care about valuation. I want to have a fair valuation where I can hit the ownership target and I don't care. All these people on Twitter, Grouchy, and their deals are at 8 .4 pre instead of 6 .2. I mean, who cares man? Who cares? That I get entirely, but I do absolutely think that actually when you're moving from 12 to 25, that difference is very important. And actually, if your fun size is constrained to an extent like yours and mine are, actually it does make a difference if you want to hit that 10 % ownership target because that's going from 1 .2 to 2 .5 and then your level of diversification will be half.

11:44In any segment of the market, folks that are doing better will command a higher valuation typically, right? So you have to, the last thing you want to do is wow, this company, I mean 700 pre is tough, right? But I think the last thing you want to do is pass on a $30 million post deal where everything's great, right? It's the last thing you want to do, right? My agreement, I want to do it. My challenge is the Jason, most of the time when they're 20 or 25, not 30, that's kind of the essence, a little bit, is not that they're going great or badly, that just starting. So I do it all by email and I don't take the meeting so I hear you I just I just if you go to sasterfund .com You will never see a more descriptive website here are the exact ranges I do if you scroll through you'll see the valuation ranges You'll see the owners like it's like just and I literally got an email from a great CMO starting a company Estory is like look there's no chance, right?

12:32I'm like no, there's no I love you, but no I read your website There's no I still caught up with him and I don't want to do small checks I don't want to do the other tough thing in today's world right and it probably segwiz into the top you want to talk about is You know there's no downturn in seed whatsoever no matter what the Twitter's wrong Twitter and seed is more vibrant than ever and we could talk about why and seed is also split up more than ever More and more folks are taking tiny more and more tiny checks, right? That's not that she needs not going back in the bottle But it's bad for seed investors, right?

13:02The last thing you know people like you Harry and they may not like me but they want my help. And so I do get a lot of offers to buy one or two percent of a startup or a hundred grand It's and the fatters don't understand they don't understand. I'm like it's great And I'll do one or two of these a year typically for outsiders or others for specific reasons, but not to make money Well, I thought why is that splintering around happening because I you know if you read a lot of tweets If you read a lot of how rigid it says that this is the end of party round days and we're back to the conviction led and log your check.

13:33Yeah, I messed around. Why is that wrong? And why is this footage completely wrong? Because there are so many founders and executives that have made tens of millions, hundreds of millions, or more money that enjoy seed investing. And many have their own funds now. I mean, even the founder of Freshworks just announced his second fund, right? Jack Altman, who I love from Lattice has multiple funds. And those are institutional funds. Those are real venture funds. Forget about that. There's just so much liquidity that happened, and especially in 2020 and 2021. And what do you wanna do? I mean, you know, San Francisco Peninsula is so boring.

14:05What are you gonna do? How many hikes can you go on the dish? Eventually, the only thing to do is angel investing in the Bay Area. I mean, yeah, if you're in the city, you can throw rocks at whatever you can make fun to San Francisco. But if you're on the peninsula, it is the most boring place I've ever lived. The only fun thing to do is angel investing. And let's say you've made a hundred million, Harry. And I know, and this would have been crazy to say when we first met, but there's so many founders made a hundred million, and so many executives made 20 million or 30 million and have good lives, and they wanna put 10 or 20 % of that into angel investing if you're connected.

14:38And there's a huge difference today between insiders and outsiders. It's more visceral than ever. But if you're an insider in Palo Alto with these board of rich tech people, you can put together a $3 million seed round with 30 people. And I was just, I was literally on a Zoom yesterday with a founder, and he's like, I'm struggling. He's like, why are you struggling? He's like, well, I have no customers, no product yet, no traction, but he's very good, like very charismatic, connected. He's like, and he's like, oh, my friends told me I need a lead investor from my seed round. I'm like, well, if I were you, I would take 30 checks from tech people.

15:08He's already have that. I already have three million for that. I'm like, close it. He's like, you're the first person that told me this. Like, I've been waiting two months to get 20 VC or coastal ventures on my capital. Well, like, you already have three million from tech rich tech people, close it this week. You fool, pick a fair price and do it. But why would you not get going with your life as a founder, right? And the other thing is the A investor. He's like, well, the A investors are going to be sensitive if it's only angels. The A investors don't care. They just want a rocket ship. The investors don't care if it was Stebbing's Lemkin Ventures that funded you.

15:38They don't care. They don't care. You would have vies found as to take their splinter rounds if they're on the table and ready to go. Rather than struggle? Yes. Of course, rather than struggle. If I have an option, if I've got 20 VC, we'll give me a $2 million check. Yeah, and I get a million from friends. Or I get $3 million from friends. of course, I'd probably take the institutional money plus a million, right? That's a great thing. That's the best of both worlds. But would I struggle to find the institutional money when I can get three million? Like, that's a fool. That's a Twitter mistake.

16:06That's a rookie error. Every week there's more liquid tech folks that want to invest in seed, either directly or creating funds, right? And the emerging manager boom of 2021 may be over, right? Folks without a track record may be over. but the folks with the assemble their own fund or their own Resources is just getting going. It's just getting going So that's like increasing supply from operators who have liquidity massive I think yeah, and then what was his a increase in supply from multi -stage funds who don't want to deploy series A and B's because they're larger checks But they still need to be in market and invest it for now that'll fade Why do you think that'll fade because you can't return a two billion dollar fund writing tiny checks into to pre -seed companies.

16:47You can't return to a billion dollar fund. You can invest in Slack when it's a gaming company that pivots into Slack. Listen, it's a thing. You gotta stay in market, right? If you're a late -stage growth fund and that market was dead last year, it's definitely better to stay in market for a right of reasons. It's not silly. It is good to stay fresh and it's good to meet entrepreneurs. It is good to deploy capital, but if you've got to deploy two billion over two years and triple it, you've got to be in like four or five big winners a year, right? And it's significant ownership positions in all of them, right?

17:17The math is just awesome. You need double digit ownership of four to five massive five billion dollar plus outcomes per year. And it's great if you can start and seed, but if it distracts you from putting a hundred million into the winner, it's not worth the distraction. We were talking about distractions before we got on and this stuff is distracting for these big funds, right? I agree, but this is what worries me. The big fund partner is saying, I'm underwashed with refinancing with board positions with company dealers with riffs, principles and associates who haven't led rounds before, go and write one's two million dollar checks, go and spray, yes, cash, and that's leading to less and less price discipline at the seed because he bought this whole new entrance of less explore insiders, Harry, for insiders.

18:01Those VPs and principles that even me as a founder back in the old Echo Sign days, one of my favorite VCs that I love, Josh Dine who runs Threshold today was more junior back then. The first time we met he gave and I love him he gave me a term sheet and he said well listen We can do it two ways, but if it's too many or less I can just do it So it's not new this idea of like bigger funds having a lower threshold for different professionals The funds are just bigger right, but there's also more startup I don't think it's bad, but my point is those deals that the deals were the principles the VP can do it They're pretty hard if you didn't come out of strife come out of YC or have traction It's not as simple as it sounds, but finding that almost solo founder from Lisbon that knows no one that only doesn't even have a desk in San Diego like when I met TalkDesk or these non -traditional other entrepreneurs, they're not going to just check the box.

18:50That five minute check the box has to have something else supporting it beyond. I think it's a great idea or I love the idea. No one wants to throw their money away and I love the idea, right? So Jason, help me. What happened to you? See them? We have this increase in supply from operators. is the answer increase in supply, but still an increase in supply, and I'm not a high -tech company from multi -sage funds. What do we do at sea, then, is the traditional at sea to master? And what happens? Well, look, I think you have two choices. One is find outsiders. Outsiders are, most of the world is not privileged.

19:19Harry, most of the world did not graduate from Stanford or Stripe or Y -combinator. And when you find outsiders, they're not dumb. These are the best entrepreneurs. But the prices are much more reasonable with outsiders, right? They're much more reasonable. They always have been and they still are today and they even were in 2021 outsiders. Insiders are priced to perfection, but if we take a pause, shouldn't they be? The Venture Markets have changed so much in my... When I started as a founder, Venture was so small, the firms would collude. I remember when I got my first offer from the VC, I went to meet another VC and they'd already called each other, agreed on the price and agreed to lower the price and split the round.

19:56That doesn't happen so often today. Okay, now like if you have the hotest startup in the world Why shouldn't you be 700 pre in your seat if you want it? I mean there's downsides to right sickness 700 because the next round may be tough But let's put aside that that meta issue Why shouldn't the perfect seed round be priced to perfection right and that may make seed investing impossible For seed funds right that the seed round price to perfection only works for megafunds It does not work for seed funds and see the seed investors are crying all over Twitter but maybe that's not their job. Maybe their job is not to invest in the perfect high profile, obvious, perfect seed fund.

20:33Maybe what did Jody Bonsel after selling AppDynamics for $3 .7 billion raised is pre -money and hardest. I bet it was 100 pre -even back then, right? And Menlo did it, but maybe I can do it. It's okay. Go find Jody before his first one, not his second one, right? I did this venture digital event back when they were digital events, Harry and I had Keith on, I had David Sacks, I had Eileen Lee, and I had Sacha Patelon, okay? It was just a VC -only event. And it was my for Lea off question. And I said, because I've done multiple true cash out unicorns from inbounds. And I asked them all, Keith, how do you do it, David, Sacha, Eileen?

21:09They all have done some of their best investments from Cold Inbound. All of them. Now they all like different things. It was really interesting. I think Keith wanted a deck. He's like, just send me the deck. I'll flip through the deck. David wanted a really short email, like maybe the simplest way to atomize the whole thing. I like the world's longest email with everything in it and the best deck. I want to learn everything about you before I talk to you and I can't remember what Eileen said she liked, but they all did it. And then some people don't do it, but I also think what gets confusing is it doesn't work late stage.

21:35No one in the world that's softbank or tiger or even the better ones, the iconic, so I can't imagine any of them respond to raw, imbound emails. They may do something that's close, right? It's like Doug and iconic. I know I saw you at Saster Annual. Let's catch up. That's not a raw imbound, is it? So I asked growth investors they think it's insane, but that's a pretty good line that wasn't it? And I can't remember which of his, like, Deca corn Sacha said from Homebrew that they did from raw imbound, but it was one of them, right? He said about kind of the price of the fashion, not making sense for seed.

22:05In terms of the tradition as funds, Sam lessons that in a recent post will go back to a stage where by seed investing in high risk capital, going to high risk ventures. Yes, do you agree? I don't agree at all. It's possible he's reacting to the $700 million seed. I don't think seed investors can participate in hot startups anymore, right? I just don't think you can make money in seed investing in hot seed startups. I don't think you can. I can give you a story on that in a minute. But I think he may be focused on, we're all kind of remembering the days when everyone could invest at Uber at four million and pre or whatever it was, or remembering even a more recent deal when deals used to take a month to happen in the old days.

22:45And you could collaborate more on them. And there were certain natural, when I started investing in SaaS and Cloud, there were a few natural floors. Like, seed rounds didn't really get done north of real seed, like early stuff, but with revenue didn't get done much more than 10 posts or 10 pre. They just didn't happen that way. Not once you're getting more revenue. But so you had time and you knew the price and you could socialize things, right? And those days are gone. This socialization are a month to get to know the founder and stuff like that. And the other thing is, you know, a lot of the best, the Peter Teals and others, despite some of their toxicity, you know, the point is that every month there is an amazing startup born, right?

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23:21Every month and every week there's a pretty darn good startup born. This hard part about seed is, you know, if you want to make real money, you've got to get in earlier and earlier. That's the stressful part today. You've got to get in earlier and earlier. You can't invest at a lot of these at a million revenue anymore. It's not seed anymore. is it? But you can still be the first person in. What's your story? You mentioned a story on this. It's an adjacent story, but I think it's already telling. I was talking with a founder, I invested in where I was the first investor in. And in today's market, they had an offer to invest at 450.

23:49Okay? And they're doing double digits in revenue. This isn't preceded. Okay? But so, but I'll tell you the point of the story. They had an offer to invest at 450. And he said to me, this is the first time as a founder. I've paused. And I'm like, what do you mean? He's like, well, he sat down with He said, I'll invest in you at $4 .50, but let me tell you what it's going to take for me to make 5X net on this investment with dilution, another round at an IPO, and the founder immediately walked from the proposal, right? It was the first time on that path from six to hundreds of millions of valuation.

24:21Here's my point that he paused and thought what the implications of all of this are, right? That's just a whole new world, or founders. Founders don't care anymore what the implications of these valuations are, right? But this was the real world moment where it became alive and I applauded him for doing that. You know, maybe a case for taking that optionality off the table wasn't a good idea. Can you ask you, I speak to one investor yesterday and they were like, I'm a bit gated actually at seed right now. I'm seeing every AI outbound sales tool, every AI marketing copy creator, and it's the 1 ,000th version of the same thing, really.

24:56And I think convinced that they're just going to do AI, you know, adjacent products that They slip in as features. And I'm a bit jaded. Do you feel the same way in terms of slightly the jaded nature of the thousandth product? Has anything made you snuff out of it? A bigger issue I have with this, right? I get it. But categories get reinvented, right? They get reinvented every four to five years. And when I started investing, I had a rule. The more crowded a category, the later I would invest. For example, when I invested in pipe drive, my first, it was CRM. There's so many folks that wanted to do Trello for CRM, okay?

25:29And really the only recent pipe drive one was because of the secret sauce of ingredients you needed in the early days They got the mix right, okay? They got the sliding the the conbon ride and the ease of use But there were 10 other conbon CRM's out there and if I had to guess at 5 K MRR I would have guessed wrong Okay, but the next second investment it was algolia now there at the time algolia had one competitor elastic So I could at 8K or 10 K MRR I could make it an educated decision How does this compare in a market of n equals 2 direct competitors? They had indirect competitors, right? And what I would love to do in this AI space is wait.

26:04I don't think we need 88 sales outbound tools, especially when the leaders in sales is perhaps the most impacted category in sas today. A lot of the sales leaders are growing 0%. And so it's very hard to even understand what's happening with some start. Because there's so much innovation in sales, right? But yet it's probably the most impacted category overall in leadership. So I loved to wait to a million or two million a revenue. I'd love to wait to one to two and see someone Break out a little bit and then lean in right, but I can't lean it at a hundred or two hundred So that's the issue. It's not that I'm jaded I'm discouraged because there are categories I can no longer wait in that I used to wait like I could wait and call Talk desk call center.

26:42I mean it was disruptive what they did back in the day But I wouldn't have been able to it still was still a slightly crowded category in the early days I was able to wait until a million a revenue and have at least a hypothesis why it was going to break out, right? Do you see the massive bundling in software buying today? A lot of people are mentioning how we're moving from a world of Unbundled to bundled in a bit. Yes, save costs. With the answer. Do you agree with that? Yes, it's starting to be in the rearview mirror, Harry. We are bouncing off the bottom. We are bouncing off these lows. We went through this period the last 18 months where where big successful companies retrench their IT and spend budgets, right?

27:19All across the board, you saw it across your portfolio. And they did it and they did two things. One, they spent an enormous amount of energy cutting back spend, cutting back workflows, cutting back cloud spend. We saw this with AWS, Azure, like how can I, I'm not gonna cut those applications, but how can I optimize my workflow, MongoSot? Everyone saw workflow optimization, data dog, right? And then they went through a second thing which I call the app layoffs. And what they did is, and you have to have been into a real human layoff in a big company to get how this works. But here's how layoffs work in big companies for both people and human beings, okay?

27:52And these are companies that are successful. They get all the VPs in the room and you go around the table and you're like, you gotta cut one person or one app. And the first one's pretty easy because there's one person on your team that doesn't even show up to work anymore. So you're like, Lemkin, let's fire. Like throw him in the table. And when you go to the VP layoff meeting to big company, like if it's a small layoff, like less than 5%, people are actually happy at the layoff meeting because they haven't been able to get rid of Lemkin or Harry. For five years, they're so excited. I can finally get this toxic person that doesn't work off my team and everyone's drinking and having, I mean, not alcohol, but coughing, having fun, right?

28:23And then the second meeting happens, it gets harder, right? Then you start to cut closer, and the third meeting is not fun, right? And we only got through two of these meetings and apps. Everyone got around the room and they said, look, we got to cut 10 % of our apps. Like, we're going to cut 10 or 20 % of our spend, and these guys are going to work on this. The procurement finance guys They're gonna manage it and we're gonna just cut names. And so everyone bought some app in 2021 to send free mugs to their sales team or to automate some obscure process because it was just go, go, go, go, go. And they're looking and we're barely using this.

28:53So they cut that one, right? And then they did another level and this hurt some real leaders. So the first one, they just cut the one they were barely using. This seemed like helpful, right? And then the second one, and this was tough for some of the leaders, they're like, well, I really want some wonderful products like a gong or an outreach, epic products or others, but I've got that feature in another product, right? This isn't sweets, this is not the same thing, and they're like, I'm gonna cut back my spend on gong because I have some of that in sales after outreach, or I'm gonna cut back some of this piece.

29:20And those are great companies that are doing hundreds of millions, right? They just saw this impact from all, I'll settle for a crappier solution because it's already in something I'm paying for. Okay, so these two things happened, and we're done, Harry, there isn't gonna be a third or fourth meeting. If you look at Mongo's latest quarter, If you look at it last season, it just came off. We're not ripping back at 2021, but they have all bounced off the bottom. Mongo is up at last season. It is not everyone. Even Zoom info, which is like the most pure play sales and marketing tool out there that's like us.

29:47It still had a rough last quarter, but not as rough as the core prior quarter. It bounced off the bottom. They're all bouncing off the bottom because your CFO and CIO can't spend their entire lives optimizing workflows. And what Amazon said yesterday was very interesting. Amazon said the cutbacks have been more than the counterbalance by the amount of AI workflows people are putting on. And we can say that's all AI, but what it really is is, listen, we got to say AI is so disruptive, we got to spend again. Maybe AI is the vanguard here that's pulling spend out of the enterprise and companies, but we've bounced off the lows.

30:21And if you're a Debbie Downer, you're missing what's happening in the enterprise, you're missing what's happening with buyers. We have bounced off the bottom. How high we're going to bounce? I'm not saying we're and the 2021's gonna take 20 years to experience that moment again. It will happen again. It's every 20 years, right? But 2024 will be rich with IPOs, and it will be a good year with solid multiples, solid multiples. We're gonna move into that over time. I do wanna get stage because it's easier to follow than... I do wanna move into the Series A. We just see it being untouched. We discuss pricing being relatively untouched, capital supplies.

30:53Series A, how do you think about the Series A and B market today? Terrible. I think it's terrible. Man, and actually I would ask you you may have in some ways you may have a better perspective Everything's better than a year ago. Let's be clear no matter what Twitter says like it was interesting You know iconic growth published their data when they came to sasture up in June iconic growth I think had done four growth deals in 2023 zero in 2020 zero so from zero to four I don't know what their traditional pace was but zero to four is pretty pretty different right the deals were lower evaluations, right?

31:22They were lower perceived risk, which is important, right? So everything's tougher. I just think A and B is today. The reason there's a huge slowdown at A and B is not because the money isn't there. Everyone that's good has a fun, Harry. And in fact, they often have an undepoied fund. Everyone's in market. Let me in some in some sense, in some sense, everyone that's good is in market. But A and B's want a return to rationality. And founders aren't there They may never get there. Every founder that raises a seed round still thinks in 12 months they're going to raise a hot A every founder So there's a large disconnect between what A's want to do and what founders think in A is and I don't think that That's been diminished much by the by the tumble to last year because these are newer founders and newer companies Right, they haven't been through the top times.

32:09So what happens if they never get that but A don't ease ones different things They used to, they used to, what happens? Well, one, I don't think it's that big of a deal. Some of them will just fail and that's fine. Seed companies are, it's okay if some fail, but it is seed investing, right? And some will get religion and struggle for six to nine months and gain humility and raise a normal round. And it's a tough venture strategy. It's a tough one, but the one of waiting and investing in the ones that missed the window, but then, but then accelerate a little after the window, that patient model, you can criticize it, but if you're very disciplined it works.

32:47The ones that they couldn't raise the A 14 months after the C to took 24 months, but then hit the number, being disciplined, picking over YC a year afterwards rather than a month before, the problem with that strategy doesn't produce enough decacorns, but it sure works. So some of them will just have to wait, they'll just have to learn to have a life experience, but the ones with high burn, they're all gonna fail. What happens to the ones you've got low burn and ten years of runway? What happens that? I only have one like that. To me, I think this whole Zerp thing is abused, what happened with Zerp, but this is a Zerp phenomenon.

33:19If nothing else, we'll never again see a massive wave of startups with 10 years of runway and no traction. This is gonna take another 20 years to happen, okay? There should be a massive wave of startups with 12 months of runway and no traction, but not a decade of that was a Zerp phenomenon. And my advice to all of them is they should offer to give the money back, 100 % offer. And I said offer. I didn't say give it. I said offer a hundred percent should offer to give the money back. It's a great process It's a great process You know slack before it was slack was a gaming company, right and Stewart Butterfield when it didn't make it his second gaming company offered to give all the money back He offered to give it was left he'd spend about half there's a whole and Dreson posts in their blog It's great and then Dreson and the investors actually thought about it.

34:00They thought about it for a beat right? They said no You're one of the best entrepreneurs You just go do what you want to do if it's this slack thing the 10 million messaging tool and that's what you and Cal are passionate about, go do it. But Harry, he offered. And if you do that to your investors, it is the most profound bonding moment. And it is the ethical thing to do. Founders today don't respect venture capital anymore. They don't respect venture capital. And it's one of my least favorite parts of the industry is that founders do not respect venture capital anymore. And I over -respected it in my day.

34:29It was, venture capital was so hard to get when I started in this industry. We over -respected it. Like we thought it was dad and grandpa and we genuinely flacked and we brought them coffee and then we met them at Pebble Beach and like venture capitals were gods. Now it's stormed so far the other way that founders have no respect for money. Why do they not? I think it's what they've been taught that it doesn't matter. It was like this great founder we talked about before who didn't think about what money met until he wanted to raise it 450 and finally having to exit at 3 or 4 billion. But they all think it's the game my friends raised at 80 Harry.

35:00There was there was an ideal I almost did, okay? I love this founder. He was uh didn't even finish high school. Like, I know I've done young founders before, but this would have been my youngest, okay? This would have been my first that, you know, couldn't, what, couldn't you do when you're 18? And I wanted to do it and he's like, well, I'll let you in at 20 today. I'm like, well, listen, I can, I'm not arguing with you, I never argue over price, but for where you're at today, I can't do it for a variety of reasons. Like, yeah, but in six months, I'm raising at 80. And I'm not even criticizing him.

35:27You gotta have some hootspots sometimes to be a founder. But my point is, it's just this disconnect for what anything means, what an exit means, how hard it is, I don't find very many of the current generation founders actually care about returns for their investors. They actually care about Stuart cared. Stuart's like, you know, he wasn't rich. They sold liquor for 40 million to Yahoo, but they had a bunch of founders and investors. How much did he make? Even a Yahoo. I mean, he made millions, but not tens of millions. He wasn't rich. And when there was a couple million bucks in the bank, he respected a couple million dollars that was left from the seed round.

35:57And I over respected money myself, but today it's like whatever. And, you know, that one founder, the only one I did that had 10 years of runway, I asked to give them money back. And you know what his response was to me? Why do you care? Now unpack that for a minute. Why do you care? He didn't care whether I made money, but he didn't understand why I would care. What ventures is just a sport? It's just a game you're just throwing dice on the roulette on the whatever the crap item gamble. You're throwing those dice so that he couldn't understand why I would care. I told him you got you should got to offer.

36:26You got to offer. You've abandoned your current business model. You have 10 years of run. You got to make the you don't have to take it, but you got to make the offer. and his answer is why do you care? So I'm gonna be, people get upset with me for this. That's why I prefer one older founders and two serial entrepreneurs. I find with both, you do not get both of those situations. You don't get the blasé, oh I'll raise it 106 months time, and you don't get the flippant, why do you care, kind of moody, which isn't cool. You actually, I like the opposite of that two by two, but I hear your point.

36:57Well I hit me, why do you like the opposite of the two by two? I feel that there are so many things that are stupid mistakes that first time founders make that take serious time and to try from Pre -Jew, runway, that can be avoided on zero -onch per nurse. They can. And I would all pay two X and avoid those terrible mistakes. You're right, but first of all, you often will pay two X, right? And it's not that it's not worth it, right? But you have to, it gets it goes back to our first point of your strategy. does your fund strategy in size and risk profile permit you to pay 2x to de -risk that investment.

37:30Right? From my perspective as someone who has built a SaaS company that even today is doing 250 million that has been a founder that has been a decent investor in first -time founders, I feel like I can help mitigate that risk by working with them. I can help them avoid not all that they're going to make 70 % of the mistakes, but I genuinely feel by bringing them their first VP of sales, by bringing them their COO, by bringing them their first marketer, by helping them hire all their reps. I know these mistakes and they're still going to make a bunch of them, but I feel like a superpower I can make is mitigate enough of them that instead of a 2x entrepreneur, they become a 1 .25x on whatever.

38:04I give them an extra, I think I give them an extra 0 .25x. I do think that you never want to invest in founders that need you and I think those founders need you. I'm much preferable. You know what the difference is? They want you. No, I'm here. I know. They do need you because they need you to close that VPCLs. They need You do close that CRO whoever that is. You get the fallacy in that thinking if you want my learning, right? I hear you and that's the classic Vinod Kostler whose wildly successful thing. Like the classic is my best founders don't need me, right? That's what they said. And listen, he's a better investor than I, but I'm 10x lifetime, so I'm not bad, okay?

38:38What's missed there is that if you're a true outsider, if you just showed up in the Bay Area from Lisbon or even London, okay? Or Estonia or Paris and no nobody. But you didn't even get to go through YC, you don't know, buddy. Yes, you're tenacious as hell. Yes, you grabbed your whole family and moved them out here. And yes, you are committed. But if I can be an insider and give you some of those connections you don't have when you get here, that's not needing me. That's me accelerating a process that would take you time to develop. You can't show up in the Bay Area literally or sort of metaphysically speaking and have 100 connections on day one.

39:14Can you? How can you know them? Yes, you can hustle your way and go to all the AI events and Hayes Valley and and shmuz on Twitter and but like you just cannot build the 20 years of relationships I have or that even the decade you have you can't build those in one week showing up right so totally agree for Series C for seed like the showpad founders said I was the first person they met when they came here from Belgium from the US right and so if you can help someone like that they don't need you but you accelerate it it's outsiders versus insides if you have to help Insiders, it's embarrassing.

39:45Those third time founders, if I have to help Jody Bonsel find a VP of sales I mean we owe it to him to find him one but he'll find his own wonny. Look, I'm not disagreeing that the playing 2x for the seasoned founders is a good bet. I just want to invest the extra time on the gorgeuses and the revenue cats and talk to us and I'll go, I'm willing to invest those cycles to see beyond those and take that risk. And I think the risk you take is more rational. It lets you deploy more capital. Put it on a spreadsheet. It's probably the better risk to take. Many of the best investors do that. For me, what I don't like is the only way I can invest on the 2x stouter in my fund structure is pre -revenue.

40:25Okay, here's my learning. And I recently did this analysis. It's about 50 -50 for me versus 90 % of an ordinary investment. It told me about that analysis. Sorry, I didn't know. Average investment I make makes money 90 % of the time. Okay. Over 10 years. And that's not all good. It means I'm not taking enough risk. blah, blah, blah, blah, it's just, but it's just the spreadsheet. The only pre -revenue ones I've done are these repeat founders, these two X that had big exits that I know personally, so I know them personally. There's no ethics issues. I don't have to do any diligence. Only half of them are, are, have are gonna make money.

40:52Now, if that's your approach, half is still pretty good, right? But I have to pay more and they're all pre -revenue. So I have to take like a year to two years more risk. There's a couple I regret. I'm not sure, I'm just not sure looking at the spreadsheet, like looking at a comment, I'm not sure. And the ones you regret, what do you regret? What did you not see that you see now? I think my biggest mistake and you're not making it, Harry. I think the biggest mistake I should have built a big team under me, but I didn't want to be that guy. I didn't want to manage 10 or 20, whether they're full -time GPs or folks running extra related funds.

41:27My LPs pushed me to do it, right? People wanted me to do it. But I've already been an entrepreneur twice, and I gotta enjoy what I'm doing, and I did not want to be this massive fund manager. It just wasn't me as a human being. I considered myself a founder first and an investor second and I just couldn't do it. But I do think, I think people get it wrong. Why do folks raise bigger and bigger funds and all of this? They think it's for the fees, it's not for the fees. It's because that's what it takes to sustain a team. This is what I learned from Sunil at Amplify, right? Because he went from an amazing solo GP and to Data Dog and then he built them into it.

42:00And I asked him one time why he did it. He's like, well, I have to do it for the team. Like they need their 60 million per fund and then their 100 million like I can't have four GPs and the four GPs need Associates they did I need like 10 people and so I got to raise this fund size and so and he was like if it a perfect world I would I might do it on my own right or just him and his partner But then again the strategy dictates the fund size and the stratum right and so 100 % if you if you do it on a capital Pop -up on a basis and then that figure out your deployment cycle and if you do a three -aid deployment cycle You're doing 10 million dollars series a season you want to be three a year across full You can walk you way very easily to the 500 million dollar.

42:35Yeah, you need 500 million with 60 % reserves to make that work. I always take in too much risk. You need 500 million, right? And so that means you need a three billion of exits, right? Gross. So that means you need 30 billion of market cap to make that fun work if you have 10 % real ownership, 30 billion of market cap. So let's say that fund has a page or duty in it and let's pick another one, another great one, a sprinkler in it. How far am I turn that 30 billion? No, I'm raising 500 every two years. I gotta get so many of those 30, I gotta do 30 billion of exits every two years. What happens with serious age A, is it staying in the doldrums for long?

43:12Does it rebound quickly? How do you advise founders who are asking you this? Well, I have two different perspectives, one from venture, one from seed. I said this a few months ago and then, you know, I said, a serious A is the best place to invest today in cloud and SaaS, right? And David Saxx's response was, shh, don't tell anybody, right? Because when you have a dislocation at a stage, that's where you make money and venture, right? There's no dislocation in seed from the car wreck house. Anyone that thinks seed isn't happening. They're out of their minds. We have a we still have hyperlocation in seed.

43:40We don't have dislocation. There is an inexhaustible amount of seed capital, at least for hot companies. It's inexhaustible. Every YC company in every batch They may not all get funded, but there is enough capital to fully fund all a 20 post that only takes what's 200 million, and two million that takes 400 million to fully fund a YC batch. There is four billion of capital that would like to invest in that in that batch, right? Whether it happens or not, it's a different question. But I do think there's discipline in the market for the moment outside of AI, outside of AI, there's discipline. And so founders either have to respect that discipline or or realize they may not be able to raise, right?

44:13And so everyone in series A is being disciplined and maybe they're being too disciplined. That will have to find out because, you know, cloud is up 35 % this year. If you measure it from the peak it's down, but you know, I deployed all my cash at the beginning of the year. Like, I feel smart in the public markets. If I deployed it all at the peak, I would feel dumb, but I happen to have a lot of cash. At the beginning of the year, I put it all in and A is the best time, but let me summarize it this way, Harry, I know this will sound obvious to you, but founders still don't get it. Every round's supposed to be harder, but in 2021, every round got easier.

44:42Think about it, they literally got easier in 2021, didn't they? It's not just that people raised this up, raised it 400 to the 800 the next week. It's not even that the valuations went up. But they actually got easier, the hysteria. For reason of Farter, it made it easier to raise it 800, because I didn't get into the round, right? And every round is, the A should be somewhere between, you know, maybe it's step function. Maybe an A should be 10 times harder than a C'd, and a B should be 10 times harder than an A, and a C, that's the way, certainly was when I started. Each round was probably an order of magnitude harder to raise than the last.

45:10It's supposed to be a winnowing. E -Twee -Yep, the fool. Yeah. As an usual NVC, due diligence, no one actually cared. Yes. What did you mean by that, Jason? Well, I was having a little fun, but you know, I remember my entire life as an entrepreneur or investors, I tried to avoid any time a VC wants to do diligence with me. I tried to studiously avoid it, and I remember my very first company as a founder actually made implantable batteries from nano materials, very hard tech, okay? What we did was impossible, only handful of people could do it in the world, and this fancy VC fund asked my co -founder, my CTO, and me, and she knew more than me, we're looking at the startup in the space, what do you think?

45:46And my co -founder who's very cautious engineer, right, very calm. She gets on the college. She says, let me tell you, I have worked in this space for a decade. I actually did some work here. It's impossible. What they're doing is impossible. It's a fraud. It can't work. And then she explained calm, not not in the emotion. I am very calm. Here's why the data that you're looking at is accurate, but you're reading the wrong things from the data, right? And they said, very thank you and wrote a $20 million check that they quickly lost. And I'd never really done that before, done diligence for a VC fund.

46:14and I found it very frustrating, right? They're not profoundly frustrating. And then I learned subsequently every VC diligence calls like that, right? And then there are certain spaces where I know something about, right? They always ask me to help them with diligence, right? Because I am a subject matter expert. And usually I don't say anything, but once in a while I know something's just a terrible idea and I tell them. And they always do the deal anyway and why? It's because the diligence is always confirmatory. VCs decide they wanna do the deal. They don't wanna hear reasons to not do it. They don't wanna hear it.

46:44So it's a niche topic, but I've given up almost entirely my my response to act now usually is it's a good space And it's such a waste of time the real point is how did we get into all this FDX trouble and every VC has a fraud in their portfolio Every single VC has a fraud in their portfolio and there's a couple reasons that it was the pace right? It was the times it was the markups But it's also the fact that VCs only do confirmatory due diligence The truth is they only do confirmatory due diligence They make a decision based on a certain set of assumptions and then they go off and do diligence.

47:13The more competitive the deal it is, the more compressed the timelines are, the less they take objections in that diligence properly. That's how VCs can do diligence after a term sheet. Because it's going to close if it's a good one. Do you think we would be a wave more of frozen companies come out? No, it won't come out because VCs aren't talking about it. They're just marking them to zero. They frauds everywhere. And there's different layers of fraud. For example, just lies. Lies are not always crimes. right? This is like the great Trump debate. What did he say that I think with the indictment said it was okay for him to lie about the results not being right but something else he did was illegal.

47:50Like the founders can lie about certain things and it's not fraud. Are you I actually think it's all fraud myself but everyone's got a founder that claimed they had ARR that really mashed months together that their financials were not accurate that misrepresented a plan that was in pop or compressed a bunch of revenue wrongfully right before fundraising that wasn't really quite there after fundraising or misrepresented their gross margins. It's just all over the place and the thing that everyone's got one in their portfolio. Any VC that says they don't either isn't close to their portfolio or is ignoring it.

48:23Everyone's got fraud. The thing that worries me, Jason, is honestly, I think you lied, egregious morons, don't care Harry, that's the thing. No, but I speak to many of you see who receive the same from founders and they go, but I don't want to do anything It could be banned from my founder and PS and I am are you fucking serious? It might be who gives a shit. I'm sorry someone like I don't think you I don't think you want a lot of negatives on bookface Harry Honestly if someone lied to me and miss you I presented numbers I didn't care if they say bad shit about me because the people that listen to them will likely be shit I think you're right, but having said that the amount of fraud I've had is relatively small, but when I have had to deal with, I've had to be the one to give the hard talk to the founders and for being the only one to do it again and again and again.

49:09My NPS has been damaged from it. I'm confident of it. My NPS has been damaged. I've had multiple times when the company was going to drive the car off the cliff. I had to have the talk and it saved the company, right? And anyone but the great founders don't forgive me. And now I do have one exit, one company did a long time ago with this and they're going to have a big $300 million plus exit to announce soon having raised very little. The founders will make a lot of money and they took that advice while others, but I've had serious NPS hits from this. I think the answer, I think this is a complicated question, right?

49:42I think it makes logical sense as an investor if you can afford to, if you can afford to, to walk away from a toxic situation. There used to be board partners and there still are and they're there for a reason. It also avoids the tension. It's not just the opportunity that says it's the tension. We'll talk to people about that. What do you mean the TEMPS issue, all those issues? If you can walk away from an investment and leave the founders alone, it's not perfect, but it's certainly better than every 60 days having tension. That tension, they just take it personally and they react to it, and it's not good for anybody.

50:10If we mention diligence, I do want to talk to someone growth. If we mention AMB being the best place, who's a bit of a dead zone bluntly. What does that mean? From a founder perspective, from the AMB, Everyone has money at A &B. It's just slower than it was, right? But keep going. Yeah. From a growth perspective, as we mature down the pipe, it's growth that too. And how do you analyze the growth state? I'm seeing something different in my portfolio. And we have very different portfolios, right? What I'm seeing today in 2012 is a very active growth, but with very specific boundaries. OK. Let's put aside the AI outliers, OK?

50:44For traditional cloud companies, SaaS companies, at growth, I would say generally speaking, there's a 15x ARR ceiling. All the growth investors, if you have a good company, it has to be a ... it does have to be more efficient today, okay? But if you're at the growth stage, 30, 40, 50, 60 million in ARR, okay? And you're not and you're not burning epic amounts of cash. You will have a series of term sheets laid out in front of you at 15x ARR if you're a good company. If you're at 30, 450, if you're at 50, whatever, 650, right? I mean, 10x, 15x is sort of the the reach and maybe that will flex later this year of multiple to continue to re expand.

51:20The only problem is, and when I talked about the investors, they're just aren't enough candidates like that. They've raised to two I prices. That's the main reason. And the secondary reason is today is because they're efficient, sometimes they just won't take the deal today. Fifty -necks is not a bad deal. The public averages six sex. You can't even actually say it's a bad deal. But if Harry, you and I are running this ass company, we're 40 million there are. We're kind of break even and nice guy growth fund wants to buy 20%. But then we have to do more and we have to report to them. We don't need the secondary and we're not sure what to do with the money.

51:48We might, it's not that we would say no, we might just wait. Let's do it at 60. Let's wait till we're next year feeling pretty good, Eric. Why don't we do it at 60 or 70? Like this seems like a stressful time to do it at 40 or 30 and so they're, they're either waiting because there's not urgency or they're sitting at evaluation where the growth round is not possible but these fifth, they're literally putting these 15 -ex terms sheets like on the driveway like a used car. They're all out there and they're hoping that they'll take and in the interim what they're all doing is secondaries in these companies.

52:16The companies I have that are north of 30 million are overwhelmed with growth investors trying to do secondaries. To achieve that, what's happening? If I can't get 15x deal from the company, I'm going to try to get it from the seed guys overwhelmed. The companies I have that are efficient north of 30, they're overwhelmed with folks, often not to me, although sometimes to me, but from anyone else trying to clean up the cap table at the valuation they want. Like if they can clean up the, they can buy out everyone at 10x, that's early, right? If it's at 40 million revenue and I'm comfortable doing 500, but a bunch of guys invested at 10, something that will take the deal.

52:48And so that's what I'm seeing happen with growth guys, but I'm seeing as doing as many clean up deals as they can, just aggressively doing ones that are in the zone, but the founders are like maybe next year, maybe later. Do you think we'll see a wave of seed manages, needing liquidity and DPI, selling in those of opportunities because of that need for liquidity to then generate the nice fund. What do you think actually? I've seen both happen. I've seen folks that have micro funds sell for sure and sometimes that could return their whole fund right or more. But I think Twitter gets another thing wrong.

53:20I recently had a conversation with one of my LPs last week about a secondary offer. You know, that was whatever. 10 figures, a 10 figure secondary offer, okay? And we both agreed no was the answer. We're in the business to make money. We don't want to take a discount. What's confusing is like is there pressure to do DPI versus TVPI and all this sort of but the best LPs want best LPs want these 6x 8x 10x funds they really do and they're more appreciative of how rare they are than than we all thought it was the best LPs They know the liquidity will come the best LPs that they've been doing this a long time What I've learned is the best LPs want the highest possible return and I asked them what do you want cash and all my LPs my three large cell B said no they don't want cash now I know you'll hear other stories but this is what I've heard no I mean this lovingly but I think it's very dependent on LP type you have certain LP types foundations and diamonds that have annual payments for scholarships for and that's what I'm talking about and they need the liquidity today but I'm not an end -recenter so I can't give them 10 billion of liquidity Harry no but they take anything in the What is he right now?

54:24Actually, you have a bigger lens than I do. What I've asked them all this literally last couple weeks. In fact, one of my LPs told me this last week, actually, we think you should reopen your last fund. Why? What was the thing? Because they think it could be a high enough return that they want to stuff as much as they can into that fund. We don't want the cash out now. They want the highest possible return from that fund. They said, this was a new one to me, reopen the prior fund. I'm like, I didn't think you could reopen a prior fund if you're investing out of a new fund. and they said, we do this, we do this, it's not that uncommon as long as you get your L pack and everyone to consent.

54:57If you can recycle or find other ways to put more money into a closed fund, put it in. Isn't that the opposite of DPI today? It is indeed, what did you say? I said, hadn't thought about it. And their point is, yeah, don't confuse gross and net multiples. Their point, they said all of our best managers to pull a well in excess of 100 % of the fund as quickly as possible. And it's fine to do it later. It's fine to do it late in the fund's lifecycle. But things pop later, it's fine to do it. and getting that extra three X on that extra money into the fund on that extra money can make the difference in those net returns.

55:27That was an aha moment to me and the thing about Twitter is different LPs are playing different games right and you've got to know what game they're playing and doing a seed investment at five and exiting to 500 million sounds great but if you own 10 % and you have a 50 million dollar fund it's still only one X one X doesn't pay the rent for anybody so it sounds great wow like that could probably be a 50 extra turn right 100 x from five to 500 but let's assume 50 x sounds great you can brag on Twitter You can put in your slide for racing your next fund, but if you're in a for carry. It's only a step, isn't it?

55:59I as you add lunch with one of the kind of biggest fundraisers what slash GPs in the world who raises billions a year Out of 60 year old and he said there has never been so hard to fundraise since the dot com boom That was the last time it was this hard for VC funds Would you agree with him and do you think LP markets are shut for funds? Logically. I think the problem is that we're still using 2020 -2021 into 2022 as the reference. Yes, it's brutal compared to those three years, right? It's easier than when I started in venture. I'll sure tell you that. It was like impossible. It's a fun when I started 10 years ago.

56:33Or when I raised my own first fund in 2016, like it's still so much easier than it used to be. Let me give you just three stories, my three largest LP's, okay? Who I get and I all met with. and they all said don't take the secondary, the, you know, the billion dollar plus secondary, they all said don't take it. One said, which is a wildly successful, university endowment for their category number one, okay? They're dropping two managers this year. Good managers. No new managers, dropping two good ones. Better than me. Good ones. Second one, not going to do that type of venture going forward. You know, do other stuff in P, and venture, and other things, but not going to do these traditional seed series A funds.

57:07Third one's done three new managers this year. Three new managers this year, and did zero last year. Just like Iconic did the 5 vs 0, this other top tier, massive LP already did 3 seed investors this year and did none last year. Okay, so just spreading this down to me, why is the first dropping those managers who are actually very good? Wants to just concentrate in smaller number of winners to react to the re -out because of the cash distributions, because of the DPI. And this first one of the pure set of endowments was number 1 in his peer group. The only one that was positive last year for his group.

57:36This is one reason, the only one that was positive last year was peer group. Everyone else had negative. versus an average 90 % IRR the year before. So 90 % in the prior year, negative last year. So how do you react to going from 90 to for him to still positive and for the rest negative? The instinctive reaction is to shrink, right? To shrink managers, right? And this is one of the best. So he's trying to figure out who's past their peak, who's past their prime. You know, they were great back then, but Harry and Jason left. And I don't know if Bill and Bob are quite as good as Harry and Jason.

58:03And it was that kind of, you know, this kind of industry stuff. One is just changing their strategy and the other is adding three managers versus zero last year, right? So I think it's not that simple, but I do think it's harder and harder to raise the mega funds, like you can't argue the math, right? It's just hard to raise the mega fund, and it is hard to be emerging managers are delusional about how hard it is to raise a fund one with no track record. Like what you could do in 2021 is unprecedented in the history of the industry, where someone with some Twitter followers and never having a record could raise a $50 million fund, it will never happen again.

58:33That's a zirp thing that will never happen again. I do and I think actually we'll see happen there's this interesting opposite of a shit sandwich which is I think you'll see massive churn at the 2 billion plus level in your large large mega funds the LPs realize that bluntly you need to return so much what it takes to make those economics workers impossible or near impossible and it actually this desire to consolidate managers and move away from the really early less experienced emerging managers under a hundred million who don't have DPI and I think the ones that actually win, are the ones in the middle of the 250 to 750, where that's small enough fun size is why you can still see real upside.

59:12I can only share what I've learned. I'm not as much of an expert here issue, but the other thing that some of these top LP said to me is they challenged that a little bit. We had that conversation and what they said is, yes, for traditional LPs managing a certain amount of capital, that makes sense. We're going to revert more to a classic type of investigate, right? Where large funds are tough to make work and it's way too much energy to work with emerging managers. Way too much energy for not enough absolute return, right? Yeah. We're back in the world. But the massive pools of capital, right?

59:40The massive government -level pools of capital. Those, even the big funds are optimized to produce a return for sovereign wealth funds. Sovereign wealth funds still have single -digit returns. If you look at them, it is so hard to deploy that capital. And if an end recenter Sequoia, and Bessamer, and light speed can you think you have to have alpha to Nasdaq, but it's not that simple. If you can have alpha to their endowment and an absorbed $500 million a year, that's better than a lot of the thing. It's just these massive. And so that's why they're all going to Abu Dhabi or Dubai. And they're all chasing these funds.

1:00:17And it's not as silly as it sounds because they amount of capital. They have to deploy as it's so large. You can't even imagine even GIC and Singapore. It's so much money, right? I agree. I had a number that is actually three trillion in the night six years. Yeah. So that's why Twitter is a little bit wrong. These multi -billion dollar funds are optimized around sovereign wealth type. They're all products, right? Everything in VC that's been around a while is a product, right? Those products, I suspect if they can return 10 % a year reliably for real and absorb massive amounts of capital, they will be able to continually raise multi -billion dollar funds, right?

1:00:54100 % and to your point on like different people playing different games a lot of people say with the large funds Oh, you know, they've got a lot of churn in their LP base in majority of this They don't actually care because it's a deliberate graduation from one LP class to another from your endowment style writing 20 to 50 million to your sovereign wealth writing 250 to 500 in your pension funds in that realm Changing the game that they play and changing changing the LP profile that sits with that game. Yeah I guess the last point is just the amount of capital even with some valuation compression that we've seen in multiples the amount of capital that Startups can absorb pre IPO storm is is large the amount of money that's going to go into venture is equal to the amount of money Startups can absorb pre IPO and even if it's gotten harder, you know if companies can IPO at a five billion six billion dollar valuation in a few higher They're going to absorb half of that in capital 20 % of that in capital.

1:01:47They're all they're all gonna absorb it One way that it's gonna get absorbed, right? It's gonna flow there. Jason, what happens to Tiger himself bank? I actually, I've kind of admired the Tiger strategy, massive momentum investing. I actually admired it. Just momentum investing doesn't work once the momentum starts, right? But it sure worked when it did, right? Soft bank, I don't know. Those things are gonna die. And then when multiples get insane again, they'll all reappear. They're just high multiple vehicles, right? We can do a quick fire. What if you change your mind on it in the last 12 months?

1:02:17I've changed my mind on the distributed world and distributed knowledge workers and everything and I've just gotten a little jaded and I just don't think most of the current generation of folks will ever work hard again. I'm becoming much, I'm using much deeper scrutiny on executives and hires. Everyone is a side hustle. Everyone's working 20 hours a week. Everyone, you know, there's a Wall Street Journal article this week that workers are the happiest they've ever been since the Wall Street Journal study. You know why I said that to do the start? You want to know the happiest they've ever been?

1:02:49It's because they work the least. They don't work at home. I have become zero sum on your average tech worker. People want to be paid hundreds of thousands of dollars a year to manage large teams and not work. This is where I sound like a funny daddy, but this is what's broken in venture. It's very hard to do much on a small amount of capital A unless you're very careful who you hire. Because everyone needs six people to do a tweet. And every salesperson I know is incredibly grouchy because they have to work harder than 2021. Everyone, every sales, I wrote this post on Saster, the sales rep that's making $500 ,000 a year in 2023 and is miserable.

1:03:20Okay, I wrote it and you know why? Because he had to work half as hard to make more money in 2021. He's miserable making $500 ,000 a year in his 20s. Okay, as a sales rep. Not as a founder, right? This is toxic and I almost, and I know this is a funny thing. I almost think we shouldn't hire any of these people in startups today. You have to have had some adversity or have worked before the boom. You just need to flush through this and have a fresh perspective. Nothing's easy, but it was too easy in the boom. It wasn't easy, but it was too easy for a lot of us not just VCs for humans But if I was telling my kids a graduate suddenly I'd say this is the greatest opportunity of it It's never been easier to be better than everyone else because everyone else started from scratch Yeah, or with this or with the learners mind.

1:03:58You don't have to spill it away from but from a fresh perspective But too many folks still have like anti -scarchet issue from 2021 They want to go back in time they want to go back when all the leads were handed to them They want to go back when every startup grew up 100 % because demand was inexhaustible and they're not struggling They were struggling last year this year. They're just they're not adjusting too many people are not adjusting to today's world That's what changed that given up on a lot of people that I wouldn't have given up on a year ago I'm gonna live here is windows open and why it'll be huge in the back half of 24 It'll be huge the public markets the multiples have reflected enough the markets have grown enough There is plenty of appetite for top tier properties.

1:04:35Okay, we need to stripe a data bricks We need a few iconic ones to get the engine going again not ones at IPO at a billion or two We need we need a 10 billion dollar plus IPOs that are under price which bill girly hate so everyone makes money and Data bricks are stripe IPOs at a high valuation, but it trades up 50 % so everyone's feeling rich Everyone's feeling smart and then I just wrote this up There is a flood of SaaS companies all north of 200 million growing at higher rates I've invested in four or five that are over 200 million. They're just waiting they actually, if the stars aligned, it could have happened now.

1:05:08It's just too fast. You, first of all, it takes six months to IPO, best case. So you can IPO tomorrow, right? If you started today, best case would be late to one Q2 of next year. Plus it takes longer because of accounting reasons, and you need these leaders to go out. So if it's going to take until early next year for some good ones to go out, that you can follow, it's going to be the back half of next year. I think it'll be a good IPO a week at least, a good one that we've heard of in the back half of 2024. And it will feel great. Now, the valuations will not be insane. They'll just be good, right?

1:05:38But it'll be an IPO week in the back after 24. I'm reasonably calm. I'll bet you whatever you want, five to one, up to a point that this is right. It'll be an IPO week in the back after 24. 10 grand? Yeah. I'll go 10 grand. 1 .5, how much? How much? What do I have? I'll do 10 grand. What did I say? He said five to one. Oh my god, 10 grand. Well, you did call me on it, right? Yeah, I guess we can do it five to one. I love you. This was awesome. As always, thank you so much and I honestly say enough I much I loved it. Alright man, we'll talk in a little bit. Thank you. I mean the amount of bangers in that one show is just incredible.

1:06:16What a great guest Jason Moore's. If you want to see more from us behind the scenes of course you can watch the full episode on YouTube by searching for 20BC. But before we leave you today, we need to talk about Sona. Sona is an AI powered learning and knowledge sharing platform. Think of it like ChatGPT for all your company's knowledge. Sona integrates with all your company's apps in under 5 minutes and can search through every single file, doc, pull request, video and more in under 100 milliseconds. Assistant is generative AI at its most useful. Say you need to create a course on OKR fundamentals for your employee onboarding program and you're just really short on time.

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1:08:07So it's time to check it out at iincladapp .com and finally, HMC or Harvard Management Company, they are constantly seeking out the next generation of great investors and entrepreneurs. HMC has managed Harvard University's endowment for nearly 50 years and was one of the first institutional investors in venture capital. Their experience and long -term investment horizon made them fantastic partners to get world -changing ideas on a path to viability and success. They work as a true partner, providing great insights and perspectives to how managers succeed. I personally have had the privilege of working with the HMC team and can say that they're just truly exceptional partners and savvy investors.

1:08:43Whether you're launching your first fund or your fifth, HMC welcomes the opportunity to partner with both developing and established managers, have an idea you want to share with the team, just send it over to vancher at hmc .harvard .edu. As always I so appreciate all your support and stay tuned for what will be an incredibly special episode on Friday. We are trying out an entirely new format. 20vc the round table, it will be fun.

From the publisher

Jason Lemkin is the Founder @ SaaStr one of the best-performing early-stage venture funds focused on SaaS. In the past, Jason has led investments in Algolia, Pipedrive, Salesloft, TalkDesk, and RevenueCat to name a few. Prior to SaaStr, Jason was an entrepreneur, selling EchoSign to Adobe for $100M where it is now a $250M ARR product.

In Today's Episode with Jason Lemkin We Discuss:

1. WTF is Happening At Seed Right Now:

Why does Jason believe seed is more active than ever?
Is the pricing of seed rounds impacted since the downturn?
Why does Jason believe it is not only not the end of party rounds but just the beginning of them?
Why does Jason believe you cannot fail if you have $1M in ARR and an amazing founder?
Why does Jason believe that seed investors cannot participate in "hot seed rounds" anymore?

2. Is Series A a Dead Zone:

How does Jason analyze the Series A and B environment today?
What has changed in what investors expect and want to see in potential Series A and B investments?
What happens to the many companies who raised pre-emptive Series As and have 10 years of runway but no product-market fit?
Why does Jason believe founders should offer to give the money back when it is not working?
What happens to the Series A and B market in the next 18 months? When does it come back?

3. Growth: People are Too Negative!

Why does Jason believe that growth is more active than many are giving credit for?
What are the ARR benchmarks required to get a good growth round term sheet today?
Why does Jason believe that VC DD is a load of BS?
Why does Jason believe that every VC has fraud in their portfolio? Will they come out?

4. Ring That Bell: IPOs and M&A:

Why does Jason believe 2024 will be an amazing year for IPOs?
Why does much of the IPO market rely on Stripe and Databricks?
What is needed for an amazing 2024 IPO market?
How does Jason evaluate the M&A market in 2024? Will regulation get in the way?

5. Jason Lemkin: AMA:

Why does Jason Lemkin believe this generation of workers will never work hard again?
What is the only way for seed funds to make money investing in serial entrepreneurs?
What does Jason know now that he wishes he had known when he started investing?

Ask about this episode

In short

Transcript

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