Jason Lemkin: Why Pricing is Worse Than Ever and There is More Funding Than Ever | E1157

1. 0:00 – 1:27

   Intro

   1. JLJason Lemkin0:00

      Seed investing is systemically broken today. There's just as much capital, chasing fewer and fewer folks that can grow at triple-digit rates. The best investments go one to 10 million in five quarters or less, the very best ones. The one... You can't IPO unless you triple, triple, double, double. As you approach 10% market share in your core ICP, your core market, you gotta expand. If the churn is anything more than three or 4% a month, it's not even software anymore.

   2. HSHarry Stebbings0:25

      Ready to go? Jason, I always love our chats. This is such a joy to do. And our shows always do so well. I always get notes from founders being like, "Whenever Jason's on, I literally get pen and paper out, and these are the ones that I have to listen to." So I'm-

   3. JLJason Lemkin0:51

      Yes.

   4. HSHarry Stebbings0:51

      ... so glad to have you back, man.

   5. JLJason Lemkin0:53

      It's ve- very exciting, um, Harry, so, so great to be here. And, um, so proud of everything that's happened with 20VC Empire. It's, it's great to have been, uh, been there on the sidelines since being, uh, guest number 50.

   6. HSHarry Stebbings1:04

      Dude, I remember when I was at university and you were like, "Should we do the SaaStr podcast?" And I was like-

   7. JLJason Lemkin1:08

      Yeah.

   8. HSHarry Stebbings1:09

      ... "Yeah, (laughs) this is great."

   9. JLJason Lemkin1:10

      (laughs)

   10. HSHarry Stebbings1:10

       I remember you had that... I don't know if you still have it, but you had that, like, picture of you, is it in a helicopter with the, like, happy one?

   11. JLJason Lemkin1:16

       Oh yeah, that, that, that one. Yes. Yeah, yeah.

   12. HSHarry Stebbings1:18

       Out of that one, I thought that was so cool as an 18-year-old, but I wa-

   13. JLJason Lemkin1:22

       (laughs)

   14. HSHarry Stebbings1:22

       ... I wanna dive in. This is a new type of show.

   15. JLJason Lemkin1:24

       Okay.

   16. HSHarry Stebbings1:24

       So I'm calling it 20VC The Review,

2. 1:27 – 5:03

   The Science & Art of Successful Deals

   1. HSHarry Stebbings1:27

      which is like-

   2. JLJason Lemkin1:28

      The Review.

   3. HSHarry Stebbings1:28

      ... analyzing the best and maybe the less well-performing deals, or worst, in other words, and then highlighting, hey, lessons and the story behind them. If we start on the best, Jason, what is the best deal that you've done, and what did you learn?

   4. JLJason Lemkin1:43

      Yeah, you know, I'll, I'll answer that, uh, but, uh, I bro- I made two best lists for you. Um, one was the best by cash, by cash back, which we all thought was no big deal in 2021, but the last couple of years, cash has looked scarce. (laughs) It's like two IPOs in B2B in two and a half years. And, and by NAV, which is what we report to our LPs, on paper, what are the best three? And so far, for me, I'm 10 years in, I had a little bit of a break for a year, right? Um, maybe I should have invested faster. But it's interesting, is... And I'll answer your question. My best by cash and best by NAV are not... There's no overlap yet. Maybe, hopefully in three to four years, they will, they will flip, and the ones that on paper are worth the most will become the most in cash. But the best three for cash I've, I've done, and y- we can take the conversation where you want. The number one was SalesLoft, which was the last big deal of the 2021 era. It closed, I think, December 23rd, 2021. HashiCorp was the last IPO, and SalesLoft sold for two and a half billion of cash and about 100 million in ARR. Um, the second one was Pipedrive, which I don't know what that one would be worth today. That was a billion and a half in cash as well. And the third one, ironically, was smaller, Harry, um, which was a company that got sold, Logikall, for 300 million. But I learned a lot from being multiple times the largest investor, because we all brag on Twitter and X how much, how, or how we were early in this and that. But if you own a 10th of a percent in a fund, it's not gonna (laughs) get you that far, is it?

   5. HSHarry Stebbings3:08

      How much did you earn of Logikall when it was bought?

   6. JLJason Lemkin3:10

      I mean, all the entities own 20 some odd percent, and it's cash, so that gets you a good... You know, it's a distant number three on the list, but for me, at this career, it still gets you a material return, right?

   7. HSHarry Stebbings3:19

      Yeah, totally. That's a good 60 million back.

   8. JLJason Lemkin3:21

      Yeah. And, and dilution. In dilute, you know, I'm learning a lot. It's taken me a decade to understand what folks who've been doing it a little bit longer say about dilution. It also helped that they stopped fundraising.

   9. HSHarry Stebbings3:31

      Would you have predicted those companies would be the three top cash returners?

   10. JLJason Lemkin3:35

       No, I, I didn't. That, that's interesting. The, the NAV ones I predicted two out of the three. The cash ones, you know, it's funny, 'cause, th- you know, VCs alwa- they say some variant of, like, you know, "You gotta go long. You don't know how they'll perform, you know, at the end of their... uh, later in life." And I, I, I don't really believe that. But when I put the list together, I realized it's true. I didn't think any of these things would happen. SalesLoft with Kyle, you know, he was one of the most determined founders I ever met in the early days, right? And it was a fun one for me because I co-led the seed, but then I brought in emergents and insight. And so almost a whole cap table, I was able to kind of assemble, which is harder to do today, but it was fun then. There's certain founders, they can't lose. They, they can't lose, right? But sometimes you just don't know where the hell it's gonna go. (laughs) And Kyle never quit, but, you know, right after we invested, they had an $8 million product they dumped, so it went from eight to almost zero million in revenue. And it was, uh, totally the right idea. Like, no... Uh, today, in my career, actually, it would, it would, it would startle me more than it did back then. Uh, back then, I was... it was early, I'm like, "That's cool, man." Like, "Okay, if that's the right decision." I mean, I challenged him on it, but, but he was right. Um, but to go through so many things, to expand the platform, to go more enterprise, I... And also, I had not been in... Uh, i- now it's very common, but back then, you know, they and Outreach were so competitive, I didn't think both could win. I didn't think both could even survive. Th- th- this wasn't my life experience in SaaStr. Like, it was more like only one could capture that 60 to 80% market share VCs always talk about. I didn't think you could have two folks with 40% market share. I didn't think it was possible.

3. 5:03 – 15:54

   Lessons from the Best & Worst Deals

   1. JLJason Lemkin5:03

   2. HSHarry Stebbings5:03

      So what did you learn from that investment? When you look back, and you look back at it going in the early days from eight to zero, the bumps, the highs, what are the takeaways?

   3. JLJason Lemkin5:12

      The number one thing is, um... And this is... You know, when I look at my three worst ones, this is gonna be the theme of the three worst ones, is just... It's not enough, Harry, but that ultra-insane commitment to success is so important, and then having a binary team. So what SalesLoft didn't have... SalesLoft's Chief Product Officer, this guy, Rob Foreman, they were, they were the pair, you know, the pair, the binary pair. And sometimes it's more the CTO and the COO, sometimes it's not. But if you, but if you have a binary pair that is 110% committed and they can build pretty decent software and sell, that's rare to have both, right? And, um, would, you know... A- and, and, and, and so there's the magic. The other thing, though, that is... You know, the thing that's- has changed radically, you know, things are so... move so much faster today. So in the old days... So I met Kyle, um, who's the CEO of SalesLoft, very early, but...... then I started hanging around the offices of a lot of startups and their first product, like, every sales team was using their first product (laughs) . Like, you used to get to spend a couple of months watching something in the field, making a decision. Now you gotta m- now you gotta pay 25 pre at demo day in one hour, right? So, so the world has changed. So in a way, like, some of these early deals that we all bra- that VCs brag about, it was a different world. And there are some different worlds of time, of time, right? Of literally getting months, in some cases, to make a decision. But finding what I will never sacrifice again is two great co-founders, two great co-founders and, uh, not f- great, numbers are great, but insane level of commitment. Like, commitment better than me, like, you're even more committed than me, I think, Harry. Um, and I'm a pretty committed guy, so anything less than that Harry or Ke- just don't, as an investor, this takes too long now. We're like 14 years to IPO. People are quitting left and right. They're quitting left and right or they're quiet quitting, or they're settling in for 5% growth, right? It's just not worth it as a ve- you can't make any money in VC, can you?

   4. HSHarry Stebbings7:11

      Uh, y- you absolutely can't.

   5. JLJason Lemkin7:12

      You can't. It's impossible.

   6. HSHarry Stebbings7:13

      Ke- Keais, given the changing times, how does that impact how you invest today?

   7. JLJason Lemkin7:17

      I don't know. I'm still learning. Um, I think that, uh, it's harder if you have less time to get to know people, it's, it's harder to catch the cynics, it's harder to catch the bullshit artists. Um, and, um, but the main thing I just do is I almost immediately do, um, another Zoom with the CTO. That's actually the way it's changed. In the old days, I would do it late in the process. I would, I would get to know the CEO, I would talk to the customers, right? I would go deep. And then at the very end, I'd be like, "Okay, I gotta talk to your CTO, Harry, to make sure that this is real." Now, I immediately skip everything else and at, uh, uh, the second call I wanna have is with the CTO. That's how it's changed for me. That's how it's changed for me.

   8. HSHarry Stebbings7:59

      What do you wanna dig in on with the CTO? Respectfully, I'm more-

   9. JLJason Lemkin8:02

      Well, one thing, you have a lot, you've done a lot that, already here in your career that I am, but I have built software that's done hundreds of millions in revenue. And I've ch- I've created an industry and rebuilt a product. So I, one thing I do know is the difference between great and good software, okay? And so I can talk with this... And I know gr- the best CTOs. I know, and I know someone that is better than the best CTOs. So I wanna know, is this CTO as g- is th- are they a ten or a five on our, on our old logarithm scale? Are they amazing? Can they build software faster than anyone else in their competitive industry, better software more quickly? And it's so easy when you talk to the best CTOs to, to hear it and learn it. It takes, uh, seven minutes.

   10. HSHarry Stebbings8:41

       What do those great CTOs show you in those seven minutes that distinguish them as world-class versus the five or sixes out of tens?

   11. JLJason Lemkin8:50

       Well, first I do give them an hour, not seven minutes, right? But what do I do? First, I ask them to do their own demo. Even if the CEO did the demo, I wanna see how they think about their product and what they're excited about. I wanna see surprise and delight. I wanna see them show me the things they, they love. I wanna se- sh- see, uh, show me, "Listen, this is this badass thing I just did with AI that, you know what, eh, eh, you know what, um, OpenAI can't even do this. Let me show you, Harry. Like, these guys at Anthropic, they don't even know how to do this, right? This is so cool. Let me show you something I know how to do that the rest of the world doesn't even know how to do yet." That's magical.

   12. HSHarry Stebbings9:21

       Do you say, "Show me your surprise and delight moment"? How do you get that point?

   13. JLJason Lemkin9:25

       No, I don't even have to do that. The best ones are so proud of their, their c- product, their code, their work. They'll show you in the demo. They can't help themselves. I'm just like, "Okay, show m- what's your favorite feature? What do you, what, and what do you like mo- what do you, what do you, what are you most excited about and what frustrates y- what frustrates you the most in the product?" They can show you why they're bothered and why, "You know, I can't afford it and the, and the OpenAPI, OpenE- AI API is too expensive," or, "This is broken to the Stripe API, doesn't do what I want," and you just wanna hear this magical insight, right? Um, and just get them going from there, have them show you, and they'll show you what they're proud of, the best ones. They'll show you what's badass. And the really good ones, just like the best business C- the best CEOs are very, asking them about competition is so telling. Um, asking the CTO what they, wha- what frustrates them in their product is very telling. The great CTOs will answer in 60 seconds, "I'm just super frustrated that I can't get this next level, this next thing out on the API or this next workflow out. I'm really frustrated that we're behind on our webhook platform." Whatever it is, they'll tell you instantly and the mediocre CT- CTOs will be like, "It's pretty good. Let me, let me straighten my tie and get my blazer in the right order and, and, uh, you know, I'm off to a, I'm off to another meetup. Uh, everything's great."

   14. HSHarry Stebbings10:32

       Do you find that they do reveal their frustrations given the fact you're an investor and you could be writing them a large check?

   15. JLJason Lemkin10:37

       I have never met a great CTO that isn't at the edge of hyper-transparent. Never met one. If I did, I would run th- run, run for the door. The best CTOs, that's the environment they're in. They're challenging everybody. They surround themselves with people better than them, engineers better than them. And there's a couple secrets they'll hi- they're gonna hide some secrets, right? Don't get me wrong. There's two or three secrets a CTO might hide, but they're so technical I can't understand them. They're not gonna hide anything that someone can't figure out playing with your product for two hours. Why would you hide something that your competition could figure out... 'Cause your competition's using your product, aren't they? They sure-

   16. HSHarry Stebbings11:10

       Yeah.

   17. JLJason Lemkin11:10

       ... better be. So, and your competition can actually pretty much expose anything that you can see in the browser. You got, uh, there's only so much you can hide, right? You can find out your stack. (laughs) Anything you can expose in the browser and what the product does. So, wha- you've gotta be a pretty weak CTO to hide that stuff, right?

   18. HSHarry Stebbings11:26

       You tot- totally do.

   19. JLJason Lemkin11:27

       Yeah.

   20. HSHarry Stebbings11:27

       God, dude, I'm loving this. I'm, I'm also just terrified, but-

   21. JLJason Lemkin11:30

       This is my s- uh, so I skip all the... I used to do the CTO at, like, two or three weeks into an investment. Now it's literally, "Can I talk to Jane tomorrow? Can I talk-

   22. HSHarry Stebbings11:38

       Uh.

   23. JLJason Lemkin11:38

       ... to her tomorrow?" I don't even need to do all the rest. I don't even need to do all the rest. I need this binary pair.

   24. HSHarry Stebbings11:43

       Okay. What percent of the time is the CEO great and the CTO eh, and what do you do in that situation?

   25. JLJason Lemkin11:50

       Overall, I would say 80% of the time, the CEO is better than the CTO, especially at the seed or early seed stage 'cause there's different ways to, like, get out 10 customers and 20 customers. And the real reason is, uh, almost any, at least in B2B, almost every startup that gets to, like, a million, like we're talking about, they have what I call a 10X feature. There's something, there's something they do better than everybody else. Like, most of their product sucks, right? Because they've only been around 18 months, and they, they, they haven't been doing it for 10 years, but they do something that the leader doesn't do well or at all, right? And so the fact that it's a 10X feature sometimes can mask the fact that the software is not that good, right? Um, especially if you get into more vertical SaaS or areas with more bounded competition. Um, and those ones tend to get swamped as you scale. They s- its growth decelerates at 10 or 20 million as, like, a cool 10X feature, but not the ability to iterate faster than competition. The competition swamps you three to four years down the road.Um, so I don't know if that answers the question. But, um, so- so- so up until a million or two million, a 10X feature plus a CEO can win, and sometimes that CTO is okay, or not that committed, or might quit, or whatever, and that 10X feature never becomes a 10X platform.

   26. HSHarry Stebbings12:57

       But will you still invest if the CTO

   27. JLJason Lemkin12:59

       No. No. No, because listen, this took us a while to figure out, Harry. Like, you know, we can't even make money on a billion-dollar exit, unless you own 20-something million like Logical. If you- if you... Like, dilution's so high as a seed investor. Let's put aside an opportunity fund, or SBVs, or other things. Let's take a traditional seed fund, okay? Really, in today's world, you're gonna suffer 50% dilution on the way to IPO. That core seed fund that you struggled to get, oh, 12% of, you know, it could be six by the IPO. Uh, 6% of a billion-dollar M&A is only 60 million. So this is where I'm... You know, it's funny, I'm coming around after 11 years of investing, Harry. I'm coming around. When I started, I didn't believe you could make money in venture, even though my first five investments all worth a billion or more for real, real billions. I didn't believe it. I believed that they could each do 5X, okay, which I thought was enough, but I didn't believe the funds could make money. Then we go into 2018, 2019, I start to believe, "Hey, these funds can make money." And then 2021, I'm like, "This is easy." (laughs) Now, I'm kind of in a mode now (laughs) where I'm like, I got some decent investments, but it's hard to, it's hard to make money in venture again, right? So you gotta have two, three billion dollar exits, especially if you've had some success in this world. If you wanna make a little bit of money and, and, um, and drive a, a, you know, whatever, a Mercedes with your fees and- and enjoy the high life, yeah, yeah, there's a lot of ways to make money in venture. But if you wanna make 100 million or more, there's only a handful of ways to do it.

   28. HSHarry Stebbings14:22

       There absolutely is. Uh, I do just want to go back to this process 'cause I'm, I'm loving this. Okay, so we have those CTO, like, you know, interviews as part of the process. Do you meet other parts of the exec team? Will you spend time with the head of sales, head of CS? Or is it founder and

   29. JLJason Lemkin14:35

       I used to.

   30. HSHarry Stebbings14:36

       ... CEO?
4. 15:54 – 19:28

   The Qualities of Great CTOs

   1. JLJason Lemkin15:54

      over time.

   2. HSHarry Stebbings15:55

      Just one final thing on that. Does it... Will it take me a while to build a benchmark of what great CTOs look like? Or will I quickly be able to tell, do you think?

   3. JLJason Lemkin16:03

      I think it may take you 20 of these, uh, Zooms to learn. Um, you know, I didn't know, um... There, there's a guy named Chris Dean who now runs, uh, a banking and service platform called Treasury Prime, a YC company that I invested in. They started in our old offices actually. And in the old days, when we were, when we were at our first startup together, we were young and new, we actually got acquired for, on paper, a billion dollars, my first startup. And when they acquired us, they made him their VP of engineering. The acquirer made Chris their VP of engineering. (laughs) I'm like, "Okay, I don't know much, but I know he's gotta be pretty good if you acquire a company in a different city and you make their one, their number two guy your VP of engineering." So, I stuck with him. He interviewed all of my original engineers and executives back at the early do- Odobis- uh, Ecosun days. We still stay in touch. And so I had a bar, I was lucky that I had a bar from him, right? Um, and we triangulated. So I skipped some steps, but you know, when you interview 20, and you see the lights go on, and the magic, and them show you the demo and show you how they built it, and you just listen. And the other key is, if you haven't d- if you haven't built the software before, Harry, just- just ask Columbo-style questions. Just ask open-ended questions. I mean, you're good at your... You know, you- you've done 1,384 podcasts, so you're pretty good at the open-ended questions. Um, just ask. You know, just ask those basic questions. You know, "Show me a demo." You know, "What do you love?" And then the other great question, you know, take it 20 years, just, "What are the couple of gap... What are your... What are the top feature gaps?" is the next question to ask. "What are the top few feature gaps you have?" Just ask, "What are the feature gaps?" Well, if they tell you none, you got a pretty crummy CTO. If they're like, "You know, Toast has this, and whoever has this, and we gotta do this, and our, and our POS is terrible, and I've got to integrate this," you just want to hear that, you'll- you'll- you'll see the same magic you see in any executive once you've done 15 or 20. And you'll see, you'll see it tomorrow to start. You'll see it tomorrow to start. Don't... Just don't lower the bar. That's the mistake so many founders make when they go out to interview a functional area they've never done before. "I've never hired a VP of eng, or sales, or marketing." They get excited that- that they worked somewhere great, that they worked at Datadog. Throw it out and just- just listen. You've interviewed almost 2,000 folks, Harry. E- You know, when you talk to the best of anything that's great, the best plastic bag manufacturer, the best bug manufacturer, they're the best. And it's the same's gonna be true with the CTO. Just let them delight you, right? Let them d- show you and just your jaw... You just want your jaw to drop 10 minutes in. You're like, "Wow." And the other thing related to that, I'll give you the last tip, is, um... This took me a while to figure out, even though it's obviously true, is, um, yes, even at... Even by demo days, certainly by a million in revenue, the best CTOs have built great software. So I'm looking for... I'm looking for signs of crappiness.I'm looking for corners cut. I'm looking for software that's too slow at a million in revenue. If the dashboards take 20 seconds to resolve at a million in revenue, what's gonna happen when you have 10,000 times more customers? If it breaks during the demo, if things don't work, anything. And I know, I, people get, people kinda light me up or, or, and I actually kinda got hazed on Hacker News the other day for this, um, on the business side. But when I see these signs that the software isn't good at a million, it rarely gets better at 10. It gets worse. The load goes up, the workflows go up. So I'm looking for... I'm not expecting this to be j- drop, jo- jaw-dropping, but I'm looking for one little bit of beauty. And if, if that's broken or, or has tons of issues, I, I'm just out, right? Slow, I'm definitely out

5. 19:28 – 31:13

   Investing in Competitive Markets

   1. JLJason Lemkin19:28

      for slow.

   2. HSHarry Stebbings19:28

      The final one on SalesLoft, but you mentioned their outreach as well. I'm just really interested, and you also mentioned Opus before when we were chatting, uh, I hate investing in competitive markets. Like, really hate it. How do you feel about investing in competitive markets given those two, which are intensely competitive markets?

   3. JLJason Lemkin19:47

      Yeah, you know, I hate it too for the reasons I think you hate it, but two things. First of all, I believe, and I, I know probably 90% of investors s- either don't believe this or say differently. I believe that best opportunities find you at the end of the day. It's not that you don't find them, okay? You... But they also find you, by the same token. And if you're gonna pass on an amazing binary set of founders, an amazing CEO/CTO just because they're in a competitive space, you're, you're gonna lose, you're gonna lose the Ripplings and, and the Gustos and the Dealz and the data... You're gonna lose Datadog because you're gonna say, "You know, New Relic owns the market." You're gonna lose these deals even though there's some logic to it, right? So that's my first thing. Dealz, like, yes, at the margin, I'm out, okay? And we just talked about a sales productivity tool you invested in with jaw-dropping numbers, okay?

   4. HSHarry Stebbings20:37

      Mm-hmm.

   5. JLJason Lemkin20:38

      I'm out on that whole category 'cause there's 200 vendors, but that's probably an error. You invested in a great company. See, so I, I'm with you. I don't even want to take those meetings 'cause there's too many vendors. But if you meet the buying, you just gotta take them where you find them. That's one, and secondly, and this is just annoying VC math, but it's true. You know, big markets often, not always, but often have more competitors. If you get too obsessed with having one competitor, you can end up investing in something that's just a small market. It's not always the case, for sure, right? But you gotta be careful you don't take that too far, right? Um, it's just, um, there's the, there, the, you gotta bet. And then the last point is, and this took me a few years to see even though I knew this was true from the beginning of investing, for hyper-agile teams, hyper-a... If you have the best engineering product team in the industry, uh, having a, a lot of competitors is a positive because they help grow a large market. And you k- each quarter, you pull away. Each quarter, you pull away, right? Each quarter, you pull away, and it becomes a net positive that everyone's investing so much money to educate the market, to grow the market. But if four years down the road, your product is 40 times better than theirs are, you, you pull away. So there, and it's complicated, right? Um, but I don't think it's as simple as running from competition. When I've done that, I kinda regret it, right? I kinda regret it a little bit. And the other thing that happens if you run from competition, especially sometimes in vertical SaaS, um, because you can find a lot of categories in vertical SaaS where the competition is SAP or Excel or Paper or, like, some DOS application from the '50s or something like that. You, there's, there's plenty of good ones there today, but sometimes those hide a mediocre CTO, or sometimes there isn't even a CTO at all. And I don't wanna do those investments, right? I don't want, I wanna do the ones, I just, those... I've done a few deals where the competition was SAP or Excel, and they get to millions in revenue, but they got there with a f- a product that was clever, but, you know, did three things, and four years later it does six things. (laughs) I want four years later doing 3,000 things. I want this, this, this, this exponential, uh, compounding of, of, of software functionality.

   6. HSHarry Stebbings22:40

      I love that. Okay, so with number two, we have Pipedrive.

   7. JLJason Lemkin22:43

      Yeah.

   8. HSHarry Stebbings22:43

      Pipedrive sold for 1.5 billion in cash?

   9. JLJason Lemkin22:45

      Yeah, to Vista.

   10. HSHarry Stebbings22:48

       Okay. Uh, fucking good exit. How mu- uh, what d'you, what was the revenue when it sold?

   11. JLJason Lemkin22:50

       They were also doing about 100 million.

   12. HSHarry Stebbings22:52

       100 million also, okay. That's super interesting. Um, how much did you earn on Pipedrive?

   13. JLJason Lemkin22:57

       The altogether was, uh, almost 10%. Just five co-founders t- is, is too many, is one learning.

   14. HSHarry Stebbings23:03

       Okay.

   15. JLJason Lemkin23:04

       Now, you can have 12, but I think five (laughs) making decisions is too many. The other interesting thing was, you know, they did, they had a lot of changes and there was a lot of CO changes and a lot of cap table changes. Um, that one today, you know, it's tough. I mean, they owned a segment that now HubSpot has just taken over. And this is what happens if you get extreme product market fit, extreme... And it's interesting. When I invested in... Pipedrive was my first investment ever in 2013. And even in 2013, I remember going on, I don't know what website, I was trying to learn. There were 20, uh, like, SMB CRMs that all looked the same as Pipedrive. They were all Trello clones with Kanban cards, and they all looked the same, okay? They all looked the same. Now, Pipedrive was slicker. It was faster, it was slicker, it worked, but most importantly, even though it was at a million when I invested, it was already breaking away. It was at double digit growths, right? It was growing more than 100% .So it wasn't that complicated an investment at the time, right? And the product market fit remained insane, but I don't think the product has changed much in 11 years. And then HubSpot comes in, and, um, you know, I, I met the HubSpot founders early because they were, wanted to get into CRM and they knew I had invested in Pipedrive. So that's actually how I met Dharmesh at first, was talking about Pipedrive and, you know, where there's synergies with, with HubSpot back in the day and all that. And they decided to build themselves an- a clone, and, you know, for two years it was free, right? Their product wasn't even that great. And now, it is the biggest source of growth at HubSpot, right? CRM is at 700 million, I think, and it's growing faster than marketing automation. So they, they, they won this, this thing, but they didn't, they weren't able to get to that next level, and it is very interesting that HubSpot won that market in the end, right? They won that market in the end. Not that Pipedrive-Vista won't make some money off of it, but it is, uh, it's a... So there's some timing stuff in these best buy cash, right? There's timing, and that's what makes venture stressful, right? We all want to hold forever.But one lesson from this one is maybe don't hold forever. (laughs)

   16. HSHarry Stebbings24:56

       I think-

   17. JLJason Lemkin24:56

       If the founders are gone, and this is the other thing I'm- I'm- I'm- I- I believe Harry, and I know many, most VCs disagree with me, but when the founders leave, I'm pretty much out. Not- I'm not- it's not that I'm not a fan. I- I'm a fan. I'm- I'm gonna be there. But I would like to sell when the founders leave. I would like to sell.

   18. HSHarry Stebbings25:15

       Always.

   19. JLJason Lemkin25:15

       That's my learning. What's that?

   20. HSHarry Stebbings25:16

       Always?

   21. JLJason Lemkin25:17

       Always. Because I know everyone thinks Frank Slootman was so great, but he left. He left when times got tougher, didn't he? He did.

   22. HSHarry Stebbings25:26

       He did.

   23. JLJason Lemkin25:26

       He did- he d- you know what happened when growth finally slowed at Snowflake? He stepped down. But a founder wouldn't have stepped down. The founders never leave. You're a founder forever. So I just... I- I know a lot of people like the bringing professional CEOs and believe in this, and some companies need- you need it, right? And- and maybe if you bring in a professional CEO and the founders are still running the company that- that you have that DNA. But what I learned from Pipedrive is that, you know, you do... When the founders are not there, you lose this- you lose this ag- this competitive agility when it's being run with knobs and dials, right? So that's the venture learning, which is for now, for me, right or wrong, if the founders leave, I will liq- liquidate my position as soon as it's significant, right? There's no point in selling early, right? It's another life lesson, right?

   24. HSHarry Stebbings26:10

       I've got a question for you. I don't think these PE guys are gonna make money on... Sorry, so I'm- I may be going too deep, but on Pipedrive, fuck, I think it's hard. But HubSpot are cannibl- cannibalizing the shit out of them. Zendesk, oh, at the buy price that Zendesk was, do you think you're gonna make money?

   25. JLJason Lemkin26:25

       10 billion, yeah.

   26. HSHarry Stebbings26:25

       On that- on that growth rate and that decay rate and churn rate of customers, I don't think you're gonna make fucking money. You're not innovating at all on both... Sorry to say. Are they gonna lose that money?

   27. JLJason Lemkin26:37

       Given today's multiples in today's world, yeah, I think they'll lose money on- on- on these deals, right? The question- the question... Well, there's a micro question and a macro question. The micro question is, just like LPs are coming around to giving VCs mulligans for their 2021 funds, are they gonna give PE funds a partial mulligan, right? Are they gonna give PE funds an okay if they- they do a 1X o- on some of these deals, right? Um, even- e- even- e- even together, right? I don't know. If- if PE gets a mulligan for these b- for these bubble deals, right, then th- then it doesn't really matter, right? If they- if they have to sell all these deals for 50% of what they paid but the LPs have moved on, we'll all kind of quietly, quietly forget about it, uh, 'cause that's what's happening in venture. Everyone's getting a mulligan. Everyone is getting... The LPs have decided they just... There's no point in being a critic for your- for your 100X deals in 2021. We're gonna more be a critic for your 100x AI deals in 2024. But the 2021 deals are, uh, are behind us. So I don't know. If they're held to the same standard, it's gonna be brutal. And it also shows, you know, I- I- I'm- I'm gonna mangle the quote, but, you know, there was that thing that Bill Gurley said about how important timing is for exits, right, and how important 2021 was for exits. And Slack selling, Slack selling for 27 billion at a billion in revenue, you know, what would Slack be worth today at two billion in revenue? Maybe it would be worth 12 billion, right, at twice the revenue. And so these are... There's timing here, and when you hold onto your NVIDIA shares for 37 years, these are- these are interesting questions. Now they're all competitors, a different- a different th- th-

   28. HSHarry Stebbings28:06

       Yeah, but go- Gong are like trading at not far off that on secondary markets.

   29. JLJason Lemkin28:11

       Yeah, they raised at seven billion their last round.

   30. HSHarry Stebbings28:13

       I- I know. This is my point though-
6. 31:13 – 34:43

   Founder-Led Companies & Product Expansion

   1. JLJason Lemkin31:13

   2. HSHarry Stebbings31:13

      When you say about founders expanding their product lines there and kind of moving away from core focus and adding to it, so often, founders wanna do that, and boards and investors say, "No, no, no. Don't, don't. We need to focus and we need to make sure that we nail the core market." Sometimes they're right, sometimes they're wrong. How do you think about when's the right time to nail the core market versus when's the right time to have the founder aspiration an expanded product?

   3. JLJason Lemkin31:34

      Yeah, I've thought about this a lot, at least in B2B. I think, um, I think it's actually fairly straightforward. Um, it seems complicated and this, this is like, well, you gotta be careful with a lot of knee-jerk VC advice, right? As you approach 10% market share in your core ICP, your core market, you gotta expand because, uh, y- growth, at some level, grows slow as you cross 10% market share. Like, you can't get to 200% market share. (laughs) Now, if you may... Now, here's the thing. Here's the disagreement. Now, going from 10 to 20 may happen relatively quickly. So you won't f- you only see it in some of the metrics. You only see it in some, in, in so- in, in like deals taking longer to close because you already got all the easy ones, right? You may only see it another, but you've got to s- but I always see something as folks cross 10% in their core ICP. I always see something getting harder, and you have enough time at 10 to be implementing your second act calmly, to be implementing it calmly. And so, that's why I c- and founders don't see this. This is a tiny way I try to help them. When I see this happening, I'm like, "Okay, let's break it down. Who's your core buyer?" "Well, you know, it, it's, it's restaurants in the South Coast of France betw- between two and four, uh, tables outside." "Okay. Okay, great. I get why you got that. Um, how many of them are there?" "3000." "Okay, how many customers do you have?" "250." "Okay, okay, guys, we gotta... We actually have a risk that we s- our growth slows in 24 months because we own this market. What are we doing?" And, um, there's the Parker Conrads that solved this problem on day zero, right, albeit with hundreds of millions, but I find more founders these days, it sneaks up on them. They're so focused on the minutia and w- and scaling and building that management team that they, they skate... They, they don't have that second act as they cross 10% market share. Now, it doesn't always have to be a second product. It c- at that, if it's at the early days, it could just be growing your ICP much broader, right? It could be going more enterprise, might, might just quadruple your market size right there, right? Going, going to another country, going to the US. So it's not always second product, but you need another act as you get to 10% market share.

   4. HSHarry Stebbings33:37

      Yeah, okay.

   5. JLJason Lemkin33:39

      Right?

   6. HSHarry Stebbings33:39

      Any other big takeaways from Pipedrive?

   7. JLJason Lemkin33:40

      You know, I'll tell you the funny one is, um, almost all the investors that I saw in the early days, they didn't listen. They all invested, including Shaquille O'Neal and a bunch of others, all invested because they wanted to invest in the next, uh, Salesforce. And the founders kept being like, "We're... That's not us. We are, uh, a PLG, freemium, self-service company. We've barely ever used Salesforce. We are not building Salesforce." In everyone's investor memo, (laughs) they're always like, "We're building the next Salesforce." And that's a learning that a lot of investors create these narratives in their minds to simplify investments, and sometimes, they're not even, they're not even listening to the founders. They're not even listening to the founders.

   8. HSHarry Stebbings34:22

      (laughs)

   9. JLJason Lemkin34:22

      And maybe Pipedrive, to be a 10-billion-dollar company, maybe it had to be the next Salesforce, right? Maybe it had to be the next Salesforce and, uh, it's not what the founders wanted and even once as they transitioned out, it's not what ended up getting built, right? It, it stayed primarily an SMB company. So listen to the... If the founders have a, have a very specific, uh, goal, and it's rigid, listen to it 'cause that may be all they wanna build.

7. 34:43 – 52:28

   Investing Mistakes

   1. JLJason Lemkin34:43

   2. HSHarry Stebbings34:43

      Before we discuss a winner in NAV, can we talk about one that didn't work and a miss, and what were the big lessons from that?

   3. JLJason Lemkin34:52

      My worst loss is five million.

   4. HSHarry Stebbings34:54

      Okay.

   5. JLJason Lemkin34:55

      Um, then I have another one where I'm gonna lose three million, but that... My, my worstest loss I realized was a company where I made 5X, um, that sold for 100 million right when lockdown happened. You may remember the world changed, maybe less in the UK than in the Bay Area. Um, the world-

   6. HSHarry Stebbings35:09

      Wait, did you say, did you say it could have sold for 100 million?

   7. JLJason Lemkin35:11

      No, it sold for 100 million. It should have sold for much more.

   8. HSHarry Stebbings35:14

      Ah.

   9. JLJason Lemkin35:15

      That's not worst. I made 5X the money, but, um, you know, the lockdown just, uh, uh, accentuated a lot of challenges we were already seeing, right? Uh, pan- a lot of folks panicked a bit. And what was happening with this company, my learn- learning is why did they sell at 100 million? Well, he was making the mistake that I see so many unicorns made the last 24 months, but, but was harder to make in, in, in, in then, is he got himself into a pickle. He hired a terrible CEO who hired 25 terrible sales reps. Ter- terrible, terrible. We went from five reps and a VP of sales, uh, who he immediately fired, the CEO, and brought in 20 people plus himself, and they did half the sales of the VP of sales plus five, okay? And not only did sales go down, but what happened to the cap, the burn rate? It obviously went way up. And so, rather than deal with it, he let it go for four quarters, five quarters, six quarters because he'd raised a bunch of money, and then you're just in this pickle, right? How do you get out of this, this, this, this pickle, this high burn rate pickle, um, and sold the company. But, you know, it's, it's n- it was not much smaller than a competitor, which has since IPO'd, and, you know, today is worth... They were really pretty close and to, you know, uh, for a while, and today is worth 20 billion. So you look at those ones where you were winning in the market, where you had competition, you're like, from a venture, what's the, what's the lesson learned? And so, I don't know if that's the worst 'cause you made money, but, um, that's one where I wi- I wish the founder had not been so stubborn. And I see this a lot, even with, with... And this is a very s- I see this a lot with smart founders that, uh, are too stubborn though is they just stick to these bad executives and bad decisions for too long. They just stick to them for s- too long.

   10. HSHarry Stebbings36:56

       Uh, did you say you lost five million on one?

   11. JLJason Lemkin36:58

       Yes.

   12. HSHarry Stebbings36:59

       Okay, talk to me about that one. What did you get wrong?

   13. JLJason Lemkin37:03

       Well, okay, here's a really interesting. I reflected a lot on it. Th- th- this is a mistake I think a lot of us, a lot of folks are quiet- are quietly making even now, which is, um... And I know you, you wouldn't make this mistake, I don't think, Harry, although maybe as you raise bigger funds you might. I lost it on the third check. So this is a company... What, what actually happened, this was my one where the- the signal was that the CEO, um, misrepresented some, some of the financials. Not, not Sam Bankman-Fried level or Theranos level, but just enough that it crossed the bullshit line.

   14. HSHarry Stebbings37:37

       Mm.

   15. JLJason Lemkin37:38

       Just enough that it crossed the bullshit line. And, um, I ended up still writing a third check into the company. The first check was small, right? Um, the second check was a supporting check, right? And the third check, they just started to grow like a weed in 2021, like everybody did, right? It, it exploded, right? In 2021. But there were a lot of issues with the company, even as it, you know, started growing double digits each month. And from a venture perspective, the right thing to do is just not have written the third check. Um, we were all geniuses in 2021, and we all had extra money to invest, and it all made sense to allocate a certain amount of capital per investment, but I should have lost a million and a half and not written that third check, or two million instead of five million.

   16. HSHarry Stebbings38:15

       And so for this five million, you doubled down when you shouldn't have doubled down, right?

   17. JLJason Lemkin38:18

       Yeah, or, or possibly tripled down depending on how you look at it. That was the mistake, yeah. So I... You're, you're, you're, you're-

   18. HSHarry Stebbings38:23

       (laughs)

   19. JLJason Lemkin38:24

       I'm agreeing with your life learnings, but the... And, and I did it, I did it intentionally, but I did it reflexively. The learning is, you know, I, I... What the... I think the mistake... I probably made a lot of mistakes, but I think the mistake a lot of folks I've seen in venture, in my own portfolio, is there's zero diligence for these checks. None for these follow-on checks, right? As long as the top line looks good, no one ever checks anything below the top line. There's no, there's no diligence, no customer calls, no nothing, right? That's the, that's the conundrum with the follow-on checks, is if you treat them as seriously as the initial checks, then I think that's the right way to do it, right? But VCs don't.

   20. HSHarry Stebbings39:00

       Okay, well, let's just unpack that a little bit. In terms of the diligence process, then, that you have today, we mentioned now spending time with obviously the CEO and the CTO.

   21. JLJason Lemkin39:09

       Yeah.

   22. HSHarry Stebbings39:09

       Um, what else do we do? Do we do customer references? How many? How do we document them? Just walk me through the diligence process used.

   23. JLJason Lemkin39:16

       My third one is the bank account. I used to do all these customer references before, when I had three months, uh, two months at SalesLoft, or three weeks with Talkdesk. I, well, I used to, I used to, I used to leisurely get on the phone and do... And I just saw you said you did 15 in one day. Um, I'm proud of you, Harry. Um, but, uh, I can't do 15 in a day, and it takes me a while to do customer diligence the way I do it. So I've re-sequenced it in order, right? Now I assume the diligence will be tolerable, right? And I'm up front in the timing, right? And now I'm quickly after my losses. Now, instead of doing financial diligence at the very end, right? Just, you know, just to check the box before I wire the buddy. Now I do it in the beginning, 'cause I wanna just make sure there's no shenanigans. I want my, I want my financial term, my fina- my, the, the accounting firm, the auditing firm I've worked with for over a decade to make sure that the financials and the banker statements are close enough to accurate. I want about 80, 90% accurate. I, I don't, I don't need it. I'm not expecting you to have a CFO or a CPA or CFA or... I, I, I'm fine if it's wrong, but what I'm looking for is bullshit. I am... If you, if I look at the investments I'm most stressed about and, and frustrated with, it's where there's any bullshit in them. The best founders don't bullsh- I don't think the best founders bullshit. I don't think... I, I think you can build a unicorn bullshitting, but I don't think the best founders bullshit.

   24. HSHarry Stebbings40:34

       Do you think you have any frauds in your portfolio today?

   25. JLJason Lemkin40:36

       I don't think I have heavy fraud, right? But I think this $5 million loss, when you, when you take 12 months of revenue and you recognize it all in one month, that's at the edge of fraud, isn't it? That's why I like this ba- this quick bank statement check. Like, okay, just go through it and just make sure that the expenses and everything ma- It sounds silly, because it doesn't really matter when you're making a seed investment whether there's 200K in the bank, or a million. It doesn't... But what does matter, I find, is, is just, I don't want there to be any... When we're investing faster, Harry, and we're investing broader, I just don't want any shenanigans. I just don't want it. Life is too short. I don't want any. I don't want any bullshit. I don't want any manipulated metrics. I don't want... And the problem with these bullshit artists, Harry, is they're bullshit artists for years. It'd be one thing if it was one and done, if they just bullshit the, you in the financing, but then every investor update's bullshit, and every board meeting is bullshit. It's just an endless stream of bullshit. And, um, you, you can't make... It's not worth it.

   26. HSHarry Stebbings41:30

       I get you.

   27. JLJason Lemkin41:31

       Right?

   28. HSHarry Stebbings41:31

       My challenge is, in a world where other people don't do it and move so fast, when you're the one being like, "Hey, can I have your bank statements?"

   29. JLJason Lemkin41:38

       Yeah.

   30. HSHarry Stebbings41:38

       And it's like, "Pbbt, fuck off, mate." And it's like-
8. 52:28 – 59:00

   Acceptable Churn Rates for SMB & Enterprise Companies

   1. HSHarry Stebbings52:28

      rate.

   2. JLJason Lemkin52:28

      Yes.

   3. HSHarry Stebbings52:28

      What is an acceptable versus unacceptable level of churn rate for a million dollar (laughs) ARR company? And how does that differ between SMB and enterprise?

   4. JLJason Lemkin52:37

      It's tough. Well, l- look, let's break it up into two. For enterprise, I think if your IRR isn't north of 110% by that point, don't invest. You have to have triple digit IRR. It's just the way it works, you know, y- it- it's hard enough, it's, you know, it's even harder to break into the enterprise than the SMB in some ways, just because sales cycles are longer and it's more complicated. If you've somehow gotten to a million in revenue, you've solved a- a- a niche but big problem in the enterprise, right? They're gonna buy more of it from you if you solve more of their problems. I've never not seen triple digit NRR at that scale. I've never not seen it, never in my, in my career. My own experience as a founder or any company I've invested in, it's always triple digits in the enterprise. Just, it's not, something's fundamentally broken if it's not triple digits at a million. Now, SMB is the tougher one. And, um, I know that, you know, the- the n- sometimes when Dharmesh and Brian talk about HubSpot and they're really, is there a little... I know they, I know they're v- and- and Dharmesh is here, I- I hear a little bit of confusion on what the monthly churn was. Was it 3 or 4% or 7%? 3 or 4% is what we see with a lot of very small businesses, will churn 3 or 4%. Credit cards expire, they go out of business, they change things. If HubSpot really was 7 to 8% and then got to 100% NRR, that's 110% at the peak, that's- that's mighty impressive. But, um, you know, if- if the churn is anything more than a c- two, 3 or 4% a month, it's not even software anymore. It's some sort of consumer-like thing that does not have recurring revenue. There's a fundamental question, Harry, which is, do we even have recurring revenue here for companies, right? And at the end of the day, you've gotta get to 100%, right? Dharmesh and Brian agree, everyone agrees, you've gotta get to 100. The question for SMBs is, can you tolerate 3 to 4% a month churn, which is endemic for small businesses for a couple years? That's the venture question. And I- I- I've passed 100%, if you wanna tie it together, th- I have no regrets here. I have passed on every single company that had o- o- for their segment, abnormally high churn, 100%. I've gone back to so many founders that were at a million with 7 to 8% churn, I'm like, "You have something, but it ain't SaaS." It's not SaaS, right? It may be something that maybe consumer, maybe that works in a- in a- in a bento box to your house company, but it's not, it's not s- it's not... Our whole fundamental model in software is like n- it all breaks if you don't have 100% retention.

   5. HSHarry Stebbings54:51

      I'm looking at this literally growth model for this company now.

   6. JLJason Lemkin54:54

      Yeah.

   7. HSHarry Stebbings54:54

      2.6% churn rate in August. Uh, okay? And then-

   8. JLJason Lemkin54:59

      That's what I would expect. It's SMB.

   9. HSHarry Stebbings55:01

      ... and then, and then in December it's a 5.6.

   10. JLJason Lemkin55:04

       That's what I would expect, and that's the risk, Ian, that's- that's the risk.

   11. HSHarry Stebbings55:07

       And so, how do we think about that? When there's a variation that is doubling or halving but is highly volatile, it's not really got any form of predictability where I can hang my hat on it and go, "Well, it's three."

   12. JLJason Lemkin55:20

       Well, I do think a couple things. For the f-... for the comp- first of all, I do think that even for startups, an L4M model is great. Take the last four months and average almost any metric. Even for, uh, as long as you're, even as you're approaching a million, I find it highly predictive. I find if you take the last four months of growth and, and average it, that's gonna be your growth the next eight to nine months. I find if you take the churn, that's gonna be your... just take the last four months and average it. I find it's incredibly predictive. And, and burn. Burn, churn, and growth. It's highly predictive. And that's why, well, you know, when I started investing, I would, uh, I would... I, I do love their model. I would take their mod- uh, uh, their historicals, and I would just build my own doing an L4M model. Was always right (laughs) . It's always been right, doing an L4M model. Um, so that churn is high, that you're describing, but for the industry you're talking about, for very... and there is a difference between small businesses and very small businesses. Very small businesses do churn 3 to 4% a month. They do. And you've got two choices in that environment. You can either do what, like, Ben Chestnut did at Mailchimp and s- and just be hyper-efficient and say it is what it is. If you're profitable, if you have, if your CAC is zero, you can survive a 4% a month churn, if your CAC is zero. Right? If you have a sales-led model, it is unsustainable. It is unsustainable in a sales-led model. That's the line. And so can you bet that a Mark Roberge will come in like a HubSpot and help you go mid-mark- m- mid-SMB and figure it out? The best founders will figure it out, Harry. They will figure it out. But anyone but the best gets stuck in this 3 to 4 to 5% churn rate, and they never dig themselves out. And even worse, sometimes they obscure it with capital. Here's where VCs can make it worse. They obscure it with capital because... The, the other thing that happened with SMBs is actually you can grow faster in the early days in enterprise because you acquire the customers in a week or a day instead of in a year. So sometimes the growth, top line growth rate is faster with SMB in the early days, and it can obscure that churn. That's, that's the ones I think you either have to pass on or truly believe the founders have a strategy to getting to that 100% NRR.

   13. HSHarry Stebbings57:19

       What are your lessons from that observation?

   14. JLJason Lemkin57:21

       That not ev- a lot of founders talk about getting... That first, the deals I regret are the worst deals, the one that was only 5X for 100 million. We also never fully solved the SMB churn there. We brute forced it with capital, right? It was, it was very SMB, and it had like 2% churn a month. And when the team was efficient and we were burning 100K a month, it was no big deal. Like it really d- at, at some level, there's always time, right, to go up market. The question is, is there enough time and is there a plan? And, um, it's, it's tough. And, uh, h- it was tough at HubSpot, and it was very tough at Toast. If you read Toast, it was brutal for them to get to 100% NRR. Um, and, you know, the truth is, here's the other truth, Harry, is, um, one, i- in some ways you probably have to be better at SMB than enterprise because the margin for error is lower. Because, you know, you sign an enterprise three-year deal, you know, and they don't even deploy for a year 'cause there's business process change. You get, like, a whole nother year to fix it. And then, you know, you're gonna work on the renewal in year three. These SMBs, the smallest ones are brutal. Like, they'll look at their credit card statement, and they'll cancel everything the day, the, the 15th or the 30th of the month it doesn't make them money. They'll cancel everything. It's brutal. And for the best founders, it makes you even better, and that's actually why I think the best software, uh, in the world, they are, are the Canvas and the Squarespaces, right? Even if maybe Canva has better metrics than Squarespace. But they have to be great or I'm just gonna churn tomorrow. I'm just gonna churn tomorrow. We're in... it's almost impossible to churn out of, of most enterprise products. It's al- it's almost impossible, right? So SMB software has to be better. It has to be self-serve. It has to be PLG. It's not a choice. It's a requirement. And do you believe, do you believe they'll get to 100%? What's their strategy? And if they don't,

9. 59:00 – 1:13:04

   Assessing Burn Rates & Revenue Projections

   1. JLJason Lemkin59:00

      if the burn is low, I would take the risk. If the burn is high, I would assume the burn will increase linearly with that churn, 'cause it's just gonna suck up more and more capital. It's gonna suck up more and more capital.

   2. HSHarry Stebbings59:08

      Fair enough, fair enough. What's high burn as a percent of revenue? Like, if you're looking at a company that's a million now or that's doing largely SMB, um-

   3. JLJason Lemkin59:17

      Yeah.

   4. HSHarry Stebbings59:18

      ... what would be, like, an acceptable burn?

   5. JLJason Lemkin59:21

      You know, it's funny. I, I, I, I, uh... You know, there's the burn ratio, right, that David Sacks popularized.

   6. HSHarry Stebbings59:26

      Hm.

   7. JLJason Lemkin59:26

      And, um, I've watched different companies y- I don't know how often you get it in your investor updates. I probably get half my investor updates get the burn ratio. Okay? And I, then I started to see its flaw. The burn ratio, the David Sacks is basically one or, one or less is really efficient, right? If you burn less, uh, than your revenue, your bookings, it's super efficient. That's great if you're clear the next rounds coming in and you have like a 120% NRR and 80% margins. If you're not clear the next rounds coming in, your NRR is SMB, so it's 60% or 70%, and maybe your gross margins are lower if you have a hardware component or other cogs. Your, your burn ratio may need to be much shorter. You know, 'cause when you look at our friends in B2C, right, they talk about, um, going profitable on a customer in 60 days, 90 days, 30 days. You know? Uh, we had, uh, Jacob from RevenueCat do our... You should do it sometimes. We had him do our little workshop Wednesday, and, you know, I think their churn rate acr- they have 10,000, you know, consumer SaaS companies on their platform, right? I think that, that it's a... they have a 60% annual churn rate. He's like, "The, our customers have to go profitable in, like, 40 days." That's the B2C world that you and I are less familiar with. But if you're gonna do very small business SaaS, you start to overlap B2C a little bit, don't you? There's an overlap here, overlap in s- And, and, and the last point I'll make is the big danger you can make, and this is why that company ended up having a, a mediocre outcome, you can't put enterprise or mid-market people into these SMB models (laughs) . They're just the toolkit, the type of people they hire, the way they spend in marketing, the, the customer lifetime, none of their metric... It just doesn't work. It doesn't work if you come out of service now where the average customer lasts 118 years, um, and GRR is 99%. At ServiceNow, the GRR is 99. They keep 99% of their customers over three years. You can't put that person in... Forget about the, the, the other issue. You just can't put that person into an SMB environment. They don't even know what to do.

   8. HSHarry Stebbings1:01:15

      We were speaking about revenues. I just want two questions on revenue. One, do you ever have it where they're not actually presenting ambitious enough revenues?

   9. JLJason Lemkin1:01:22

      I think it's almost certainly a pass, but...... if you think the founders are great, but here's where you have to check yourself. If- if you f- truly think the founder, like, your job, I think found- everyone- everyone in life has to pass a 20-minute test. By minute 20 of the meeting, uh, do you think this founder is so great that you have to invest? If they pass the 20-minute test but they have a crazy metric, just share it with them. Just say, "Listen, Harry, um, I love everything I've heard today. I just wanna let y- like, eight million, we're at six today, so eight million 2025 seems a little modest." And maybe he'll laugh. He'll be like, "I, okay, I've never raised money before, Harry. You know, I- I wanna do 60, but I thought if I put 60 in, uh, you know, I read this thing on Reddit, it said don't do that." Um, w- every once in a while with a first-time founder, they get b- you know, everyone gets bad advice. So you gotta, if you love them, give them a chance to self-correct on that mistake.

   10. HSHarry Stebbings1:02:11

       Okay, second question on the revenue and kind of growth assumptions. Eh, in a lot of AI tools today, especially the PLG AI tools, we mentioned some of the sales rep productivity AI tools-

   11. JLJason Lemkin1:02:21

       Yeah.

   12. HSHarry Stebbings1:02:21

       ... uh, you mentioned Opus Clip. The revenue growth is just, like, doosh.

   13. JLJason Lemkin1:02:25

       Yeah.

   14. HSHarry Stebbings1:02:25

       And my question to you is, like, how do you think about that and how do we know experimental budgets versus sustainable budgets and what you think is real revenue versus AI hype cycle revenue?

   15. JLJason Lemkin1:02:35

       I- I don't think we know, um, and I think it's fine not to know. I think that's called venture. I think we invest in things that are exploding. And so I think if we're trying to overanalyze some of these AI explosions, um, we're- we're missing the fact that we can make 20 investments per fund. I think the bigger issue is when the burn rates are vast, then we're making the just, that's a bet that I, it's just a crazy bet. It's one thing if you go, if you go from 1 to 12 in a year and you're cash flow positive, like Opus, that's okay. If you go from 1 to 12 in a year and you're burning 50 million of some big fund's money, that might be a great, I mean, you know, great investment, like an open API, but that's the kind of bet I don't know how to make. I don't know how to do that. It's, it needs so much capital. Do you just throw a chip in and walk out the door and- and tell them, "Let me know if you need a tweet or to be on the podcast?" I'm not, I'm not sure what you do if they're gonna burn 50... Because we haven't seen, uh, some of these AI companies, we haven't seen, eh, the way we invest, we haven't seen these types of burn rates either. Even when we've seen some that burned a lot, like a Rippling or something, it was very intentional. It was like, "Here, Parker, here's why." It was, you know, decent in the early days, then it's really high. But, you know, if they're coming up on 400 million and there's a very specific reason why and there's a plan and it's pretty consistent with the plan, it makes sense. This- this, hmm, you know, I know costs are coming down, but just these massive... Eh, I just don't, we don't know. So I don't- I don't have the answer, but you got to... If the founders are great and they have an answer, you got to make some of, you got to make the bet if they're great. You got to make the bet.

   16. HSHarry Stebbings1:04:01

       Listen, I- I- I do agree. I do think the deal has to be right. Like, you can have a great founder, but if, like, you hate a lot about it and it's 150 million price, there is a line where, like, a great founder but a bad deal, you don't do the deal, I think.

   17. JLJason Lemkin1:04:16

       I think the hu- the other hubris that a whole generation of folks on 20VC and otherwise are, we're all gonna slowly regret over the next decade, um, and it's a tough one to solve, is just these low ownership stakes. Who was it, was it Silver Lake that just said they regret every deal they did in 2021 that was small? Didn't they just say that?

   18. HSHarry Stebbings1:04:33

       Yeah, they did. (laughs) Yeah.

   19. JLJason Lemkin1:04:34

       Yeah. It's like, okay, like, we're only gonna make any money on our big positions. We regret everything. And the- the problem isn't that this AI deal's at 150 million, uh, pre- in the seed round. I mean, that sucks. But if you have a $50 million seed, even $100 million dollar seed fund, how- how much can you put into it without creating systemic risk in your fund? Founders don't get this, nor should they. But this is why I- I actually, Harry, believe that a lot of seed investing is- is systemically broken today. Because let's just do the math. When I started, a typical, you know, I did Pipe Drive at 16 at a million in revenue, okay? So now your typical YC deal's at 25, right? And- and you can't buy much, right? So, uh, even if you could, like, if you wanna, eh, like, so you got to do a three or four million dollar seed check and you have a $50 million fund, how does the math work? You either have to take systemic risk, right, and do, like, six investments or eight investments, or you have to buy tiny stakes, right? Or you have to find pre-pre-pre-seed stuff, right?

   20. HSHarry Stebbings1:05:39

       Or you have $100 million funds and you write-

   21. JLJason Lemkin1:05:41

       Even 100's barely enough at 20, at a $25 million to own a true 10%, a true 10% or 12%, 12% 'cause you're gonna get diluted. So you need to- to write a $3 million check pre-revenue at 10K MRR, 2K MRR. And I think everyone that complains about YC is missing the point that it's not for them. YC doesn't owe it to anybody to create rounds that make certain VC funds happy. I mean, we would, it's- it's okay. It's okay. It's a feature not, and I hate this expression, but it's a feature, not a bug. How many folks are there per batch at YC now?

   22. HSHarry Stebbings1:06:12

       (sighs) No, I don't-

   23. JLJason Lemkin1:06:13

       150?

   24. HSHarry Stebbings1:06:14

       Yeah.

   25. JLJason Lemkin1:06:14

       I mean, it's smaller than it was at the peak. It's 150, right? So Gary and team's job is to get 140 of them funded, most as quickly and as possible. And the next week, they're on to the next batch, okay? This is not getting just one or two funded 'cause even if it's Stripe, you don't know for sure, right? So the most efficient way with their brand is to get, have everyone sell up these releases slices, create a lot of FOMO, and get it done. And it doesn't make sense to- to accommodate, uh, different structures of seed funds. It do- it's a bad business model for them to- to make folks like you and me happy. (laughs)

Episode duration: 1:24:53