The Twenty Minute VCEd Sim & Jamin Ball: Did Figma Kill M&A Markets & 3 Requirements to IPO in 2024 | E1101
EVERY SPOKEN WORD
150 min read · 30,035 words- 0:00 – 3:21
Intro
- HSHarry Stebbings
What's the best investment advice (cash register chime) you've received?
- ESEd Sim
This shit is really fucking hard, and it takes a long time, so you gotta... (beep)
- HSHarry Stebbings
(upbeat music) This is Ed Sim, founder of Boldstart Ventures, (text whooshing) and this is Jiamin Ball, partner at Altimeter. I invited them on the show after reading Ed's tweet (text whooshing) on why we are at a time in the cycle where late-stage investors would rather get their cash back from investments (cash register chime) to either reinvest or redistribute to LPs. How do you guys foresee the M&A markets in 2024?
- JBJamin Ball
From a regulations standpoint, it is really hard to see any large-scale M&A.
- ESEd Sim
If you're gonna go public, I think you've gotta be cash flow break-even. I think you have to have, you know, 30% plus growth, which is probably what high growth is right now. You've gotta be moving towards the rule of 40 or 50, with slanted more towards growth than you are cash flow break-even. This is the time to put money to work.
- HSHarry Stebbings
Chaps, I am so excited for this. I saw the different Twitter threads going out this weekend, and I was like, "We have to do this discussion." So first, thank you so much for joining me today.
- JBJamin Ball
Thanks for having us.
- ESEd Sim
Thanks for having us.
- HSHarry Stebbings
Listen, I wanna dive in with a little bit of an intro, just so people get familiar with each others' voices. So, let's start off with you, Jiamin, and then move to you, Ed. What do you do? And (laughs) just provide a little intro for the audience.
- JBJamin Ball
Yeah, it's great to be here. So I've been in the, the venture world for, let's see, eight, nine years now. I'm, I'm currently at Altimeter Capital. I was at Redpoint Ventures before that. Over at Altimeter, we have two different strategies that, that we run. We have a public investing strategy, right, that kinda looks, acts, and feels like a hedge fund, and then a private investing strategy which looks, acts, and feels like a venture fund. Um, on the venture side is where I spend all of my time. Our primary focus is partnering with companies right around that product-market fit, uh, point, and then beyond. And so whether that's a Series A, a Series B, a Series C, uh, wha- whatever it might be kind of around product-market fit and then scaling beyond it is, is kind of typically where we look to, to partner with founders and businesses.
- HSHarry Stebbings
Come on, Ed. Hit me with your intro. Dazzle me with your good looks.
- ESEd Sim
(laughs) Um, I'm a little bit older than, than Jiamin. I, I'm entering year 28 of doing enterprise software venture capital at the early stages. Yeah, so, um, (laughs) it's been quite a while.
- HSHarry Stebbings
I think we had this, we ha- we had this joke last time, 'cause I was born in '96, which I think is the year you entered.
- ESEd Sim
Exactly.
- HSHarry Stebbings
(laughs)
- ESEd Sim
(laughs) Um, yeah, so, uh, you've accomplished a lot in a short time, Harry. I, I'm the founder (laughs) of Boldstart Ventures. Uh, started that in 2010. Um, and our idea is to be the, uh, inception-stage partner for founders. And, you know, you and I went through this whole thing about pre-seed, seed, and whatnot, but inception-stage investing for us means, uh, collaborating with founders well before they incorporate, helping them iterate on their ideas before they launch, uh, and leading that round upon incorporation so they already know who their first six hires are. They have money in the bank. Don't have to waste time. It really saves six months of time to kinda get going. And I also say inception because it doesn't mean it's a pre-seed round, because a third-time founder is gonna raise $10 million outta the gate, and they may very well deserve it, whereas a first-time founder may get one. So, that's kind of what we do. We also have an opportunity fund that allows us to back the truck up in later-stage companies, like a Snyk or a Big ID, um, and companies like that as well.
- HSHarry Stebbings
Love that. Now, I, I want this
- 3:21 – 11:37
2024: Year Companies Face Challenges?
- HSHarry Stebbings
to be as much of a discussion as possible, but I'm gonna kind of lay the framework and kind of groundwork of the history so far. And so we saw a huge amount of companies in 2020 to 2022 raise these enormous rounds. Uh, I'm, I'm sure some of us were involved in some of them. Uh, I know I definitely was. Uh, and often, they preemptively, kind of before product-market fit and with valuations that were, let's just say, extremely high, uh, and many years ahead at best. However, but they had so much cash that it was like five years of runway, and it's like, "Ah, we'll punt down a decision down the line." And so I wanted to start with the question of, we all thought, "Okay, they've got so much runway. It's many years out." Is 2024 the year where a generation of companies suddenly hits the wall? And I'm just gonna throw that one out there to start.
- ESEd Sim
I'll, I'll jump in and say yeah.
- JBJamin Ball
Oh.
- ESEd Sim
(laughs) I mean, you nailed it. Everyone was like, "Hey, let's stop the bleeding. Let's extend runway." Uh, two is, "Let's buy time." And then last year was the year we got to see whether these enterprise software companies could execute and grow their businesses. But the years of companies at the later stages going 100% year-over-year are over. Two is, everyone got fit financially in terms of cash, trying to get to cash flow break-even. And I think now, this is the year, Harry, that you're saying like, "Shit, if I'm only growing 20% year-over-year and it's still burning cash, I don't know if I have a business. Like, what the hell am I gonna do? I need to figure out kinda, do I, you know, buy another company? Do I exit? Can I get to cash flow break-even?" So, so this is the year that the shit's hitting the fan because, you know, you can only extend runway so much, and it doesn't mean much if you're not growing. That's just my, my opinion, but...
- HSHarry Stebbings
Jiamin?
- JBJamin Ball
Yeah. No, look, I mean, I, I would say that if I had to summarize that 2021 period, it really was, we crammed five years of fundraising into an 18-month period. And, and I actually, I have a ... I don't know if we can show charts, if it'll work if I share my screen, but I-
- HSHarry Stebbings
Yeah.
- JBJamin Ball
I pulled this together, so...
- HSHarry Stebbings
I'm sure you can share screen. If you click Share at the bottom and then just Screen.
- JBJamin Ball
I pulled, I pulled together some, some PitchBook slides. Uh, just some-
- ESEd Sim
Oh my God.
- HSHarry Stebbings
Oh.
- JBJamin Ball
... data from PitchBook.
- ESEd Sim
Oh, wonderful.
- JBJamin Ball
Um-
- ESEd Sim
Look at this.
- JBJamin Ball
And let me know if this... Oh, I think it's popping up, but-
- HSHarry Stebbings
There we go.
- JBJamin Ball
... you know, right here, you can see on the left-hand side, it's kind of aggregate seed Series A, capital raised for US-based companies, and I just tagged software, right? So kind of a, a li- not an arbitrary tag on PitchBook, uh, but I thought representative of, of what we saw. And then on the right-hand side, it's the same, the same set, Series B, C, D-... D& E stage businesses. Right? And I think what you'll see here is we kind of, we had a trend line, right, that went crazy in really 2021 and probably the first half of 2022, and now in 2023 we're down 90% from where we were at the peak, but we're really just back to the 2016, 2017 trend line, right? And if seed and series A was around that $5, $6 million, uh, billion dollars a year, and series kind of B through E was around that 30, we really cr- we really took that, right, we multiplied it by five, um, and we funded that in an 18-month period. Um, and I think there's a lot of just implications from that, right?
- HSHarry Stebbings
Mm-hmm.
- JBJamin Ball
If we think about how businesses, you know, were built in the good old days of, right, four years ago, companies would raise a round, they'd hit a milestone or two, and then they'd raise the next round. And that's typically how the cadence worked. In 2021, in the period of ZIRP, everyone was risk-on. You know, investors across the board, whether it's private, public, uh, de- definitely venture. And I think what a lot of folks said was, "Hey, those milestones we used to require, we don't require them anymore. We just want to invest in companies." And you had companies raising series B rounds, series C rounds, that might not have hit the typical milestones a series A stage business needed to, and at the same time the valuations were super high and, and it basically created this setup where if the world ever shifted to go more risk-off, right, now all of a sudden if you wanna raise an up round, it's not just do you want to hit one or two milestones? It's you gotta hit seven, eight, nine, 10 milestones, and you gotta grow kind of 10X to do it. And, you know, and lo and behold what happened, we had this bi- big macro slowdown, growth slowed, everyone started missing plan, it got hard for everyone, and I think the TL;DR of coming out of this 2021 period is companies who raised those big mega rounds are pretty much all in this overvalued and underperforming bucket, right? And underperforming relative to plans set in 2021. And there are plenty of companies who are saying, "Hey, we still have lots of cash. Everything is gonna work out. Let's kick the can down the road." And then you have some smart companies that are asking themselves these hard questions that I think we're gonna talk a little about, a little bit about today, right?
- HSHarry Stebbings
Yeah.
- JBJamin Ball
Do we have a real enduring business? Are we taking false comfort in the size, in the size of, of our cash balances? And those hard conversations are undoubtedly really k- kicking into gear now.
- HSHarry Stebbings
Can I ask you, Ed, we're both at the seed, and predominantly at the seed, I'm looking at this chart going, "Is-"
- JBJamin Ball
Oh, I can pull it back up.
- HSHarry Stebbings
No, no, totally fine, but it's like, that wasn't how I lived in the last 12 months. It showed, you know, a massive drop to two. Um, seed is as competitive and pricey as ever. Uh, that does not...
- JBJamin Ball
Oh, yeah.
- HSHarry Stebbings
... seem reflective of my experience.
- ESEd Sim
Yeah, at least at the seed. I mean, I kind of m- w- we also played on both sides, right, 'cause we also have later stage companies that are at the, uh, uh, scale that, that Cem had mentioned. But man, I gotta tell you this, is that I think the inception rounds, uh, were off the charts last year because there's data from Carta that shows you that if you look at, um, priced rounds from Q1 of 2021 compared to, let's say, Q4 of last year, the only round that increased in valuation was the seed round. You know, quote unquote seed round.
- HSHarry Stebbings
Mm-hmm.
- 11:37 – 15:56
Board's Key Questions for Founders?
- HSHarry Stebbings
so I... Just so I understand, what are the questions that board members should be asking, and how should founders be thinking about that just practically?
- ESEd Sim
First, I think you have to ask yourself (laughs) is, I mean, I- I'll go very, very basic. Um, is like, "Hey founder, do you have the energy and conviction to keep going? Like, do you really believe in what you're doing?" Because if they don't have the energy and conviction, then I think it doesn't matter what you do, right? It just doesn't matter. Maybe they've been at it five years. Do you know how many founders have been at it five, six, seven years right now sitting on valuations that are probably one third kind of where they're at?... um, and maybe they're tired. Right? So sometimes you may have that conversation with the founder and they may feel relieved. You may say like, "Hey, one of the later stage investors in this round is okay getting their money back." Sometimes you hear this sigh of relief, like, "Oh, my God." Like, like, "Yeah." "Oh, wow." Like, "I-i-it..." Hey, this would be a win for you. And by the way, early stage investors, you may make three times your money back. And by the way, founders, given like how much cash you have in the balance sheet right now, maybe you only spent half of it, maybe you still have 40 or 50 million bucks, that can be distributed back if you have an exit. So if we work on finding the right exit opportunity for you, A, you can have a graceful opportunity to say you sold your business, B is you can, um, you can not have to worry about growing into some insane valuation and the later stage investors will thank you, and three is perhaps depending on where you're able to land the plane, let's say, uh, with the right company, you might be able to get some equity value for yourself and your employees and also get a retention pool. So you can create situations where it's a win-win-win, but you have to have that conversation. And sometimes the founder will say, "Fuck you, I'm gonna keep going, and it doesn't matter," and that conversation could take 12 months. But I can tell you this, if you don't have the conversation, then you're not doing a service as a board member or investor for that founder, period.
- HSHarry Stebbings
Mm-hmm. So I had Jason Lemkin on the show and he says, "There's no point in doing this. There's no point because they'll just say 'fuck you' and then they'll just hate you. And like nine out of ten, they just say 'fuck you.'" And so you just ruin the relationship.
- ESEd Sim
Oh, oh, by the way, Harry, I've had them... I've had founders say, "Fuck you," and then by the way, when they exit, they're like, "Thank you very much," like you just-
- HSHarry Stebbings
It's true.
- ESEd Sim
... saved me time. And so they're always gonna say, "Fuck you." Why? Why would they... (laughs) 'Cause if they wanted to do it, they'd come to you first and say they wouldn't do it, but they're gonna say "Fuck you." But if you don't get the "fuck you," you're not doing your job for them too.
- JBJamin Ball
Yeah. A-and Harry, what I'd... what I'd add is, I think what we'll get into, this is why these processes end up taking 12, 18 months, is because it's not 12, 18 months of negotiating with an acquirer or figuring out how to do a dividend back of... to the preferred, right? It takes 18 months because these are really hard decisions that are often very contentious in the early days, and it takes a long time to get the early stage investors, the late stage investors, and the founders like all on the same page in agreement that this is the right thing to be done. And I think you do have... And, and this is something I'm... I'm like trying to learn in my career, right? You do have just a class of what I would call founder friendliness-
- ESEd Sim
Mm.
- JBJamin Ball
... right? That isn't really the true founder friendliness, right? To be a truly founder friendly investor and board member, it is about having those hard conversations. It's not about shying away from conflict.
- ESEd Sim
Can I... Can I just take one step back, though?
- JBJamin Ball
Yeah.
- ESEd Sim
I know that a lot of the companies right now, I just wanna be really clear, is that these are the companies that maybe have five, 10, 15 million of ARR, maybe they're priced at 300 to 500 to a billion dollars of, of valuation. But there's a different part here. You know, in the earlier stage of the stack, uh, when-
- HSHarry Stebbings
Well, this here, this is my point. I've got a ton-
- ESEd Sim
And, and... (laughs)
- HSHarry Stebbings
... of companies, Ed, that are like 15K MRR and it's three years in.
- ESEd Sim
So, yeah. So, so let's go back to that. I mean, usually in those situations, it's not like, you know... Investors like us aren't asking for our money back in a lot of those. It's-
- HSHarry Stebbings
Ed, why can't we ask for our money back? If we're being blunt, if it's three years to minimal, minimal revenues and you're just going, "Listen, this isn't working," you tried, fair enough, but, you know, we gave it our best shot but let's call it a day and move on to something different. Your time is the most valuable thing. Work on something else, start afresh. Why is it so bad to ask for money back?
- ESEd Sim
I'm not saying it's bad to ask for money back. I'm just saying... (laughs) So in that case, three years after you've tried three times, I'm just saying that, you know, once again, it's... it's... it's the founder and the conviction that they have, and if they can get the team rallied around kind of what the next opportunity is then, yeah, you keep going, and if not, then you look at alternatives, right?
- 15:56 – 17:40
Incentives and Different Perspectives
- ESEd Sim
- HSHarry Stebbings
I wanna move to that conversation then, 'cause it's-
- ESEd Sim
(sighs)
- HSHarry Stebbings
... a tough one to have, and there's many competing voices on a board, in a cap table, um, so what are the different incentives between, as we said, founders early and late, and how does that determine where the conversation goes?
- JBJamin Ball
There's one variable here that is becoming a lot more important that I don't think a lot of people really thought about, founders or investors, which is the size of the pref stack, right? One of the downsides of raising these big, massive rounds is now all of a sudden your pref stack is really big, and that really starts to come into play when we think about an acquisition. What price can you truly be acquired at and is it greater than that pref stack? And the reason this, this matters, right, is I think when... And again, just to speak in gen-... you know, broad strokes here, you have a lot of late stage investors who I think the typical stereotype is they can get very reflec-... you know, very, um, um, y- you know, they can jump around in, in how they view the world, like they can have loose conviction, right? At the... At the first sign of things not going well, they're gonna want to jump ship, pull the rip cord, and get out and maybe kind of atone for some of the sins of the high valuation rounds and, you know, they can flip-flop around a lot more. I think on the flip side, you know, the very early stage investors, there's very different dynamics in play, right? I'd say the earlier you go from a fund dynamic, the more your fund returns are driven by bigger power law outcomes in, you know, a 0X, a 1X, a 2X, right? It's all kind of the same thing, right? It's either it's at 100X or it's not, uh... And so you might have... Oh, I can see you wanting to jump in here, sorry. (laughs)
- HSHarry Stebbings
Oh, I'm... I'm... I'm-
- JBJamin Ball
Uh, go for it.
- HSHarry Stebbings
I'm just intrigued.
- 17:40 – 22:05
Changing Dynamics of Exits
- HSHarry Stebbings
Do you think later stage investors have come to that realization moment of, "Fuck it, 2021 was a wild time. If we get 1X, we've done okay"? Has that realization hit?
- JBJamin Ball
Um, let me share. Let me share something with you.
- ESEd Sim
(laughs)
- JBJamin Ball
And I think this just-
- ESEd Sim
I can't wait to see what... Is this something new here? I love this.
- JBJamin Ball
This just sets... This just sets the stage, right? And, and I wanna walk through the math of 100X ARR round at scale, right? And what we have here are...... public so- like, the median multiple for a public software company is going back to call it the beginning of 2015. And what you'll see is that, you know, on average, software companies trade around seven and a half times forward revenue, right? You can ignore that 2020, 2021 period when interest rates went to zero. And so companies, on average, are going to exit at seven to eight times forward revenue, right? Another cut at this data is looking at, you know, what percentage, at any given point in time, what percentage of public companies are trading over ten times revenue, right? There are points on this graph where it was zero. There was not one public software company trading over ten times, right? There was a period of time very recently where that number was low single digits. So the math here is... And, and this is why we can get into as well what we're still seeing today, but some of the challenges of these 100X ARR rounds, and I'm not talking about 100X valuation when you're at, you know, 200K of ARR. I'm talking when you're at, you know, 10 plus, right? And your valuation is into the billions and you're raising at, you know, 100X multiple. If you're going to exit at ten times, and ten times, like the point of this slide, ten times is actually, you know, you're a top 15% public software company if you're getting a 10X plus multiple. If you wanna go from an entry price of 100 to an exit price of 10, you're going to have dilution along the way, right? Maybe you have 20 to 30% dilution along the way. Just to get back to the price, to the valuation that you were given, you have to grow your top line probably 12, 13X, right? You know, you're gonna have a little bit of dilution, right? That 20, 30%, plus the multiple compression from 100 to 10. That's really, that's really hard, right? And as we've seen over the last few years, growth has slowed, and so as growth comes down, multiple also comes down, and it... You know, growing 13X just to grow into your valuation, that's, that's really hard to do, and if you're a late-stage investor and you wanna get a three, four, five X return, you gotta grow 40, 50X your top line from that initial investment. So there are just a lot of these investments that I do think are, are in a tough position f- in terms of, like, where their valuation was relative to where the business is today, um, and that's a challenge, right? I think there's a vast majority of companies who raised these mega rounds in 2021 will probably never be worth, um, at any point in time, right, the valuation that they were given in the public markets. And, and that's just this inherent challenge of when you come to that realization, like, what do you do?
- ESEd Sim
Um, a great example would be that at the end of last year, I'm not in the room with Loom, but that last round valuation was at $1.5 billion, right? That was led in 2021 and they sold for 999 or something, 950, right? So, you know, clearly the last investor that underwrote that was probably thinking, "I'm gonna get a 3X on this thing," uh, but instead, they decided to, you know, vote with the founders to sell the business. I'm sure they got their lic pref back, um, and I think basically the- Loom might have only raised a few hundred million dollars. So there's $600 million of delta sitting there, or, you know, between the founders, the management team, and everything else, plus some incentives. So, you know, that's a situation we ask the question, is, are some late-stage investors saying, "Yeah, maybe 1X is great and I can reinvest that"? I think I'm seeing more of that-
- JBJamin Ball
Mm-hmm.
- ESEd Sim
... based on the companies that I'm in, from the people that I'm talking to anecdotally. I'm not a late-stage investor, but I do know from the boards I'm on, I can see a lot of people starting to get wind of that, and then figuring out from a portfolio triage perspective which are the third that may, to Jamin's point, are the ones that are gonna grow into the valuations or are-are almost there where they, they may just need a little bit more comp- uh, cash and a flat round so that it can actually create a return. So-
- JBJamin Ball
We're gonna-
- ESEd Sim
... it's happening, it's happening.
- 22:05 – 30:42
Challenges of AI Companies
- ESEd Sim
- JBJamin Ball
We're gonna- we're gonna get into why they might want that liquidity with bridge rounds and everything in between.
- ESEd Sim
Yeah.
- JBJamin Ball
I do just wanna ask, on the 100X ARR, bringing it back to actual today, you know, there is still one segment that is fucking nuts, and it's-
- ESEd Sim
(laughs)
- JBJamin Ball
... AI, and there are a lot of AI founders who today, who have crazy ass term sheets on the table that are very reminiscent of 2021 pricing environments. What do you advise them? Because someone is giving you a lot of money at an exorbitant price. Should founders come back and say, "Thank you, Jamin, but I don't want your 150 million valuation. I would like it to be 60 million instead"? Look, I, I think, uh, and my hope would be that a lot of the conversation we're having today is foresh- is trying to foreshadow-
- ESEd Sim
Mm-hmm.
- JBJamin Ball
... a lot of the dangers and risks that arise from raising one of those crazy rounds. And, like, the way that we talk about it internally is don't make the cap table a risk to your business, right? Build a business the old-fashioned way. Raise smaller amounts of money, right, more frequently that are more milestone-based, where when you raise a round, you know what you're signing up for for the next 18 months and you feel good about getting there, because there's just this inherent risk. Um-
- ESEd Sim
I see Harry laughing. I see Harry laughing-
- JBJamin Ball
(laughs)
- ESEd Sim
... 'cause he knows-
- JBJamin Ball
(laughs) There is this risk. There's always that-
- ESEd Sim
... that when you're throwing, when you're throwing 1,000X, it's gonna be hard-
- JBJamin Ball
Yeah.
- ESEd Sim
... to say no. And, and-
- JBJamin Ball
And it is.
- ESEd Sim
... of course, there's this-
- JBJamin Ball
Yeah.
- ESEd Sim
I know you're laughing at that, Harry.
- JBJamin Ball
I'm laughing 'cause it's also like, I mean, and sorry, love nicely at Jamin, it's unrealistic. I'm sitting there with, like, you know, some of the mega funds saying, I'm like, "Why did you do that deal? It's crap." And they're like, "Do-"
- ESEd Sim
I, I do think, though...
- JBJamin Ball
"Wait, wait," and they're like, and they're like-
- ESEd Sim
I do think-
- JBJamin Ball
But wait, and they're like, "I'm fundraising next year. We need to deploy. We've got billion, billion five, two billion," and they know they've got more money coming from their LPs, their top funds. It's a deployment game. And so- I think that last statement, though, is where the rubber is gonna start to meet the road, right? I think there is this assumption that from a, from a fund standpoint, not a company standpoint, we're always going to be able to raise. We have the brand. Investors are always asking to, you know, get into our funds. I think that-... is the part of the cycle that we haven't gotten to, right? We haven't got to this LPs really-
- HSHarry Stebbings
I don't, I don't, I don't think we're gonna get there, Jamin. We're not gonna get there. We're not gonna... You're gonna get there with a couple of shit ones, I admit. But you know, when you're looking at your Andrisens, your General Catalysts, your LightSpeeds. I know you guys don't like to name names, I'm happy to.
- JBJamin Ball
(laughs)
- HSHarry Stebbings
But, uh, like, you know, with these guys, as they scale, you just move into pension fund world, sovereign world, and they're looking at 6, 7% nets. And so these guys come in and say, "Hey, we'll give you 10, maybe 11%." And they go, "Ah, Inshallah, take our money, take our money." (laughs) And so, I don't think it does hit the road. And then you've got NASDAQ booming, and so their publics are looking better, and actually, it offsets the denigration in private performance. I don't think it's gonna change.
- ESEd Sim
Uh, I, I do have a, I do have a thought though. I do see more founders, um, actually do, getting religion. I mean, I frankly think that this class of companies that are started, and I'm talking about we, we did eight net new investments last year, and we only did three the prior year with our largest fund yet because a lot of founders are getting religion. I don't need to tell founders, "You don't need to raise $6 or $7 million at the highest price possible anymore." They know that if they set the bar too high from the very beginning, it's gonna be hard to kind of meet that, uh, expectation. They also know, by the way, unless you're getting thrown 1,000X, right, you know (laughs) , from some crazy, I think, they know for the most part, I'm saying on the margin, we're reeducating founders again that you've got to build back the way we used to build. And that every time you take a check, every time you take a check at a higher price, you limit your exit options. Make sure when you take that check, you know where you're going. Because those checks, by the way, for the most part, Harry, are harder to come by. You're not getting 10 term sheets in, in 10 days anymore. You're getting, you know, you're getting a few, and, and, and now I think the best part about this world, uh, and I'm, and advising founders and investors that we, we're moving from a transaction-driven world to a relationship-driven world now, in the sense that since things are taking a little bit more time, founders as much as investors need to get to know who's joining their boards right now. I think the OpenAI thing was the best thing that ever happened in the sense like enlightened people to say, "Who's my board member? How are they gonna stick with me through good times and bad times?" Because it's gonna really matter in the next few years. So everything we learned during ZIRP is gonna, is undone right now. Unless you're an AI company getting 1,000X, and I can hard, I can tell you that if a founder had that, it'd be hard for them to say no. If I was in their shoes, it'd be hard for me to say no. I'm just being realistic, right?
- HSHarry Stebbings
I, I totally agree. Sorry for getting on a high horse there.
- ESEd Sim
(laughs)
- 30:42 – 31:10
Role of Founders in Building Successful Companies
- HSHarry Stebbings
I being too harsh to say that the difference between those that peter out and those that don't is just a simply great founder? 'Cause a simply great founder builds that go-to-market machine that smashes the enterprise. The great founder moves into that second chapter of the business. Is that too-
- JBJamin Ball
That's a huge ingredient. Yeah, it- it's definitely a huge ingredient, right? Um, and you see some of the most successful public companies today, the CrowdStrikes of the world, the Datadogs of the world, right? And it's exactly what you just said, it's moving from a point solution to a platform. Like, that's really
- 31:10 – 33:54
Investor Focus: M&A, IPOs, or Cash Preservation?
- JBJamin Ball
hard.
- HSHarry Stebbings
Before we actually go to that, like, due sell and M&As, IPOs, we mentioned before about kind of late-stage investors getting liquidity, being happy with a 1X, being able to recycle that capital. Bridge rounds, are we gonna see bridge rounds, or are we gonna actually see the preservation of cash from investors and shy away from anything that's not a great company purely to concentrate capital into the best? How do we feel about that bridge round just before we touch on M&A and IPO?
- JBJamin Ball
One, one clarification. I think, um, as, uh, as someone who does kind of, like, that growth stuff as well, I don't think anyone's happy with a 1X (laughs) , right? It's a little bit of-
- HSHarry Stebbings
(laughs)
- JBJamin Ball
... "Hey, is a 1X in the context of, right, what happened over the last few years an acceptable type outcome where you can recycle that money back into new opportunities?" And I'll go back to, um, I listened to this podcast with Doug Leone, which I just absolutely loved, um, and he talked about a f- a fu- a fund that they had. I can't remember if it was kind of a 2000 or more of a 2008 type vintage, uh, where they had to kind of kick, scratch, and claw to get from w- I think, a- and again, I'm, I'm, I might be misreme- misremembering the numbers here, um, but you know, a less than 1X type fund, right? I think he maybe called it a 0.3 or 0.4X fund to a 1.9, right? And what he said was, "What you can't do as an investor is blame vintage and move on to the next fund." Right? They fought to make every fund a positive vehicle for their investors, and one way to do that is through recycle, right? Um, it's through taking investments that maybe didn't get to the exit you hoped for, that 3X, maybe you got that 1X, taking those proceeds and recycling it back into, into new opportunities, right? And so I think what you do have is a lot of investors who are thinking now, "Hey, is that a good thing? Should we be doing that?" And I, I think that can be a way of finding returns for investors in funds that were more challenging vintages. But I think the wrong answer is giving up, blaming vintage, and, and moving on.
- ESEd Sim
Uh, I would add to that, is that if you look at funds, everyone talks about, um, kind of that outlier, especially at the early stages, that drives kind of performance, like the one to two outliers r- that drives the massive performance, but if you don't quit on the founders and work with the founders on the less, on the bottom third, you could probably cobble together another .5 to .75X from some of those exits by returning 75% of the, uh, the cash back on certain deals. Maybe getting a 1.3X where it's not that heroic, you know, and then maybe a 2X here or there. But you cobble some of those things together, that can be the difference between a, you know, top 25% fund or a top 10% fund.
- HSHarry Stebbings
Can I ask
- 33:54 – 39:11
Lessons Learned from Mistakes in Investing
- HSHarry Stebbings
you guys just a blunt question? If my biggest mistake was not selling positions that I really should have done, what were your biggest mistakes that you reflect back on?
- JBJamin Ball
Hm.
- ESEd Sim
Uh, I would, I literally just had my annual meeting in November and, you know, as I said, we have an early stage f- you know, we have the inception fund and we have an opportunity fund where you back the truck up in the winters, and I would probably say that, um, we're very ownership focused. We love (laughs) ownership. Uh, we always wanna lean in the pro ratas, but ownership matters to an extent, right? So everything's not always going up and to the right, and I had the same probably realization that you do, Harry, is that, um, maybe we could've sold some a little bit da- uh, sold a little down kind of on the way up, uh, instead of leaning in 1000%, right? I mean, and so, you know, those are the balances that you have to kind of look at over time.
- HSHarry Stebbings
Uh, w- we're in deals together. You continuously concentrate capital and do kind of bridge rounds where rounds aren't in place. You're like, uh, eh, which is fascinating to see. I've really learned a lot from you in this way. How may- I'm just interested, how many of those work out positively versus negatively?
- ESEd Sim
I'd say probably two thirds work out more positively than negatively, but the ones-
- HSHarry Stebbings
Wow.
- ESEd Sim
... that work out can be outliers. I mean, look, we lean in to see... I've found that everything is not always up and to the right, and when you fund things that are way ahead of the market that are kind of new categories or just kind- doing things completely different, it always requires something extra. You know, guy from Snyk, um, we funded him three times before he got his A round done. No one wanted to fund that company. They're like, "I don't think open s- why is he focused only on JavaScript open source? Why is he only focused on developers? Developers don't care about security." I can g- I have a list of 100 firms. I'll pull up the spreadsheet one day and I'll show you all the firms that said no multiple times over. Okay? That's one. Uh, BigID, three rounds before they got their A round done, and then Zuckerberg was sitting in front of Congress testifying about privacy, and then all of a sudden they raised a bunch of money and, and they're doing very well. SecurityScorecard, "Oh, and the market's not big enough. It's not this, it's not that." They did over 100 million of AR last year, um, and they required a bridge round between CNA before Sequoia jumped in. And the final one I'd say is, um, uh, Even Customer, we required a b- bridge between the A and the B 'cause people were like-G, you just need a few more checkboxes to, um, compete against Zendesk before I even believe in your innovative kind of new way of doing things. So all of our best winners, I can't tell you any of them were the ones where we s- came in and said, "A," first of all, those founders are just the lights-out founders like the, the Airbnbs, 'cause they aren't until they are. And then two is that there's always gonna be a come-to-Jesus moment. And if you have some insights and you have some trust and the founders have conviction... The truth is, founders have so much fucking conviction, and you watch them, and you see the customers kind of, you know, looking at the product. Maybe they're not signed yet, but you talk to them and th- you see the energy. You lean in. You're not gonna get every one of them right, 'cause I can tell you a bunch that didn't work out. But if they do work out in the margin, that's where you get that extra delta.
- HSHarry Stebbings
Jamin, what would you say-
- JBJamin Ball
Yeah.
- HSHarry Stebbings
... your reflections are on mistakes?
- JBJamin Ball
Yeah. There's kind of three buckets of mistakes folks can make when kind of investing at the stage that I do, right? One bucket is a simple one, like, "Did we just pick wrong?" Right? Like, was the company just, uh, like, not in a good market? Did the product actually not work? Um, right? Did, did, did we pick the wrong company? Then there is, "Did we forecast wrong," right? "Did we have expectations for how the business was going to perform and w- w- were we just really off?" Uh, they're obviously kind of related. And then the third one, which is maybe only relevant in the 2021 period because before that (laughs) you didn't think any- anything else, but it's, "Did we get the exit multiple 'wrong'?" Right? And so those three buckets of mistakes I think were very common, right? Like on, on the, the latter end, there were folks who said, "Hey, this, this kind of, these public multiples, 20, 30, 40 times revenue, like, that's the new normal. Like, we can underwrite to a 30X exit multiple and then we'll make money," right? Like, it's totally crazy in hindsight, but I'm sure there were people who made those types of mistakes. Um, I think the mistakes that I made, right, when I reflect back, was that middle category, right? It was forecasting wrong. It was saying, "Hey, I think I'm identifying a good market and a good business, but I had an expectation for growth durability that just didn't happen." And part of that was macro-related, right? It got harder for everyone. But part of it was getting back to the conversation that we had earlier, which is, there are different things businesses need to get done and to achieve that help them sustain growth at 50 million of ARR, at 100 million of ARR, at 150 million of ARR, right? It's turning that point solution into a platform. It's, is that point solution, does it have enough what I call strategic real estate where you can truly layer on other products around it and build the foundation of a platform? Or, is your point solution actually part of someone else's platform that will get layered into someone else's platform and you don't have the strategic real estate? And so I think not accurately forecasting forward was the biggest mistake that I made. And again, when you're investing at bigger valuations, like, that is where you can really run into a lot of challenges.
- 39:11 – 43:39
Mistakes in Forecasting & Exit Multiples
- HSHarry Stebbings
So we, we can, we can fire back. Just have to ask. You mentioned now, like, forecasting and exit multiples.
- JBJamin Ball
Mm-hmm.
- HSHarry Stebbings
Um, like, y- you guys did Hopin at eight billion.
- JBJamin Ball
Yeah, yeah.
- HSHarry Stebbings
How, how does one rationalize... I'm just genuinely interested. How does one rationalize doing that if one wants a 3X, like, did one genuinely think... That's a $25 billion company?
- JBJamin Ball
Yeah, look, a- again, I think this, this does get back to, in that 2021 period, there were plenty of businesses that if you just looked at their historical performance, you'd say, "That is n-of-one, and if we kind of project that forward," like, "it's the next thing." And I think there was a case to be made that, hey, virtual events are going to be an enduring part of the future. I think what ended up happening in practice was, COVID went away and there was just tons of pull forward. There were lots of businesses that no longer made sense that, right, were using that platform, that churned off, and, and that turned into a situation where you had a business now that probably no longer made sense in the new world, which was really the old world, right, that we lived in. And so, I'd say the mistake there was thinking that, hey, this thing, um, that hit insane product/market fit, right, that had, like, the best product/market fit... You have to go back now, and a lot of companies are doing this. Did we really have product/market fit, right? Or was it just market fit, right? Did we, were we just the thing that everyone had to grab and use because they all needed it all at once, but maybe we didn't... And this isn't Hopin-specific. This is just kind of broader, right? Like, maybe we j- hadn't actually built the thing right, right? And now that the world is coming out of that and there isn't that insane market fit, are there alternatives? Are there different ways of, of solving this problem? And I think there's, you know, there's two sides of product/market fit. There's the product and the market, and when we had this jostle that was the 2021 period, and COVID, and everyone was kind of, like, in their homes, um, I think the fundamental thing, right, that we got wrong there was kind of projecting what the world would look like when we come out of COVID, right? And it ended up, you know, there was not product/market fit, right, coming out of COVID, and then what do you do with a company that, right, might not have it? Um, and so that-
- HSHarry Stebbings
So-
- JBJamin Ball
... that's maybe kind of the best I can do (laughs) on, on that one.
- ESEd Sim
I, I actually hear this conversation going on about platforms enduring companies and stuff. I also don't wanna scare kind of founders away either, because I like to say, "It's, uh, not the TAM you start with, it's the TAM you exit with." And what I'm saying really is, is that I don't want a founder coming in telling me, "I'm gonna start a platform company." (laughs) I mean, (laughs) what 10-person company is gonna come out and sell a platform and compete against the giants, right? I need the founder to come in-
- HSHarry Stebbings
What, what, what about Rippling?
- ESEd Sim
... y- well, he's a special guy. Look at him, he did something before, right? I mean, he did something before. He knew what he was doing. He started out with a massive kind of, um, uh, checkbook, uh, when he started, right? That was a big round. So, he's a special founder, and I think there are special founders that can do that. But I'm talking about your average everyday founder that no one even knows about. The way you do it is that, um, I like to say you've got to be able to zoom in. Zoom in on the end user, zoom in on how you're going to make their life 10 times better with your product and how you're going to uniquely solve that problem. So you sell the product. But then you can market the vision to us. I like to ask the question, "In three to five years, if everything went right, what does this w- look like?" And you then you get the idea of like, "Hey, I'm gonna start here, but I may, I could jump into three other places," right? So, I just want to tell founders that, you know, I like them to start kind of on a narrower path with a vision that they can go bigger, and I just don't know which direction you can go. I just don't want to scare them to think, like, "Hey, I need to find a platform from the very beginning." 'Cause they're, it's the very rare founder that can go and do that, and it's usually a second or third time founder, and people are like, "Let's give that person $20 million," right? And so, I just wanted to kind of throw that in there, into the mix.
- HSHarry Stebbings
Yeah. Ann Parker is incredibly unique as a-
- ESEd Sim
Oh, the guy, he's, he's super unique.
- HSHarry Stebbings
He often comments on my tweets though, and I'm like, "Yes, but that's for you," and like, "It doesn't count."
- ESEd Sim
Did you know he was an intern for me, uh, once, uh, when he was an-
- HSHarry Stebbings
No kidding.
- ESEd Sim
... undergrad at Harvard? Yeah.
- HSHarry Stebbings
Whoo!
- JBJamin Ball
No kidding.
- HSHarry Stebbings
That's a, that's a bit of a miss, Ed. No offense, you should have kept that relationship alive.
- ESEd Sim
(laughs)
- JBJamin Ball
Yeah.
- HSHarry Stebbings
Sorry.
- ESEd Sim
Yeah, yeah.
- HSHarry Stebbings
Uh-
- ESEd Sim
Yeah.
- HSHarry Stebbings
... Ed's going, "God, Harry used to be so nice when he started this show."
- ESEd Sim
(laughs)
- HSHarry Stebbings
(laughs)
- JBJamin Ball
(laughs)
- 43:39 – 51:17
State of M&A Markets in 2024
- HSHarry Stebbings
Um, anyway, (laughs) -
- ESEd Sim
Mm-hmm.
- HSHarry Stebbings
... uh, I do have to ask you, because there's kind of different scenarios in terms of exits. You could have M&A. We, we mentioned customer into Facebook there. But you can also have IPO. If we start on M&A, I take a very negative view as to M&A moving forward, because I don't think anyone's looking to add headcount and add cost. And I think regulatory's never been worse. How do you guys foresee the M&A markets in 2024, and am I wrong to be so negative?
- ESEd Sim
You can start first, Jamin, if you want.
- JBJamin Ball
Yeah, look, I mean, I, I would say from a regulations standpoint, it is really hard to see any large scale M&A right now, right? In, in this, you know, administration and this environment. Like, that is a, a really hard path that I think every company now, right? Looking at kinda like the Figma, Adobe, um, resolution is saying, "Do we want to embark on a big distracting, distracting to employees, distracting to customers process, if the end state is most likely a no-go, right? Or, or not approved." Um, and I think a lot of boards and founders are saying, "It's not worth it. We don't even want to embark on that potential." Um, and so right now, like, that, that door is, is, is maybe closed. Um, for the smaller scale M&A, right, I think this is why it's so important to start having these conversations now with these companies. There's only so many acquirers. And the reality is, is any acquisition, small or large, takes time and energy, um, and then on some level is a distraction, right? You can't have... Palo Alto isn't gonna go acquire 10 companies, right, in the next year. They might acquire a couple. Same with all these other, like, large acquirers. And so, I think when it comes to these acquisitions, you will see them. Um, you'll see two different types of them. You'll see acqui-hires, which is really more of a, "Hey, these are special people that we want to bring under, kind of, our tent." Or, it is a, right, kind of like the Snyk acquisition playbook of, there are tangential products to what we offer that we think are very strategic to the overall thing that we are building, right? Snowflake just announced, um, an acquisition of a company called Samua, which is a business that we work with, right? They viewed that product as very accretive to their overall platform. Um, so I think you're going to see a lot of companies looking to be acquired. There's only so many companies that can be absorbed, um, and I think that will be a bottleneck, which again, is just why it's so important to start having these conversations, these conversations now. Um-
- ESEd Sim
Yeah.
- JBJamin Ball
I don't know if that answered your question. (laughs)
- ESEd Sim
(laughs) I think, I think-
- HSHarry Stebbings
Okay, okay.
- ESEd Sim
... I think that's a great answer. Like, very few huge M&As because of antitrust. Maybe save cybersecurity, which has national security interests, and those things tend to go a little bit faster. But other than that, no. Um, acqui-hires for public companies, I'd say not really. Um, and I'd say what happens is, if you're the one product company, back to your point, Jamin, if you're the one product company and things are going well, but not as well as you thought, this is your opportunity, because ultimately, it's a game of musical chairs. There are so many seats out there available for, uh, like a Palo Alto to buy a DSPM player or some other kind of player, they're gonna look at five of them, and they're gonna talk to all five of them. I mean, even t- when Snyk bought the last company that we just bought in the ASPM space, we talked to three or four, and we ult- ultimately found the team that we wanted at the price that we wanted with the product that we wanted, right? But there is, because of all the funding that has happened in the last three years, there's 10 of everything. And in this game of musical chairs, there'll be a couple winners and a lot of losers. And so, the sooner you can get your ducks in a row and have the conversation and say, "Am I enduring a business or not? Am I gonna be the one acquiring other companies, uh, or, or not?" Uh, then you can determine kinda what your fate's gonna be. Look, we just sold, uh, a company right towards the end of the year as well. Uh, PagerDuty bought, uh, Jelli. Uh, Noor is a fantastic founder. Uh, they wanted to get into the incident analysis space, uh, and evolve, and that fit, you know, well, right? I mean, they are clearly looking at some other companies. Um, we also, you know, I th-
- HSHarry Stebbings
Can I jump on there? The- these are, and I- I've had these, too. These aren't needle movers for firms in any way though, are they? They're like, you get, you get cash back and you're like-
- ESEd Sim
It, it just-
- HSHarry Stebbings
... "Great."
- ESEd Sim
... it just depends. I, I, I would say it just depends on the situation. Um, but if you have a product that people need and you're ahead of the curve, and maybe you're not the best at sales and marketing but you're really great at building, you can create some pretty good valuable exits, right? Look at all the stuff that Palo Alto bought. A lot of those companies had $2 to $3 million of ARR getting sold for $200 or $300, $400 million, right? So, I would say that...... you know, those are discussions you have to have and you've gotta be open. It also goes to not taking too much cash upfront 'cause that limits your ability to exit at those numbers. And the final thing I'd say is that we haven't talked about yet, is private to privates. This is where, for example, like the Airplane to Airtable situation. I think, you know, if you look at the numbers, um, I know there's a lot of debate online, but let's just assume that if they only spent half of the $40 million and there was $20 million of cash on the- on the- on the- on the balance sheet. So perhaps, uh, you know, the founders, investors, um, you know, made some- made some money on it, right? Maybe they took Airtable at a... I don't know what price they took it at, but maybe they took it at a- at a higher price, maybe an inflated price that they would have to grow into. Maybe they distributed cashback, maybe there was a retention pool. But you're gonna see more private to privates as well. And the reason why that makes sense for a- a private company is because if you're a one product company, going back to the platform play, you're gonna go ha- you're gonna have to buy another product or two and show that you can get out to the public markets with two or three products, and that you can be a true platform. That you can buy something, you can integrate it, and you can sell it. So I think you'll see, while it's harder to do on the private to private side, there'll be some more privates coming down the line for some of these unicorns who say, "Gee, I think the only way for me to go public is to- is to add more products, uh, to the, you know, to my platform."
- HSHarry Stebbings
But are those boards approving them? I mean, boards obviously are- are core to those discussions. Are they gonna say, "Yeah, you should- you should acquire that new company."
- ESEd Sim
That- we- we- we just sold Atomic Jar to Docker. Docker is- is- is, from what you see out there, is a company that can go public in the next two years. Two to three years.
- JBJamin Ball
This just gets back to one of these core themes we're talking about today. If you get acquired for 100 to 300, right, the difference in whether you as a founder and your employees can make really good money, right, or make no money, can be the difference of did you raise a crazy round or- or did you not? And the challenge is, a lot of these companies that will exit kind of in that band could have made really significant money, right? For the founders, for their year in employees. But the challenge is they raised $200 million of cash, and now all of a sudden their pref stack is really big, they're sitting on a really high valuation, and that exit path now is a really hard thing to get to, um, because of some of these rounds that were raised in- in 2021. And so in a world where my private multiple is gonna start to converge more with public multiples, what do I need to do from a business standpoint to get to a kinda two to 3X markup? Do I think I can get to those metrics in the next two to three years? Can my market support, right, that size business in this market? I think asking those questions and knowing, hey, when we raise a round of funding, kind of like, what are we implicitly signing up for for the next few years? And just being honest around... And can we get there? I- I think that's an important part of kind of fundraising conversations today.
- 51:17 – 1:01:52
Outlook for IPOs in 2024
- JBJamin Ball
- HSHarry Stebbings
Can we get there? Ed, you mentioned Docker, you know, being in a position to go public in the next two to three years. Um, IPO windows. Um, I- I had Jason Lemkin on the show. He said, "Ah, 2024 is the year of, 'Ah, fuck it, we might as well go public.'" (laughs)
- JBJamin Ball
(laughs)
- ESEd Sim
(laughs)
- HSHarry Stebbings
Um, "It's time to move out of the basement." Um, do we agree? Is 2024 the year of, "Fuck it, we might as well move out of the basement"?
- JBJamin Ball
The IPO markets are always open, right? You can always go public. It's just a question of do you want to accept the market clearing price at that point in time? You can go pu- companies could have gone public in 2022, it just would've meant at a much lower valuation, right, relative to a- their last private round or- or what they were expecting to get. Uh, so I would say the markets are wide open. It's just a question of do you want to go public, and do you want to accept the reality of what that valuation means, right? Um, in many ways, I think an IPO is a great point in time, it's a great event, it's a great transaction for businesses to kind of reset the cap table, right? All the preferred is converted to common, your shareholder base starts to turn over, right? You can innovate in the public markets. I think there are plenty of examples of companies who are able to innovate and kind of, like, build act two, three, four, like, in the public markets. Um, and so again, like, I think you will see companies who start to say, "Hey, look, let's just reset this business," right? "We'll take a down round IPO, but guess what? Public stocks go up, public stocks go down. Private valuations should go up, private valuations should go down. Let's levels- let's reset this business in the public markets. Let's get liquidity for folks who have been here for a while. Um, if that's at a down round to our 2021 zerp round, so be it. We'll manage it, we'll set employee expectations, and we'll grow from there."
- HSHarry Stebbings
I- is there ever a case where it's just too much? And so if you take an example like, and I'm- I'm, you know, again, this is not you, I'm using it, so any problems, it's on me. Um, but like Carter is at $400 million in the air, art. Henry's been very public about that. If you were to apply the 10X revenue multiple to them, they'd be at four billion for the best in class, and they probably wouldn't be that because their margins on the services side are not as high at 51%, 52%. So say they're B, you know, 8X. Okay, so they're trading at three and a half to four billion when they go public. Their last round was at seven, seven and a half. When you are that far off, three and a half billion dollars in enterprise value off, is that too big to assail that gap? Or is it still, "Fuck it, let's go out as best"?
- JBJamin Ball
Look, Snowflake was trading at $400 a share, now it's trading at $200 a share, right? It's- it's still half. Like, despite the recovery we've seen in public stocks, right, like, that business is trading at half of what it was trading at the peak. And, but that are all things that can be worked through. What we're not seeing, right, if we rewind the clock back, re- rewind the clock back to kinda 2008, a lot of rounds that were raised kind of in that period had ratchets, right, had really heavy anti-dilution clauses. And the reality was is, if you wanted to go public at a significant down round, the cost to the company in terms of incremental dilution was so high that it actually was in the best interest of these companies not to go public because they would be diluting themselves-... right, to the ground with a down round. The reality of the moment we live in today is, a lot of these ZIRP rounds, they didn't have ratchets. It was the opposite. They were very light on terms and they were very light on structure, so you don't have this dynamic of super heavy ratchets, anti-dilution clauses, that structurally make it really difficult to go public at a down round. It's, it's just really more about, like, how do you manage promises you made to employees, right? You hired people two years ago, you said, "You're gonna be worth X," and now all of a sudden you're worth Y. Like, do you lose the, do you lose the trust? Um, I think it's more of those types of issues versus real structural ones, and, sorry Ed, I'll let, I'll let you answer that one.
- ESEd Sim
Yeah. No. I, I, I'll ... I, t- this is great. I, I will just say that this also makes you realize who your board is as well, right? Because I think ... Look, the mar- majority of companies that go, do go public this year will be down rounds from the prior rounds, especially if they raised during the ZIRP era. It just is a reality, right? I think the question, to your point Harry, is, at what price are you willing to go below? Is it 50%? Is it 30%? Is it whatever? And I think part of the answer too is, um, there are some benefits and there are some negative issues with going public, right? Benefits could be, you now have a public currency in which you can hire some amazing talent as a public company now, because there aren't many people that wanna work at a late stage company right now unless they know what the price is, right? So it's hard to know what my restricted stock's really worth unless it's public. Two is, is now you have a public currency in which maybe you have three or four companies you wanna buy, and once again, the buyer now, um, and the buyer, you know, as a public company, can go out and talk to a private company and say, "Hey look, I've got real estate stock that's really valued, and within six months perhaps you can sell that thing." So those are positives, right? So it'll really accumulate and accelerate that platform play. The negative would be you're gonna have to accept for the most part that it's gonna be tough to get an up round if you did raise during 2021. That would mean ... There's pretty much unlikely that the valuation you raised at in 2021, um, you know, you probably raised at a really great multiple at that point in time.
- HSHarry Stebbings
Given the fact that it takes six to nine months to really get in shape for an IPO, I don't think you're gonna see much go out in 2024. I think the odds-
- ESEd Sim
Oh, I think people have been prepping for the last 18 months, Harry. Like, the people are ready. So, uh, I'm just saying, the ones that have thought about going public, like the Rubrics of the world, you know, all the ... th- they're almost all IPO ready now. It's just a matter of do they wanna file confidentially or not. So, those are the ones that are kind of ... I, I'm, I'm talking about kind of the, the next herd of people-
- HSHarry Stebbings
Ed, if you're on, if you're on the Databricks board, would you say to go public?
- ESEd Sim
Um, no. From what I know, A, I'm not on the board, but two is, I heard that their expense line is still, you know, relative to the growth, is still kind of not. But, if you're gonna go public, I think you've got to be cash flow, break even. Um, I think you have to have, you know, 30% plus growth, which is probably what high growth is right now. Um, and, you know, you've gotta be moving towards the rule of 40 or 50, uh, in my opinion, with ... slanted more towards growth than you are, you know, cash flow break even, right? So, uh, I think those are the things that you're gonna need but, you know, as I said, Jamim could probably comment better than, than me on that.
- JBJamin Ball
Yeah. I'll go back to, um, I love listening to podcasts. Es- especially podcasts with some of the greats (laughs) , right, that have been in the industry for a while. And there's a recent podcast that Bill Gurley was on, and they had a little bit of this discussion which was, "Hey, well the trouble with the public markets is, there's lots of scrutiny, and, like, everyone's kinda gonna pick through your financials with a fine-tooth comb, and, like, maybe we don't want that," right? And, and I think what he basically said was, like, "Grow up. You know, like, what, do you not want that scrutiny? Do you, do you want to be a child?" Right? And I think the, th- the metaphor he raised, or, or that he brought up was, imagine a college athlete. A college athlete says, "You know what? I don't think I really wanna go to the pros. People are gonna really just look at my statistics and gonna critique me a lot, and I'm gonna be on national television. I think I'm just gonna ... I just wanna stick to college." Uh, and then he, he kind of, like, drew this parallel between this fear of, like, the scrutiny and, and kind of, like, the microscope. Like, that's actually a good thing, right? Like, that will force companies to get fit. That will force companies to talk about their path to profitability. It will force companies to think about, "Why are we an enduring business over the next 10 years?" And while it may seem scary, it's actually like a good forcing function on, let's get fit. Like, let's, let's build the muscle that will help us sustain and endure for the next, call it, you know, 10 plus years.
- HSHarry Stebbings
And there's a generation of new firms though, which I, I heard Brad, uh, discuss on, on different podcasts actually, and he mentioned this, so I'm copying his words, not being rude.
- JBJamin Ball
Yeah.
- HSHarry Stebbings
Uh, uh, he said, you know, there's a generation of firms that have been created which basically extend that private window. Um, and if you apply that scenario, they're the Twinkie bars. They're the snooze on your alarm clock so you don't go to the gym. They're the ones that are letting you stay in that, you know, less-
- JBJamin Ball
Mm-hmm.
- HSHarry Stebbings
... tier.
- JBJamin Ball
Mm-hmm.
- HSHarry Stebbings
Stopping you from going pro. And so, I guess my question is like, is this not a world that we've created? And I mean this respectfully. Is that not part of Altimata's business?
- JBJamin Ball
Well, look. I mean, I think in general if you look at the venture capital market, like, it's ex- it's expanded massively over the last 10 years, and I, I saw some tweet from Gokul the other day who, who brought up, like, Bessemer's memo on MindBody and it was, it was kind of crazy to go back and look, right? This was 2010 and they were doing a deal at 10 million of ARR at 42 pre. And you're thinking, "That wasn't that long ago," (laughs) right? Like, 10 million of ARR at 42 pre? Like, it wasn't, you know, 14, you know, 13, 14 years ago. Like, the reality is, the venture markets have expanded so dramatically. Again, another Doug Leone quote, right? You know, he called Venture, it's moved from a high margin cottage industry, right, to a low margin mainstream industry. And there are lots of implications of that. Um, I think one implication is you have these really big funds, right, who their mandate is to put money into private companies, right? When you have big pools of capital, a very big supply, right, chasing, I'd say, the scarce resource, right, which is the high quality founders and, and high quality businesses, it can create this dynamic of keeping companies-... private for longer, right? You had companies like Twilio and Mongo and Shopify, right? Like, the list goes on of, like, really not that old companies that went public at a billion, two billion dollar, right? Valuations, right? And they saw their company's value appreciate significantly in the public markets, right? And the challenge of staying public for longer is companies generally follow this growth curve, right? Of growth mode to maturity mode. And the challenge is if you s- if you wait too long, and you go public once you're in kind of, like, de-growth mode, the story and the multiple that you will get will be drastically different. And if you're not profitable, and your growth is really starting to slow, there's just not gonna be much appetite in the public markets. And you just have to be willing to accept like a two times, three times revenue multiple, right? And that's a very different outcome than going public earlier in that journey. And so, I'd encourage lots of companies just to think more critically about like, "Should we go public sooner?" Just let's accept that down round, right? In the same way layoffs were this taboo thing from 2022, and no one wanted to do them, and then everyone started doing them, and they were okay. I think kind of down rounds or down round IPOs will be the same thing. There'll be a taboo on them, but they'll
- 1:01:52 – 1:04:40
Saturation of Software Spend & Company Growth
- JBJamin Ball
be normal.
- HSHarry Stebbings
Fa- final one before we do a quick fire but I, uh, I mentioned Jason Lamkin, but you know, talked to him he said the biggest worry that I have, you know, 15, 16, whatever years it is into SaaS investing is that the growth has slowed. Have we reached saturation point in software spend? No CFOs have like AI as a line item on their budgets. Yes, they all want it, but it, it's not a line item. Have we reached saturation of software spend, and does growth or the deceleration of company growth show that?
- ESEd Sim
Um, I would, I would answer it a couple different ways. (laughs) Um, I shouldn't be in the business if I didn't think of creative destruction and that the world gets reinvented every, you know, 10, 15, 20 years, right? So, I fundamentally believe that with the new platform shift happening with kind of AI... And by the way, I'm not an AI investor nor do I chase AI things. I just believe AI is just part of what we do every day. It's gonna be-
- HSHarry Stebbings
Mm-hmm.
- ESEd Sim
... infused in most software where it makes sense, where people will pay for it, where it's economically, uh, important. But I do think we're gonna enter a new cycle where things have been around 15 years and they're gonna get reinvented. As an early stage vents- investor, I need to believe that. And that's always going to be the case. Secondly, um, yeah, Jason's right on... And things have slowed down. They're not growing 100% year over year. Um, yeah, enterprises aren't spending willy-nilly. In fact, enterprises bought, um, way ahead of the curve, uh, thinking that they're continuing to grow up and to the right. And the other part would be, probably 25% of all this revenue from all these tech companies was selling to other startups. That shit vaporized, dude. (laughs) So, if you look at the growth from that, that automatically kind of dragged everything down. But I do think that the customers that are signing on board last year are buying at the right numbers. And, you know, from there, you know, this new cohort of customers, I think that retention's gonna get back to a place where it's more like 110. It's not gonna be 130, 140, but maybe healthy numbers like 110, 115. So, we're gonna work through it all, but I think that, um, we're gonna actually come back to the point where retention will get back up and, and we have to believe that people are gonna create new things all the time, which I do.
- HSHarry Stebbings
That's optimistic. I'm so glad to hear that, Ed.
- ESEd Sim
(laughs)
- HSHarry Stebbings
That makes me happy.
- JBJamin Ball
(laughs)
- ESEd Sim
(laughs) I got one for you too, Harry. I got, I got a crazy one. Like the other thing is that there's these new markets that you just don't even know what's gonna happen, particularly like in cyber. Like even like ProtectAI and the AI security space. We funded that thing in early 2022 and the, uh, thesis was three years from now maybe there'll be a seminal event in, in security in AI that's gonna actually make people rush, run for the hills. We didn't realize GPT would come around, you know, at the end of the year, and all of a sudden AI security now is a big deal. Um, but you know, the point is, is that there's always these new things that we never have thought of 'cause we're not smart enough to think about it. It's the crazy founders that do. And I need to, you know, we all need to keep our eyes open for, for those types of things too.
- 1:04:40 – 1:10:15
Quick-Fire Round
- HSHarry Stebbings
Yeah. Are we ready to do a quick fire, chaps?
- JBJamin Ball
Let's do it.
- HSHarry Stebbings
Okay. So, uh, let's go with Ed. What's the best investment advice you've received?
- ESEd Sim
This shit is really fucking hard and it takes a long time, so you gotta be patient. And the things that always seem like they're the best ones in your portfolio may eventually be the worst and the vice versa. So you gotta figure that out. You gotta ride through the times. And, and I think when things are going really, really well, that's when you challenge the founders even more. And when things are shitty, that's where you kind of pick them off of the ground and maybe kind of cheer them on a little bit. So I call that my three CHs, cheer, challenge, and chill. And you kind of do the opposite. Um, and you know, sometimes the worst ones can come out and, and create some value for you.
- HSHarry Stebbings
Jamin, what investment advice do you most often give?
- JBJamin Ball
Hmm. I, I think they're very related. I think most of the investment advice that I might give was investment that advice was... that was given to me. (laughs)
- HSHarry Stebbings
(laughs)
- JBJamin Ball
Uh, so in many ways they're similar. Uh, but I would say, look like, you know, I can't remember who said this, um, but like cool is the, is the enemy of reality, right? There are a lot of products in venture companies that seem cool, but like at the end of the day you need some, you need to solve a real tangible problem for someone. There's, e- e- someone on the other end of the buying decision is putting in a purchase order who is making a case to their boss that this is the problem that I'm solving with this product and here is exactly why I'm buying it, right? And so you have a lot of cool products that sound good, but at the end of the day, it's the boring stuff, um, that, that really actually moves the needle and, and builds the big businesses.
- HSHarry Stebbings
Honestly, yeah, when I look at my portfolio, it's the boring stuff that provides the returns. (laughs)
- JBJamin Ball
(laughs)
- HSHarry Stebbings
The sexy never, never works. Uh, fucking consumer social.
- ESEd Sim
The problem is that-
- JBJamin Ball
Uh-
- ESEd Sim
... boring became sexy for a few years and, and that kinda-
- JBJamin Ball
Yeah.
- ESEd Sim
... destroyed evaluations for a while.
- JBJamin Ball
Sure.
- HSHarry Stebbings
A- amazing how sexy-
- JBJamin Ball
(laughs)
- HSHarry Stebbings
... dev tools can be, isn't it?
- ESEd Sim
(laughs) Yes.
- HSHarry Stebbings
Like... (laughs) Uh, okay.
- JBJamin Ball
Yes.
- HSHarry Stebbings
Now, Jamin, you're recused from this one, uh, for compliance-
- ESEd Sim
(laughs)
- HSHarry Stebbings
... reasons. Uh, Ed, you're not. You're not getting away with this. What's your buy and short for 2024 with the year ahead?
- ESEd Sim
I gotta tell ya, I'm, I'm, you know, I'm looking at Microsoft. Uh, you know, even though that's still priced pretty high, I just think that because of their lead on everything AI, that they're taking market share on the cloud side, so I think that, that's gonna drive a lot of their business, and I'm hoping that by the back half of the year, you know, you start seeing some of the revenue numbers reflect in that. That would be my long. Um, my short would probably be, I mean, just what everyone's looking at now is just Apple right now. I think, I think Apple, you know, you've got an iPhone growth issue, uh, over there at Apple, but I, one, the one thing that gets me excited about Apple is the idea of, uh, machine learning and AI on the edge device, whether it's in the laptops now, uh, or even in the phones. As these models get smaller and get pushed out onto these devices, I think there's going to be some interesting stuff built, uh, that has privacy, compliancy built in, speed built into that. But I don't see where that results in revenue in, in, in this year from that perspective.
- HSHarry Stebbings
I'm more excited than ever about Apple. I think their ability to run models locally on device gives them unparalleled access and advantage, and it's all about access to that end consumer point.
- ESEd Sim
Yeah.
- HSHarry Stebbings
I agree with you, it's five years out maybe, but I-
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