Jason Lemkin: Every VC has a FRAUD in their portfolio; The IPO market is about to EXPLODE | E1046

1. 0:00 – 0:38

   Intro

   1. JLJason Lemkin0:00

      I'm not saying we're bouncing to 2021. It's gonna take 20 years to experience that moment again. It will happen again. It's every 20 years, right? But 2024 will be rich with IPOs and it will be a good year with solid multiples, solid multiples.

   2. HSHarry Stebbings0:14

      Jason, I am so excited for this. I always so enjoy our chat, so thank you so much for joining me today, my friend.

   3. JLJason Lemkin0:20

      Thanks, uh, thanks for having me back, Harry. It's always a pleasure.

   4. HSHarry Stebbings0:22

      Now, you know the normal start of that how did you get into venture malarkey, I wanted to start with if you could call yourself up the night before you started as a venture investor and give yourself a piece or two of advice, what advice would you give yourself knowing all you do now?

2. 0:38 – 9:00

   Jason’s First 5 Investments

   1. HSHarry Stebbings0:38

   2. JLJason Lemkin0:38

      Yeah, well, the first... It's an interesting question. The first one I tell everyone that's a new manager, especially anyone abo- above the analyst level, and what I was told when I w- went into venture, and I think, I think you might have been told the same thing, was, "Don't worry about doing a deal your first year." Don't worry about doing a deal... I'm not talking about an angel check for f- 10K or 15K. I'm talking about don't worry about writing an enormous check and... This is what the traditional GPs tell you, because the last thing they want you to do is to meet with 28 pretty good companies and burn the fund, right? They know how rare the outliers are, right? And so this is the advice I got, "Don't invest your first year." And I did five real unicorns in my first 13 months, right? I did Pipedrive, which exited for, like, 1.25 billion, and then Algolia was my second. That's worth 2.5 billion. It will IPO next year. I did Talkdesk worth 10 billion. I did, um, Parklet Greenhouse, which will IPO next year. They're at 200 million, and I did SalesLoft, which sold for two and a half billion of cash. Um, those were my first five deals. And it's interesting how it happened, but I tell everyone, "If you have something, if you have a hot hand, if you have a brand, like, like, a 20 VC or anything behind you, or a great network, if you came out of Datadog or Stripe or wherever, MongoDB, and you have a network, go do those deals." Like, you may not know venture, but that's what the other guys are for, right? They will teach you ownership. They will teach you some discretion to some extent, but, um, leverage it. And I, and I am... It's interesting how many great VCs had a great investment their first six or 12 months. The first friend I had that became a VC was David Hornik, right, who's now at Lobby, was at August, and he tells a story how this first deal he, like, blew 10 million, which back in the day was, like, a career-ender, right, as a kid going into venture, but his second was Splunk. I think his second one was PayCycle, which then he did Bill, right, which was Rene's second one. So the first one exited for 100, the second one's worth 20 billion, I think Splunk was his third, and he did those all the first year in a downturn, in a massive downturn. And, and I, the more... I mean, you talked a lot more VCs than I can, but I wou- I wouldn't be surprised if a lot of the best VCs had a few, at least one big winner their first 12 months, and so that canonical advice is great for the fund. Trust me, it's great for the fund. Don't blow it all, kid, right? Just because you are a, a SVP of, uh, engineering at New Relic does not mean you know how to find a great seed investment. That is true, but... So th- and I tell it to everybody and I say to them also because, "E- e- even if it's not perfect for the fund, it's great for you to get into a winner your first year. That winner lasts forever." The great thing about venture is your w- your winners last, you can talk about them for a decade. You can literally... And so the earlier you get a winner, and a winner really being, like, the, the person on the board, the first investor, like an iconic winner where the founders will back you, the earlier you get in your career, you could probably raise three funds on the back of that, even if they, all the rest of your investments are dogs, right? So you only live once, so that's the main advice. That's the number one which we get to give you, and the second one is the opposite, which is, I tell folks, um, "U- unless you're starting your own fund really from scratch," right? Um, and even you didn't do that, Harry. You, you had a stint a- at another fund, right, before you started.

   3. HSHarry Stebbings3:42

      Sure.

   4. JLJason Lemkin3:42

      If you're joining someone else's fund, the other advice I give folks is, "Be zen 'cause it's not yours." This is the biggest mistake I made. The biggest good thing I did was ignore the advice and I did all those deals immediately, right? All of them, right? Uh, you know, and, and, and it... Now I'm a 10X investor for life. Like, that was worth it, right? But I wasn't zen enough about joining someone else's fund and all the friction. It's not yours, right? It's not yours. Uh, whether you join someone else's fund at 15 or 50, you're an apprentice. You're not running the management company. You probably don't know what the management company is. You don't know how the economics work. They used to say in your... It's your second startup you make money. It may be your second stint in venture you make money. (laughs)

   5. HSHarry Stebbings4:20

      Can I ask you, when you look back on your first five-

   6. JLJason Lemkin4:23

      Yeah.

   7. HSHarry Stebbings4:23

      ... has anything changed from that style of investing, and to what extent do you think that was luck? I mean, that five in a row is-

   8. JLJason Lemkin4:30

      It's not, obviously, it's not luck, Harry. I mean, like, I, I, I, I don't think, I don't think I'm any Keith Rabois or Vinod Khosla, but it can't be luck if it's five for five, can it?

   9. HSHarry Stebbings4:38

      Exactly, so, so-

   10. JLJason Lemkin4:39

       Yeah.

   11. HSHarry Stebbings4:39

       ... what would you put it down to?

   12. JLJason Lemkin4:41

       First of all, one thing which is o- only a small amount of it, but is having time, right? And I remember I bumped into Byron Dieter at the airport when I just started investing. I'd known Byron 'cause he'd gave me a term sheet as a founder, right, at, running Best in World's Cloud Product, and he's like, "I'm jealous of you." I mean, "What do you mean you're jealous of me, Byron?" He's like, "You actually have time. All you have to do is work on new investments. Not only do you not have boards or down rounds or workouts to deal with, you just don't have the emotional baggage going into venture, as, in a venture fund, right? All you have to do is hunt and meet founders," right? I think that's underestimated in the industry, right? And ultimately, I mean, you have large teams working under you in many ways, Harry. You need that in venture to scale. You can't be this, this rogue artist going out and hunting deals your whole career. A few people do that, right? But it's rare, uh, for a variety of reasons. If we're... Uh, not only do we get tired and age out of our networks, but we have too much to manage, right? We have too many, we have too many, uh, investments under them, right? And I didn't, I only half knew this but really sticking to your sweet spot is core, right? And I knew I only wanted to do a certain type of founder at a certain stage doing products I d- I intuitively understood, right? I intuitively understood search. I intuitively understood contact center. I intuitively understood, uh, ATS. I intuitively understood, uh, I thought, how to build a better version of Salesforce, and so I only did this narrow overlap of things I already understood before the meeting and were exactly in my sweet spot, right? Um, and if, and I did that-... with founders that were better than me with good growth, like 100% hit rate, right?

   13. HSHarry Stebbings6:15

       Uh, totally. I think what's rare there is not many people actually know what is their type of deal.

   14. JLJason Lemkin6:20

       Yeah.

   15. HSHarry Stebbings6:20

       It's a very precise art to know exactly what is a Jason Lemkin type of deal, and many investors I know 10 years in still don't have that clarity on what is their type of deal.

   16. JLJason Lemkin6:29

       Yeah, and if you don't, y- you also can get into trouble in terms of how much you deploy into what, right? If you know your type of deal, you're probably gonna almost inherently get your risk profile right, right? I know my, I know my valuation ceiling, and I know the different types of valuations I'll do for different companies, and so I can only lose so much. It, it just de-stresses things a little bit.

   17. HSHarry Stebbings6:48

       Can you give me a- an example of that, just so I understand that? You said your risk profile on the valuation side and how-

   18. JLJason Lemkin6:54

       Yeah.

   19. HSHarry Stebbings6:54

       ... that differs. Is that because outcome scenario planning for contact center software might be a very different outcome scenario plan for Salesforce competitor?

   20. JLJason Lemkin7:04

       No, I don't do outcome planning. Um, I remember when I, when I invested in Talkdesk, the best comp was Five9, which is public today. They were worth a stunning $150 million as a public company.

   21. HSHarry Stebbings7:15

       (laughs)

   22. JLJason Lemkin7:16

       (laughs) So the comp was horrific, right? It was terrible. Um, you know, I- we could look at... I think Five9's worth $6 billion today, and on paper, Talkdesk was worth $10 billion. So you have to be careful with comps as, you know, as, as markets change, right? Some of it, it- you have to back into your fund size, right? What's 2% of the fund per check? Um, and so for me, I learned there were two types of investments I wanted to make, like traditional seed, where you had at least a little bit of revenue, at least 10 customers, 15 customers, 20 customers, and then I wanted to do what used to be called late seed, which is hard for me 'cause it's been obliterated. But late seed was sort of approaching a million in revenue, right, with real traction. No management team, like n- a lot, but, but getting to a million in revenue, and I wanted to do one of each. So I did, you know, Talkdesk at a million but Algolia at 10, you know, at 100,000, right, in terms of annualized revenue, right? And I did Pipedrive at a million. I kind of ping-ponged back and forth between the two, and I was able to write smaller checks to try to get at least 10% ownership in the others, and then the late seed ones, I would write up to a four to $5 million check to get double di- digit ownerships. And that, you know, if you get... if you're able to invest at a million and the founders are great, you'll never lose money. If the founders are great at a million in revenue, the problem is that's become a series A, B deal even in t- even today. So that part of my, my model has partially been obliterated, which is the hardest part for me, but it still happens with outsiders. It's just impossible with insiders.

   23. HSHarry Stebbings8:38

       I had a 600K AR ordeal done at 750 million.

   24. JLJason Lemkin8:42

       Yeah, so that's tough from, for my fund size.

   25. HSHarry Stebbings8:44

       (laughs)

   26. JLJason Lemkin8:44

       It's hard 'cause le- well, let's do the math. How much would I have to invest to get 10%? At seven- I'd have to invest 70 million, the fund's 68. Uh, let's see. It's, it's tough.

   27. HSHarry Stebbings8:56

       (laughs)

   28. JLJason Lemkin8:56

       (laughs)

   29. HSHarry Stebbings8:56

       It's a, it's a tricky one to get the maths around. That's one way where your LPs might question you.

3. 9:00 – 26:56

   Why Valuations Don’t Matter / The State of the Seed Market Today

   1. HSHarry Stebbings9:00

      But no, I totally agree.

   2. JLJason Lemkin9:01

      That's why I actually don't... I know, I know a lot of folks go back and forth. That's why, honestly, Harry, w- within a range, I simply don't care about valuation. I want to have a, a fair valuation where I can hit the ownership target, and I don't care. All these people on Twitter grouching that their deals are at 8.4 pre instead of 6.2, I mean, who cares, man? Who cares? (laughs)

   3. HSHarry Stebbings9:19

      That I get entirely, but I do absolutely think that actually when you're moving from 12 to 25, that difference is very important, and actually, if your fund size is constrained to an extent like yours and mine are, actually it does make a difference if you wanna hit that 10% ownership target 'cause that's gone from 1.2 to 2.5, and then your level of diversification will be half.

   4. JLJason Lemkin9:39

      In any segment of the market, folks that are doing better will command a higher valuation typically, right? The last thing you wanna do is, wow, this company... I mean, 700 pre is tough, right? But I think the last thing you wanna do is pass on a $30 million post-deal where everything's great, right? It's the last thing you wanna do, right? It's the last-

   5. HSHarry Stebbings9:57

      I agree.

   6. JLJason Lemkin9:57

      ... thing you wanna do, right?

   7. HSHarry Stebbings9:57

      My challenge is though, Jason, most of the time when they're 20 or 25, not 30, that's kind of just-

   8. JLJason Lemkin10:03

      Yeah.

   9. HSHarry Stebbings10:03

      ... a little bit... it's not that they're going great or badly. They're just starting.

   10. JLJason Lemkin10:09

       (laughs) So, well, yeah. For me, honestly, Harry, I, I, I do it all by email and I don't take the meetings, so I- I hear you. If you go to sasterfund.com, you will never see a more descriptive website. Here are the exact ranges I do. If you scroll through it, you'll see the valuation ranges, you'll see the owner sh- like, it's like just... and I literally got an email from a great CMO starting a company yesterday. He's like, "Look, there's no chance, right?" I'm like, "No, there's no... I love you, but no." (laughs) "I read your website," (laughs) and, uh, I was like, "There's no, there's no." I still caught up with him. The other tough thing in today's world, right, and, and it probably segues into the topic you wanna talk about, is there's no downturn in seed whatsoever, no matter what. Twitter's wrong. Twitter... Seed is more vibrant than ever, and we can talk about why, and seed is also, um, split up more than ever. More and more folks are taking tiny, more and more tiny checks, right? That's not, that genie's not going back in the bottle, right? But it's bad for seed investors, right? The last thing... You know, people like you, Harry, and, uh, they may not like me but they, they want my help. Or maybe they like me. And so I do get a lot of offers to buy one or 2% of a startup or 100 grand, and the founders don't understand. They don't understand. I'm like, "It's great," um, and I will do one or two of these a year, um, typically for outsiders or others, uh, for specific reasons, but not to make money.

   11. HSHarry Stebbings11:24

       Why is that splintering of rounds happening 'cause I, you know, if you read a lot of tweets, if you read a lot of coverage, it says that this is the end of party round days and we're back to the conviction led larger check-

   12. JLJason Lemkin11:34

       Yeah.

   13. HSHarry Stebbings11:34

       ... investor round. Why is that wrong, and why is the splintering of rounds?

   14. JLJason Lemkin11:37

       It's completely wrong because there are so many founders and executives that have made tens of millions, hundreds of millions, or more money that enjoy seed investing.... right? And many have had their own funds now. I mean, even the founder of FreshWorks just announced his second fund, right? Jack Altman, who I love from Lattice has multiple funds. Um, a- all... and, and those are institutional funds. Those are real venture funds. Forget about that. What about the, the folks that- that... there's just so much liquidity that happened, especially in 2020 and 2021, and what do you want to do? I mean, you know, the San Francisco Peninsula is so boring. Like, uh, y- what are you gonna do? How many hikes can you go on The Dish? Eventually, the only thing to do is angel investing in the Bay Area. I mean, yeah, if you're in the city, you- you- you can, uh, you know, throw rocks at... whatever, you can make fun of San Francisco. But if you're on the peninsula, it is the most boring place I've ever lived. The only fun thing to do is angel investing. I- i- let's say you've made $100 million, Harry, and I know... and, and this was- would have been crazy to say when we first met, but there's so many... so many founders made $100 million, and so many executives made $20 million or $30 million and have good lives, and they want to put 10% or 20% of that into angel investing. If you're connected... and, and, and there's a huge difference today between insiders and outsiders. It's, it's so... it's more visceral than ever. But if you're an insider in Palo Alto with these board of rich tech people, you can put together a $3 million seed round with 30 people. I was literally on a Zoom yesterday with a founder and he's like, "I've... I, I'm struggling." He's like, "Why are you struggling?" He's like, "Well, I have no customers, no product yet, uh, and no traction, and I'm, uh..." but he's a very good found- like very charismatic, connected, and he's like... and he's like, "And all my friends told me I need a lead investor for my seed round." I'm like, "Well, if I were you, I would take 30 checks from, from, from tech people." He says, "Oh, I already have that. I already have $3 million for that." I'm like, "Close it." (laughs) He's like, "You're the first person that told me this. Like, I've been waiting two months to get, uh, 20 VC or Khosla Ventures on my cap table." I'm like, "You already have $3 million from tech... rich tech people? Close it this week, you fool. T- pick a fair price and do it. Why would you not get going with your life as a founder," right? And th- the other thing is the A investors. He's like, "Well, the A investors are gonna be sensitive if it's only angels." The A investors don't care. They just want a rocket ship. The A investors don't care if it was Stebbings Lemkin Ventures that funded you. They don't care. They don't care.

   15. HSHarry Stebbings13:53

       So, you would advise founders to take those splintered rounds if they're on the table and ready to go?

   16. JLJason Lemkin13:58

       Rather than struggle? Yes, of course, rather than struggle. If I have an option, if I've got 20 VC who will give me a $2 million check and I can get a million from friends, or I get $3 million from friends, of course, I'd probably take the institutional money plus a million, right? That's a great... you can... then that's the best of both worlds. But would I struggle to find the institutional money when I can get $3 million? Like, that, th- that's a fool... that's a Twitter mistake. That's, that's a, that's a rookie error. Every week there's more, uh, liquid tech folks that want to invest in seed, e- either directly or creating funds, right? And, and the, the emerging manager boom of 2021 may be over, right? Folks without a track record may be over. But the folks with an... that can assemble their own fund or their own resources is just getting going. It's just getting going.

   17. HSHarry Stebbings14:44

       So, I, I totally get you. I think we're also... so that's that increase in supply from operators who have liquidity.

   18. JLJason Lemkin14:50

       Massive supply, yeah.

   19. HSHarry Stebbings14:51

       I think... yeah, and then we're also seeing increase in supply from multi-stage funds who don't want to deploy series A's and B's because they're larger checks, but they still need to be in market and investors.

   20. JLJason Lemkin15:00

       For now. That'll fade.

   21. HSHarry Stebbings15:02

       T- why do you think that'll fade?

   22. JLJason Lemkin15:04

       Because you can't return a $2 billion fund writing tiny checks into, uh, pre-seed companies. You can't return a $2 billion fund.

   23. HSHarry Stebbings15:10

       Talk to me about that. You can invest in Slack when it's a gaming company that pivots into Slack.

   24. JLJason Lemkin15:16

       Listen, it's, it's a thing. You've got to stay in market, right? If you're, if you're, if you're, if you're a late stage growth fund and that market, uh, was dead last year, it's definitely better to stay in market for a variety of reasons. It's not silly. It i- it is good to stay fresh, it is good to meet entrepreneurs, it is good to deploy capital. But if you've got to deploy $2 billion over two years and triple it, uh, uh, or come close to triple it, you know, you've got to own... you've got to be in, like, four or five big winners a year, right, and in significant ownership positions in all of them, right? The math is just awesome. You need double digit ownerships of four to five massive $5 billion-plus outcomes per year. And it's great if you can start in seed, right? But if it distracts you from thr- putting $100 million into the winner, it's not worth the distraction. We were talking about distractions before we got on, and this, this stuff is distracting for these big funds, right?

   25. HSHarry Stebbings16:06

       I agree, but this is what worries me. The big fund partners are saying, "I'm under water with refinancings, with board positions, with company closures, with RIFs. Principals and associates who haven't led rounds before, go and write $1 to $2 million checks, go and spray some seed cash."

   26. JLJason Lemkin16:22

       Yes.

   27. HSHarry Stebbings16:22

       And that's leading to less and less price discipline at the seed because you've got this whole new entrant of less-experienced-

   28. JLJason Lemkin16:28

       For insiders, Harry. For insiders. Even me as a founder, back in the old EchoSign days, one of my favorite VCs that I love, uh, Josh Stein, who runs Threshold today, was more junior back then and he ca... the first time we met, he gave... and I love him, he gave me a term sheet and he said, "Well, listen, we can do it two ways. But if it's $2 million or less, I can just do it." (laughs) When he was at DFJ. So, it's not new, this idea of, like, bigger funds having a, a lower threshold for different professionals. Uh, it's not a, it's not a new phenom-... the funds are just bigger, right? Um, but there's also more startups. I don't think it's... I don't think it's bad. But my point is, those deals, those deals where the, the, the principal or the... and maybe Josh was a general partner back then, I don't know, but the, the deals where the principals, the VP can do it, they're pretty hard if you didn't come out of Stripe, come out of YC or have traction, okay? It's not as simple as it sounds. But finding that sol- almost solo founder from Lisbon that knows no one, that, that, that only... doesn't even have a desk in San Diego like when I met Talkdesk or, you know, these, these, these non-traditional other entrepreneurs, they're not gonna just check the box. It's th- th- that five-minute check the box has to have something else supporting it beyond, "I think it's a great idea," or, "I love the idea." No one wants to throw their money away and I love the idea, right?

   29. HSHarry Stebbings17:39

       So Jason, help me. What happens at seed then? We have this increase in supply from operators, a temporary increase in supply, but still an increase in supply, no matter how temporary, from mul- multi-stage funds. What do we do at seed then, as the traditionalist seed investor, and what happens?

   30. JLJason Lemkin17:55

       Well, look, I think you have two choices. Um, one is, uh, find outsiders. Outsiders are... Most of the world is not privileged, Harry. Most of the world did not graduate from Stanford or Stripe or Y Combinator. And when you find outsiders, they're- they're not dumb. These are the best entrepreneurs, but they're e- the prices are much more reasonable with outsiders, right? They're much more. They always have been and- and they still are today, and they even were in- in 2021, outsiders. Insiders are priced to perfection, but if we take a pause, shouldn't they be? The venture markets have changed so much in my c- when I started as a f- as a founder, venture was so small that firms would collude. I remember when I got my first offer from a VC, I went to meet another VC and they'd already called each other, agreed on the price, and ag- and agreed to lower the price and split the round, okay? That doesn't happen so often today. Now, like if you have the hottest startup in the world, why shouldn't you be 700 pre in your seed if you wanted? I mean, there's downsides to raising (laughs) at 700 'cause the next round may be tough, but let's put aside that- that meta issue. Why shouldn't the perfect seed round be priced to perfection, right? And that may make seed investing impossible for seed funds, right? The- the- the p- the seed round priced to perfection only works for mega funds. It does not work for seed funds. And seed- the seed investors are crying all over Twitter, but maybe that's not their job. Maybe their job is not to invest in the perfect high profile, obvious, perfect seed fund. What did Jody Bonsal after selling AppDynamics for 3.7 billion raise his pre money at Harness? I bet it was 100 pre even back then, right? Um, and Menlo did it, but maybe I can't do it, it's okay. (laughs) Go find the f- go find Jody before his first one, not- not his second one, right?
4. 26:56 – 31:09

   The Great Unbundling

   1. JLJason Lemkin26:56

      gonna break out, right?

   2. HSHarry Stebbings26:57

      Do you see the massive bundling in software buying today? A lot of people are mentioning how we're moving from a world of unbundled to bundled in a bid-

   3. JLJason Lemkin27:05

      Yes.

   4. HSHarry Stebbings27:05

      ... to save costs-

   5. JLJason Lemkin27:06

      Yes.

   6. HSHarry Stebbings27:06

      ... within a large c- Do you agree with that

   7. JLJason Lemkin27:08

      It's ge- it's, it's, it, it's starting to be in the rear view mirror, Harry. We are bouncing off the bottom, we are bouncing off these lows that we went through this period the last 18 months where not, not f- failing unicorns, big successful companies retrenched their IT and spend budgets, right? All across the board. You saw it across your portfolio. And they did it and they did two things. One, they spent an enormous amount of energy cutting back spend, cutting back workflows, cutting back cloud spend. We saw this with AWS, Azure, Google. Like, how can I o- I'm not gonna cut those applications, but how can I optimize my workflow? Mongo saw it, everyone saw workflow optimization, Datadog, right? And then they went through a second thing, which I call the app layoffs, okay? And what they did is, and, and, and you have to have been through a real human layoff in a big company to get how this works. But here's how layoffs work in big companies for both people and human beings, okay? And these are companies that are successful, right? These are big comp- they're all succ- they're all still growing. They get, they get all the VPs in the room and you go around the table and you're like, "You gotta cut one person or one app, okay?" And the first one's pretty easy because there's one person on your team that doesn't even show up to work anymore, so you're like, "Lemkin, let's fire, like, throw him in the table." And when you go to the VP layoff meeting at a big company, like, if it's a small layoff, like less than 5%, people are actually happy at the layoff meeting because they haven't been able to get rid of Lemkin or Harry for five years. They're so excited, "I can finally get this, this toxic person that doesn't work off my team," and everyone's drinking and having, I mean, not alcohol but coffee, and having fun, right? And then the second meeting happens, it gets harder, right? Then you start to cut closer, and then the third meeting is not fun. And we only got through two of these meetings in apps, so everyone got around the room and they said, "Look, we gotta cut 10% of our apps." Like, "We're gonna cut 10 or- 10 or 20% of our spend and, and these guys are gonna work on this, the procurement finance guys are gonna, they're gonna manage it and we're gonna just cut names." And so everyone bought some app in 2021 to, to, you know, to send free mugs to their sales team or to automate some obscure process because it was just go, go, go, go, go and they're looking and like, "We're barely using this. We're bar-" So they cut that one, right? And then they did another level and this hurt some real leaders, th- so the first one we, they just cut the one they were barely using that seemed like, helpful, right? And then the second one, th- and this was tough for some of the leaders, they're like, "Well, I really want some wonderful products like a Gong or an Outreach, epic products, or others, but I've got that feature in another product," right? This isn't Suites, this is not the same thing and they're like, "I'm gonna cut back my spend on Gong because I have some of that in sales after Outreach," or, "I'm gonna cut back some of this piece." It's not like those ones, th- those are great companies that are doing hundreds of millions, right? They just saw this impact from, "I'll, I'll settle for a, a crappier solution 'cause it's already in something I'm paying for," okay? So these two things happened and we're done, Harry. There isn't gonna be a third or fourth meeting. If you look at Mongo's latest quarter, if you look at Atlassian's that just came off, they- we're, we're not ripping back at 2021 but they have all bounced off the bottom. Mongo is up, Atlassian is up. Not everyone. Even ZoomInfo, which is like-... the most pure place sales and marketing tool out there that's like us. It still had a rough last quarter, but not as rough as the cor- prior quarter. It bounced off the bottom. They're all bouncing off the bottom because your finance- your CFO and CIO can't spend their entire lives optimizing workflows. (laughs) And what Amazon said yesterday was very interesting, Amazon said, "Our, our, the cutbacks have been more than, than, than counterbalanced by the amount of AI workflows people are putting on." Okay? And we can say that's all AI, but what it really is, is listen, we gotta s- AI is so disruptive, we gotta spend again. And maybe AI is the vanguard here that's pulling spend out of the enterprise and companies, but we've bounced off the lows, and if you're a Debbie Downer, you're missing what's happening in the enterprise, you're missing what's happening with buyers. We have bounced off the bottom. How high we're gonna bounce? I'm not saying we're bouncing to 2021. It's gonna take 20 years to experience that moment again. It will happen again. It's every 20 years, right? But 2024 will be rich with IPOs and it will be a good year with solid multiples. Solid multiples.

   8. HSHarry Stebbings31:03

      We- we're gonna move into that over time.

   9. JLJason Lemkin31:05

      Yeah.

   10. HSHarry Stebbings31:05

       I do wanna kind of do it staged 'cause it's easier to follow then.

   11. JLJason Lemkin31:08

       Okay.

   12. HSHarry Stebbings31:08

       I do want to move

5. 31:09 – 35:36

   The State of Series A Today

   1. HSHarry Stebbings31:09

      into the series A. We discussed their seed being untouched. We discussed pricing being relatively untouched, capital supplies. Series A, how do you think about the series A and B market today?

   2. JLJason Lemkin31:18

      Terrible. I think it's terrible. And, and, and actually, I would ask you, you may have, in some ways, you may have a better perspective. Look, everything's better than a year ago, let's be clear, no matter what Twitter says. Like, it was interesting, you know, Iconic Growth published their data when they came to SaaStr Europe in June. Iconic Growth, I think, had done four growth deals in 2023. Uh, zero in 2022. Zero. So from zero to four. I don't know what their traditional pace was, but zero to four i- is pretty, pretty different, right? Um, the deals were lower valuations, right? They were lower perceived risk, which is important, right? And, um, so everything's tougher. I just think, you know, A and Bs today, the reason there's a huge slowdown at A and B is not because the money isn't there. Everyone that's good has a fund, Harry. I'm sure you agree with me. Everyone that has a track record has a fund today. And in fact, they often have an undeployed fund, an underdeployed fund, everyone is good, right? Uh, yeah, LPs are culling names and folks without a track record are having trouble raising another fund, but if you're, if you're pretty good, you got a fund to invest today. You're in, everyone's in market. Let me, in some s- in some sense, in some sense, everyone that's good is in market. But A and Bs want a return to rationality, right? And founders aren't there yet. Or, and they may never get there. They may never get there. Every founder that raises a seed round still thinks in 12 months they're gonna raise a hot A. Every found- not every founder, okay? But every founder. (laughs) So there's a large disconnect between what As want to do and what founders think an A is. And I don't think that that's been diminished much by the, by the tumult of last year because these are newer founders and newer companies, right? They haven't been through the tough times.

   3. HSHarry Stebbings32:58

      So what happens if they never get that-

   4. JLJason Lemkin33:00

      Yeah.

   5. HSHarry Stebbings33:00

      ... but As and Bs want different things than they used to, or are-

   6. JLJason Lemkin33:04

      Yes.

   7. HSHarry Stebbings33:04

      ... willing to accept less than they used or, uh, more than they used to? What happens?

   8. JLJason Lemkin33:09

      I don't think it's that big of a deal. Um, some of 'em will just fail, and that's fine. Seed companies are, it's okay if some fail. The w- you know, it is seed, it is seed investing, right? They don't all grow up into a Mighty Oak. And some will get religion and struggle for six to nine months and gain humility and raise a normal round. It, it's, it's a tough venture strategy. It's a tough one, but the one of waiting and investing in the ones that miss the window, but then, th- but then accelerate a little after the window, that, that patient model, you know, it, um, you can criticize it, but if you're very disciplined, it works. The ones that, that, that they couldn't raise the A 14 months after the seed, it took 24 months, but then hit the number being disciplined, picking over YC a year afterwards rather than, uh, uh, a month before. Problem with that strategy doesn't produce enough decacorns, but it wor- it sure works. It sure works if you have the discipline to do it. So some of 'em will just have to wait, they'll just have to learn, they'll have to have a life experience. But the ones with high burn, they're all gonna fail.

   9. HSHarry Stebbings34:08

      What happens to the ones who've got low burn and 10 years of runway? Transparently, I have quite a few companies which got preemptive As, they literally have 10 years of runway, they do not have product market fit. What happens there?

   10. JLJason Lemkin34:21

       I think this whole ZIRP thing is o- is abused, what happened with ZIRP, but this is a ZIRP phenomenon, if nothing else. We'll never again see a m- a massive wave of startups with 10 years of runway and no traction. It's n- this is, this is gonna take another 20 years to happen, okay? (laughs) There should be a massive wave of startups with 12 months of runway and no traction, (laughs) but not a decade of, of that was a ZIRP phenomenon. And, um, look, I don't think we know, right? My advice to all of them is they should offer to give the money back, 100%. Offer, and I said offer. I didn't say give it, I said offer. 100% should offer to give the money back. It's a great process. It's a great process. When, you know, Slack, before it was Slack was a gaming company, right? And Stewart Butterfield, when it didn't make it, his second gaming company, he offered to give all the money back. He offered to give what was left. He'd spend about half. There's a whole Andreessen post on their blog that's great. And the inv- Andreessen and the investors actually thought about it. They thought about it for a beat, right? And, and, uh, they said, "No, you're one, you're one of the best entrepreneurs. You just go do what you want to do with this." This Slack thing, the 10 millionth messaging tool, and that's what you're, you, you and Cal are passionate about, go do it. But he offered, but Harry, he offered, and if you do that to your investors, it is the most profound bonding moment, and, and it is the ethical thing to do.

6. 35:36 – 39:33

   Founders Don’t Respect VCs Anymore

   1. JLJason Lemkin35:36

      Uh, founders today don't respect venture capital anymore. They don't respect venture capital, and it's one of my least favorite parts of the industry is that founders do not respect venture capital anymore. And I over respected it in my day. It was, venture capital was so hard to get when I started in this industry, we over respected. Like, we, we thought it was dad and grandpa and we genuflect, and we, we brought them coffee and, and we met them at Pebble Beach, and, like, venture capitals w- were gods. Now it's swung so far the other way that founders have no respect for money. Most of them.

   2. HSHarry Stebbings36:04

      Why not? Why do they not?

   3. JLJason Lemkin36:06

      Uh, I think it's what they've been taught, that it doesn't matter. It was like this great founder we, we talked about before who didn't think about what money meant until he wanted to raise at 450, and finally having to exit at three or four billion. But they all think it's a game. My friends raised at 80, Harry. I'm... There was, there was a deal I almost did, okay? I loved this founder. He was a... Didn't even finish high school. I've done young founders before, but this would have been my youngest. Okay? This would have been my first that, uh, you know, couldn't, w- couldn't... What can you do when you're 18 that you can't do? Well, he would have been the first-

   4. HSHarry Stebbings36:35

      Well, I c- I-

   5. JLJason Lemkin36:35

      What's that?

   6. HSHarry Stebbings36:35

      I c- I couldn't drink. I remember raising for-

   7. JLJason Lemkin36:38

      Okay.

   8. HSHarry Stebbings36:38

      ... an endowment fund, and they didn't want the water in the-

   9. JLJason Lemkin36:38

      Yeah, well, you're in Europe. I forget what it is in the States. Um, uh, although he was European. And, and I wanted to do it, and he's like, he's like, "Well, um..." And obviously if he's 17, he has limited life experience raising venture capital. He's like, "Well, I'll let you in at 20 today." Um, I'm like, "Well, listen, I can... I, I'm not arguing with you. I'd never argue over price, but for where you're at today, I can't do it for a variety of reasons." Like, "Yeah, but in six months I'm raising at 80." And I'm not even criticizing him. You gotta have some chutzpah sometimes to be a founder. But, uh, my point is, it's just this disconnect for what anything means, what an exit means, how hard it is, and no one cares if only... I don't find very many of the current generation founders actually care about returns for their investors. They actually care about... Stewart cared. Stewart's like... You know, he wasn't rich. They sold, uh, Flickr for 40 million to Yahoo, but they had a bunch of founders and investors. How much did he make even at Yahoo? You know, I, I mean, he made millions, but not tens of millions. He wasn't rich. And when there was a couple million bucks in the bank, he respected a couple million dollars that was left from the seed round. He of- 'cause that was r-... He o- And I, I over-respected money myself, but today it's like whatever. And you know that one founder, the only one I did that had 10 years of runway, I asked him to give the money back.

   10. HSHarry Stebbings37:49

       What did he say?

   11. JLJason Lemkin37:49

       And you know what his response was to me? "Why do you care?" Now, unpack that for a minute. Why do you care?

   12. HSHarry Stebbings37:59

       He's suggesting ultimate detachment from you and, u- you and your work.

   13. JLJason Lemkin38:03

       All of it.

   14. HSHarry Stebbings38:04

       Yeah.

   15. JLJason Lemkin38:04

       He didn't care whether I made money, but he didn't understand why I would care. What? Ve- venture is just a sport. It's just a game. You're just throwing dice on the roulet- on the whatever the cr-... I don't gamble. You're throwing those dice, and the... He couldn't understand why I would care. I told him, "You got, you should, gotta offer. You gotta offer." Right? "You've abandoned your current business model. You have ten years of runway. You gotta make the of-... You don't have to take it, but you gotta make the offer." And his, his answer was, "Why do you care?"

   16. HSHarry Stebbings38:28

       So, I'm gonna be... People get upset with me for this. That's why I prefer, one, older founders, and two, serial entrepreneurs. I find with both, you do not get both of those situations.

   17. JLJason Lemkin38:39

       You don't.

   18. HSHarry Stebbings38:39

       You don't get the blase, "Oh, well, I'll raise it 100 in six months time," and you don't get the flippant, "Why do you care?" kind of moody, which isn't cool. You actually aff-

   19. JLJason Lemkin38:49

       I like the opposite of that two-by-two, but I, I hear your point.

   20. HSHarry Stebbings38:52

       Well, hit me. Why do you like the opposite of the two-by-two? Because I fe-... I, to... And again, this is just... I feel that there are so many things that are stupid mistakes that first-time founders make that take serious time and detract from precious runway that can be avoided on serial ti- serial entrepreneurs.

   21. JLJason Lemkin39:08

       They can.

   22. HSHarry Stebbings39:10

       And I would rather-

   23. JLJason Lemkin39:10

       But-

   24. HSHarry Stebbings39:10

       ... pay 2X and avoid those terrible mistakes than-

   25. JLJason Lemkin39:15

       But... You're right, but... And, and you're right. Well, first of all, you, you often will pay 2X, right? And it's not that it's not worth it, right? But you have to... It, again, it goes back to our first point of your strategy. Does your fund strategy and size and risk profile permit you to pay 2X to de-risk that investment, right?

   26. HSHarry Stebbings39:31

       Mm-hmm.

   27. JLJason Lemkin39:32

       From my perspective,

7. 39:33 – 44:16

   Jason’s Superpower as a VC

   1. JLJason Lemkin39:33

      as someone who has built a SaaS company that even today is doing 250 million, that has been a founder, that has been a decent investor in first-time founders, I feel like I can help mitigate that risk by working with them. I can help them avoid not all the... They're gonna make 70% of the mistakes, but I genuinely feel by bringing them their first VP of sales, by bringing them their COO, by bringing them their first marketer, by helping them hire all their reps, I know these mistakes, and they're still gonna make a bunch of them, but m-... I feel like a superpower I can make is mitigate enough of them that instead of a 2X entrepreneur, they become a 1.25X entre-... you know, whatever. I give them an extra pu-... I think I give them an extra 0.25X.

   2. HSHarry Stebbings40:10

      Dude, I, I think you give them a lot more than that. But I do think that you never want to invest in founders that need you, and I think those founders need you. I'd much prefer if they-

   3. JLJason Lemkin40:20

      No, you know what the difference is? They want you.

   4. HSHarry Stebbings40:22

      No, I-

   5. JLJason Lemkin40:23

      It's... He- here's the-

   6. HSHarry Stebbings40:23

      No, no, no. They do need you, because dude, they need you to close that VP sales. They need you to close that CRO, whoever that is.

   7. JLJason Lemkin40:30

      Here's the fallacy-

   8. HSHarry Stebbings40:31

      You want-

   9. JLJason Lemkin40:31

      ... in that thinking, if you want my, my learning, right? I hear you, and that's the classic Vinod Khosla, who's wildly successful, thing. Like, the classic thing is my best founders don't need me, right? That's the cl-... That's what they've said. And listen, he's a better investor than I, but I'm 10X lifetime, so I'm not bad, okay? I think the... what's missed there is that if you're a true outsider, if you just showed up in the Bay Area from Lisbon or even London, okay? Or Estonia or Paris, and know nobody, right? You didn't even get to go through YC, you know nobody, yes, you're tenacious as hell. Yes, you grabbed your whole family and moved them out here. And yes, you are committed. But you don't... But if I can be an insider and give you some of those connections you don't have when you get here, that's not needing me. That's me accelerating a process that would take you time to develop. You can't show up in, you know, the Bay Area, literally or sort of metaphysically speaking, and have 100 connections on day one, can you? How can you know them? Yes, you can hustle your way and go to all, all the AI events in Hayes Valley and, and shmooze on Twitter, and, and... But, like, you just cannot build the 20 years of relationships I have or the, even the decade you have, but you can't build those in one week showing up, right? And, and if... So, totally agree for series C. For seed, you know, I, I... There's a co-... I love the... You know, I love several founders. Like the Showpad founder said I was the first person they met when they came here from Belgium, from the US, right? And so if you can help someone like that-... they don't need you, but you accelerate it. Outsi- it's outsiders versus insiders. If you have to help insiders, it's embarrassing. Those third time founders, uh, if I have to help Jody Bonsal find a, a, an, a VP of sales, I mean, he, he, he, we owe it to him to find him one, but h- he'll find his own, won't he? (laughs)

   10. HSHarry Stebbings42:17

       I think it's, I think it's tough be- 'cause I, I get you entirely, but I think it's tough 'cause there, it's not as black and white as insiders and outsiders. There's quite a few people who were a PM at New Relic, at Algolia, they're not inherent insiders, actually. They're not sitting at the dinner table on a Friday with Collisons and with Sam Altman, but they're also not from Belgium like the Showpad guy, who's totally out of it. And I find those are often the ones where the real painful mistakes are made.

   11. JLJason Lemkin42:48

       Yeah, for sure. Um, look, I'm not disagreeing that the, that playing 2X for the seasoned founders is a good bet. I just want to invest the extra time on the Gorgeous's and the Revenue Cats and Talkdesk and Algolia's. I'm willing to invest those cycles to see beyond those and take that risk. And I think the risk you take is more rational. It lets you deploy more capital, and if you can put a, put it on a spreadsheet, it's probably the better risk to take. The, many of the best investors do that. Um, for me, what I don't like is, the only way I can invest on the 2X founder in my fund structure is pre-revenue. Okay, here's my learning. The on- it doesn't work for me unless... And I've done it, and I, and I recently did this analysis, it's about 50/50 for me, versus 90% of an ordinary investment.

   12. HSHarry Stebbings43:34

       Talk to me about that analysis. Sorry, I didn't...

   13. JLJason Lemkin43:36

       The average investment I make makes money 90% of the time, okay? Over 10 years, okay? And that's not all good. It means I'm not taking enough risks, blah, blah, blah, blah, blah. It's j- but it's just the spreadsheet. The only pre-revenue ones I've done are these repeat founders, these 2X that had big exits that I know personal- so I know them personally. There's no ethics issues. I don't have to do any diligence. Only half of 'em are, are, have are gonna make money. Now, if you have an, if that's your approach, half is still pretty good, right? But I have to pay more and take... They're all pre-revenue, so I have to take, like, a year to two years more risk. I'm not... I, I want... There's a couple I, I regret, right? Don't get me wrong. I'm not sure, I'm just not sure looking at the spreadsheet, like, looking at it calmly, I'm

8. 44:16 – 47:25

   Jason’s Biggest Mistake as a VC

   1. JLJason Lemkin44:16

      not sure.

   2. HSHarry Stebbings44:17

      In the ones you regret, what do you regret in terms of, like, what did you not see that you see now?

   3. JLJason Lemkin44:24

      What did I not see? I think it's more the opposite. I see less now.

   4. HSHarry Stebbings44:30

      What do you mean by that?

   5. JLJason Lemkin44:31

      It's just, everything's so much bigger. There's so many more startups. And frankly, for me, like, when I started investing, like, SaaS was seen as a dumb area to invest. People made fun of it. People were like, "No, you should be doing either fintech or consumer. It's stupid." So yeah, I saw almost everything, but, you know, there were only 20 or 30 SaaS investors, and, uh, there was only one that had a blog, or two. Me and Tamaz were about it, and Christophe. There were three of us that had any social presence (laughs) , and there were only 20 or 30 of us. So you didn't get to see e- you still can't see every CTO but... It was much easier to see, uh, see them all in a smaller universe. I think my biggest mistake in, uh... And you're not making it, Harry. Uh, I think the biggest mistake I've made... And this is just me, 'cause every, again, everyone's different. This is the complicated thing about ventures. Everyone has different strengths and sweetnesses. I think were the world evolved in 2023, I should have built a big team under me, but I didn't want to be that guy. I didn't want to manage 10 or 20, whether they're full-time GPs or folks running extra related funds. My LPs pushed me to do it, right? People wanted me to do it. But I've already been an entrepreneur twice, and I gotta enjoy what I'm doing, and I did not want to be whoever, you know, the, this massive fund manager. It just wasn't me as a human being. I consider myself a founder first and an investor second, and I just couldn't do it. I think people get it wrong. Why do folks raise bigger and bigger funds in all of this? They think it's for the fees. It's not for the fees. It's because that's what it takes to sustain a team. This is what I learned from Sunil at Amplify, right? 'Cause he went from an amazing solo GP and did Datadog, and then he built .......................... And I asked him one time why he did it, and he's like, "Well, I have to do it for the team." Like, they need their 60 million per fund and then their 100 million. Like, I can't have four GPs, and the four GPs need associates to data... Like, I need, like, 10 people, and so I gotta raise this fund size. And so, and he was like, "If, in a perfect world, I would g- I might do it on my own," right? Or just him and his partner, but, but the, but the, but the, again, the strategy dictates the fund size and the stra- right? And so...

   6. HSHarry Stebbings46:26

      100%. If you, if you do it on a capital per partner basis and then d- like, figure out your deployment cycle, and if you do a three-year deployment cycle and you're doing $10 million Series A's and you want to do three a year across four partners, actually, you can work your way very easily to the $500 million fund-

   7. JLJason Lemkin46:42

      Yeah, you need 500 million with 60% reserves to make that work. Otherwise, you're taking too much risk. You need 500 million, right?

   8. HSHarry Stebbings46:47

      Exactly, and so you-

   9. JLJason Lemkin46:48

      So that means you need, uh, three billion of exits, right? Gross. So that means you need 30 billion of market cap to make that fund work if you have 10% real ownership. 30 billion of market cap. So let's say that fund has a PagerDuty in it, and let's pick another one, uh, another great one, uh, let's say it has a, a, a Sprinkler in it. Uh, how far am I to that 30 billion? (laughs)

   10. HSHarry Stebbings47:11

       (laughs) .

   11. JLJason Lemkin47:11

       And I'm raising 500 every two years (laughs) . I gotta get so many of those 30 b- I gotta do 30 billion of exits every two years.

   12. HSHarry Stebbings47:19

       Yeah, buy real estate. Um... (laughs)

   13. JLJason Lemkin47:23

       (laughs)

   14. HSHarry Stebbings47:23

       Uh, which is the other option. Uh, so, uh, before we

9. 47:25 – 50:02

   When will Series A rebound?

   1. HSHarry Stebbings47:25

      move to growth, what happens with Series A, Jason? Does it stay in the doldrums for long? Does it rebound quickly? How do you advise founders who are asking you this?

   2. JLJason Lemkin47:34

      Well, I have two different perspectives, one from venture, one from seed. I, I said this a few months ago and then, you know, I said, "Hey, Series A is the best place to invest today in cloud and SaaS," right? And David Sax's response was, "Shh. No, don't tell anybody," right?

   3. HSHarry Stebbings47:47

      (laughs) .

   4. JLJason Lemkin47:47

      Because when you have a dislocation at a stage, that's where you make money in venture, right? There's no dislocation in seed from the ............................ Anyone that thinks seed isn't happening i- they're out of their minds. We have a, we still have hyper location in seed. We don't have dislocation. There is an inexhaustible amount of seed capital, at least for hot companies. In- inexhaustible. Every YC company and every batch, they may not all get funded, but there is enough capital to fully fund all at 20 post that only takes, what's 200 million, two milli- that takes 400 million to fully fund a YC batch. There is four billion of capital that would like to invest in that, in that batch, right? Whether it happens or not is a different question. But I do think there's discipline in the market for the moment outside of AI. Outside of AI, there's discipline. Um... (clicks tongue) And so, founders either have to respect that discipline or, or realize they may not be able to raise, right? And, and so everyone in series A is being disciplined, and maybe they're being too disciplined. That we'll have to find out because, you know, cloud is up 35% this year. You're, uh, you know, if you, if you measure it from the peak, it's down. But you know, I deployed all my cash at the beginning of the year. Like, I feel smart in the public markets. If I'd deployed it all at the peak, I would feel dumb. But I happened to have a lot of cash at the beginning of the year. I put it all in and, um... So, it all depends on your perspective. But uh, A is the best time, but let me summarize it this way, Harry. I know this will sound obvious to you, but, but founders still don't get it. Every round's supposed to be harder. But in 2021, every round got easier.

   5. HSHarry Stebbings49:09

      Huh.

   6. JLJason Lemkin49:10

      They li- think about it. They literally got easier in 2021, didn't they? E- it's not just that people raised this, uh, uh, raised at 400 and then 800 the next week. It's not even that the valuations went up. They actually got easier. The hysteria. Raising at 400 made it easier to raise at 800 'cause they didn't get into the round, right? And every round is... The A should be somewhere between... You know, maybe it's step function. Maybe an A should be 10 times harder than a seed, and a B should be 10 times harder than an A and a C. That's the way it certainly was when I started. Each round was probably an order of magnitude harder to raise than the last. It's supposed to be a winnowing.

   7. HSHarry Stebbings49:41

      (overlapping) Well, speaking of winnowing-

   8. JLJason Lemkin49:42

      Um, it's supposed to be a winnowing, right?

   9. HSHarry Stebbings49:44

      Speaking of it should get harder, you Tweeted before-

   10. JLJason Lemkin49:47

       Yeah.

   11. HSHarry Stebbings49:47

       I'm leaving out the company 'cause there's a friendship there for me.

   12. JLJason Lemkin49:51

       Yeah.

   13. HSHarry Stebbings49:51

       "As usual in VC due diligence, no one actually cared." What did you mean by that, Jason?

   14. JLJason Lemkin49:59

       Well, I was having a little fun. But, um,

10. 50:02 – 52:38

    Why Jason Stopped Helping Other VCs Do DIlligence

    1. JLJason Lemkin50:02

       you know, I remember, uh, my entire life as an entrepreneur or investors, I, I try to avoid any time a VC wants to do diligence with me. I try to studiously avoid it. And I remember, my very first company as a founder, actually we made implantable batteries from nanomaterials. Very hard tech, okay? And it was impo- what we did was impossible. Only a handful of people could do it in the world. And this fancy VC fund asked my co-founder, my CTO, and me, and she knew more than me, "We're looking at this startup in this space. What do you think?" And my co-founder, who's very cautious, very, very cautious engineer, right? Very calm. She gets on the call and she says, "Let me tell you, I have, I've worked in this space for a decade, and I actually did some work here. It's impossible. What they're doing is impossible. It's a fraud. It can't work." And then she explained calm- not, not in the emotion I am. Very calmly, "Here's why. And the data, the data that you're looking at is accurate, but you're reading the wrong things from the data," right? And they said, "Very thank you," and wrote a $20 million check that they quickly lost. I'd never really done that before, done diligence for a VC fund. And I found it very frustrating, right? Not profoundly frustrating. And then I learned s- subsequently, every VC diligence call is like that, right? And, and there are certain spaces where I know something about, right? There's certain spaces I know something about. Um, and, uh, people ask me for event software, right? 'Cause we do events. Um, like they ask us for Cvent competitors and, and they're, and they ask me for c- certain types of social media like they try to ask you, right? And there's certain categories that I've invested in. They ask me about contact center and call center, and they, they always ask me to help them with diligence, right? Because I, I, I'm a subject matter expert. Usually I, I don't say anything. But once in a while, um, I know something's a, just a terrible idea and I tell them. And they always do the deal anyway. And why? It's because the diligence is always confirmatory. VCs decide they wanna do the deal and they don't wanna hear (laughs) reasons to not do it. They don't wanna hear it. So, it's a niche topic, but I've given up almost entirely on, uh, on, uh... You know, my, my response to Act Now usually is, "It's a good space." (laughs)

    2. HSHarry Stebbings51:59

       I don't think-

    3. JLJason Lemkin51:59

       It's such a waste of time, right?

    4. HSHarry Stebbings52:02

       I, I think-

    5. JLJason Lemkin52:02

       VC... The real point is, how did we get into all this FDX trouble? And every VC has a fraud in their portfolio. Every single VC has a fraud in their portfolio. And there's a couple reasons it happened. It was the pace, right? It was the times, it was the markups. But it's also the fact that VCs only do confirmatory due diligence. The truth is, they only do confirmatory due diligence. They make a decision, they, based on a certain set of assumptions, and then they go off and do diligence. And the more competitive the deal it is, the more compressed the timelines are, the, the less they take objections in that diligence properly, right? That's how can- VCs can do diligence after a term sheet (laughs) -

    6. HSHarry Stebbings52:36

       (laughs)

    7. JLJason Lemkin52:36

       ... 'cause it's gonna close if it's a

11. 52:38 – 56:24

    Every VC Has a FRUAD in Their Portfolio

    1. JLJason Lemkin52:38

       good fund. (laughs)

    2. HSHarry Stebbings52:39

       Do you think we'll see a wave more of fraudulent companies come out?

    3. JLJason Lemkin52:43

       No, it won't come out because VC aren't talking about it. Um, they're just marking them to zero. The fraud's everywhere. And there's different layers of fraud. Um, for example, just lies. Lies are not always crimes, right? Um, this is like the great Trump debate. What did he say? That like, I think what the indictment said, it was okay for him to lie about, uh, the results not being right, but s- but something else he did was illegal. Like, the, l- founders can lie about certain things and it's not fraud, argue. I actually think it's all fraud myself. But, um, everyone's got a founder that claimed they had ARR that really mashed months together, that their financials were not accurate, um, that misrepresented a plan that was impo- that, that, that literally... Or, or compressed a bunch of revenue in- wrongfully, right before fundraising, that wasn't really quite there after fundraising, or misrepresented their gross margins, right? It's, it's just all over the place. And I, I... Everyone's got one in their portfolio. Any VC that says they don't either isn't close to their portfolio, uh, or is, uh, ignoring it. Everyone's got fraud.

    4. HSHarry Stebbings53:47

       The thing that worries me though, Jason, is honestly, I think, "Fuck you. You lied."

    5. JLJason Lemkin53:52

       Yeah.

    6. HSHarry Stebbings53:52

       That is like, egregious morals.

    7. JLJason Lemkin53:54

       The fraudsters don't care, Harry. That's the thing.

    8. HSHarry Stebbings53:56

       N- no, but I speak to many VCs who s- who receive the same from founders and they go, "But I didn't wanna do anything, i- it could be bad for my founder NPS." And I'm like, "Are you fucking serious?" Like...

    9. JLJason Lemkin54:08

       Might be.

    10. HSHarry Stebbings54:09

        Who gives a shit? I'm sorry, someone lied to you.

    11. JLJason Lemkin54:11

        I don't think you wa- I don't think you want a lot of negatives on Bookface, Harry.

    12. HSHarry Stebbings54:14

        H- ho- honestly, if someone lied to me and misrepresented-

    13. JLJason Lemkin54:18

        Yeah.

    14. HSHarry Stebbings54:18

        ... numbers, I don't care if they say bad shit about me, 'cause the people that listen to them will likely be shit.

    15. JLJason Lemkin54:24

        I think you're right. But having said that, listen, the, the amount of fraud I've had is relatively small. But what I have had to deal with, I've had to be the one to give the hard talk to the founders and been the only, we've talked about this before, I've been the only one to do it again and again and again. Uh, my NPS has been damaged from it. I'm sh- confident of it.... my NPS has been damaged, that I- I've had multiple times when the company was gonna drive the car off the cliff, I had to have the talk, and it saved the company, right? And the- and- and anyone but the great founders don't forgive me. Now, I do have one- one exit, one company I did a long time ago with this. And you know, they're- they're gonna have a big $300 million plus exit to announce soon, having raised very little. The founders will make a lot of money. They took that advice well. Others, but I've had serious NPS hits from this. I- I- I think the answer, I- I think this is a complicated question, right? And I- I think it makes logical sense as an investor if you can afford to, if you can afford to, to walk away from a toxic situation. Like we all, there- there used t- uh, there used to be bored partners, and there still are, and they're there for a reason. (laughs)

    16. HSHarry Stebbings55:27

        Listen, I- I totally get you on that. That is a fair point in terms of opportunity cost of time. Um, it's one where I feel (overlapping dialogue)

    17. JLJason Lemkin55:34

        It also avoids the- the- the- the, um, it also avoids the tension. It's not just the opportunity cost, it's the tension.

    18. HSHarry Stebbings55:41

        W- well, talk to me about that. What do you mean, the tension?

    19. JLJason Lemkin55:42

        The NPS issue, all those issues. If you just wa- if you can walk away from an investment and leave the founders alone, um, it- it- it- it's not perfect, but it's certainly better than every 60 days having tension.

    20. HSHarry Stebbings55:55

        I really do.

    21. JLJason Lemkin55:55

        That tension's good for the best founders, but for the less than the best founders, that tension, um, they just take it personally and they- and they react to it. And it's- it's not good for anybody, is it?

    22. HSHarry Stebbings56:06

        No, I agree with that. Uh, we mentioned diligence. I do want to touch on growth. We mentioned A and B being the best place, but also a bit of a dead zone, bluntly.

    23. JLJason Lemkin56:15

        Yes.

    24. HSHarry Stebbings56:15

        What does that mean from-

    25. JLJason Lemkin56:16

        From a founder perspective, from the A and B, they, everyone has money at A and B, it's just slower than it was, right? But keep going. Yeah.

    26. HSHarry Stebbings56:22

        From a growth perspective, as we mature

12. 56:24 – 1:10:26

    The State of Growth Stage Today

    1. HSHarry Stebbings56:24

       down the pipe-

    2. JLJason Lemkin56:25

       Yeah.

    3. HSHarry Stebbings56:25

       ... is growth dead too? And how do you analyze the growth stage (overlapping dialogue)

    4. JLJason Lemkin56:28

       I'm seeing something different in my por- and look, we have very different portfolios, right? What I'm seeing today in 20- uh, what we're talking now, is a very active growth, but with very specific boundaries. Okay? For example, I'll- I'll be ver- like, listen, there are, let's put aside the AI outlayers, okay? It's a- it's a conversation we won't have today, we'll run out of time. For traditional cloud companies, SaaS companies, at growth, I would say generally speaking, there's a 15A- A- X ARR ceiling. A pretty universal. Now, there are exceptions out there, but they're, you gotta work 'em. There are a h- all the growth investors, if you have a good company, that, and it has to be a fi- it does have to be more efficient today, okay? But if you're at the growth stage, 30, 40, 50, 60 million in ARR, okay? And you're not- and you're not burning epic amounts of cash, you will have a series of term sheets laid out in front of you at 15X ARR if you're a good company. If you're at 30, 450, if you're at 50, whatever, 650, right? It, I mean, 10X, 15X is sort of the- the- the reach. And- and maybe that will flex later this year if multiples continue to reexpand. The only problem is, uh, and when I talk to growth investors, there just aren't enough candidates like that. They've raised at too high prices, that's the main reason. And the secondary reason is today is because they're efficient, sometimes they just won't take the deal today. 15X is not a bad deal, the public average is 6X. You can't intellectually say it's a bad deal. But if Harry, you and I are running a SaaS company, we're at 40 million ARR, we're kinda break even, and nice guy growth fund wants to buy 20%, but then we have to do more and we have to report to them. And- and you and I, we're- we're actually, n- we don't need the secondary and we're not sure what to do with the money. We might... it's not that we would say no, we might just wait. Like, "Hey, Harry, let's do it at 60. Let's wait till we're, next year it's feeling pretty good, Harry. Like, why don't we do it at 60 or 70? Like, this seems like a stressful time to do it at 40 or 30." And so they're- they're either waiting 'cause there's not urgency or they're sitting at a valuation where the growth round's not possible. But these 15, they're literally putting these 15X term sheets like on the driveway, like a used car. They're all out there and they're hoping that they'll take, and in the interim what they're all doing is secondaries in these companies. Like I- I, my, th- the companies I have that are north of 30 million are overwhelmed with growth investors trying to do secondaries.

    5. HSHarry Stebbings58:42

       Talk to me about that. What's happening there that you're trying (overlapping dialogue)

    6. JLJason Lemkin58:44

       Eh, if I can't get 15X deal from the company, I sure can get it at f- I'm gonna try to get it from the seed guys. Overwhelmed. Overwh- the companies I have that are efficient north of 30, um, I- I- I- I- you know, they're overwhelmed with folks, often not to me, although sometimes to me, but from anyone else trying to clean up the cap table at the- at the valuation they want. They can buy out everyone at 10X, that's early, right? If I- if I wanna, if it's at 40 million revenue and I'm comfortable doing 500 but a bunch of guys invested at 10, like, some of them will take the deal. And- and so that's what I'm seeing happen with growth guys behind the scene, is doing as many cleanup deals as they can. Just b- just aggressively doing ones that are in the zone, but the founders are like, "Maybe next year, maybe later." So like, maybe I can buy 4% or 5% today.

    7. HSHarry Stebbings59:28

       Do you think we'll see a wave of seed managers needing liquidity in DPI selling in those o- opportunities because of their need for liquidity to then go and raise their next fund? Or do you think actually that will-

    8. JLJason Lemkin59:38

       I've seen both happen. I've seen folks that have micro funds sell, right? For sure. Um, and sometimes those dea- uh, uh, that deal could return their whole fund, right? Or more, right? Sometimes. But I think, uh, Twitter gets another thing wrong. I recently had a conversation with one of my LPs last week about, uh, a secondary offer, uh, you know, that was 10 figures, a 10 figure secondary offer, okay? Um, and we both agreed no was the answer, because w- we're in the business to make money. We don't want to take a discount, right? So, I think though it's confusing in the, is like, yeah, is there pressure to do DPI versus TVPI and all this? Sort of. But the best LPs want, the best LPs want these 6X, 8X, 10X funds, they really do, and they're more appreciative of how rare they are than- than we all thought it was. And they, the best LPs want, they ha- they know the liquidity will come. The best LPs kn- they've been doing this a long time, okay? And they want, what they want, what I've learned is the best LPs want the highest possible return. And I asked them all, "Do you want cash?" And all of my LPs, my three largest LPs said no, they don't want cash. Now, I know you'll hear other stories, but this is what I've heard.

    9. HSHarry Stebbings1:00:52

       No, I mean this lovingly, but I think it's very dependent on LP type. You have certain LP types, foundations, endowments, that have annual, uh, payments for scholarships for, uh-

    10. JLJason Lemkin1:01:02

        And that's who I'm talking about.

    11. HSHarry Stebbings1:01:03

        ... and, and they need the liquidity today.

    12. JLJason Lemkin1:01:05

        Yeah, but, but I'm not Andreessen or Sequoia. I can't give them 10 billion of liquidity, Harry.

    13. HSHarry Stebbings1:01:10

        No, but they-

    14. JLJason Lemkin1:01:10

        That's the thing.

    15. HSHarry Stebbings1:01:10

        ... will take anything in liquidity right now.

    16. JLJason Lemkin1:01:13

        Okay, listen. You have, actually, you have a bigger lens than I do. I, but what I can tell you, I, I have a smaller group of but pretty good LPs. I'm just telling you a count, what I've asked them, all this literally the last couple weeks. Everyone said, "We're, we want more. We want m- a bigger return," right? In fact, one of my LPs told me this last week actually, "We, we will, we will, we, we think you should reopen your last fund."

    17. HSHarry Stebbings1:01:35

        Why? What was, what was the thing they said?

    18. JLJason Lemkin1:01:36

        Because they think it could be a high enough return that they wanna stuff as much as they can into that fund. They don't want the cash out now. They want the highest possible return from that fund. They said this, this was a new one to me, reopen the prior fund. I'm like, "I didn't think you could reopen a prior fund if you're investing out of a new fund." They said, "We do this, we do this. It's not that uncommon as long as you get your, your LPAC and everyone to consent. If you can recycle or find other ways to put more money into a closed fund, put it in." Isn't that the opposite of DPI today?

    19. HSHarry Stebbings1:02:07

        Uh, uh, it is indeed. What did you say?

    20. JLJason Lemkin1:02:09

        I said, "Hadn't thought about it." (laughs) And, and their, (laughs) and their point is, yeah, don't confuse gross and net multiples. Their point is this is a great strategy. They, they said, "All of our best managers deploy well in excess of 100% of the fund as quickly as possible, and it's fine to do it later. It's fine to do it late in the fund's life cycle. P- things pop later, it's fine to do it. Getting that extra 3X on that extra money into the fund, uh, uh, on that extra money can make the difference in those, in those net returns." That was a, that was an aha moment to me, and, uh, and, uh, and I guess the learn- the thing about Twitter is different LPs are playing different games, right? And you've gotta know what game they're playing. Doing a seed investment at five and exiting at 500 million sounds great, but if you own 10% and you have a $50 million fund, it's still only 1X.

    21. HSHarry Stebbings1:02:56

        Mm-hmm.

    22. JLJason Lemkin1:02:56

        1X doesn't, doesn't pay the rent for anybody. So it sounds great, wow, like, i- i- that could probably be a 50X return, right, 100X, like, from five to 500, but let's assume 50. 50X sounds great. You can brag on Twitter. You can put it in your slide for raising your next fund. You can tell all your friends. You can mock the folks that haven't had an exit. But if you're in it for carry, (laughs) it, it don't ma- it don't ha- it, it, it only, it's only a step, isn't it?

    23. HSHarry Stebbings1:03:21

        Uh, no, it a- absolutely is.

    24. JLJason Lemkin1:03:22

        It's only a step.

    25. HSHarry Stebbings1:03:23

        I, I actually had lunch with one of the kind of biggest fundraisers, well, slash, GPs in the world who raises billions a year, uh, 60-year-old, and he said, "It has never been so hard to fundraise since the dot-com boom. That was the last time it was this hard." Do you think-

    26. JLJason Lemkin1:03:39

        For, for, for VC funds?

    27. HSHarry Stebbings1:03:41

        For VC funds. Would you agree with him, and do you think LP markets are shut for funds, largely?

    28. JLJason Lemkin1:03:47

        I, I think the problem is that we're still using 2020, '21 into 2022 as the reference. Yes, it's brutal compared to those three years, right? When I, you know, when I st- it's easier than when I started in venture, I'll sure tell you that. It was, like, impossible, (laughs) to raise a fund when I started 10 years ago or when I raised my own first fund in 2016. Like, it's still so much easier than it used to be. Um, let me give you just three stories, my three largest LPs, okay? Who I, again, I all met with, and they all said, "Don't take the secondary," the, the, you know, the billion-dollar plus secondary. They all said, "Don't take it." One, which is a wildly successful university endowment, uh, f- for their category, number one, okay? They're dropping two managers this year, good managers. No new managers. Dropping two good ones. Good, good, better than me. Good ones. Second one, not going to do that type of venture going forward. Gonna do other stuff in PE and venture and other things, but not gonna do these traditional seed Series A funds. Third one's done three new managers this year. Three new managers this year and did zero last year. Just like Iconic did the five versus zero, this other top-tier massive LP already did three seed investors this year and did none last year.

    29. HSHarry Stebbings1:04:55

        Okay, so just break this down for me. Why is the first dropping those managers who are actually very good?

    30. JLJason Lemkin1:04:59

        Wants to just concentrate in smaller number of winners to react, to reo- because of the cash distributions, because of DPI. And this person, and this first one of the peer set of, of endowments was number one in his peer group, the only one that was positive last year for his group. This is one reason, the only one that was positive last year of his peer group. Everyone else had negative versus an average 90% IRR the year before. So 90% in the prior year, negative last year. So how do you react to going from 90 to, for him, to still positive and for the rest negative? The instinctive reaction is to shrink, right, to shrink managers, right? And, and this is one of the best, right? Um, so he's trying to figure out who's past their peak, who's past their prime. That's what, that's what you do, right? You know, they were great back then, but Harry and Jason left, and I don't know if Bill and Bob are quite as good as Harry and Jason. (laughs) And it was that kinda h- you know, it's this kind of industry stuff. One is just changing their strategy, and the other is adding three managers versus zero last year. So I think it's not that simple, um, but I do think it's harder and harder to raise the mega funds. Like, you can't argue the math, right? It's just hard to raise the mega fund. Emerging managers are delusional about how hard it is to raise a fund when- with no track record. Like, what you could do in 2021 is, is unprecedented in the history of the industry where someone with some Twitter followers and never having a record could raise a $50 million fund. It will never happen again. That, that's a ZIRP thing. That will never happen again.

Episode duration: 1:15:36