DEBATE: State of Seed Investing w/ Jason Lemkin, Sam Lessin, Frank Rotman & Harry Stebbings | E1047

1. 0:00 – 0:31

   Intro

   1. SLSam Lessin0:00

      No one gives a shit about a c- company that does $200 million top line and grows at 30% margins. Right? No one cares. It's like, you wanna bet on AI? Bet on Facebook, bet on Amazon, bet on Microsoft. It's so obvious.

   2. HSHarry Stebbings0:11

      (instrumental music) I am so excited for this. I've been really (laughs) looking forward to this one. I'm so used to having a one-on-one, now I get three brilliant brains joining my terrible British accent. And I'm just gonna dive straight in. We're doing the state of the seed market today. Sam, I'm quoting you, "Seed investors need to come to terms with the fact that this is not an 18-month

2. 0:31 – 10:40

   Perspectives on Investing

   1. HSHarry Stebbings0:31

      timeout, it's likely much longer, and even the death of systematic thematic seed funds." Can you help me understand, Sam? What did you mean by this?

   2. SLSam Lessin0:41

      I think I said it. (laughs) No, I mean, like look, I think, (laughs) I think, um ... Look, I've, I've seen a lot of eras of seed investing in my life and career so far. Actually, hilariously, I was just reminded of this by someone. You know, my father, as he used to say, was an incredibly, uh, active seed investor in the late '90s in th- in, in the East Coast. He used to call himself, he say, "I was the big ..." He used to say, "I'm the largest seed investor in the East Coast, which is kinda like being the smartest utilities executive." Right? And so I, you know, but he, you know, I used to sit in on a ton of meetings when I was a kid in the late '90s and kind of watch the rise and the 2001 crash. Did a bunch of angel investing myself through the next decade. You know, ended up starting a seed fund with some friends, you know, in the last decade or so. So I've seen a few eras of this, and I think what was unique about the last era of seed funds, which really was the first time it got big and institutional, right, um, was this era where really the role of a seed fund was to kind of be the first step in a factory production line of startups that you popped out the backend $1 to $10 billion valuation companies pretty predictably, right? And, you know, i- it was a factory system. You found a company, you packaged it up, you knew what the series A firms were looking for, you knew the series A firms, you say, "Okay, we're gonna hit these two metrics, we're gonna pass you to the next line of production." Next line of production does their things, passes them to the Bs, pass them to the Cs, eventually pass them to Goldman Sachs, pop them out, $10 billion company, everyone makes money. That's over, right, because I think that was predicated ... It wasn't just zero interest rate policy, there was a bunch of things that was predicated on, but it was predicated on this idea that because of technology and things like AWS and platforms, that you could very predictably manufacture good companies, right? Not great companies. You weren't trying to manufacture a Facebook. Every once in a while you get lucky, right? But you could manufacture predictably the DTC companies, the companies on theme, you knew what people wanted, you passed it through the line. That's over, right, because it turned out that didn't work, right? Like everyone got excited about these companies and all these companies got crushed once they went public, right? They, they're not good companies, the market doesn't want, you know. And we, we were in plenty of them, right, along with everyone else. My view when I say that seed is dead is that I think the factory model of seed which supported massive scaling of it is dead. And we're kind of back to where we have been historically, which is spe- seed is a bespoke industry, it's a bespoke thing. Some people can do it well, it's about being better at pattern recognition. There's certain things you can get right about it, and it will be a power law game where you'll still have a few huge victories and a lot of losses, but, you know, the idea you can sit there and just manufacture pretty good outcomes from seed, I think, is over and not coming back.

   3. HSHarry Stebbings3:16

      Jason, Frank, who wants to take the baton here?

   4. JLJason Lemkin3:21

      Well, let me, I'll take up the baton, but let me ask Frank a question to, to do it. Um, do you ... I, I know that you've posted so many interesting, um, tweet storms on how things are challenging and what's going on in venture now. And all of us actually are ex-founders and have been doing this a little while, um, is this really worse than, like, 2018, 2019, 2017? I only do SaaS and cloud, so I've not done any trendy investments. I completely hear Sam's point, but to me it doesn't feel ... There are elements that are harder, like these crazy valuations, the $700 million, uh, caps on, on precedes. That's new. But the core investments, the core deals, I just feel like we just gotta hit a reset button and go back to the vibe before, you know, late 2019. And I think the model kind of works, even if it's bespoke, to Sam's point. Even if it's bespoke, I don't know why it d- why it's broken today.

   5. FRFrank Rotman4:08

      So, the, the way I would answer that is I think, um, about the manufacturing process of companies the same way that Sam articulated it. You basically are trying to de-risk companies in stages. So you put money into a company, and at the seed stage, it's the closest thing to, uh, trying to get a writing sample out into the world. Right? So you have a new author, you have a new story that's never been written, the whole goal is to see what they can accomplish with a little bit of money. And I think what's broken is what's happened from that point forward. Right? And I think about it as, uh, the 2017 to 2021 era was the era of alphabet soup. Right? So you had an A round, a B round, a C round, a D round, an E round, an F round, like extensions. So you weren't de-risking businesses systemically. You know, when capital was incredibly cheap and it was abundant, um, i- it almost, uh, I wouldn't say forced, but it encouraged, uh, you know, founders to actually invest in multiple S-curves at the same time. It encouraged them to have more ambition to try to immediately jump to a great company instead of going through the stages of building a good company first. So I think if we hit the reset button, it's about saying, look, there are four stages of de-risking in a business. There's the seed, there's the A, the B, and then C is really private equity and connecting the dots to a profitable company, right-

   6. JLJason Lemkin5:27

      Yeah.

   7. FRFrank Rotman5:27

      ... and figuring out what an exit looks like. And if we get back to a much more efficient, uh, you know, way of de-risking businesses, which means that you will have a failure rate. Darwin will do his job along the way. You will have 20 to 30% failure between seed and A. You will have 20 to 30% failure between A and B. And I think that is the rude awakening for a lot of seed investors in series A and a- and, uh, angel investors who haven't seen this environment before, that they think it just, you know, thing go up, you know, valuation go up, company get funded. And I think those days are over, where you have to get far enough fast enough, otherwise the money isn't going to be there.

   8. JLJason Lemkin6:07

      I think these are all good points. But this idea that it's all sequenced, right, and that these are products, when I started investing in venture in 2013, you know, it, SaaS was much smaller, right? But I knew these VCs that had offered me term sheets, the Byron Detters from Bessemer and Josh Stein from Threshold and the Excel team. I actually thought my job was to package my investments up. I would invest in a funky outsider company like Pipedrive from Estonia or Algolia from France or Talkdesk from Portugal. No one heard of them. I felt like I had a couple jobs. Uh, help them bring in a VP of sales um, and then package this thing up as a product. Like, actually-

   9. HSHarry Stebbings6:41

      Yep.

   10. JLJason Lemkin6:41

       ... more so than today when the world was smaller.

   11. HSHarry Stebbings6:43

       Absolutely.

   12. JLJason Lemkin6:44

       And I spent 30% of my time, and I'm not a schmoozer, schmoozing with these guys. Schmoozing with Byron and Josh. And I would socialize like a, like a plate of, uh, things. "Here's, here's what I got going. I got, you like search, I got this. You like contact center." Um, I don't think that's a bad thing even if the denominator's like exploded, is it?

   13. HSHarry Stebbings7:03

       I mean, I just think what that's, that's called investment banking, right? Like, and, and I do think in the end of the day, like I don't, I mean, look, look, we do that as a firm too all the time, right? Like that's actually a core thing and I think we're pretty good at it, candidly. And we have a whole strategy around how we think about this stuff. I just, I got to say that like when I look at our seed portfolio over a long period of time now, my own personal investing longer, you know, the seed deals that have mattered have always been the ones that were hardest to package. They were not on the factory line. The places we've made serious money have always been the places where we had a thesis at seed that was super weird and it was super cheap because it wasn't a thing that was going to be on the factory line and any firm could package and kind of pass on series A people. And then we were right. You know, to your point about mortality rates, I mean, we've looked at our portfolios recently and it's comical how low the mortality rates are. That's obviously shifting in real time, right, and will go up. But I just think it's like, I think about my own personal investing and whether we've been successful or not, it's not clear to me in a world where, you know, you look at the failure rate, the overpricing, the lack of real public, you know, things coming out of the backend for all the middling companies. I'm not talking about the every once in a while breakout. I'm talking about like the middling kind of you can manufacture it SaaS or whatever, right? If that goes away, then I think the entire staging system really breaks down, right? And I do think we're back to a game where venture capital is what it always was, which is you find something really interesting that not everyone likes, right? That's kind of off theme and you're right about some very different thesis and then you make a thousand times your money. Not, okay, we know what the playbook is and everyone does pretty well. I think that's what... And I think the problem with that is if you don't have a manufacturing line, then the LP stories get way tougher, right? Especially at the scale we're talking about, right? You're not going to have a bajillion seed fund in an efficient market for seed, right? Because, you know, everyone loves a capital, you know, a factory. And the story of, "Well, you should bet on us because we are really good at identifying weird shit. And every once in a while we'll make a ton of money and we're also going to light a bunch of money on fire," is a way less palpable LP story, right, than what we've been running in the last decade. Yeah. Yeah, I think Sam, one of, one of your partners, Will, who I spend a lot of time with, he said one of the flaws of the past few years is that everyone was trying to earn the right to do the obvious. Right? So they were trying to earn the right to win these deals that everybody thought were good deals. And by the time you ended up pricing them, you know, you ended up getting a pretty bad deal, right? It, it really wasn't- Oh, boy. ... a good deal. Yeah.

   14. JLJason Lemkin9:29

       (laughs) That's true. Um, I think there's a, a flaw in the ecosystem is that pricing has slowly started to correct, but it still hasn't corrected at the seed stage.

   15. HSHarry Stebbings9:50

       Yeah, I mean, I definitely agree with that. It's a good line from Will. Will has good lines on this stuff. But yeah, I mean, I think that's, at the end of the day, like I think seed funds and seed investors, like the model has to be selling very expensive money that when you're right, right, you're really, really right. And this idea that there was an efficiency to it, the market got big enough and whatever and everyone was competing for the quote unquote, I couldn't... I totally agree. Like that's the place, that's the breakdown of the factory, right? That's the standardization that goes away.

   16. Guys, can I ask you, you said there about pricing and it's starting to correct a little bit. I'm not seeing that. I'm seeing multi-stage just come in harder and harder, not wanting to deploy series A and B checks. I'm seeing more and more rich tech execs wanting to angel invest, and continuing to see more and more people raise funds or start to try and raise funds. Pricing hasn't corrected for me. Am I in a world of my own or

3. 10:40 – 19:53

   Risks and Insights in Early-stage Investing

   1. HSHarry Stebbings10:40

      are you seeing something different?

   2. So it is starting to ripple its way back from the public markets to the later stage rounds, and from there to the mid-stage rounds and starting to ripple earlier. Uh, I think what you're seeing are more capital efficient businesses and business plans being built, which I think is a fantastic thing for the industry. You know, so they're asking for slightly less capital, um, because they can't invest in multiple S-curves at the same time. Uh, and I do think that the correction is occurring, it's just happening slowly because a lot of insider rounds are happening in order to, uh, extend companies to earn their way into their valuations while we go through this seam. You know, what I worry about if there isn't a correct, correction at the earliest stages is that, you know, the de-risking of businesses and the building of businesses is a multi-stage game. And just because it's healthy for the first move doesn't mean that it sets you up to make the other moves well. And if pricing doesn't correct at the earliest stage, um, you're going to have a lot of no bids, you know, at the series A because they wouldn't have gone far enough fast enough for a series A investor to come in and say, "They've earned their way into a significant increase in valuation." And what a lot of founders don't realize is that venture capitalists, a lot of them, would prefer to give a no bid than to deliver the bad news that we like your company, but guess what? It probably needs to be a flat round or a down round to the last round because you haven't earned your way in. So you're reducing the aperture of downstream capital if you've over-funded yourself at the wrong valuation early on.

   3. JLJason Lemkin12:10

      For sure, but do you think founders care or listen? I don't think any founders are listening to these terrific insights on Twitter. And (laughs) I don't think that they are ratcheting back their valuation (laughs) expectations. And I think very few are worried that when they do their seed at 30 post, that that will impact an A in Leff's life, uh, you know, they execute-

   4. SLSam Lessin12:30

      Well, they-

   5. JLJason Lemkin12:30

      ... to perfection. I can't even-

   6. SLSam Lessin12:31

      I mean-

   7. JLJason Lemkin12:31

      ... convince a founder that's true in 2023.

   8. SLSam Lessin12:33

      Well-

   9. JLJason Lemkin12:33

      I can't get any of them-

   10. SLSam Lessin12:34

       I agree.

   11. JLJason Lemkin12:34

       ... to believe it, but ...

   12. SLSam Lessin12:35

       But I think the, the answer is I think it's actually, I don't think it's gonna happen with the founders, I agree. And the reality is, the seed world, the tantalizing prospect of 1,000X return, you know, if you really believe it's there, we'll get a lot of people in. It's like cents on the dollar, like who the hell cares? I even do this. There are places like, you know, in history there have been a few instances and my partners are like, "We like the deal, it's too expensive." And I'm like, "Ah, fuck it, I'll put in a few personal dollars," 'cause like who cares? It's so little money, right? And I do think it's cool and like whatever. Uh, you know, I do think it's like that is the problem with it is that like it- it is, it is a market, but it's not fully a market in terms of how people treat it in a lot of ways. And I don't think ... But I, I will say this, like, you know, uh, we'll basically no bid lots of stuff where we don't see the huge asymmetry at this point. Whereas before when the factory model exists, we'd be like, uh, even I will admit, I'd say there are two types of deals we did. We did deals where we're like, we have fundamental conviction from zero, hopefully no one else does, which means the price is super low, right? Because like, and we love that. It's in some ways you're hunting in the right ponds if the price is low. Like that's the key indication because it means no one else is bidding. Like I, that's where we've made all of our money, right? Or I'll be honest, even we got sucked into, eh, there's a factory model. We know how Sequoia is gonna buy this. We know what the markup looks like. We might as well plug into it. We have access. And I think that, at least for us, that latter stage just kind of goes away. And I think a lot of good firms will do that. I think that'll change what types of opportunities go af- people go after. Those things will still exist to a point, but you know, over time slowly these things will correct.

   13. FRFrank Rotman13:58

       The fundamental flaw in the discipline is that those 1,000X return, uh, companies only exist in areas where TAM probably is unlimited or TAM probably is like extraordinarily large. And all of this generic advice going to founders, like, you know, people are looking at them like they have an unlimited TAM for every single company because I think this standard dilution concept is like a bunch of crap. Like standard-

   14. SLSam Lessin14:26

       Well ...

   15. FRFrank Rotman14:26

       ... dilution is basically saying that your valuation is just a division exercise, you know, saying that-

   16. SLSam Lessin14:31

       So-

   17. FRFrank Rotman14:31

       ... this much money and therefore my company is worth this much. And not every company is pursuing unlimited TAM or in large markets could drive 1,000X. So it's, it's hard.

   18. SLSam Lessin14:42

       I ... I totally agree, Frank, but I think the other way to look at it is like, do you need the series A firms and B firms? You know, like do you, like or are you just, you say like there are a thousand, lots of 1,000X with smaller TAMs, right? If you're just like, "I actually am just starting a business. I need $3 million to get it started. You, I need it, no one else is gonna give it to me. Let's get it going, but we're running it as a real business." You know, my wife started a business that does tens of millions in top line with zero dollars of outside investment. I just had a friend over this weekend who blows my mind actually. You know, when I always started, uh, my first company, we had, um, uh, we had excess space in DUMBO in like the mid 2000s. By far the most successful company to come out of that is a company called Muck Rack, right? Unbelievable success, right? Uh, and it was the team in the corner that actually took $0 of VC, right, until very, very late in the game when they did a private equity price round. That does not need to be on unlimited TAM. That will make, generate billions, right? And so there, there are ...

   19. FRFrank Rotman15:33

       The, the key here is, and I think it's something that needs to be relearned in the venture industry, companies need to learn to make money at low levels of scale, right?

   20. SLSam Lessin15:40

       Yes.

   21. FRFrank Rotman15:41

       Either you're in an unlimited TAM market where you can justify putting capital into the business and continuing to pour capital into the business. I think some SaaS companies, like the TAMs are just gigantic when you look at, you know, the, the markets that they're actually, uh, serving. But there are a lot of other markets where the only way to get a venture return is to be incredibly capital efficient and make money at low levels of scale.

   22. SLSam Lessin16:02

       But isn't like this the greatest moment in history for that, given the platform to do this?

   23. FRFrank Rotman16:06

       I think so.

   24. SLSam Lessin16:06

       I mean, to me that's the most exciting pla- I mean, to me the, there, every once in a while you get a let's literally shoot for Mars, fuck it type play, right? Where like you know you need more capital whatever, but like I actually think the world would be much healthier, to your point about TAM sizes, if a lot of seed funds came around and started focusing on businesses that are great businesses that you can start and scale with revenue, with growth, with quality throughout. And capital raising just becomes an option, not a requirement.

   25. JLJason Lemkin16:34

       But do you mean as part of that the exits will be low, like getting your arms around old school exits of just two or 300 million?

   26. SLSam Lessin16:41

       Yeah.

   27. FRFrank Rotman16:41

       No, no, no, no.

   28. JLJason Lemkin16:41

       Are you suggesting businesses-

   29. SLSam Lessin16:42

       I mean-

   30. JLJason Lemkin16:42

       ... would have to get comfortable with that? I think that train-
4. 19:53 – 36:22

   Strategy and Scalability

   1. SLSam Lessin19:53

      (laughs)

   2. JLJason Lemkin19:54

      Can I throw out a meta question, Harry? Maybe you could comment too, but to the group. When I'm looking, let me talk to you what I think the ultimate seed investment was. Uh, maybe not even SaaS, but SaaS adjacent is The Trade Desk, okay?

   3. SLSam Lessin20:04

      Mm-hmm.

   4. JLJason Lemkin20:05

      The Trade Desk today is worth $40 billion, $41 billion. It was led by two true seed funds, right? IA Ventures, right? Well, I don't know, tell me, 40, $50 million fund? And Founder Collective, a $20 billion fund. I think IA owned a little bit more, but let's call them both in a round and a half, they bought 20%, right? So let's, I know they did distribute early, but let's assume like they held to 40 billion, they each own 20%. That's 8 billion each out of funds that are smaller than 80 million, right? So this is classic, I'm going to get in at single digit millions. I'm going to own 20% through two rounds with two great founders. And my bigger concern is that I think those are dead-ish in seed, right? Owning 1% is- is still good. 1% of 40 billion is good, but that's the classic seed that I think we're griping about. Like can we do Trade Desks today, right? Because that's- that's your career. You know, I mean, Roger's retired (laughs) and he had a few others in that fund. I mean, I don't know what that fund was, but it was double digit X a long time ago, right? (laughs)

   5. FRFrank Rotman21:09

      Yeah, I mean, we- we-

   6. JLJason Lemkin21:10

      Just a thought, does that exist, that magical-

   7. FRFrank Rotman21:12

      Yeah.

   8. JLJason Lemkin21:12

      ... that magical seed deal, right?

   9. SLSam Lessin21:13

      I mean, why would argue ... In the last several years, absolutely, but it didn't exist in the factory model, right? Like I made 1,000X on our Solana seed, right? I have a company called Team Shares, which we put in our first check at four posts that is now touching a billion and is a real company with hundreds of millions in revenue.

   10. FRFrank Rotman21:30

       We- we love you in the last rounds in Team Shares.

   11. SLSam Lessin21:31

       Thank you.

   12. FRFrank Rotman21:32

       We love the company. (laughs)

   13. SLSam Lessin21:33

       We're in there, you know, I bought 20% of that company for $500,000, right? Like those deals exist, but like the reasons those existed is because people didn't like them then, not 'cause they did like them, right? You know, and so like I think that's the key is-

   14. JLJason Lemkin21:45

       For- for sure.

   15. SLSam Lessin21:46

       Yeah.

   16. JLJason Lemkin21:47

       But if those exist regularly, then seed is the best. It's- it's, even though it's unpredictable and it's hard to get information, it's- it's epic, right? That's where you get your 1,000X of those Trade Desk like deals, right? That's where you get 1000, right?

   17. SLSam Lessin21:59

       Yeah, I just think you have to be willing to light a lot of money on fire along the way, which I think is, you know, the other part of it. It's like, you know, and- and, you know, I'm- I'm not saying that you can't beg again. I, what I would say is I think maybe we can all agree then that here's the thing. To your point about sizing, the other thing is fund size, right? Like if you have a 50, even $100 million fund, you can make seed math work. But these mega seed funds, like, and all of a sudden, oh my God, your $2 billion return is only a 3X. Like it, that just, the math won't work, right? Um ...

   18. HSHarry Stebbings22:26

       Well, Sam, Sam, can I, can I just posit something to you? You said about fund size there. Say if you have a $50 million fund size, you've got 40 million investable, you want to do seed stay with the average seed being three to four, you can't lead seed rounds with them and have enough diversification. You got $22 million checks there and 20 at seed assumes that you're a pretty fricking good picker, and that's totally done with no reserves. So like 50 is not- not- not nearly enough. I would argue that 100 is not even enough.

   19. SLSam Lessin22:56

       I don't know. But on the flip side, I think like you just got to be good at picking. Like no one said it's easy, right? Like I think that, you know, you only get so many bullets in the gun, right? And like that's kind of how it works. And you know, the reality, Harry- Harry, on this is like, you know, I think with anyone is like, if you have institutional investors, maybe you end up with three $50 million funds and like you don't need all of them to be 100X funds, right? And so like, and you don't know for long enough to kind of play it out. So I think there- there's some squishiness to what I'm pointing out, but I'm just saying that like, you know, I think the most depressing thing in the world is not being wrong, it's being right and not making money. You know, being right to the tune of like having these epic outcomes and being like, "Oh fuck, that was a 1X returner of the fund," right? Fuck, right? Like that's the thing that like is kind of the worst case scenario, right? Because those are rare and- and far, far to find.

   20. HSHarry Stebbings23:40

       No, I totally get you there and that makes sense. Kanesh, do you think we're looking at loss rates in the right way? Like we mentioned there about kind of the challenges of picking and the right levels of diversification. How do you think about loss rates and whether this generation is completely skewed in terms of the mentality around loss rates and graduation rates?

   21. FRFrank Rotman23:59

       Yeah, I mean, look, I- I was looking at some data from Crunchbase just to, uh, figure out like what percentage of the entire venture world ends up becoming public companies, right? Which is, uh, at least a way of drawing a line and saying these are real companies and these are real outcomes, you know, versus the smaller outcomes of a couple hundred million dollars or aquihires.

   22. HSHarry Stebbings24:19

       And it ends up that, uh, if you go back the past 20 years or so, it's, it's a single digit number, right? And in fact, for some vintages, that number is 2%. For some it's three, some it's four. But it's not 8% or 10% of companies end up becoming public companies. So what you're really looking about is, call it a one in 50, you know, has the potential, uh, to actually execute against a plan, be in a space that's big enough to create the type of outcome the industry actually cares about. And again, I'm not disrespecting the smaller exits or to Sam's point, you could actually get a fantastic return if a company on three million dollars could become profitable and you end up selling it for 300 million. Like, that could end up being an amazing return. But in the venture world in, in general, like you need an IPO-able event or a, a mega sale, you know, uh, of the variety of a Honey or a Credit Karma to kind of make things work. And it's, it's just small, so you have to be very I don't know, but does it, does it have to be the case, Frank ... Historically, it's been directionally true, and I think we got very, everyone got addicted to this idea that you can manufacture five billion dollar companies, not maybe 50 but five, right? And like there were... But I mean, I just, I'm very interested personally, and I think the future is in these companies. There are a lot of companies you can put $3 million into and get to a place where like you're pretty sure it's profitable, it's gonna be worth, it's worth 100, 200, and you have an option on something much bigger, right? Like that's kind of the thing that I think is most interesting these days, right, is like options 'cause you-

   23. JLJason Lemkin25:41

       But why is that a better use of time than finding the trade owning 20% of the trade debt?

   24. HSHarry Stebbings25:45

       I just, I think it's-

   25. JLJason Lemkin25:45

       I don't get... You're, you're a very good and aggressive investor. I'm just having ... entering into the conversation, but why do you care about that seeming downside mitigation? I, I totally respect the smaller businesses. I mean, Harry and I have both built media businesses. I mean, I've got one they're doing almost 30 million on the side. Harry's got a one doing million. I get that life, no, all bootstrapped, but I, why do you want optionality as a VC, right? It doesn't, it doesn't really, covering your losses-

   26. HSHarry Stebbings26:08

       Well, here's the qu-

   27. JLJason Lemkin26:08

       Doesn't help much, does it?

   28. HSHarry Stebbings26:09

       No, no, I guess the question in my mind is like, does building a 100, 200, $300 million company really give up the option value of building the 10 or 20 or $50 billion company? I think there's a lot of examples at this point, right, in, in our, in history of people that build the kind of obvious winner, right, and do a really good job with it and then are ... and then graduate it. Like Squarespace, you name it, like Anthony's company, like we can go down the line and like ... I think people got into this mentality and it was partially 'cause money was free and partially 'cause of like Uber and Lyft and everything's an Airbnb and blah blah blah, right, of like the way to play home run derby is to start with the home run derby mentality. And I actually think it's not like baseball, it's not like by getting on first you don't get a chance to hit a home run, right, or a grand slam. I just think in a lot of cases getting on first is the best way to set yourself up for a 10 year sprint at a home run. Mixing my sports metaphors, but I think you get the point. Mm-hmm. I, I talk to companies about this all the time and, you know, it comes from my operator background, but I don't think great companies are just manufactured. I think great companies are built on top of good companies. Like you have to get to good first-

   29. JLJason Lemkin27:13

       Yeah.

   30. HSHarry Stebbings27:13

       ... and then you can eventually get to great. And when you get to good, you can stand on whatever that mountain is and look around and see what optionality you have and say, "Wait a minute, this is a great team, we can expand, we have great customers, here's what we can do." Or you might find that, you know, you have kind of exhausted the opportunity and it's actually time to sell. So I, I do believe that great companies are built on top of good companies, but if you're still trying to get a good outcome, you know, for those good outcomes instead of great outcomes, you have to be incredibly capital efficient to get to that good state, right? So if you think about like, uh, let- let's make up a number, uh, 10 times enterprise value to paid in capital ratio, right? If you have a 10 times enterprise value to paid in capital ratio, you know, the management team will probably own 30% or 40% of the company at that point, which means that investors are probably getting a 6X return on all of their capital. Which means that the early investors are probably getting double that and the later stage investors are probably getting half of that, right? So late stage investor will get 3X and early stage investor will get 12X. But in order to do that with a $300 million outcome, it means you have to have invested less than $30 million of capital to get to that point. And I think this is what needs to be relearned, you know, the capital efficiency to actually de-risk a business-
5. 36:22 – 57:14

   Investment Approaches, Hiring, and Predictions

   1. FRFrank Rotman36:22

      Guys, can I, can I ask you, we've looked at different models here. We've seen multi-stage funds as we've discussed, we've discussed pure play seed funds. Sam, you said something that was different to what Jason said the other day. And so I'm intrigued to hear these opposing thoughts. You've written that clubby seed investing and the YC playbook will certainly not work anymore. And then, Jason, we chatted the other day about actually why party rounds and a proliferation of very rich tech execs from the liquid years we've had over the last years is more than ever.Are these two ideas arguing with each other? Are they the same? I'm trying to understand. Do we have more party rounds, less party rounds, more rich execs, less rich execs? Which one is it?

   2. SLSam Lessin37:07

      I mean, I- my basic point I- I- I believe is, I think that Y- the YC thing in particular was if there's a factory to- i- if there's- if we're talking about venture capital as a factory, that was, like, ground zero for the construction of the factory. It literally was like, "Oh, venture capital and, like, how you raise money and form these companies is, like, this opaque playbook, it's hard to figure out, da-da-da-da." No, like, literally here is playbook, and then here is demo day, we bring in a bunch of every investor, they bid, they bid it up, they justify our 7%, we're done, it's packaged, it moves on the factory line, right? It is the purest part of the factory you could imagine, right? And, you know, as an investor, you know, we've stayed away from it for a long time, partially because there's no signal in it, because everything comes off the factory line looking exactly the same, packaged properly. All looks fine, right? But it's packaged the sa- you know, et cetera, et cetera. So, to me, that, you know, that's- yes, tha- the factory part is the dead part. Party rounds, rich tech execs, sure. There are lots of rich tech execs. And like, again, seed investing is fun, right? Like, and you get 50% of your money back when it fails, right? So the nice part about mortality rate being higher is you get your money back faster, at 50 cents on the dollar, right? Like, you know, as a tax write-off. So, like, sure, that- that'll happen, people can team up on that, but I think that's more about the capital side than- in my mind, than it i- than it is the factory part.

   3. FRFrank Rotman38:21

      Jason, Frank, do you agree in terms of YC's days being challenged as ground zero for kind of factory line formation? Look, I mean, YC has a track record, it has a brand, it has, uh, a lot that, uh, I would say is a feeder to a lot of funds. In fact, they rely on YC, you know, for their deal flow, or at least a portion of their deal flow. And we find that some of the things coming off the factory, uh, the hygiene about how they were built and what they learned during their period in the factory wasn't necessarily the things or the order that they should be learning, and they weren't set up in necessarily the right way. A lot of the growth trajectory was in unscalable things, in order to get the up and to the right 45-degree chart so that you can package it for demo day. You know, so there are a lot of artificial things done in order to package it, like, um, you know, to Sam's point, it will come off the factory all looking the same, and a lot of that advice you actually have to undo, you know, if you end up funding the company. So you end up overpaying and then having to undo a bunch of the damage, you know, that was done by setting up the company in the first place and the way that they got their early results. So I- I just worry about, you know, are the companies actually getting the proper advice for the industry they're in, um, you know, from a generic factory doing hundreds of businesses a year? Jason, how do you feel?

   4. JLJason Lemkin39:59

      I am grateful for YC for a couple reasons. But one thing is I like to only invest in outsiders and first-time CEOs on a two-by-two, outsider, first-time CEO. Over time, the obvious lesson I've learned is you wanna find really great CEOs, right? And, you know, sometimes you'll get an email from Frank or Sam and say, "Hey, this is the best kid I've worked with in 72 years," like you know, okay, if you trust them. Or Harry says, "The smartest kid." If it's outsiders and first-time CEOs, you can only guess if they're... I mean, you can know as a founder, you can know if they're a better founder than you. I enjoy the fact that YC is an IQ and drive filter. It is not perfect. There are folks in each batch of 200 that are not as smart as the rest or that are gaming the system. Above average, I know dr- high drive and high IQ, I love it. And so I will- I will enjoy that meeting, I will take that meeting. I will take, uh, a cold inbound that is worse than a traditional from a YC company. And the only... And I don't actually mind the 20 million post. It's okay for my fund size, which isn't even huge. What is hard in- today is that the rounds are too split up, right? And I've done two YC companies. One, I led the seed Algolia, hopefully it will IPO next year. And another one I love that we did together, Harry, RevenueCat, but I don't think I could get those ownerships today with the fund style I have. That's for me, I kind of have to give up on YC, not because I won't pay or don't love the signal. If there's 84 people in the round, I- there's no point in me putting 100 grand in- in a 20 post. It just doesn't, uh, it doesn't get me the 100X funds Sam (laughs) was talking to. It doesn't even get me close to 1X. So I just don't have the time to invest in... I just don't have the time at this point in life, right? But I love the signal actually.

   5. FRFrank Rotman41:34

      It's a really important point. I mean, i- in venture there are a lot of ways to make money but you have to choose one of them and do it well. And some of these, uh, accelerators, it's just very hard, right? They're crowded and we don't like crowded cap tables in general. We like when we have, you know, friendlies who have diversity of Rolodex or diversity of ability to hire or diversity of introduction they can make to different companies but you've got to be very careful about who you're assembling around the cap table and a lot of these party rounds, like 40 and 50 people, you know, taking up a lot of room and ultimately it's kind of a- a rule of thumb that I have, I- I like to see as much money on the cap table in the hands of active investors as possible. And when a lot of the money is in the hands of passive investors, it's very hard. Do Series A investors give a shit if the seed company that's graduating has a party round before or an institutional seed? Do they care?

   6. SLSam Lessin42:43

      No. Why would they care?

   7. JLJason Lemkin42:45

      (laughs) Yeah, this is the- the trade-off, the paradox, right? Uh, seed investors might not like 40- 48 people out in the round, but if the seed guys will s- the A guys will still do the deal, maybe the founders are happy with John Collision and, uh, and Olivier from Datadog and, uh, you know, all- all the other folks on their cap table that- that will respond to an email.Like, they will respond. Those 50 guys will res- ... They won't take a 10-hour meeting, but they do respond to emails. In my- in my- in my ecosystem, it's pretty amazing what one ... That a- that a, you know, uh, 10 or $100 billion company CEO will actually respond thoughtfully (laughs) .

   8. SLSam Lessin43:20

      (laughs) .

   9. JLJason Lemkin43:20

      More than many VCs, frankly, who just say, "Good job. Good- good job, kid. Good job, pal." (laughs) .

   10. SLSam Lessin43:26

       Hey, that's my- that's my favorite email, good job. What's wrong with good job?

   11. JLJason Lemkin43:29

       Good job (laughs) .

   12. SLSam Lessin43:30

       (laughs) .

   13. JLJason Lemkin43:30

       Let's not say, "Let me know how I can help," let's just simplify it to good job (laughs) .

   14. SLSam Lessin43:34

       Sometimes you just got a thumbs up.

   15. JLJason Lemkin43:36

       The- Yeah. Th- the best use of an emoticon ever is the- is the, um, uh, investor update thumbs up.

   16. SLSam Lessin43:42

       (sniffs) .

   17. HSHarry Stebbings43:42

       If you- if you have 30 100K checks from amazing, amazing individuals and it actually means something to them, it can be just as strategic.

   18. SLSam Lessin43:49

       Look, in the end of the day, there are plenty of people who do the seed, they don't need help. They're gonna do the seed on their own, right? And, like, sure, a phone call here or there is helpful and those people don't ... It doesn't matter, it's just money. Like, we're just selling them money, right? And, like, I mean, so it's funny, it's, like, we have this thing which is very different, I think, probably than it sounds like Jason and Frank how you approach, which is, like, when people sometimes ask Slow Ventures, they're like ... Or at least I- I- I don't want to speak for my partners 'cause I- I sometimes play a slightly different tune on this than they do. But the way I would say it is people ask me, they say, like, "Well, what do you guys do to, like, support founders?" And my answer is always, "Nothing." Now, that's not actually true. There's a bunch of stuff we do to support founders but, like, when people ask, my answer is nothing, right? Because I ... If you're coming to me for help, my view is you're almost by definition ... Or you're saying, "I need help," almost ever, "I want help," I think you're a weak founder, right? And, like, I want founders who are like, "I got this. I got the plan. You're money to me." Right? And then sure, I actually will- we will be helpful and there are things we do, but, like, I think there's signal on- on- on kind of how- how people think about that, and it's very different. Like, if you are really like, "I got this. Stay the fuck out of my business. You want 30 famous people at a high price? Go nuts." Like, it doesn't matter to the series A firms. Sam, I'm with you, totally. But Jason disagrees with me.

   19. FRFrank Rotman44:59

       Yeah, I mean, there are many companies, many strategies here, and there are founders in certain sectors where they have everything that they need. You know, we happen to be a specialist firm in a specialist sector where, again, if a founder needs too much help, that's signal. Like, if they're relying on us to actually get things done, that is huge signal and- and a big red flag. But when you have a very talented founder who actually understands the space and then you add, like, again, Rolodex, being able to see around corners, being able to actually help. You know, as an example, like, you know, I was the chief credit officer of- of Capital One, you know, back in the day. If a company needs help writing credit policy or, you know, working through credit issues that they have, like, we're actually there to help them. If they need to raise debt funds, like, we know how debt funds think.

   20. SLSam Lessin45:44

       Yeah, yeah.

   21. FRFrank Rotman45:44

       We can help them do those things. So it's important to understand that not all companies are the same and even talented founders can use the help if there are other talented people around them. I mean, we almost become employees of the company, uh, in the early days to- to help them accelerate their path.

   22. SLSam Lessin46:01

       Yeah. I think, like, to your point, that's the right line, Frank, which is just a lot of different approaches to seed and that's good. Like, you know, our approach is always gonna be ... I say- I'd say even mine, even with- and my partner is gonna be find the weird shit no one else can fund where the money's expensive because the founder has a ton of conviction and wants to go for it, and you can see it, right? And you're gonna be wrong a bunch but every once in a while you're really right, right? Like, that's kind of, like ... And it's- it's a very different strategy than the, like, you know, "We have a space we play in and, like, we, you know, uh, you know, run h- know how to run the risk models," right?

   23. JLJason Lemkin46:31

       I know almost no founders that are born amazing recruiters. It doesn't mean they're not tenacious, it doesn't mean they won't LinkedIn 1,000 people and set up a million calls. I don't know too many first-time founders that know how to recruit a perfect VP of sales or a perfect VP of marketing, let alone a- a true VP of engineering, even for a CTO. And I think that is an area you can add massive value at seed. In fact, I think that, like, all venture firms have failed with their talent arms. I think all venture firms that are seed into A should, in theory ... Actually they're just investing firms, but if they really want to do what they pretend they should do, at least half the headcount should be recruiting. Not fake recruiting, not someone that doesn't want to work hard at a tech company and is phoning it in at a big venture firm. I'm saying half the time should be bringing ... That- that's the value we're not ... That you're n- that VCs aren't delivering, like, none. None of these talent arms really work, right? They- they don't. That's am- amazing. That's what I've seen make the difference.

   24. SLSam Lessin47:27

       Look, I agree with you in theory. I guess in practice, like, I also would say that, like ... This is a classic thing, is, like, when people come to me and they're like, "I need help recruiting," I'm like, "Go work with someone else." Right? Like, it- it's like-

   25. JLJason Lemkin47:39

       I don't think they say that. I think they say, what they-

   26. SLSam Lessin47:41

       (laughs) .

   27. JLJason Lemkin47:41

       A founder will typically say is ... I- I mean, I've had this conversation a million times. "I need a great VP of sales." Like, they all come to the same conclusion somewhere approaching a million in revenue, right? And they'll go out and find their own person. They'll go hire someone from Okta or Salesforce or Twilio who will- who will spend all of the money Frank just gave them. It'll all be gone in- in 12 months. But if you can actually help them find that person that was actually the number one person at Rippling today that was there early, or that match, or whatever it is, it- it's a game changer, right? I- I think that-

   28. SLSam Lessin48:11

       Yeah.

   29. JLJason Lemkin48:11

       And I think, um, seed firms all think they want to be on speed dial. That- that's nice, but ... (laughs) .

   30. SLSam Lessin48:17

       I- Look, I agree with you, and I think sales is a particularly interesting one. I would actually argue in my life as an entrepreneur, I've, like, never successfully hired sales. I think sales is incredibly hard to hire at startups, uh, specifically because the whole nature of sales is, like, the people who want to go early are, like, anti-correlated with the good people, right? 'Cause that is not how sales works, right? Like, in general, like, the whole point in sales is it's coin operated. You wanna go to a place where the playbook's super clear, you just go fucking make bank. The people who are like, "Oh, I want an entrepreneurial adventure and go early," like, those people are almost always the worst salespeople, right? So I think if you're a- a specialist at that and you can crush early stage sales, that's a superpower. You don't even need to have a venture fund, you can just take equity, right? Don't put money in, just take equity for- for finding s- the great, th- the, that vanishingly small number of people that fit the I'm actually good at sales, not ... Doing it, not just strategizing about it, and I want to go early. I mean, that alone is, like, a winning strategy. It's certainly not one we have (laughs) .
6. 57:14 – 1:03:09

   Final Insights and Quick-Fire Round

   1. FRFrank Rotman57:14

      So, can I just throw one more grenade out there? That's like, I completely agree with everything that we've said today in terms of the factory output and the kind of packaging, but show me the incentive, and I'll show you the outcome. The LP world is not changing. We can say what we want, but Andreessen will still get their funds. So will Lightspeed. The returns will go down, and as you said-

   2. SLSam Lessin57:33

      Well, they're not, Harry. I think that's wrong. Like, they're, they're funds, they're cutting fund sizes left and right.

   3. FRFrank Rotman57:38

      Yeah.

   4. SLSam Lessin57:38

      And they're combining funds to bulk them up. I actually think that, that you're seeing very real repercussions, right? As people realign here. They, they are not getting their funds. (laughs)

   5. JLJason Lemkin57:46

      (laughs)

   6. FRFrank Rotman57:46

      Well, really? Are you... No, no, no, no, wrong. You're seeing Insight at 20, and you're seeing TCV at six, seven.

   7. SLSam Lessin57:53

      All right. This is, this is where you gotta, this is where unfortunately it's the talk of the other lesson, because my wife has much more I promise you, if you read the information, there have been many articles published recently about people dramatically cutting/underfunding funds, combining funds to bulk them up 'cause they can't raise the vertical vehicles, et cetera. There is absolutely an LP pullback, right, on this. Like, and it's very real and material. Now, will Andreessen raise any fund? Of course. Of course. But like, you know, the scale is, is definitely dropping.

   8. JLJason Lemkin58:20

      I think Frank has the most data, but I, I looked at this before, in 2019. I shouldn't have, I could have updated it 'cause it'd be better. But in 2019, the average SaaS company that went public absorbed all, just shy of 400 million in capital, 390 million in capital before they went public. Now, there haven't been any IPOs for a while, and there's a few down rounds going on (laughs) , but I have to assume when the, when the engine revives, we will absorb 400 million again per IPO, and that should reflate all these mega funds. Like, no matter what else is happening today, with l- with venture being negative for LPs last year and valuations being down, there's some raw math. I think these bigger funds are designed to absorb that 400 million, right? How can I put 200 million of the 400 million going into Datadog or whatever? Like, that's their goal, right? And it's just 400 million. We don't have room for four billion into these. And that's what probably happened in 2021, right? We deployed as if there was four billion (laughs) 'cause of the unicorn bloat. But it's still 400 million per company.

   9. FRFrank Rotman59:15

      LPs are waking up. I mean, we just completed, uh, a fundraise and talked to, uh, actually, I don't know, probably 150 LPs. A lot of them are the same LPs that end up funding a lot of the funds. And they definitely are waking up. Like, if you are a mid-tier firm with good but not great results, like, they are consolidating. They are making very strategic choices about which funds they're putting money into and which ones they're not going to renew. Uh, you can talk to the LPs. They have, you know, very tough conversations about which emerging managers that they did fund that they're no longer going to fund when they come back to market. So, I think this plays out over a number of years. It doesn't happen instantaneously, which is why you might not be seeing it or feeling it. Uh, also, a lot of the funds aren't coming back to market because they know that they would be raising off of a track record which is depressed, right? Because everyone is taking markdowns right now. So they're avoiding going back to market. If they did go back to market, a lot of them wouldn't be received very well. So there is a period of time right now where the LPs are awake and they are rationalizing where they're putting their money. Um, and the question is, like, if Jason is right with the IPOs, then money will flow back into the LP ecosystem once the IPO window kind of opens up, and that might reverse course. But I think for a number of years, like, if you are a middling fund, you know, or an emerging manager, you are gonna have problems raising capital.

   10. JLJason Lemkin1:00:38

       Right. We're gonna do a quick fire round, chaps. Otherwise, I'm gonna keep you all day. Um, so I'm gonna say a short statement to each of you. I'm gonna direct it, and then we're gonna rock and roll. We'll do one each. Uh, let's go with Frank. What's the most important trend in the venture world that not many people are paying attention to?

   11. FRFrank Rotman1:00:54

       I think we talked about it. I, I think companies are trying to figure out how to make money at low levels of scale. And I think the capital efficiency is coming back into kind of the, uh, decision-making, you know, within the, the venture world.

   12. JLJason Lemkin1:01:08

       Do you think not many people are paying attention to that? Like...

   13. FRFrank Rotman1:01:12

       Uh, I think that at the earliest stage, they still think narrative is carrying the day, and I think narrative is going to stop at the seed, uh, when it used to flow through to the series A and even into the series B. So I think the trend is, you can raise on narrative at seed, and then it's results starting in series A.

   14. JLJason Lemkin1:01:28

       Sam, what do you believe that most around you disbelieve?

   15. SLSam Lessin1:01:32

       (laughs) Like, everything? What do I believe in most, um, in venture capital?

   16. JLJason Lemkin1:01:40

       Could be in life, Sam. I, I love your brain, if I'm honest. You could just go for anything.

   17. SLSam Lessin1:01:44

       Um, I mean, th- that's a great question, but it's one I'm not sure I'm gonna have a great off-the-cuff answer to. Uh, I think the first thing that comes to mind is just like, I think kind of, again, to, to play back what we were talking about today 'cause it's top of mind, obviously, is like, I am very excited to fund a bunch of companies at five and under in weird things that are coming to be 'cause no one else will give them money that are going to be highly profitable on the way up and create option value down the line, right? So it's kind of a riff on what Frank is saying but a different way, but like an earlier thing, which is like, that's my jam. Like, I don't wanna ever be reliant on a series A firm again.

   18. JLJason Lemkin1:02:19

       (laughs) Jason, final one. What would you most like to change about the world of venture moving forwards? You have your magic wand. You can change anything. Well, I don't... I, I wish my magic wand worked. Uh, I would like to, going back to Frank's point, I would like to have more concentration rounds. I would like to be able to magically buy at least 10% of any seed company I meet that I want to invest in. That would be a gift. That's my biggest stumbling block to investing, is like, there's so, like, I have to wait on too many deals where I can't get double-digit ownerships, and I just don't believe I can make any money without it. Guys, listen, I've loved doing this. Thank you so much for universally, uh, betting against Jason with me, uh, on this. Okay. (laughs) I super appreciate the support. (laughs) I feel like I'm gonna lose 70 grand, but it's okay.

   19. FRFrank Rotman1:03:05

       It was just a wee... (laughs) But guys, honestly, this has been fantastic. So, thank you so much.

Episode duration: 1:03:09