20VC: Why Seed is Systemically Broken | Why Pricing is Worse Than Ever and There is More Funding Than Ever | Benchmarks for Churn, Retention and Growth Rates - Good vs Great | Why Last Vintage for Private Equity Will Suck with Jason Lemkin

22:57and I know many, most VCs disagree with me, but when the founders leave, I'm pretty much out. I'm not a fan, I'm a fan, I'm gonna be there, but I would like to sell when the founders leave. I would like to sell. Always, always, because I know everyone thinks Frank Sloopin was so great, but he left. He left when times got tougher, didn't he? You know what happened when growth finally slowed a snowflake, he stepped down. But a founder wouldn't have stepped down. The founders never leave you're a founder forever. So I know a lot of people like the Peringon professional and some companies need it, right?

23:29And maybe if you bring in a professional CEO and the founders are still running the company, that you have that DNA. But what I learned from pipe drive is when the founders are not there, you lose this competitive agility when it's being run with knobs and dials, right? So that's the venture learning, which is for now for me, right or wrong, if the founders leave, I will liquidate my position as soon as it's significant, right? There's no point in selling early, right? It's another life lesson, right? I've got a question for you. I don't think these P guys are going to make money on pipe drive.

23:59I think it's hard. It helps put a camera on by cannibalizing the shit out of them, Zandask or the buy price of Zandask was. You think you're going to make money? Yeah, on that growth rate and that decay rate and churn rate of customers, I don't think you're going to make fucking money. You're not innovating at all. Are they going to lose that money? Given today's multiples in today's world, yeah, I think they'll lose money on these deals, right? Well, there's a micro question and a macro question. The micro question is just like LPs are coming around to giving VCs Mulligans for their 2021 funds, are they going to give P funds a partial Mulligan, right?

24:31Are they going to give P funds an okay if they do a 1x on some of these deals, right? If P gets a Mulligan for these bubble deals, right? Then it doesn't really matter, right? If they have to sell all these deals for 50 % of what they pay, but the LPs have moved on, well, I'll kind of quietly, quietly forget about it, because that's what's happening in venture. Everyone's getting a Mulligan. Everyone is getting the LPs have decided they just, there's no point in being a critic for your 100x deals in 2021. We're going to more be a critic for your 100x AI deals in 2024, but the 2021 deals are behind us.

25:00So I don't know. If they're held to the same standard, it's going to be brutal. And it also shows, you know, there was that thing that Bill Gurley said about how important timing is for exits, right? And how important 2021 was for exits and slack selling for 27 billion into billion in revenue. You know, what would slack be worth today at two billion in revenue? Maybe it would be worth 12 billion, right? at twice the revenue. And so there's timing here. And when you hold on to your Nvidia shares for 37 years, these are interesting questions. Now they're all competitors. Yeah, but going to like trading it, I know far off that on secondary markets.

25:35Yeah, they raised it $7 billion in their last round. I know. This is my point that was just like, go, what a great asset for sales loft. You know, you know, you know what the other learning from that one is? What? This is a VC that it turns out is true. If the founders say to sell sell, so Kyle was sure, there was actually, this was 2 .5 billion at the end of 2021, that was an early investment. I wasn't on the board at this point or anything, but I was on the sidelines. It was mixed whether folks wanted to sell or not. It was mixed. The goal in 2021 was to play another card, wasn't it? Why sell it to a half when 5 billion seemed easy?

26:06That's where you make money and venture, is that last card? That's where you get the big multiple in your fund, right? So Kyle had to push it through. He had to push the sale through. He's the kindest founder I've ever invested in. And it's a reminder that you can be kind and win. And, but he pushed it through. He said, listen, this is, there is no argument that this is not the right thing to do for the company. Like, to get here, post delusion, post IPO, post everything, this is the thing to do. And so what founders say that, just like when the founders leave, I'd like to quietly exit my positions.

26:35When the founders say to sell them no longer gonna talk them out of it, or even play devil's advocate, I'm just gonna tell them, I'm sure you're right. What is HubSpot's pipe drive competitive product at 700 million? CRM. Yeah, but what does that teach you? When you look at them getting to 700 million and pipe drive being an amazing but much smaller 100 or 150, what does that teach you? Distributions, everything? Brand is not even distribution help them, but it's very interesting if you listened to Darmation Brand and they had some distribution, but remember back in the day it was a single product company selling to marketers.

27:08The distribution to sales professionals was very adjacent. It was attenuated at best, right? And I had a long conversation with them just on this point. I remember at South Stranial when they came together and they're like, yeah, like people thought it was crazy. Like it's not the same buyer. It's not the same ICP. But here's the a bunch of learnings. One of it and this is how I met them early. Like if you have a founder -led company and a bigger company is going to do this like this is a top. This was their top priority beyond marketing was to do CRM. It might have been a dumb idea because it was a different buyer.

27:35It was a different time. But they're willing to invest multi years in a free version a decade in doing this because they knew was the right decision If it's founder led be wary be wary that's what Olivier has done a data dog of Decimated multiple categories because it's a founder led company and he comes in and says we're gonna own these categories We're gonna keep owning a product after product now. They don't win in everything But that's why you know a huge percent of data .com Customers buy eight products now. Those are the ones to be wary of in the competition You think the big companies are slow and agile I mean, in disagil, but it's not always true, especially if they're founder led.

28:08It's not, it's not always true. You say about founders expanding their product lines there and kind of moving away from core focus and adding to it. So often founders want to do that and boards and investors say, no, no, no, don't, don't, we need to focus and we need to make sure that we nail the core market. Sometimes they're right, sometimes they're wrong. How do you think about when's the right time to nail the core market versus when's the right time to have the founder aspiration and expand products? Yeah, I've thought about this a lot. I think it's actually fairly straightforward. As you approach 10 % market share in your core ICP, your core market, you gotta expand.

28:40You have to expand because at some level, growth slows as you cross 10 % market share. Like you can't get to 200 % market share. Here's the disagreement. Now going from 10 to 20 may happen relatively quickly. You only see it in some of the metrics. Deal's taking longer to close because you already got all the easy ones, right? But I always see something as folks class 10 % in their core ICB. I always see something getting harder and you have enough time at 10 to be implementing your second -act calmly. And founders don't see this. This is a tiny way I try to help them. When I see this happening, I'm like, okay, let's break it down.

29:13Who's your core buyer? Well, it's restaurants and the South Coast of France, but with between two and four tables outside. Okay, great. I get why you got that. How many of them are there? 3000. Okay, how many customers do you have? 250? Okay, okay guys, we actually have a risk that our growth slows in 24 months because we own this market. What are we doing? There's the Parker Conrads that solve this problem on day zero. I'll be with hundreds of millions, but I find more founders these days. It sneaks up on them. They're so focused on the minutia and scaling and building that and the management team that they skate, they don't have that second act as they cross 10 % market share.

29:50Now, it doesn't always have to be a second product. It's at the early days, it could just be growing your ICV much broader, right? It could be going more enterprise, my quadruple, your market size right there, right? Go into another country, go into the US. So it's not always second product, but you need another act as you get to 10 % market share. Before we discuss the winner in NAV, yeah, we talk about one that didn't work and amaze. I'm all right. Yeah, the big lessons from that. My worst loss is 5 million. Then I have another one where I'm going to lose 3 million. My worst loss I realized was a company where I made 5x that sold for 100 million right when lockdown happened.

30:27Why did they sell it 100 million? Well, he was making a mistake that I see so many unicorns made the last 24 months. Is he got himself into a pickle? He hired a terrible CEO who hired 25 terrible sales reps. We went from five reps in a VP of sales who he immediately fired the CEO and brought in 20 people plus himself And they did half the sales of the VP of sales plus five, okay? And not only did sales go down, but what happened to the cap the burn rate? It obviously went way up and so rather than deal with it He let it go for four quarters five quarters six quarters because he'd raised a bunch of money and then you're just in this pickle Right, how do you get out of this pickle this high burn rate pickle and sold the company?

31:04but it was not much smaller than a competitor, which is since IPO'd in today's worth, they were really pretty close. For a while, today is worth 20 billion. So you look at those ones where you were winning in the market, where you had competition, you're like, what from a venture, what's the lesson learned? And so I don't know if that's the worst, because you made money, but I wish the founder had not been so stubborn. And I see this a lot, even with, and this is a very, I see this a lot with smart founders that are too stubborn though is they just stick to these bad executives and bad decisions for too long.

31:38They just stick to them for too long. Nice try but not really like a bad one, Jason, when you still five acts of money. Did you say you lost five million on one? Yes. Talk to me about that one. What did you get wrong? Well okay, here's a really interesting, I reflected a lot on it. This is a mistake I think a lot of us, a lot of folks are quietly making even now. I lost it on the third check. What actually happened this was my one where the signal was at the CEO Misrepresented some some of the financials not Sam Brankman flea level or Theranos level But just enough that across the bullshit line just enough that across the bullshit line I ended up still writing a third check into the company the first check was small The second check was a supporting check and the third check they just started to grow like a weed in 2021 like everybody did right?

32:23It exploded but there are a lot of issues with the company even as it you know started growing double digits each month And from a venture perspective, the right thing to do is just not have written the third check. We were all geniuses in 2021 and we all had extra money to invest and it all made sense to allocate a certain amount of capital per investment. But I should have lost a million and a half and not written that third check or two million instead of five million. And so for this five million you double down when you shouldn't have double down a Christ. Yeah or possibly triple down depending on how you look at that was the mistake.

32:52I did it intentionally but I did it reflexively. I probably made a lot of mistakes. but I think the mistake a lot of folks I've seen adventure in my own portfolio is there's zero diligence for these checks. None for these follow -on checks, right? As long as the top line looks good, no one ever checks anything below the top line. There's no diligence, no customer calls, no nothing, right? That's the conundrum what the follow -on checks is. If you treat them as seriously as the initial checks, then I think that's the right way to do it, right? But VCs don't. Okay, well, that's just on pat on a little bit.

33:20In terms of the diligence process that you have today. We mentioned spending time with obviously the CEO and the CTO. What else do we do? Do we do customer references? How many? How do we document them? Just walk me through the diligence process for you. My third one is the bank account. I used to do all these customer references before I went ahead three months. I used to leisurely get on the phone and do. I just saw you said you did 15 in one day. I'm proud of you, Harry. But I can't do 15 in a day and it takes me a while to do customer diligence the way I do it. So I've re -sequenced it in order.

33:50Right now I assume the diligence will be tolerable, right? And I'm up front in the timing, right? And now I'm quickly after my losses. Now, instead of doing financial diligence at the very end, you know, just to check the box before I wire the buddy. Now I do it in the beginning. Because I want to just make sure there's no shenanigans. I want my accounting from the auditing from I've worked with for over a decade to make sure that the financials in the bank statements are close enough to accurate.

34:19I want If it's wrong, but what I'm looking for is bullshit. If I look at the investments I'm most stressed about and frustrated with, it's where there's any bullshit in them. I don't think the best founders bullshit. I think you can build a unicorn bullshit, but I don't think the best founders bullshit. Do you think you have any forwards in your portfolio this day? I don't think I have heavy fraud, right? But I think there's $5 million loss when you take 12 months of revenue and you recognize it all in one month, that's at the edge of fraud, isn't it? That's why I like this, this quick bang statement check, like, okay, go through it and just make sure that the expenses and everything, it sounds silly because it doesn't really matter when you're making this investment, whether there's 200K in the bank or a million, it doesn't.

34:57But what does matter I find is when we're investing faster Harry and we're investing broader, I just don't want any shenanigans, I just don't want, life is too short, I don't want any manipulated metrics. And the problem with these bullshit artists, Harry, is their bullshards for years. There'd be one thing it was what and done, if they just bullshit, you know, in the financing, but then every investor updates bullshit and every board meeting is bullshit. It's just an endless stream of bullshit and you can't make, it's not worth it. What about customer references? Some people feel guilty about asking for them too early, but then you kind of need them in some elements to help you with the diligence process.

35:31How do you think about when's the right time to do customer references? I feel guilty too early about asking for customer references. If I'm not 90 % sure I want to invest, I still feel guilty about that. I still feel guilty about burning. VCs don't care, but I feel, I felt uncomfortable as a founder. I only raised a couple times burning those, you know, oh, you want to talk to Dell and Comcast and LinkedIn again, the third guy that then doesn't invest. It's just like, so I try to actually do things that are quick. And then I view those customer calls as a real ask, as a favor and for real. And so I'm hoping they mostly confirm what I believe to be true.

36:04I'm not looking for a customer call to turn a frown upside down. I'm not looking at it to take a marginal investment. This is, I think, what VCs used to do in the old days, is they'd hope. I'm looking only for confirmation with customers. If you're at a million, growing 10 % a month and your churn is low, I'm gonna assume your customers are mostly happy and I'm gonna gripe about a bunch of things too. Okay, so we're out of million. What monthly growth rate is good enough to really peak your interest and what monthly churn rate is like acceptable. When I've let the growth bar go down just a little bit, I always regretted it now.

36:37What is that? Is that from Fist? It's gotta be, at the end of the day, the best investment still. And this is a brutal. The best investments go one to 10 million and five quarters or less, the very best ones. You can't IPO unless you triple, triple, double, double. You know, when I started investing, I'd never put it on the whiteboard, tried to figure this out. And when I invested in pipe drive, and I'm like, okay, they're invested, they're growing 8 % a month at just over a million in revenue. And I was asking the other VCs, I was working with them, like, is this good enough? I actually didn't, it's a long time ago in SES.

37:04I didn't know no one actually knew. But I'm like, okay, 8 % is my new bar at a million. It's got to be 8 % a month because I just won that I was growing 6 % so I'm like, okay, it's better than me and two I don't see how they'll ever get to a hundred million before I'm in a retirement home if We're not hitting this numbers and that 8 % ultimately, you know, we really want 10 Which is what I where you fall out of your chair is when you you know You see that double digit growth at single digit millions, right? That's when you fall out of your chair But this basic VC math of triple triple double double as annoying as much as the noise founders and they say well It's harder now and how can I do triple triple triple triple here?

37:39I only raised six million or I can't raise a series G or series Q. The IPO markets don't care. They actually don't care whether you raised nothing, right? In primary, like at last year or whether you raised a crapload like Rubric or whether you raised almost nothing like Clavio and then a bunch, the IPO markets don't care. They care if you're efficient, the weak U IPO, like the two quarters. They don't care about the past, do they? Has expectation on revenue trajectory changed in the wake of deal scaling to a monstrous 5 or 600 million error where they are today in the wake of Whiz being monstrous whatever they are today half a billion error has what we expected in terms of revenue scaling changed.

38:17For a venture I think people are full of S. I think everyone wants a Whiz and now we know it's possible but the truth is if you're in the zone today if your growth is good enough what has happened is like there was you know in 2021 if we had a pyramid this many folks could all get funded, right? For, I don't know, half the pyramid could get funded because everyone is growing to triple digit rates, right? Now, it's a much smaller segment of the startup community growing to triple digits. So actually, what I'm seeing is they're flooded with even more capital. They're flooded with even more capital, the outliers, because there are enough of them.

38:47There's just as much capital chasing fewer and fewer folks that can grow at triple digit rates. The way I'm seeing that my personal portfolio is, and this is so different than 2021 is, talking about Prerada, anyone in my portfolio that is growing quickly, the insiders is flood it with capital, flood it with capital. In a way, I've never seen in my whole career. Everyone used to be a risk averse, and then they wanted Tiger to do it, and they wanted Softbank to do it. Now the big funds, the 10 billion dollar fund, they don't want to share to leave the capital. In any cases, did it turn out for the better for the company?

39:15To all take all this insider money? Yeah, to get flooded with cash. No, it's a complete negative. It's because they do less work, and they have a different bar, right? Because if you're managing 10 billion, and you've got a $5 million stake or 10 billion dollars, and that company is just, it's just in the top desk style of your portfolio. It's not whizz, but it's in your top desk style. What are you going to do with the other nine billion you haven't deployed? You're going to put it into that company. And as you see that other people want to do it, your elbows are going to get sharper. And then you're going to realize you got to do it with secondary.

39:44And then you realize, you know what, the deal's only worth 200. But if I offer 300, like I wouldn't do it for a new investment at 300 Harry, but I already invested it 20. So what's the difference on a blended basis? Like it's, like I'm going to make money, aren't I? Because this is a billion dollar company. This is going to be a three billion dollar company. and so it inflates valuations. Companies are getting overfunded, add inflated valuations by insiders today. I see it left and right. I agree. I also see people doing structured rounds as a way of preventing the world from knowing how bad a company is or flat rounds just to prevent the world from knowing how bad a company is or from realistically marking it differently in their books.

40:18So many companies had a bridge round, right? A true bridge round. Like, you just get it wrong. I had one as a founder. I needed an extra 500K. But taking a company that's struggling and putting tons of money in through safes or debt or whatever. How many of these have turned around and been $10 billion companies? How many of the leaders in cloud had a year and a half or two years of 8 % growth, then investors put another 60 million with safes and they turned it around and people made money. I mean, I feel like they should be written off. What happens to these kind of zombie public companies, Jason?

40:49And it sounds awful, so I'm just getting so much trouble for this. But like you would drop box, your box, your Twilios, with low growth, unexciting road maps, single digit market caps. What happens to them? And they kind of let zombie public companies? I don't think so. I would have thought that if you asked me 18 months ago, or even 12 months ago, two things. First of all, I'll take a very good example. Like model N, which was growing like nothing. It's a public company in revenue optimization for Farmer. It had the problem as it never expanded its niche. It's kind of like contract revenue management for Farmer.

41:23and it grew pretty nicely and now it's not growing at all. It just got bought out by Vist, our friends at Vist again, for 1 .25 billion. Is that like a great outcome or something? I don't know, but like, first of all, all of these companies, as things swing back even a little bit, they're all targets for PE. They're all tart, whether it's Zendes, before a 10 billion or a model in, this is a good price for model in. What does PE expect to do? Do they expect to just like margin efficiency, the shit out of it, cut all access and then reinvigorate growth. I mean, if they're the ones to reinvigorate growth, they must be pretty optimistic.

41:57I don't know, certainly you can see, like when we started the conversation with sales loft, I mean, Vista combined them with drift, right? So I don't know what drift was doing. It was doing 100 million when they got acquired, even if they're struggled a bit. Let's assume you bolt on another 100 million. I know we make fun of these bolt on combination things, but maybe they work. Well, that's enough to be perfect, right? Maybe there's a lot of financial engineering. I don't know for sure you could talk to them. I just don't I don't think there's any dummies here. So I don't know the answer the other point I will say you know you talk about zombies, but some of these zombies are approaching 40 % operating margins I don't think it's fun to be running Dropbox today.

42:31Okay, I don't I don't think it's fun I don't think it's anything like when Drew started, but they're approaching 40 % margins If they decide they want to run this as a cash engine for a while and then slowly reignite growth It's so profitable at scale. I don't know. I don't know. I mean square space just went private at 7 .5 billion, right? At 20 % growth, it was in the middle. Will they come back out of 15? I don't know. I don't know. It's easy to be cynical about the stuff going to our early conversation. Like I didn't believe you could make venture in money in 2013. I'm starting to get nervous again in 2024.

43:00But I think there's logic to this. And it doesn't take multiple expansion in the public markets. It doesn't take much growth reflation for these deals all of a sudden to be great deals. If multiples go from 6x to 8x, if you look at what Yamini said from HubSpot just a couple weeks ago for this quarter, she said it is not any easier. Even though they're growing 23 % at 2 .5 billion, she said, listen, it was briefly easier in December. Q1 was brutal. It is as hard as it's ever been. We sell the small businesses and we got to sell the CFO and do demos. We didn't do staff to do demos. It's hard out there, even at their rate.

43:30But when it does turn, all these deals may be decent deals. They may be 20%. That's what you've got to do is 20 % Net IRR. It's the goal here. They may be decent deals. And I just remember, I know I'm doing a while, but when things were really crappy in the 2016 down turn. I might be getting my time in off and LinkedIn panicked and sold to Microsoft cheap, right? And then Marquetto sold the Vista for one billion and everyone said they never could make money, right? And they ended up selling for four and a half billion and all of that. It took some market reflection. If you're in a segment of SaaS that's in a downturn, we're going into the third year.

44:002016 was one year. This is three years. So it's tough. If you make the right bets and things just go up 20%. You can make a lot. That's a lot of leverage. That's a lot of leverage of multiples go up 20 % and growth grows up 20 % or it's gonna make a lot of money. There are two elements that I want to discuss. That number one was Chann -Ryze. What is an acceptable versus unacceptable level of Chann -Ryze for a million dollar ARR company? And how does that differ between SMB and enterprise? It's tough. Well, let's break it up into two. For enterprise, I think if your NRR isn't north of 110 % by that point, don't invest.

44:36You have to have triple digit NRR. It's just the way it works. It's even harder to break into the enterprise than the S &B in some ways, just because sales cycles are longer and it's more complicated. If you've some have gotten to a million in revenue, you've solved a niche but big problem in the enterprise, right? They're going to buy more of it from you if you solve more of their problems. I've never not seen triple digit NRR at that scale. I've never not seen it. Never in my career. My own experience as a founder, any company I've invested, it's always triple digits in the enterprise. Just something's fundamentally broken if it's not triple digits at a million.

45:05Now, S &B is the tougher one. Sometimes when Darmesh and Brian talk about HubSpot and they're really, is there a little and Darmesha's and your, I hear a little bit of confusion on what the monthly turn was, was it three or four percent or seven percent? Three or four percent is what we see with a lot of very small businesses. We'll turn three or four percent. Credit cards expired, they go out of business, they change things. If HubSpot really was seven to eight percent and then got to a hundred percent, and that's 110 percent, that's mighty impressive. But if the turn is anything more than three or four percent a month, it's not even software anymore.

45:36It's some sort of consumer -like thing that does not have recurring revenue. Those are fundamental question, Harry, which is, do we even have recurring revenue here for companies, right? And at the end of the day, you've got to get to 100%. Darmesh and Brian agree, everyone agrees you've got to get to 100. The question for SMBs is, can you tolerate three to four percent a month churn, which is endemic for small businesses for a couple years? That's the venture question. And I've passed 100 % if you want to tie it together. I have no regrets here. I have passed on every single company that had for their segment abnormally high -churn 100%.

46:08I've gone back to so many founders that were at a million with 7 -8 % churn. I'm like, you have something, but it ain't SASS. It's not SASS, right? It may be something that may be consumer. Maybe that works in a bento box to your house company. Our whole fundamental model in software all breaks if you don't have 100 % retention. I can't. I'm looking at this literally growth model for this company now, 2 .6 % churn rate in August. That's what I would expect. It's SMB. And then in December, it's a 5 .6. That's what I would expect, and that's the risk. How do we think about that? When there's a variation that is doubling or halving, but it's highly volatile, it's not really good.

46:46Any form of predictability where I can hang my hat on and go, well, it's three. Well, I do think a couple things. First of all, I do think that even for startups and L4M model is great. Take the last four months in average, almost any metric. Even as you're approaching a million, I find it highly predictive. I find if you take the last four months of growth and average it, that's going to be your growth the next eight to nine months. I find if you take the churn, that's going to be just take the last four months and average it. I find it incredibly predictive and and burn, burn churn and growth.

47:12It's highly predictive. And that's why when I start investing, I do love their model. I would take their, their historicals and I would just build my own doing an L4M model with always right. It's always been right doing an L4M model. So that churn is high that you're describing and there is a difference between small businesses and very small businesses. Very small businesses do turn three to four percent a month. They do. And you've got two choices in that environment. You can either do what Ben Chessna did at Milchimp and just be hyper efficient and say it is what it is. If you're profitable, if your CAC is zero, you can survive a four percent a month turn.

47:45If your CAC is zero, it is unsustainable in a sales led model. That's the line. And so, can you bet that a Mark Rebearerge will come in like a HubSpot and help you go mid -Mark, mid -SMB and figure it out? But anyone but the best gets stuck in this three to four to five percent turn mind They never dig themselves out and even worse sometimes they obscure it with capital Here's where VCs can make it worse they obscure it with capital The other thing that I'm with SMB is is actually you can grow faster in the early days and enterprise because you acquire the customers in a week or a day instead of in a year So sometimes the growth top line growth rate is faster with SMB in the early days and it can obscure that turn That's that's the ones I think you either have to pass on or truly believe the founders have a strategy to get into that 100 % NRR.

48:29Or do you have lessons from that observation? The deals I regret are the worst deals. The one that was only 5x for 100 million. We also never fully solved the SMB trend there. We brute forced it with capital, right? It was very SMB and it had like 2 % turn a month. And when the team was efficient and we were burning 100K a month, it was no big deal. Like it really did some level. There's always time, right, to go up market. The question is, is there enough time and is there a plan? And it was tough at HubSpot and it was very tough at toast. if you're retouched, it was brutal for them to get to 100 % NRR.

48:57Here's the other truth, Harry, is one. In some ways, you probably have to be better at SMB than Enterprise, because the margin for error is lower. You sign an Enterprise three -year deal, and they don't even deploy for a year, because this business process change. You get a whole other year to fix it, and then you're gonna work on the renewal in year three. These SMBs, the smallest ones, are brutal. They'll look at their credit card statement, and they'll cancel everything the day, that the 15th or the 30th of the month, that doesn't make the money. They'll cancel everything. It's brutal. And for the best founders, it makes you even better.

49:28And that's actually why I think the best software in the world are the canvas and the square spaces. Maybe canvas better metrics and squares, but they have to be great or I'm just going to turn tomorrow. It's almost impossible to turn out of most enterprise products. So it has to be software, it has to be better. It has to be self -serving. It has to be PLG. It's not a choice. It's a requirement. And do you believe they'll get to 100 % what's their strategy? And if they don't, if the burn is low, I would take the risk of the burn as high I would assume the burn will increase linearly with that churn because it's going to suck up more Mark Apple.

49:57What's high burn as a percent of revenue? Like if you're looking at a company that's a million there are that's doing largely SMB, what would be like an acceptable burn? You know, there's the burn ratio, right? The David Sacks popularized. And I've watched different companies. I don't know how often you get in your best updates. I probably get half my investor updates get the burn ratio. Then I started to see its flaw. The burn ratio, the David Sacks is basically one or one or less is really efficient, right? if you burn less than your revenue, your bookings, it's super efficient. That's great if you're clear the next round's coming in and you have like 120 % NRR and 80 % margins.

50:30If you're not clear the next round's coming in, your NRR is SMB, so it's 60 % or 70%, and maybe your gross margins are lower if you have a hardware component or other COGS. Your burn ratio may need to be much shorter. You know, because when you look at our friends in B2C, they talk about going profit a lot in a customer in 60 days, 90 days, 30 days. We had Jacob from RevenueCat do our, you should do it sometimes, we had him do our little workshop Wednesday and they have 10 ,000 consumer SaaS companies on their platform, right? They have a 60 % annual turn rate. He's like, our customers have to go profitable in like 40 days.

51:02That's the B2C world that you and I are less familiar with. But if you're going to do very small business SaaS, you start to overlap B2C a little bit, don't you? There's an overlap here. The last point I'll make is the big danger you can make. This is why that company ended up having a media over outcome. You can't put enterprise or mid -market people into these SMB models Just the toolkit the type of people they hire the way they spend in marketing the customer lifetime None of their metric it just doesn't work It doesn't work if you come out of service now where the average customer lasts 118 years and GRR is 99 % at service now The GRR is 99 they keep 99 % of their customers over three years forget about the others You just can't put that person into an SMB invite.

51:41They don't even know what to do We was speaking about revenues. I just want two questions on revenue One, do you ever have it where they're not actually presenting ambitious enough revenues? I think it's almost certainly a pass, but here's where you have to check yourself. Everyone in life has to pass a 20 minute test. Five minute 20 of the meeting, do you think this founder is so great that you have to invest? If they pass a 20 minute test but they have a crazy metric, just share it with them. Just say, listen, Harry, I love everything I've heard today. I just want to let you like eight million, we're at six today.

52:11So eight million, twenty -two, twenty -five seems a little modest and maybe he'll laugh. I've never raised money before, Harry. I want to do 60, but I thought if I put 60 in, I read this thing on Reddit, it said don't do that. Every once in a while, with the first time founder, everyone gets bad advice. So if you love them, give them a chance to self -correct on that mistake, right? OK, second question on the revenue and growth assumptions. In a lot of AI tools today, especially the PLG AI tools, we mentioned some of the sales rep productivity AI tools. Yeah, I even mentioned OpaScript. The revenue growth is just like, my question to you is, how do you think about that?

52:46And how do we know experimental budgets, versus sustainable budgets, and what you think is real revenue versus AI hype cycle or revenue? I don't think we know. I think it's fine not to know. I think that's called venture. I think we invest in things that are exploding. And so I think if we're trying to overanalyze some of these AI explosions, we're missing the fact that we can make 20 investments per font. I think the bigger issue is when the burn rates are vast. That's a bet that it's just a crazy bet. It's one thing if you go if you go from one to 12 in a year and your cash La positive like opus that's okay if you go from one to 12 in a year and you're burning 50 million of some big funds money That might be a great.

53:22I mean, you know great investment like an open API But that's a kind of bet. I don't know how to make it needs so much capital Do you just throw a chip in and walk out the door and tell them? Let me know if you need a tweeter to be on the podcast I'm not I'm not sure what you do if they're gonna burn fifth the way we invest we haven't seen these types of burn rates either. Even when we've seen some that burned a lot like a ripening or something, it was very intentional. It was like here's Parker, here's why. It was decent, nearly as thin as it's really high, but you know, if they're coming up on 400 million, and there's a very specific reason why, and there's a plan, and it's pretty consistent with the plan, it makes sense.

53:51If the founders are great, and they have an answer, you got to make someone, you got to make the bet, if they're great, you got to make the bet. I do need a deal, I have to be right. You can have a great founder, but if you hate a lot about it, and it's 150 million in price. There is a line while I, a great founder, but a bad deal. You don't need the deal, I think. I think the other key of risk that a whole generation of folks on 20 VC and otherwise are we're all gonna slowly regret over the next decade. And his tough one to solve is just these low ownership stakes. Who was it? Was it silver like they just said they were great, every deal they did in 2021 that was small?

54:24I'm only gonna make any money on our big positions. We regret everything. And the problem isn't that this AI deals at 150 million pre in the seed round. I mean, that sucks. But if you have a $50 million seed, even a $100 million seed fund, how much can you put into it without creating systemic risk in your fund? Founders don't get this nor should they. But this is why I actually, Harry, believe that a lot of seed investing is, is systemically broken today. Let's just do the math. When I started a typical, you know, I did pipe drive at 16 at a million in revenue. So now you're typical YC deals at 25, right?

55:01And you can't buy much, right? So you gotta do a three or four million dollar seed check and you have a $50 million fund. How does the math work? You either have to take systemic risk, right? And do like six investments or eight investments. Or you have to buy tiny stakes. Or you have to find pre -pre -pre -seed stuff, right? Or you have a hundred million dollar funds, and you write even hundreds barely enough at a $25 million to own a true 10%, a true 10 % or 12 % because you're gonna get diluted. So you need to write a $3 million check, pre -revenue, a 10K MRR, 2K MRR. And I think everyone that complains about YC is missing the point that it's not for them.

55:38YC doesn't owe it to anybody to create rounds that makes certain VC funds happy. I mean, it's okay. How many folks are there per batch at YC now? It's 150, right? So Gary and Team's job is to get 140 of them funded as quickly and as possible. And the next week, they're on to the next batch, okay? This is not getting just one or two funded because even if it's ripe you don't know for sure, right? So the most efficient way with their brand is to have everyone Sell up these really slices create a lot of FOMO and get it done and it doesn't make sense to to accommodate Different structures of seed funds.

56:10It's a bad business model for them to make folks like you and me happy It only works for them. It doesn't work for anybody else It doesn't even work for EF or certainly anybody else. It only works for them So you go revenue cap and you have talk desk. We only have time for one more. Which one do you have more learnings from and more of the biggest learnings from them? Revenue cats are fun one. I'm usually not the first investor, like literally the first dollar in the door. I'm usually the first institutional, but this is the first time I've been the first investor at like $30 a month in revenue.

56:39I confuse their, they're basically their GMV with their ARR. I got it wrong. So I thought they were doing like $10 ,000 a month in MRR, but they were doing managing $10 ,000 a month in subscriptions and making like $30. So I took a little more risk than I usually did. That was an easy risk to take because the co -founders already knew the space cold. What was the price in what? Did you do? The first check was for about 10 % and it was pre -YC. So I think it was seven or eight million pre. But that would be 25 today, right? That was in 2018. That's a tough structural issue, right? And it was before Demo Day and all that kind of stuff.

57:13And then they did only have $30 a month in revenue. So maybe it was a good price. But today they were just waiting to get 25. What are the big lessons from that? When you have founders that are truly committed to a multi -decade journey at NOAA Space Cold, maybe that's the most important thing of all, right? So revenue cat is on 30 % of all mobile, US mobile devices managing subscriptions. And so that they've crushed. Developers love them, the product is great. Have they been too slow to develop the sales side of the business? Yes, I think Jacob and Miguel would admit that they're a little slow to go.

57:43They lead too much onto the PLG, too much onto the brand. But it's okay. They're at many tens of millions of revenue. They can do more there today. They've just closed their first million dollar deal Okay, maybe they could have done it a year earlier But it doesn't really matter at some level and so there are times what's fun about a company like revenue cat is there are times When a company or sometimes an executive comes into their own right not everyone can see it And now everyone can see that this is like the right team for the right problem at the right time and just back Then I never had one second of lack of as you probably we've chatted just for a few times about this coming years for fun.

58:16I've never had one second where I doubted the team, right? I question them a few times on different things. Never one second because they understood a problem and were committed to it for 20 years, right? And don't want to get acquired and have a planned IPO and for all the right reasons. And maybe that's a rambly answer to the question. But those are the investments where I just don't think you can lose. And when I've got my losses to tie this all into the theme, my losses are when the founders weren't that way. This $5 million loss I had, they were woeous me. They're like, I tried really hard.

58:44This company started at the same time as revenue cat. For a while, they were growing just as quickly. And they're like, oh, it got so hard. And I had churned and I lost my customers. And then this $5 million company, one day they came into work and they fired their entire sales and marketing team. With $15 million in the bank, they fired everyone, just like Elon, but Elon's a better founder, fired a supercharger team. They came and told nobody. And because growth got harder, they fired every single person in sales and marketing. So my mistake of 2021, when everything was gray, following somebody else.

59:11It was a waste of energy. The slightly second lesson, which you probably agree with, is like, there's no good deals. If a deal seems good, don't do it. I agree. I've definitely made a mistake before. It's like a good deal. Does not make a great investment. You know, and the funny thing is that also that was the last deal of that fund. Right? So there's also some micro -alerting. It's about managing the end of the fund. Because, you know, I've never thought I was that kind of investor. But everyone was kind of a genius in 2021. I'm like, well, you can't lose money. So I'm not going to make some extra money in the fund because we'll be so far into carry every extra dollar is just profit.

59:45It's kind of like recycling, right? If you can recycle just right, and this is the classic argument for recycling, hey, maybe you'll only make 3X on your recycled investment. But if you can invest another 10 million out of your fund and 3X it, that's 20 extra million to the LPs and four to six extra million to the GPs, you can't lose. So this was an end of fund thinking and I will never approach an end of fund investment and treated it any differently than the start of fund investment. I will never do that again. Any other lessons you mentioned in my career learnings on end of fund investments?

1:00:13Any else there? The only lesson that's actionable is, you know, we talked about the company where we exited at a hundred million during lockdown, right? I should have recycled all that money instead of distributed. It was impactful to a seed fund, right? Because it was a significant return. But it was so early in the life cycle of the fund. And now I wish I had those tens of millions to put into the portfolio. I think I will learn how recycling really works just after I retire from investing. I don't think I'll truly understand it. I mean, I get it, but like, you have to manage so many funds, so much money to get it right.

1:00:46But just recycle everything. I think it's the learning, right? I just wish I had that there was extra $20 million to put into that portfolio today, because that's another way to get an extra X out of the fund. You were invested to say you don't invest fast enough. Yes. They're correct. Do you worry about that? I do worry about it. I do worry about it. There are downsides that are not working for other people, right? Like you and I aren't. There are downsides to it. It's a great question. I do worry about it. I do think I need to invest more quickly. I feel like I've made enough investments that the financial returns from the existing portfolio will be good enough.

1:01:23I think I will achieve my investing goals from the investments I've made in 10 years. But I would like to play two more cards. I'd like to do two more funds. I'd like to have six more big winners. That would be enough, but I'd like to have six more fun returns. Okay, we're gonna do a quick far out my friends. That's on Okay. Yeah, I think most underrated sassy or today. When we talked about SMBs, I think when service Titan does IPO, soon I think we're gonna see the era is one of the most underrated folks coming out of Pasadena, doing it as own wise, selling to plumbers and folks, always committed to this mission.

1:01:53I think him and Andrew from Clavio were just missed because they're out of the circle. Clavio was missed because it didn't really raise or do other things. They're neck and neck. I mean, if you're outside of the Shopify ecosystem, you're like, what the heck's Clavio? They IPO'd. If you're in the Shopify, like, if you have any investments in it, Andrew and Clavio are like, God level, God level. Coming up on a billion, dominating this thing, kicked MailChimp out of Shopify on a billion revenue. They will be soon be doing more marketing revenue than HubSpot. They will cross. They'll be doing more SaaS revenue than Shopify in a couple years.

1:02:27This is a force of nature and there's been a little bit of grumblings when they raised prices this year But I would say until recently I couldn't even meet up anyone on the plenary if they didn't love this product That is next level stuff, isn't it? Marki Camp stays six and a half billion and I think you started at 23 or something like that too. It's 24 today. That's one of the reasons I have some some malaise and worry adventure. It should be 10, 11, 12 in my mind. There's not much better than Clavio out there. You could give it a discount for having a platform risk, but based on what I follow the company pretty closely, because of what I don't think anyone gives it a discount for platform risk.

1:03:00This is why almost every SaaS company's overpriced in the venture markets, because of Clavio. If Clavio was worth 20 billion, then all these deals were doing make sense. What do you use the most overvalued company stay? I'm hopeful that almost everything in SaaS is undervalued. There are folks where sometimes I wonder why a clavio is trading at what we're coming up on a billion. So we're trading it basically 6x AR, right? Sometimes I wonder why and at last year, which is an iconic company, could never say anything about positive at last year. And sometimes I wonder why it's trading it twice the revenue.

1:03:31Why is that a 12x company? It's growing 20%, which is great. It's not 40%. It has great cash flow. Some of these mark these just multiple dislocations. I just I'm not I'm not a smart enough public guy to get, but the clavio to Atlassian gap in multiples is remains a mystery to me. Tell me, what happens to Annaplan, like respectfully terrible product getting eaten alive by pigment, bought by pee, fuck all innovation? What happens there? I don't know what happens to these pee companies that invest less after they do. I don't know. Our little team at Saster, we are accidentally stuck on Marquetto.

1:04:07We would be on HubSpot if we could be. We have huge data issues for migration, but we're stuck on Marquetto. But it's kind of The fun is a case study. I mean, literally, I don't think they've launched a feature in six years, or whatever. I mean, I guess it's under a Dopee and then Adobe. Nothing. It's the same, same clunky app. A lot of people still swear by it because it is powerful in the enterprise, right? What happens when companies stop innovating? I don't know. I guess the meta question is, can they grow in the teens? This is the Dropbox question. Can you grow in the teens, right? And sure, pigment, maybe pigments on fire, but again, I can't segment the market.

1:04:38Maybe Anna Plan is stronger in the true enterprise, for example, or maybe they have, maybe they're impossible to rip out. I think if you can grow on the teens, you're still going to hit the rule of 40. I think if we look at our public companies, you still have a lot of enterprise value if you hit the rule of 40. There's no point in venture, but in the public markets are still a point. So maybe that's the bullish version is that these companies have, even though we can be critical because we're so focused on the upstarts, they may have a decade to run if the growth is in the teens. Even 15 % growth over a decade, that plus maybe 35 % margins, those compound to a lot.

1:05:0815 % a year is better than most VC funds make. What was the biggest thing about the world of LPs that you wish you'd known when you started? I basically have two anchors and they've been the same my whole career. I have horse Lee and transpose. Together with their affiliates and friends, people would say it's about I think they're 80 % of all the funds I've done. People would say that's a bad idea. It's too concentrated. But everything I've asked for direct and direct follow on whatever they've done it one way or another. So for me, for what for my gig, it's worked out pretty well. So what's my learning from that may be radically different than like 99 % of people.

1:05:40I mean, if you can find a couple LPs, ideally four or five that truly believe in you and you don't put up too many Mulligans and you deliver with some regularity, it's a gift because you can kind of do your thing. Even if you're a little criticized for investing slowly, like we talked about, you can kind of do your thing. And I've worked in environments where it was very transactional with LPs, right? And I've worked with in environments where you're more supportive. It is better to be more supportive. And maybe it's better to not be agra. Maybe it's better to leave a few nickels on the table.

1:06:06maybe it's better to go the extra, I don't have the answers. Let me put it differently. I've been able to work with my LPs like I worked with my VCs, which is a good framework for me rather than to work with them, which maybe, you know, maybe another kind of mistake rather than work like everyone's just a number on a sheet, right? Final one for you, you can invest in a seed fund, a series A fund, and a growth fund, which one do you put money into for each? Well, first, my advice to everyone out there that, like e -mails me, hey, can I invest in SasterFund, don't put money into any of them. Is my advice to individuals.

1:06:37Everyone's full of shit. If you do a seed fund and you make 3x net after 16 years as an individual, put the money into S &P 500, put it into VTI. It's not worth the extra gains for the illiquidity and people don't put a nut, they don't write a large enough check into funds as individuals, right? If you put half your net worth into it, I would get it. But if you're putting 100 grand or 50 grand and that triples to 150 grand after 16 years in its illiquid, it ain't worth it. If I said to you, here's a pension fund. You always see, yeah, go put money in the seed fund, a serious A fund, and a growth fund.

1:07:11And this is absolute returns focused. I want money back. The little bit I know, I've been doing this just long enough, that I see all these funds decaying. I see partners leading, I see old playbooks not working, I see folks struggling. I even see pretty good investors investing more slowly. You see folks quietly stepping back or they're not investing themselves, their teams are doing all the investments now. So I have the same issue that I think is the existential challenge for LPs is you're looking backwards and a lot of these funds that we all look up to A lot of those managers aren't even active anymore or they're not fully active and a lot of folks returns You have access to a thousand times more data a lot of it is not as impressive as you might think not that you need me But if handful of times I've been able to help you I've recommended you I'm saying I can't predict the future perfectly But here's someone that has the right drive that has enough of a tracker to put together I think you've got to make the Harry Stebbing's type bets because I don't know how to make the rest look it look at like open view Right make so much money on data dog.

1:08:04They owned almost 20 % of data dog three four billion and then you're done And then you're one guy owns the whole fund right my general assumption in all these situations is the most logical thing happened Which is look? Well, you know if you have one guy getting owning the management company in like 50 or 80 % of the carry and you have a data dog exit And then it gets harder everything gets harder. Why would you keep doing it? You got to love it I mean, you got to really love it. So like, if they made four or five billion off a couple hundred million dollar fund, let's have some fun for the audience.

1:08:30We should do the math better, but let's say they made three billion in carry, okay? And let's say it was just 20%, so they had 600 million of the partners, but one guy got 60%. So let's say he made 350, 400 million. And now you're in your new fund and it's hard, Harry. We're sitting at one X. I got a hustle and my valuation suck. Data dog, every investor that got a data until the late one got in cheap. I mean, we did a fun one together with I Avengers. The other thing, I think they invested like four or five million in data dog in the early days, right? Open view, I think did it in the teens, right?

1:09:01Now that like the next data dogs at 400 pre, you're running the fun. You're like, okay, listen, I got to sign up for 14 years and I'm gonna make like nothing in carry or a cup of a million. I made 300 million updated dog. What would you do if you didn't see three billion coming? Like, you'd hang up your hat. I'm assuming that's the answer. I could be wrong to offend anybody, but I just think my limited understanding is they made It's so much, they have some good investments, but there's no way they're gonna make 400 million as GPs off -calendly. It's such an iconic company, but only 8 % of calendar at a $3 billion entry price is not the same as only 20 % of data dog at $16 million entry price, is it?

1:09:37Calendly, we all have counted, let's say IPO is at $6 billion and they invested $60 million, probably doesn't return the fund, does it? We blow your brains out, right? And you ask why I invest more slowly, there's a lot of reasons, but one is, listen, I don't want smaller ownership stakes, I don't want single digit ownership stakes. I don't want anything that doesn't return the fund for real not for fake Not to raise the next fund, right? You realize like there are there's a lot of fake bravado on Twitter and a lot of folks Making personally very little money on very high -profile investments, right?

1:10:05So that's my may not be what happened to open view But when you have one of these outlier events, right? Even the guys that emerged into I love you know They had a gentle transition when they made something made so much money to merchants between Bill Viva, they own 30 % of Viva and they held it, right? So let's have some fun. I'm not gonna look it up, but Viva's worth what, 35 billion today? Yeah, I'm gonna look it up. I know they kept it at the fun level until eight figures. So let's say they had 25 % carry and distributed it 20 billion, so the partners, let's say they had, say it six billion, the partners had a billion to divide up between themselves and that fun.

1:10:39Plus they had Yammer, plus they had Bill. This was an epic fun to this fun. They had little old Echo sign, didn't even get above the line. And so how would you keep going? I mean, Gordon's still there. It's a great fund, right? But you know, when you have those moments, I mean, it's so, so much money. I was on a board with John Doerr when I started investing and I asked him why he kept doing it. The only thing I saw was he still had the sparkle in his eye, you know, back then. This was 2014. He still had the sparkle. But if there's, if you've made that much money in the sparkles gone, dealing with this bullshit is not worth it.

1:11:09Listen, Jason, I've loved doing this. Thank you so much. As always, this has been fantastic and you are my hero man, I look forward to London. It's gonna be fun, it'll be good. I have to say that, show in terms of the format, the review, the review of the three best and three worst deals. It was an experiment, so I want to hear your thoughts. I love doing it personally, I think there's so much to learn from the bigger successes and biggest failures. Again, you can find it on YouTube by searching for 20VC, but let me know what you think on Twitter and Harry's debbings. But before we leave you today, we're all trying to grow our businesses here.

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