Jason Lemkin: WTF is Going On in VC? Are LPs Investing in New Funds? | 20VC #965

1. 0:00 – 0:36

   Intro

   1. JLJason Lemkin0:00

      When I see, like, a founder cry, I have no sympathy. (upbeat music) The competition slide finally matters again. Why will you win? I almost wanted to jump off the roof if we couldn't be number one in categories, right? Being number two wasn't good enough, right? Oh, my God.

   2. HSHarry Stebbings0:12

      I want to invest, but there's no companies. So what do I do, Jason?

   3. JLJason Lemkin0:17

      You know, if you didn't have multiple billion dollar cash exits in 2021, you're not a good investor. I felt like an idiot not investing in a bunch of these companies. For founders, you have to understand that will never lead to a return of 2021. Never.

   4. HSHarry Stebbings0:30

      Jason, this is gonna be a very freeform discussion. But I wanted to start with-

   5. JLJason Lemkin0:35

      Yes.

   6. HSHarry Stebbings0:35

      ... something that I'm seeing a

2. 0:36 – 2:07

   Where are the companies?

   1. HSHarry Stebbings0:36

      lot, which is, I'm in a lot of WhatsApps with GPs and they're going, "I want to invest. I want to invest."

   2. JLJason Lemkin0:42

      Yes.

   3. HSHarry Stebbings0:42

      "But there's no companies." And then I'm going on Twitter and the companies are saying, "Are any VCs investing?" And I just want to understand, how do you see where we're at today? Especially when I see what I just said there?

   4. JLJason Lemkin0:54

      I've been investing in venture since 2013, as you know. Um, we met fairly early in your career. And I, I w- I bolted out of the gates in 2013, right? I did Pipedrive, Talkdesk, Algolia, Greenhouse, and SalesLoft all within 12 months. Uh, I did almost no investing the last 12 months, and some of it's certainly the macro. I mean, the, boy, the market's changed a lot in 12 months, didn't they? (laughs) I mean, the world changed. But it is, I will say, an- and, and I will say I do think it's harder to find good deals. And I think it is true, and I think people are a little bit full of it on the Twitter, right, and on the social media. And there's probably a lot of it going on, um, and, and some of it is just that, like, we just, we, we all have to reset, which is that we all took so much risk for two years and the markets were so strong that we're, we're resetting to a day when we're looking for so much more out of an investment. The, the bar's gone up and, and they are harder to find. Um, but I, I think that anyone who's... You know, I look, I agree with you. I look at folks on Twitter, they're like, "Yeah, it's, it's whatever, January something 2023, I've done 11 deals this year." I'm like, "Kudos." (laughs)

   5. HSHarry Stebbings1:58

      (laughs)

   6. JLJason Lemkin1:59

      Kudos, because I have, I have not seen 10 times the qualified deal flow of 12 or 24 months ago. I haven't seen it in these times,

3. 2:07 – 3:46

   What has changed with early-stage investing?

   1. JLJason Lemkin2:07

      right?

   2. HSHarry Stebbings2:07

      Can I ask, what has changed in what early stage investors are looking for in the companies that we back?

   3. JLJason Lemkin2:13

      I wrote this at sort of the peak of the media in 2021 when I was talking with someone, to Sequoia, and they said they called it the Postmates effect.

   4. HSHarry Stebbings2:20

      Mm-hmm.

   5. JLJason Lemkin2:20

      And what they decided is that, it, I mean, obviously Sequoia's ahead of most of us, certainly me, is that they realized early on when things exploded post-pandemic that at this point now number three or number four on the market could be worth billions, right? Postmates, like, you know, I used it. But in the US I think it was number three or number four and it still sold for almost $3 billion. And so for a- ever since I was a founder in my first job and then an investor, we were always looking, you had to be number one, right? And back in the days when I was competing with DocuSign, I almost wanted to jump off the roof if we couldn't be number one in categories, right? Being number two wasn't good enough, right? Oh, my God. But then we realized there was room for 10 vendors in every category, right? Payroll, sales automation, or expense management, right? Some of these products are hard to tell the difference, right? And you don't have to sweat it because when, when Brex and Ramp and Expensify and Divvy, all of them are worth billions, it changed... Not only did it change the size of outcomes, but it changed the way we invested. We didn't have to decide who was number one. And it was very stressful in the old days, like until 2018 to have to know if they were number one. You'd pass on so many deals. You would pass on so many deals. And I, I don't think that's, we're back to that today, but we're back to pulling our hair out of realizing a billion dollar outcome's really hard. It's really fracking hard, right? And n- and we got so arrogant in 2021, so greedy. Everyone with their unicorns. I don't think anyone brags about being a unicorn today, do they? Do founders brag about it? It's gone out the window as a term of brag- brag- braggification.

4. 3:46 – 7:40

   Where should early stage founders focus their efforts?

   1. JLJason Lemkin3:46

      (laughs)

   2. HSHarry Stebbings3:46

      I'm, I'm just looking at a lot of founders who are DMing me and they're going, "I, I don't get what you wanna see. Do you wanna see growth still? Do you wanna see profitability now?"

   3. JLJason Lemkin3:55

      Yes.

   4. HSHarry Stebbings3:55

      "Do you wanna see margin improvement? What, what do you want to see at the early stage so I can focus my efforts?"

   5. JLJason Lemkin4:01

      Yes.

   6. HSHarry Stebbings4:01

      When you hear that, where do you go, "Ah, bad"?

   7. JLJason Lemkin4:05

      Let me step back for a minute. I think the key to, to, to success in SaaS and, and B2B investing that I only do and you do a lot of, it actually hasn't changed that much. It's that somehow, somehow in 7 to 10 years you've got to get to 100 plus million in revenue, okay? You, you just have to. And, and really today it probably has to be closer to 200 million because that's when you can really IPO, right? Approaching 200 million. So you've got a decade to get to 200 million. Like, there's, you ha- there are certain rates that you just have to grow. And whether, and, and, and Niraj from Battery simplified it all for triple, triple, double, double, right? For me, in the, in the old days it's like, you know, c- can you go from like one to five in five quarters or less? That will also set you up. That was, I guess that was a 5X. But the math has to work. And founders, and the only thing that's changed is the amount of capital you're allowed to spend, right? In the old days, the rough rule is we could raise, including A, B, C, D, E, F, G, H, I, and J rounds, you could raise 100 total, right? Then that kind of grew to like 300 or 400 million as the IPOs got bigger at the peak. And now we're probably back to 100 million, which is everyone has to be capital efficient in a way we forgot how to be. And so VCs unfortunately are looking for the trifecta. They're looking for top tier growth, but also some sort of top quartile capital efficiency. And, um, even at, you know, even at a million, even at a million in revenue, maybe not, you know, 10K in MRR, but even at a million in ARR they're looking for this combination. And all the original investments I did, not everyone, not Benchmark, Sequoia, they all met that bar, right? They were all growing at top decile rates, but were pretty capital efficient, and that's, that's the market today I think. And th- they're harder to find, especially with founders' burn rates and everything. We, we have not fully reset, uh, if we are going to reset to sort of the old day expectations, at least in SaaS.

   8. HSHarry Stebbings5:55

      So I, I do wanna touch on that. I do just wanna finish on the Postmates effect though, because-

   9. JLJason Lemkin5:59

      Yeah.

   10. HSHarry Stebbings5:59

       ... I totally get you in terms of the Postmates effect, but it's turned out not to be true. That was in a macro environment-

   11. JLJason Lemkin6:04

       It was true for two years. It was true-

   12. HSHarry Stebbings6:06

       ... i- i- in a-

   13. JLJason Lemkin6:06

       There were many exits. There were many cash exits, right?

   14. HSHarry Stebbings6:09

       True in a macro environment that was kind of artificially inflated by, you know, certain stimulus, by, you know-

   15. JLJason Lemkin6:14

       Yes.

   16. HSHarry Stebbings6:14

       ... public bodies. Um, and now it's not true. What happens in a world then when the Postmates effect isn't true?

   17. JLJason Lemkin6:22

       There's two ways of looking at it. There's the, there's the VC perspective and the founder's perspective. Okay? Let's step back for a minute. Um-You don't always have to directly compete with someone else in your category. You can, you can own a segment of it, right? Um, you can own the SMB segment or the mid-market, or you can be focused on e-commerce or a different vertical. So categories have more rooms for number one than sometimes VCs realize, right? They're, the, and that has certainly happened as SaaS and cloud has expanded, especially with vertical SaaS. Um, but it's, it's, it's true. Um, you, I think you have to have... As founders, you have to have conviction about why you will truly win. The comp- the competition slide finally matters again. Like, why will you win? And I always knew it as a founder, and I think the best founders know it. Um, and w- we need to know. And it, it, it cert- it certainly alarms me investing when I ask a founder, you know, "Why will you beat the competition?" And, and they don't know, right? Um, or my, my version of that question is, is I ask them, "Why did whomever stumble? Why did Postmates stumble? Why did whoever stumble?" And the best founders always have a story, and they know why they're gonna win. And the almost great founders are like, "I'm not sure." (laughs) "I'm not sure why, why competitors stumbled." Uh, I don't know if that answers the question, but, um, I think you have to be number one. But the good news for founders is, there are more number ones, I think, in most

5. 7:40 – 11:30

   SaaS Buying Patterns

   1. JLJason Lemkin7:40

      categories than existed a few years back. 'Cause SaaS is bigger.

   2. HSHarry Stebbings7:43

      I, I totally agree with that in terms of market expansion there. I do want to ask you, when we look at and you look at portfolio companies today, when you look at the buying patterns, what are you seeing in terms of overall SaaS buying patterns today?

   3. JLJason Lemkin7:55

      Yeah, I have a very different perspective than Twitter. There is a, a subset of categories that are doing fine. Let's, let's be clear, they're doing fine. There is a, a subset that's deeply troubled, and then there's a bunch in the middle where it's just a little bit, uh, a little bit or a lot harder. And so be it. That's called life, right? But these folks who are saying this is the worst, worst recession since the Tulip Age in, in Holland are out of their minds. They haven't... They have no life experiences. Um, and it's not evenly distributed. And, uh, let's talk about a few examples for a minute. But before we even get there, think about folks maybe in your portfolio, Harry, that are selling to healthcare. There... Uh, in the US, there's no downturn in healthcare right now. Th- there's nothing. And I can't imagine it's different in the UK. So yes, I'm sorry, if you sell only to overfunded startups, you may think that this is the worst recession since 1811. But if you sell to healthcare, and then, we'll just give some others, you don't see an issue. For example, in my portfolio, like, let's, let's take an int- a really interesting example, which is B2B e-commerce, okay? Now, B2B e-commerce, I have two leaders I've invested in: uh, Gorgias, which is number one contact center in Shopify, and then Algolia, which we talked about before, where about half of Algolia's business is in e-commerce. And interestingly, you can see the future, because e-commerce actually peaked early in 2020, and then it fell off a cliff and it hit rock bottom in the beginning of 2021. Okay? It hit the beginning of '21, and then kind of rock bottom as 2022 came back. But e-commerce rebounded in the second half of 2022. It came back. Look at Shopify's numbers. Shopify at the end of 2022 was not the rocket ship it was at peak COVID, but Shopify had stronger numbers at the end of 2022 than it did at the start. And so when you look at folks like Gorgias, um, on its own, like, it's grow- it grew faster in the second half of last year than in the beginning. If you look at Algolia, it... Half its business is e-comm, half is SaaS. The SaaS folks have multiple impacts, pro and con, but the e-commerce is up, right? So there's lots of effects, and they're not even. You and I are both co-investors in a company called RevenueCat. We were emailing on it. RevenueCat automates subscription management for mobile. It was a rocket ship. Then in COVID, it blew up, then it kind of plateaued, and then it re-accelerated at the end of this past year. Re-accelerated in 2022.

   4. HSHarry Stebbings10:02

      Mm.

   5. JLJason Lemkin10:02

      And it has its own issues, but there's not a lot of macro issues impacting it. So I'm j- I'm not saying it's easy out there. It is hard. But, but go find the segment of your customer base that's winning. Go find healthcare or e-commerce or mobile or some part of infrastructure, MongoDB, Okta. These companies are doing really, really well, right? They're doing really, really well. Get some of that business. So maybe it's not quite the question you're asking, but I kind of quit on founders that say the world's ended. I kind of quit on them.

   6. HSHarry Stebbings10:30

      What do you say to the founders where actually they're doing really well, and they're still getting a battering? When you look at quite a lot of the SaaS companies, they're down 20, 30%.

   7. JLJason Lemkin10:38

      Oh, by the multiple?

   8. HSHarry Stebbings10:39

      Yeah.

   9. JLJason Lemkin10:41

      Um, well, I'd say, "Praise the Lord, you're private." You know what's not fun, Harry? Um, and I've only experienced this once as a startup executive, but, uh, but I've seen it in a few investments. It's not fun to be running a public company that's down 70% when your revenues are up.

   10. HSHarry Stebbings10:57

       Yeah.

   11. JLJason Lemkin10:57

       It's really not fun. It's a, it's a morale crusher. And you tell the team to ignore it. You tell the teams there will be ups and downs. I did a great interview with Spencer from Amplitude. He was like, "We prepared the team for this. Like we said, there'd be ups and downs. I just didn't know there'd be this down." (laughs) 'Cause Amplitude's pretty much hit all of its numbers. It's a great one, right? So that's... At least in a private company, you can hide a bit. And it, it is a gift of being private. You can up... As long as th- th- there's no down round or a lot of drama, you, you can hide a little bit. And maybe that's not the question exactly you're asking, but it's m- it's a benefit of being private,

6. 11:30 – 13:21

   How are marketing spends being impacted?

   1. JLJason Lemkin11:30

      is that you can duck out some of these issues if you don't need to raise capital.

   2. HSHarry Stebbings11:34

      Totally agree with you. Can I ask-

   3. JLJason Lemkin11:36

      Yeah.

   4. HSHarry Stebbings11:36

      ... you mentioned, like, the buying patterns. In terms of marketing spends, how are you seeing marketing spends impacted across the board? And, and are you concerned about that? I am, running the media company that I do.

   5. JLJason Lemkin11:47

      I'm concerned about... You know, we work... I, I have a... I have a limi- l- limited visibility through my portfolio of, like, 25 larger investments, but we have 200 sponsors for SaaStr, right? And you have quite a few. Um, look, it's, it's exactly what... This is one thing where Twitter has it right, okay? Which is that, uh, marketing has become myopic. Marketing is focused on this quarter, right? What can I spend to get more revenue this quarter? I'm under pressure from my board. My revenues are down in some cases, and my, and my burn rate has to last longer. So the CEO is only approving these, these marketing expenses that create revenue immediately. A- and they do exist out there, right? But the problem is, it's, it's such a small part of marketing that, that pays off. The only part that really pays off is, like, funnel assist, like taking someone that's almost ready to buy, and then they hear about, they hear about...... someone on 20 BC and that (claps) magic moment gets them to buy the next week. Like, but nothing else... And, and so we're cutting too much in marketing, and I'll, I'll tell you what I think we should be doing. We're cutting too much and it's gonna hurt everybody, not this week or even this quarter, but it's gonna hurt ev- everyone's gonna not gonna have enough pipeline at the end of the year when I think things will be better. I think things will be better for startups at the end of this year, and I think we will all be hurting for pipeline. And I think we're all making the mistake we made in each of the last downturns. I mean, Marc Benioff in his book wrote his biggest mistake in the last downturns was cutting sales. And what did he just do? Cut sales.

   6. HSHarry Stebbings13:09

      (laughs)

   7. JLJason Lemkin13:10

      It was... (laughs) so we're all, he's making them, he's making the same mistake three times. And if Mark can't help himself, I guess I can't blame any founders, but we're all gonna come out of this with not enough sales capacity

7. 13:21 – 16:55

   Marketing Advice for Startups

   1. JLJason Lemkin13:21

      and not enough pipeline. It's just gonna happen.

   2. HSHarry Stebbings13:23

      So I'm a seed founder, seed/series A, yeah?

   3. JLJason Lemkin13:26

      Yeah.

   4. HSHarry Stebbings13:26

      And I'm being told by everyone, "You gotta cut burn, you gotta extend runway."

   5. JLJason Lemkin13:30

      Yes.

   6. HSHarry Stebbings13:30

      But then I'm also hearing you saying, um, your pipeline's gonna be short at the end of the year-

   7. JLJason Lemkin13:34

      It is.

   8. HSHarry Stebbings13:34

      ... and actually... So what do I do, Jason?

   9. JLJason Lemkin13:37

      Well, the answer, it's, it's, it's actually pretty simple. It's going back to basics, which is be data-driven. If you have a sales and marketing leader, right, or whoever it is, give them a budget. It's just that simple, okay? You ha- I have a million dollars to spend this year in marketing, and I have an incremental half million in sales. You make the decision, right? You make the decision and spend that one million the best you can. Cutting the marketing budget to zero, wrong answer, right? Let them optimize what they can do with a million and trust in your team. I think we can't solve everything. We do ha- most of us have to extend runway right now, right? We have t- we have to extend it. But I think we're over-cutting in marketing by not empowering people to have budgets. And we're doing the same in sales. Just tell them, "Look, you have this much to spend this year, this quarter, this month." And then trusting your team to make the best hires. Um, layoffs don't really solve anything. They're just little, they're little snacks, right? They make little incremental changes, but layoffs don't create growth on their own, right? So say, great, okay, fi- even if you did a layoff for 10 or 20%, you're still gonna have budget for this year. "Hey, head of sales, you, you get 20 hires. You get 20 hires and you go decide who those 20 are gonna be. You've hit your number, right?" Same with marketing. And I don't see enough of this trusting the adults on your team with a, a number, and I don't see enough, I don't see strong enough ops and finance support helping them do that, because we don't all know how to do that intuitively, right? We need some help from budgeting and planning to manage it, uh, uh, many VPs need help.

   10. HSHarry Stebbings14:59

       I think also, which bluntly, we've had a generation where budgeting and planning has not been a central focus because of the liquidity that we've had in the system. And actually-

   11. JLJason Lemkin15:07

       Yeah, there might have even been none in some cases. (laughs)

   12. HSHarry Stebbings15:10

       A- I mean, absolutely.

   13. JLJason Lemkin15:11

       Right?

   14. HSHarry Stebbings15:11

       I mean, uh, (laughs) QuickBooks and FDX is a wonderful example. (laughs) Um, wouldn't have that for QuickBooks. I don't know-

   15. JLJason Lemkin15:18

       I remember the first time, I'd never really worked with a VP of marketing before the first startup job I had, right? And I remember we went through a situation where we had to cut the budget, right? And everyone, everyone that was young on the team was kind of freaking out in our cool 50,000 square foot office in SF, but we had one, we had one person on the team over 35 or so at the time, and he walked in. He's like, "Okay, understood. Um, tell me what my new budget is and I'll start executing on it tomorrow." (laughs) He just, that was the answer. And I'm like, "Who is this? Who is this godlike character, the only seasoned executive on our team?" But that was the right answer. "Tell me what my new budget is and I will get you as much, uh, as much leads, as many pipelines, as many opportunities as I can with my budget. Just tell me, just tell me what it is and I'll go execute." That's what you want from your sales and marketing team. Not, you know, "Come to me with the perfect..." Because the problem in marketing, Harry, is everything that's crappy ROI. If you wanna talk about marketing. Here's the problem. This is why CAC is such a flawed metric, because if your cust- let's say your, your average deal size is 5K, a 5K a year customer. You're re- you're actually not gonna have anything that, where you can spend $5,000 to get a $5,000 customer. You're gonna have a lot of stuff that's viral, that's free, that's word of mouth, that's people telling their friend. And that, that CAC, m- the marketing's close to zero, right? Even with other words. And then frankly, your average customer's gonna cost you like 10 grand to get five grand, right? And if they stay five years, you're ahead. If they refer their friends, you're ahead. If you steal it from a customer, you're ahead. If you hit your plan and raise the round, you're ahead. But all of these marketing programs are too expensive. And so if you view them too simplistically, you just don't market. And that's what people are doing, they're just doing nothing, and, um, it's going to fail them. Instead, they should be doing the best they can with the budget they have.

   16. HSHarry Stebbings16:54

       So i- if we put on

8. 16:55 – 18:20

   How To Do Target Setting

   1. HSHarry Stebbings16:55

      the hat of a sales leader or a founder.

   2. JLJason Lemkin16:57

      Yes.

   3. HSHarry Stebbings16:57

      When we think about like target setting, how do we do target setting in a market like this where there is such volatility and uncertainty?

   4. JLJason Lemkin17:05

      This is where there's a lot of burden on CEOs, and CEOs have to, have to be the adults in the room and they have to do it the right way. You gotta, you gotta slow down. First of all, you have to look at your trailing velocity. You have to look at your last three to four months, average the growth rate, average the burn rate, and that's who you are. Whoever, whatever you've been growing or burning last week, even if you want to be a different person, even if you don't like how you look, that's who you are, the average of your last three to four months. And that, that's your base plan. And then you have to calmly sit down and say, "Hey, if I don't like that, how do I do better?" And how, and be realistic about it. You can only inflect a curve so much. If you, if you, if, let's say, your g- let's say last year you were growing, you were growing 200%, but for the last four months, you've only been growing 20%, right? That's your average growth rate. That's you today. And if you go to your sales team and say, "We're gonna get back to 100 by the end of the year," you may destroy the team, right? You have to level, l- you have to take that trailing three to four months average and scale it, gradually scale it up to something that is sane, and you have to importantly do it with the burn rate. I think we've gotten better the last couple months, but people that don't do this on the burn rate are still gonna drive their cars right off the cliff this year. They're gonna drive their cars right off the cliff.

   5. HSHarry Stebbings18:15

      What are the big mistakes you're seeing there, Jason?

   6. JLJason Lemkin18:17

      Look, the, the biggest mistake I, I've seen, which

9. 18:20 – 24:34

   Biggest Mistakes Founders Are Making

   1. JLJason Lemkin18:21

      f- is, is probably twofold. Um, the number one one is not enough sensitivities to models. And this got people in trouble last year, but it's gonna hurt again this year, which is that if you miss your growth plan even by a smidge, um, it can dramatically increase your burn rate. People do not build sensitive enough models, right? If I've hired all this headcount, extra headcount, and they don't hit the number, but I've-... incurred all the expenses for that headcount, um, my burn rate often is materially higher than I think. So people don't build the right sensitivity analysis to when they underperform, right? So you have to have at least ... E- either you have to have a great model, or what you have to do is build a worser case model, right? Where you miss the plan significantly, and you're sort of stuck with a certain amount of expenses, and just understand what your burn rate is. So, so really that's the, that's the biggest problem I see. Th- the second one is, there is still delusion out there on the odds of raising a s- a later round. There's still delusion across all of the markets, and I still anger founders when I bring it up. I still get toxic comments. But you just have to assume absent evidence you're unfundable. Like, go find, go get a term sheet, or just go get someone you trust to tell you, "Hey, Harry, if you hit $10 million growing to these numbers, I will write you a term sheet." Go prove me wrong, but assume you are unfundable, um, and it's, I mean, I literally ... I'm gonna write a small check into a great second-time founder that had a multi-billion dollar exit, right? And I was talking to him this week. I'm like, "What's your plan?" And he's like, he's gonna raise a pretty small amount of money in his first round. I'm like, "I, I think you need more. I mean, you've built a huge enterprise before." He's like, "I'll just go raise the A or the B later this year." I'm like, "Ugh, my friend, like, you've been out of market." (laughs)

   2. HSHarry Stebbings20:06

      Okay. Do you-

   3. JLJason Lemkin20:06

      Raise it all now. Raise every dollar-

   4. HSHarry Stebbings20:08

      Yeah.

   5. JLJason Lemkin20:08

      ... you can get now. (laughs)

   6. HSHarry Stebbings20:10

      I- is that what you would say, "Raise it all now"? 'Cause this is the other question that-

   7. JLJason Lemkin20:13

      Yes.

   8. HSHarry Stebbings20:13

      Well, I, but then a lot of people say, "Well, actually, you know, now is the worst time, because now everything's-"

   9. JLJason Lemkin20:18

      (laughs)

   10. HSHarry Stebbings20:18

       "... uncertain. It may be worse later, but it will probably be more certain, or maybe more certain." Now it feels like kind of p-

   11. JLJason Lemkin20:25

       You don't think ... I think things are settling into certainty. I think they were uncertain at the end of last year. I think they're settling into certainty. Uh, I think we've had crummy multiples in the public markets for three quarters now.

   12. HSHarry Stebbings20:37

       Mm-hmm.

   13. JLJason Lemkin20:37

       Um, and I think we have ... Everyone has reset what they want to do in a world where we're dealing with, you know, to simplify in SaaS, we're dealing with 5X AR- a 5X ARR world.

   14. HSHarry Stebbings20:49

       Hm.

   15. JLJason Lemkin20:49

       Okay? Do you want to be bullish? Do you wa- I'll, and I can give you a story from today. Do you want to be bullish and say, "We're, we're gonna come out of that world aggressively"? Do you want to be a, a Debbie Downer and say, "We'll, never get out of it"? Which some people are fine. But I think people do have a thesis now this year. I think they've settled on a thesis on ... They've adjusted that we're in a 5X ARR world, okay, and they've decided w- how are they gonna view ... what's their world view around that? Uh, will it stay? Will it recover? Will it recover a little bit? Or will it get even worse? Uh, d- different views out there. I don't know. Uh, but I got this, th- this morning I re- I got a first growth offer of 2023 on a portfolio company, and it was interesting. They were aggressive. Not everyone is out of ... Uh, I would say 90% of growth ... I don't know what you see. You have, you might see more than me. I would say 90% of growth investors are mostly out of market. Like, they're not actively investing.

   16. HSHarry Stebbings21:36

       Mm-hmm.

   17. JLJason Lemkin21:36

       But some are. Some, some want to ... Some either want bargains, which I'm not sure exist, right, or they're making a bullish bet. And this one actually was an offer at 15X ARR, which was interesting. They said, "This is th- this is what we will do for a top decile company. That's it. This is ... We've, this is our thesis." Okay, this was their thesis. "For the best ones, not for any company, 15X ARR, right? Um, and there are over 100% don't want to take any risk, right? Um, depending on the stage, 50 to 100% growth, right? Um, and profitable or close." That's the kicker.

   18. HSHarry Stebbings22:11

       (laughs)

   19. JLJason Lemkin22:11

       Profitable. So they'll take the ARR risk, the 15X, right, uh, above ... This is 50 million and above, 50 million ARR. This is their thesis, right? They'll even actually take a little bit less growth, but it's gotta be basically profitable, right? That's their thesis, which ... And there's logic in that, right? Because they're saying there won't be another check probably.

   20. HSHarry Stebbings22:29

       Do they have late prefs? Do they have protection on the downside? 'Cause I think this is the other thing that people forget.

   21. JLJason Lemkin22:33

       It's a different issue, right? The, the ... And, and I actually personally don't think any of that stuff matters. We could talk about it. Um, I, I-

   22. HSHarry Stebbings22:39

       Well, I think it does for employees, because they see the numbers of, like, $1.5 billion valuation.

   23. JLJason Lemkin22:43

       Yeah.

   24. HSHarry Stebbings22:43

       But if it sells for 500, your growth investors will still be made good because they only raised 250. But for you as employees, you'll be under water.

   25. JLJason Lemkin22:52

       If as an employ- if, if you join a company with ... in, in, in 2023 with a valuation over a billion as an employee, you're gonna make nothing. It doesn't matter what it sells for, you're gonna make nothing. There are no $100 billion outcomes. You are probably not joining Microsoft or Adobe or whatever, and those took forever. There are w- th- there will be a, an occasional Figma, and that's why we invest, right? But what are the, what are the incredible ones? What are the HashiCorps worth? What are the GitLabs worth, right? They're, they're, they're ... These are not worth 15 or $20 billion. You'll make nothing. So don't worry about your equity when you join a unicorn. Like, last year joining a unicorn was the smart play. Today, if you care about equity, it's a sucker play, right? Um, it ... You're not gonna make anything. You're not gonna get any RSUs, and you're not gonna make anything.

   26. HSHarry Stebbings23:37

       (inhales) So though HashiCorp's five and GitLab's six now?

   27. JLJason Lemkin23:41

       Yeah, those should be, those should be $20 billion companies, Harry. They should be $20 billion-

   28. HSHarry Stebbings23:45

       When you say should-

   29. JLJason Lemkin23:45

       ... companies.

   30. HSHarry Stebbings23:45

       So where's the injustice there? Is it, is it that they're, like, misvalued? Is it that they're, like ... I don't understand. When you say they should be, what do you mean?
10. 24:34 – 27:41

    Investing in Public Markets

    1. JLJason Lemkin24:34

       as an employee.

    2. HSHarry Stebbings24:35

       Can I ask ... Oh, okay, a couple of things. One, do you ever think about dipping into public markets? You know, you all are an OG of SaaS.

    3. JLJason Lemkin24:41

       Yeah.

    4. HSHarry Stebbings24:41

       You look at this and see gener-Why are you not just aggressively deploying into your HashiCorps and your GitLabs?

    5. JLJason Lemkin24:47

       I think folks have. ICONIX and others have done a lot of crossover investments into the best ones, right? Um, for me, I have done a tiny, a tiny bit, but, um, I- I- I think it's a, personally, I find it a, a distraction, right? We talked, we started this conversation, and we talked before we started about finding more gems, startups. Anything, anything you do that takes you away from that kibbutz scene in the public market, it's not worth it. It's not worth it. Let, let, let's step back. As hard as things are, Harry, there is a magic in a solo GP practice, or maybe a two GP fund, which is, venture is so hard, but good God, Harry, if you own, if you're a solo GP and you own 10% of GitLab today, you make $100 million yourself, okay? So w- w- I don't wanna screw around with a few shares of, of Okta or HashiCorp, or these are companies that... I don't even wanna screw around with a lot of shares of them. I- i- if there's any chance, if there's any chance I can find another Talkdesk or Algolia or Pipedrive or SalesLoft, or if I can find a GitLab or Figma, like you should drop everything. If you have a chance of investing in even one of these deals, you should drop everything and do it. And this was the first time I ever worked with a VC. Forget about anything in venture, this is what I learned. I was with my mentor, and he's like, "Here's this VC of a guy that was, uh, what's now IVP." And he's like, "You know what I learned about this guy? When he finds one deal, he drops everything. He drops everything." Right? We were visiting a public company that had IPO'd, it was worth eight billion, and he does, did one deal a quarter and drop everything. You wanna make... That's the answer. And so when I see VCs on Twitter talking about how they're looking at buying some shares of Shopify, I honestly, I think they're losers.

    6. HSHarry Stebbings26:28

       (laughs)

    7. JLJason Lemkin26:29

       Fucking go find the next Shopify. Stop... You can make, like venture is so hard to make money, but if you're privileged enough to, to be able to write a significant checkbook, you can make a lot... You're not gonna make as much money as a CEO, but you can make a lot of money. But it's hard. You gotta find the next Shopify, right? But God, it's a gift. So go spend all of your time doing that. Stop screwing around on, on, and to put it all into QQQ or VTI. I have everything public I own is V- is almost all VTI.

    8. HSHarry Stebbings26:55

       Uh, can I ask a-

    9. JLJason Lemkin26:55

       Put it in the stock market, ignore it.

    10. HSHarry Stebbings26:56

        You mentioned that pricing of, of some great assets like-

    11. JLJason Lemkin26:59

        Yeah.

    12. HSHarry Stebbings26:59

        ... you know, GitLab and HashiCorp. What about the $3 to $10 million ARR companies last year who were valued at 100x ARR? I've got one that was 1,000x ARR.

    13. JLJason Lemkin27:11

        Yes.

    14. HSHarry Stebbings27:11

        What happens to those companies in this market? Do they just ride out their massive runways?

    15. JLJason Lemkin27:16

        Yeah, I mean, it really depends on the founders. I, I don't have any 1,000x ARR. I have two, two companies I've invested in that are doing okay that have like a decade of runway, right? So we'll see what they do. Like, we'll, I, I actually don't know of these two, right? We'll see what they do with their decade of runway. Um, that, that's-

    16. HSHarry Stebbings27:33

        Do, do you mark them down?

    17. JLJason Lemkin27:33

        ... the first time in my lifetime, right, in tech, where that could happen, right, where you can get so much capital that you could have a decade of runway and you could just fart around

11. 27:41 – 30:07

    Company Mark Downs

    1. JLJason Lemkin27:41

       and do whatever you want, right? Uh...

    2. HSHarry Stebbings27:42

       Do you, do you mark them down to your LPs, one? And two, do you say to them, "You've got a decade of runway. Give cash back." Like, this is...

    3. JLJason Lemkin27:50

       Uh, I've marked down only one, um, because, uh, uh, if you're growing at a decent rate, um, uh, I, I don't, I, I don't know that a mark down at the C level helps a lot if the company's growing. I think if the company's stale, it makes a lot of sense to, to mark it down, right? Um, but, uh, but I only have one portfolio company that's not really growing. And that one I did, I did, I did mark down, or maybe one and a half, I would say. I would say, I would say there's two, that if you're not growing, I think it makes sense to mark it down. If it's growing at a decent rate, I think, um, if you're not Fidelity or a late stage investor, I think it's a waste of your time to mark up or mark down because, um... Uh, I asked all my LPs this question. They said if it's growing, they don't care. Um, uh, but, but I don't think that's-

    4. HSHarry Stebbings28:34

       And the, the great harm-

    5. JLJason Lemkin28:34

       ... the question you asked at the beginning, right, is what's gonna happen to these folks, right? Um, and I think, um, I think it's terrible, Harry. I tried to summarize my thinking actually today in a tweet, which is in the old days, before $10 million in, in ARR, you could, just couldn't raise much money. You could only raise five, 10, 12 million, and so you sold your company for $100 million, which is still very hard to do. There are not that many $100 million exits, y- you know, even in the best of times. But everyone makes money. You raised ten... If you s- this is my old SaaStr rule. If you sell for 10x or more than you raised, like it's all pretty good, no matter what the... It gets worked out. You can work out the valuation, you can change this, right? But when you raised massive amounts of money early, how are you gonna sell for 10x what you raised? Who's gonna buy you for $500 million? They're, they're, they're... You're dead. You're... And I don't have an answer for these ones. I, I think that they, th- the an- the best answer may be to combine with a competitor, right? Um, and, and build some sort of critical mass with your combined revenue and capital streams. But I, I think it's sad. I wish... I ha- I have a lot of answers, um, in SaaS, but this one, you know, you raised m- they're just ex- exits are rare. They're really, really rare. And VCs ta- don't talk this way, and Twitter doesn't talk this way. They're very, they're- they're very rare. Um, I've only, in all of my startups as a founder, I only had a handful of true M&A offers that were decent, only a handful.

    6. HSHarry Stebbings29:56

       That's what I found funny though with the last couple of years is just the amount of times people are like, "I don't know if it's a $50 billion company, but it's definitely a $10 billion."

    7. JLJason Lemkin30:04

       Definitely, yeah. It's definitely 10.

    8. HSHarry Stebbings30:04

       The amount of times I've heard that, I'm like, "Definitely a 10." And you're like, "10

12. 30:07 – 32:57

    Will employees stay or leave?

    1. HSHarry Stebbings30:07

       is fucking big." Um, I do wanna go back to what you said about like, hey, if you join a company at over a billion, like you're not gonna make money. Question then, are we gonna see this like great resignation away from those super overvalued companies and they're gonna start new companies and it's gonna be this glorious age of innovation with this talent? Or actually, are they gonna go, "I might not make any money on my equity, but I'm paid okay. I haven't been laid off. Security's really important."

    2. JLJason Lemkin30:35

       Everyone that says that this is going to lead to a, a wave of new innovation, I think there's some truth to it, don't get me wrong. But I think what everyone, what old timers, anyone that's been doing this more than five to seven years forgets is that the typical tech worker today is nothing like five to seven years ago.... um, w- this ev- what happened is that you used to have to... When I started in tech, you had to be crazy to do a startup. When I told my dad I was doing a startup the first time, just joining one, he said, "That's..." Like s- he said, "Go do it, but it's, it's a terrible financial idea." I'm like... And I went through the math and how it works. He says, "It's such a..." He's like, "I'm taking a 50% salary cut. And like if everything goes right, someday after all these years, I might make a million dollars. But divided by this many years..." He's like, "This is a terrible idea." He said, "But go do it," right? So first of all, you had to be insane, right? And then, and then as things got a little bit bigger, you ha- kind of had to be just kooky to do a startup. Like, not, not a founder, but just to join one. You had to be a romantic. You had to be one of these people that's like, "I just can't fit in at an Adobe or, or, or, or, or Microsoft or whatever." And then startups sucked so many human beings into it, thousands of SDRs, thousands of AEs, thousands of, of, of marketing managers and social media, uh, strategists, that these became just or- highly paid ordinary jobs. Highly paid ordinary jobs. And I don't think any of those people are gonna go off and start the next Figma. (laughs)

    3. HSHarry Stebbings31:54

       I don't think they will.

    4. JLJason Lemkin31:55

       I think they're gonna continue to look for a job. They can kind of phone it in and make a lot of money. And, and, and tech went from one of the... uh, a risky, terrible paying segment to like the best risk/reward segment in, in, in the economy for, for three years, for three or four years. It was such a good deal. Come out of college, um, be handed a whole bunch of warm leads at the peak of the, of the pandemic, and make 200 grand in sales. I mean, this is, this is an insane world, right? Publish three, three TikToks a week and make 140. Like, I don't think we're going back to that, and I don't think those people are, are looking to start a Figma. But, um, so I, I think what will happen with that dislocation is... (laughs) it remains to be seen.

    5. HSHarry Stebbings32:32

       I, I... My worry is that, actually, I think there's this generation of kind of entitled but also pretty crap, um, team members, that are also maybe-

    6. JLJason Lemkin32:41

       Terrible.

    7. HSHarry Stebbings32:42

       ... that I used to remember.

    8. JLJason Lemkin32:42

       Terrible. This is, this is a triggering topic, but the quality w- plummeted as we hired mainstream normal people. The, the, the quality plummeted. Any, any leader will tell you this quietly, any, any VP. E- Marc Benioff said it last week, like, they'll tell you t- the quality

13. 32:57 – 35:24

    Do you meet the full team before investing?

    1. JLJason Lemkin32:57

       went down the last three years, way down.

    2. HSHarry Stebbings32:59

       Do you meet the broader team? 'Cause like, actually, when you're investing in companies, uh, you know, you're investing in a company, not in a founder, to be clear.

    3. JLJason Lemkin33:07

       Yes.

    4. HSHarry Stebbings33:07

       Like, you are a shareholder of the company. And so do you meet those, like, head of marketing? 'Cause I, I, I meet some head of marketings that sponsor the show, Jason, and I'm like, "You are shit." (laughs) Like, that was, that was terrible and-

    5. JLJason Lemkin33:20

       Yeah.

    6. HSHarry Stebbings33:21

       ... I would never have invested in your company if I'd known you were head of marketing.

    7. JLJason Lemkin33:24

       The latest I do is late seed, um, but I'll tell you a story. I do... I don't meet with the whole team, 'cause usually there isn't much of a management team.

    8. HSHarry Stebbings33:31

       Huh.

    9. JLJason Lemkin33:31

       I do, for sure, always spend a lot of time with the CTO. This is my cheat. Um, I view the CEO as the proxy for sales and marketing. Like, if the CEO is great, with some help, maybe you and I can... we're working on a search together today, we can help you find a sales and marketing leader. But I don't really care who you have it, 100K in ARR or one million. Like, eh, uh, w- you, you are that person. But the, the CTO is the product, right? Usually. So that's, I think, the mistake 90% of VCs make, is they haven't built product themselves. They don't even know how to talk to a CTO or, or a technical co-founder, and I find them the funnest conversations. So that's as far as I usually go, but, uh, when I've invested at the edge of A, right, I certainly do. And I remember when I was starting investing, there was a founder I really... I just liked him. I knew him. He was so charismatic. They... And they had pretty good traction, and I went in and it was great, and I kind of wanted to do the deal. It was cheap. Y- Always a good sign in venture when it's cheap, right?

    10. HSHarry Stebbings34:28

        Love a good, love a good deal. Love 'em.

    11. JLJason Lemkin34:30

        Love a good deal. And I went up and I met with the VP of sales. I'm like, "How it's going?" He's like, "I'm quitting." (laughs) He's like, he's like, "We're not gonna make it." (laughs) I'm like, "Okay, well, this is learning. Next, bring in the head of marketing." And the head of marketing is like, "Yeah, I was, like, the office manager until recently. I don't know a lot about marketing." (laughs)

    12. HSHarry Stebbings34:48

        (laughs)

    13. JLJason Lemkin34:49

        So, okay, I did... I said to the CEO before I left the office, I'm like, "Listen, I'm not your, I'm not your Hail Mary." (laughs) And, um, so I do do that, and I think the meta learning... You know, and I reflect a lot on this today, is you do have to be careful with the bullshit artist, right? So I don't know if you need to meet all the management team, but you gotta, you gotta talk to enough people, I think, to push through the, the bullsh- bullshit artists. And I think the bullshit artists really benefited from the boom, right? They really did well, uh, from less scrutiny. Um, it's not just Sam Bankman-Fried, or however you pronounce his name. They're all over the place in SaaS and cloud. And you got to meet enough people to make sure that you're

14. 35:24 – 38:50

    The Power of the Mature Founder

    1. JLJason Lemkin35:24

       not investing in the, in the bullshit artist.

    2. HSHarry Stebbings35:26

       I totally agree with you. Can I as-... Uh, one trend that I'm seeing now is like given how tough it is, just bluntly-

    3. JLJason Lemkin35:32

       Yeah.

    4. HSHarry Stebbings35:32

       ... the mature founders, the fathers, the... and the mothers, and the more mature minded are s- weathering it well. They know that if their child gets sick, it's gonna be much worse than a recession. But-

    5. JLJason Lemkin35:44

       Yes.

    6. HSHarry Stebbings35:44

       ... the young, young founders, their volatility is very extreme. In the highs, they're selling secondaries and buying Guccis-

    7. JLJason Lemkin35:51

       Yeah.

    8. HSHarry Stebbings35:51

       ... and in the lows, they're absolutely on the floor. And I'm really seeing the power of the mature founder and gravitating towards them. Are you as well?

    9. JLJason Lemkin36:02

       I get, uh, your point about maturity. I do think that you can be passionate at any age. You can be passionate at 80 or 90 about your startup. But I, I do think that passion is so important, right? For what you're doing. So I hear the comfort. I think we have to be careful. Let me answer the question differently. I think we have to be careful, in tougher times, what we take comfort in. It's like taking comfort in a low burn rate. Hooray. Hooray. I call this a strategic retreat. If you do a st- a brief strategic retreat as a startup, it's fine. Take a quarter. Get your house in order, right? Get rid of that terrible VP. Cut your burn rate. But if you stay in strategic retreat for a year, you never pull out of it, right? And I see... I... This is what I see happen too often over my decade of investing, is when fo-... And this is what I worry about today. I don't, I do-... I worry about strategic retreats. And so if I see a founder that's young and very passionate and they're struggling, I can try to help them. But if they cross that line into full strategic retreat, I, I, I, I, I, I, I ca- lack ideas. So yeah, the, the seasoned folks, they... Like-They know what to do that second, right? I remember like, you know, going back in time in March 2020 when we had to cancel SaaStr Annual the night before. We lost $10 million, okay? The team was, uh, my team was all first-timers. They were devastated, Harry. They worked for this on a year and we lost $10 million in one night.

    10. HSHarry Stebbings37:17

        Okay. Were you devastated?

    11. JLJason Lemkin37:18

        Took me about 15 minutes. Okay? I waited, I saw this happening, I saw the first ship come into San Francisco with COVID on it from this tour ship. This, and I, and I knew, and then, and then I, I fought it. I fought it, and then the moment came when the fight was over, right? Santa Clara County said, "There's no COVID here in the Bay Area, but we're shutting down larger events." And so I just called it that day and the team was, I'm like, "Okay." And it took me about 11 minutes, maybe five minutes to be your adult, right? Because I'd seen this, I'd seen this playbook before, right? It didn't even bother me all that much because I had to go into fix it mode. But I don't know that that makes me a better f- person or better ex- I mean, you, you know, f- first time founders are so powerful, right? They're so powerful by the same time. They both, they both have superpowers, right?

    12. HSHarry Stebbings38:00

        It, it does make you better. It does make you better because I think for me, it's like the only thing that matters there. Jason, why am I successful? It's not 'cause I'm fucking smart. Um, we both know I'm not. It's just, I'm just dogged and persistent. (laughs) I never stopped.

    13. JLJason Lemkin38:12

        Right.

    14. HSHarry Stebbings38:13

        I just kept going. Like you there, when you had the shit of shit, you went, "Okay, let's carry on."

    15. JLJason Lemkin38:19

        Yeah.

    16. HSHarry Stebbings38:19

        That's why you win.

    17. JLJason Lemkin38:20

        I think that's good. I just think not, not to sound like fuddy duddies or, or to talk about the laziness that's gone into tech. I think that's true, but also I worry today that more, not, not necess- not necessarily founders, but I worry too many seasoned folks just quit too quickly now.

    18. HSHarry Stebbings38:35

        Yeah.

    19. JLJason Lemkin38:35

        They, they just waiting for that easy job, they quit. They're jumping, they're jumping in. Startups are meant to be hard. They're meant to have these, (laughs) these hard periods. But yes, young f- young, new founders, young founders, the, the emotionality and the downturn can be... I'm not sure I'm compatible with it. (laughs)

15. 38:50 – 43:13

    What happens to LP markets?

    1. JLJason Lemkin38:50

    2. HSHarry Stebbings38:50

       J- j- Jason, we're, we're both, um, fund managers. What happens to LP markets in this?

    3. JLJason Lemkin38:54

       Well, I can just tell you what I've learned with my LPs, right? In, in I'm a small, a very small check for, for my LPs, but I have a lot of good commonality. Like, I have a lot, because of Alex Bengos, I have a lot of overlap with Initialized, with Atomic, with th- we have a lot of LP overlap. So I think what I've learned is interesting. None, one, none of them want another manager. Th- they don't. Okay? It's not that they won't take another manager in. Like, they, they, they will, right? If you or I sent one of them an email and said, "This is the best new fund on planet Earth," they will probably write a, write a check, right? But no one wants another manager.

    4. HSHarry Stebbings39:25

       Mm-hmm.

    5. JLJason Lemkin39:26

       Simple answer. No one wants another manager. Two, they're pretty chill right now. They're pretty chill. Um, the LPs that have been doing this for a while, I've heard versions of this from three or four top LPs, which is, "We still believe fundamentally this is the best asset class in our portfolio, and this is part and parcel of the asset class." Now, if this went on for five years, (laughs) they might reassess whether timber or diamonds or ventures should be in the portfolio. But right now, people, people are pretty chill with it. And then the last insight, which I didn't totally get until my last LP meeting, which was just a few weeks ago, which is a lot of LPs are judged on an annual basis, right? They're judged annually. And last year actually was great for a lot of LPs because... I didn't get this. Uh, th- the last big exit I had was SalesLoft, which sold for two and a half billion to Vista on December 31st, 2021. But by the time the LPs got their distributions, especially from IPOs, they're deep into 2022. So a lot of LPs, this is just what I, this was not, this, you may be skeptical, this is what I've heard. A lot of LPs may be worried about 2023 when they may have no distributions, right? But 2022 was much bet- even if the stock market was down, cash, in many cases, cash was pretty good compared to model, right? Because of the lag, the cash collections lag.

    6. HSHarry Stebbings40:43

       Okay. Could our saving grace for 2023 be the distributions from Figma? When you look at the amount of LPs across the different funds from Kleiner to Index and everyone in between, there's a lot of LPs in there. That's a lot of distributions.

    7. JLJason Lemkin40:57

       I think it'll help. I think there's so much money in venture now, though. We would n- I would need someone smarter than me to throw together a spreadsheet to say, is it enough, right? So how, how much did Figma sell? Uh, so if Figma generated 10 billion of venture returns out of 20, let's say, right?

    8. HSHarry Stebbings41:11

       Yeah.

    9. JLJason Lemkin41:11

       Um, is that enough compared to the size of the funds in Figma? It, it might not be enough. Like, ven- again, going back to the start of the conversation, venture is a hard business, right? And if, if that 10 billion represents sort of 50 billion of funds, right, in coverage, then it's, uh, it's helpful, but it's not gonna rain, right?

    10. HSHarry Stebbings41:32

        I think we'll see the death of many of the micro funds, the funds that raise from founders, public market founders who now have had their net worths crushed, and then GPs like me and you who bluntly are probably writing less LP checks than we did before.

    11. JLJason Lemkin41:45

        I think they're gonna be decimated. I think they already are decimated and they don't know it. I think the last two years were insane, were insane. And kudos to everyone that raised, every new manager with absolutely no track record whatsoever, no exits, um, sitting on likely a one X portfolio at best, was able to raise double-digit million first-time fund. Kudos to you because that never happened in venture before, okay? I literally, when I, when I raised SaaStr Fund One in 2016, we knew each other then. You c- I still have some of the testimonials on the website. People thought it was insane. They're like, "How could one person raise $60 million?" Like, they're like, "That's so much, so much money," right? And, and I already was, I, by then, like, it was still early in my career, but I already ha- was al- almost four X from, like, real companies with significant ownership positions, right? Not like w- not like throwing a check into, into something. And so it was... I hope that the new managers know that it's a gift, and I hope that they leverage that gift because, um, you can make so much money in venture if you invest extremely well. But investing at a mediocre level only gets you fees, right? So use your, if you're a new manager with a new fund, don't waste your shots. Like, I think we all wasted a few shots the last couple of years. I know I wasted one or two. I wish I could get them back. I didn't waste 20, but times were so good I wasted shots. Don't waste, don't, maybe don't waste a shot if you're a new manager, right? Just assume this fund is your, your last one. Um-... but one Figma, one, one HashiCorp, one th- th- you can make a lot

16. 43:13 – 45:26

    Do you know your winners early?

    1. JLJason Lemkin43:13

       of money. Do you not think so?

    2. HSHarry Stebbings43:14

       You don't think-

    3. JLJason Lemkin43:14

       You don't think you can make a lot of money on one?

    4. HSHarry Stebbings43:16

       Oh, no, I totally think you do. But do you know-

    5. JLJason Lemkin43:17

       Yeah.

    6. HSHarry Stebbings43:18

       ... your winners early? For those that are the Figmas and the HashiCorps or the SalesLofts or the Algolias-

    7. JLJason Lemkin43:22

       Yes.

    8. HSHarry Stebbings43:23

       ... (mumbles) good, do you know it early, or are y- are you ever surprised?

    9. JLJason Lemkin43:26

       I, I can only share my experience. I think people have different experiences. I think you know that they are operationally successful early.

    10. HSHarry Stebbings43:36

        Mm-hmm.

    11. JLJason Lemkin43:36

        Um, you know that they're gonna grow. I had no idea that any of my cash unicorns, right, the ones that were exited for a billion, I didn't think any of them would, except for Talkdesk. I did- I- and it's not that I didn't love the founders, it's just it's just so hard, right? It's just so hard to build these companies that I would not have predicted that Pipedrive, Algolia, SalesLoft would get that big. I knew Talkdesk would, just because going from, you know, one to 15 million with so few employees in a year was so much product market fit in there that you're like, "Okay, well, this is gonna be worth a billion, but not more," right? Not the 10 billion on paper. But I think, so I think the meta learning is just, like, get into winners and just, just don't worry about the stock market. Don't worry about multiples, because you can't control it, and it's gonna change so many times. Like, it takes 10 years to get a billion-dollar exit, like M&A. I don't- I- IPO converts 10 years for... So the market's gonna change a lot in 10 billion, right? Don't, don't e- you don't even need to look other than to understand follow-on capital and burn rates, just, just do. But I do think, I know people will disagree, I do think if you're able to invest post-revenue in SaaS-

    12. HSHarry Stebbings44:38

        Sure.

    13. JLJason Lemkin44:38

        ... um, you, you can, you know. You know it's gonna be, gonna do reasonably well, and you also know it's probably gonna have a crap year in there.

    14. HSHarry Stebbings44:45

        I think me and you, well, I, I don't know, but I- I speak for myself here, I definitely have a sweet spot of, like, like, post-product, 20 to 40K in revenue, you have some customers, you have some data, the founder's probably still leading the sales process, but there's something there. There's that-

    15. JLJason Lemkin45:00

        Yes.

    16. HSHarry Stebbings45:00

        ... seedling of goodness.

    17. JLJason Lemkin45:02

        You know what, the truth? That's where I started investing, because I was like, "I'm a founder." Like, I, I, I, I just, I need to f- invest n- at least in a moment in time where I can tell if they're a better founder than me.

    18. HSHarry Stebbings45:13

        Yeah.

    19. JLJason Lemkin45:13

        And so I needed a little meat on the bones. And you're a founder now, Harry, so you know who's better than you as, as a founder, not just an investor. So founders have this investing superpower that money managers don't have, which is they know who's better than them. But if- in SaaS, in

17. 45:26 – 55:59

    Are LPs re-uping?

    1. JLJason Lemkin45:26

       B2B, if you do that pre-revenue, you really can't be sure. (laughs)

    2. HSHarry Stebbings45:28

       Jason, what happens with re-ups? They don't want new managers. Are they re-upping?

    3. JLJason Lemkin45:33

       I don't know. Uh, I, I, I should've asked that question more, and I think we, we would have to ask other people. I think that if you have done reasonably well as a manager, you are still earmarked for the next fund. I think you are still earmarked. Whether you will get it, uh, and whether you will get it in the same amounts or the way you want, I don't- I, I don't know the answer. I know that, I know that, um, other than one LP, I remained earmarked. One LP de-earmarked me, so that wa- that was a learning process. Um, but I know I'm ear- but it doesn't mean I might not get any more money. But I know that I'm bud- like, they've got- the budgeting process for LPs, like, I- I'm on the other side, it's really complicated between capital calls and timing and managers. It's not a, it's not a simple process to, to, to, you ha- you have to plan, you have to plan the science out of it. Otherwise, you're gonna get hit hard, right? It's so many capital calls over so many years and so many managers.

    4. HSHarry Stebbings46:23

       Why did they de-earmark you? Did they tell you?

    5. JLJason Lemkin46:26

       I think they felt I was, uh, investing too slowly and wanted to invest in, in, more in crypto or a hotter manager, they said.

    6. HSHarry Stebbings46:33

       I love how- you were investing too slowly? What, you don't want vintage diversification in this cycle? That seems a little bit s- (laughs) sorry, I'm just, uh, I, I agree with you, 'cause I, I invested 35% of my fund in, you know, 17, 18 months.

    7. JLJason Lemkin46:46

       Yes.

    8. HSHarry Stebbings46:46

       My LPAC are going, "That's fantastic news. This is great," you know? "Unlike every other manager, you deployed slowly. Good."

    9. JLJason Lemkin46:53

       There, there is a certain amount of pressure to deploy capital, but LPs, they're, they're dealing with large pools of capital, and they, they just don't want unexpect- they want expected risk.

    10. HSHarry Stebbings47:03

        Yeah.

    11. JLJason Lemkin47:03

        They don't-

    12. HSHarry Stebbings47:04

        Yeah.

    13. JLJason Lemkin47:04

        ... want the unexpected risk. That's what freaks them out, right, is, um, uh, you know, there's this one fund out there which, who we won't name names, who raised their huge, I think it's their third fund, and they called 95% of it at the peak and put most of it into some of the hottest crypto names, a, a well-known fund, and, uh, that's, that's what LPs sp- and, and my limited, my, uh, not, not to gossip in a gossipy industry, my limited understanding from the limited overlap is that the LPs did not expect 95% of that fund to be called (laughs) in the first year.

    14. HSHarry Stebbings47:32

        On the re-ups, from what I understand, and I speak to a lot of LPs, if you had the chance to produce DPI last year and you didn't, you're in the bad books. If you deployed way too fast and left them very, very surprised on your deployment cycles, you're in the bad books.

    15. JLJason Lemkin47:46

        Yeah.

    16. HSHarry Stebbings47:46

        But otherwise, if you stuck to plan and you actually prioritized the relationship, this is where I, yeah, I love people, you know me, but if you did build the relationship throughout cycles and didn't just take money and say, "Fuck off," actually, and you stuck to plan, they should be there, but likely in the same not an expanded capacity, where they would have expanded normally. Do you see what I mean?

    17. JLJason Lemkin48:10

        I think that's right with, uh, with maybe the only family caveat. For a newer mana- like, yes, the, I, I forget, someone great on Twitter said, like, the l- ultimate LP judge was how many exits did you have in 2021, right? So I'm new, but I did have three billion-dollar cash exits in 2021 in my investing career, but I didn't make those investments in 2021. (laughs)

    18. HSHarry Stebbings48:29

        Well, I guess-

    19. JLJason Lemkin48:29

        So if I hadn't started investing ear- I, I didn't have any, like, B2C stuff. If I had invested early, I would have zero instead of these good-looking ca- so I think new managers are, are... it's tough, because there just wasn't enough time for all but, you know, unless you're in these super hot deals to create those cash exits, right? You probably are sitting on no DPI. And it doesn't mean your investments are bad, but it's just, that's a time trouble, right, is that these, the dist- the, it, it, there, there is sec- secularity there.

    20. HSHarry Stebbings48:54

        And I had, like, five billion-dollar consumer companies. I think one is still one. (laughs)

    21. JLJason Lemkin49:00

        (laughs)

    22. HSHarry Stebbings49:00

        (laughs) Sorry (laughs) sorry.

    23. JLJason Lemkin49:00

        But I'm talking about cash. LPs want to know how much... Uh, I think it's a very important question for LPs to ask is not just the fund but the GP. They should ask, like, you know, "If you didn't have multiple billion-dollar cash exits in 2021, you're not a good investor."

    24. HSHarry Stebbings49:14

        There you go.

    25. JLJason Lemkin49:14

        That's the, that, that, I saw that on Twitter and it, and it struck me as painfully true. If you did not as a GP, if you've been investing more than six or seven years, and you didn't have multiple billion dollar cash outcomes in 20... At the best, because it was just so accelerated, you never will. Like, the LP should just quit on you. But I-

    26. HSHarry Stebbings49:30

        When I speak to LPs, Jason, I don't see that transition of power. They're still like, "Oh, I couldn't ask them for GP track there. That would, they wouldn't like that." It still feels like the premier GPs tell LPs how it's done and say, "Speak to IR teams."

    27. JLJason Lemkin49:46

        Well, sure. Uh, y- w- (laughs) I don't, not to get lost in the weeds. Yeah, the best GPS don't wanna deal with any of the LP issues. They want a team that just ha- handles that, right? Uh, that, that's part of the process right now.

    28. HSHarry Stebbings49:58

        But most of the funds that we know are now that size.

    29. JLJason Lemkin50:01

        Yeah.

    30. HSHarry Stebbings50:01

        That's what's terrifying. Like, actually, the tier two, tier threes-
18. 55:59 – 57:27

    What have you changed your mind about in the last 24 months?

    1. JLJason Lemkin55:59

       i- this stuff was hard. Like, it's all hard. SaaS is hard, startups are hard. It's meant to be hard. And I'll tell you my last little bit of lack of sympathy, but, like, you talked about new founders being emotional, right? When I see, like, a founder cry, I have no sympathy. And I know someone's gonna listen to this and be mad, but I mean, like, it's supposed to be hard. Like, you can cry a little bit with me. Like, Harry, you and I can cry. We can end this. We can cry a little. I don't mean that literally, but like, uh, adult up. I mean, it's... This s- stuff is hard, right? So that's what we're learning. It's, it's hard. It's meant to be hard. You should have a terrible year. You should almost run out of money. Like, if... I bet if you went back in 20 VC and you interview... eh, and you, and you looked in the early days, am- almost every top founder I knew almost ran out of money, but they didn't.

    2. HSHarry Stebbings56:43

       Mm-hmm.

    3. JLJason Lemkin56:43

       They almost, they almost all had that great story, right? You get 'em on stage. Outside of these last two years, you get anyone on stage, "You know, we were three weeks away. We only... (laughs) We had to meet 7,000 investors and we only got one." And those stories kind of evaporated, but they're all gonna come back. (laughs)

    4. HSHarry Stebbings56:57

       Um, my personal favorite, I got an investor update the other day. It said, "The good, amazing team offsite."

    5. JLJason Lemkin57:03

       Yeah.

    6. HSHarry Stebbings57:03

       I was like, when that is number one-

    7. JLJason Lemkin57:05

       Oh yeah, that's a bad one.

    8. HSHarry Stebbings57:05

       ... we're still not good. (laughs) It's still not okay. Um, Jason, I, I love this. This has been fantastic as always. I think it's so helpful for founders understanding going into the year. So thank you so much, my friend. It's wonderful.

    9. JLJason Lemkin57:17

       Okay. Thanks, Harry. Best, best of luck to you and everyone in the audience in 2023. Let's... It's gonna e- this year is gonna end better than it started, right? So take advantage of it. Take, take advantage of it.

Episode duration: 57:27