Roundtable #4 with Jason Lemkin, Woody Marshall, Deven Parekh, Harry Stebbings | E1071

1. 0:00 – 3:00

   Intro

   1. DPDeven Parekh0:00

      You can wake up in the morning and decide the glass is half empty or you can decide the glass is half full. We went over a year without any tech IPO. We went about a year without any kind of meaningfully large strategic MNA. Cisco just bought Splunk. You had three companies go public at real scale, which are real business models. That, to me, is a glass half full.

   2. HSHarry Stebbings0:19

      (instrumental music) Well, I am so excited for this. I think we have some of the best minds around this kind of virtual round table for this. I'm just gonna start off by, one by one, I just wanna do like half a minute of an introduction so everyone gets a scene and actually hears the voices. So Deven, let's start with you. Can you introduce yourself in 30 seconds?

   3. DPDeven Parekh0:37

      Sure. Uh, Deven Parekh, Managing Director with Insight. Uh, been at Insight since January of 2000. When I joined Insight, the market was rip-roaring, uh, and about four months later, it was no longer rip-roaring. So I've kinda been through the current rodeo before. Insight is a kind of a global investor in software. We do everything from kind of early growth to buyout, um, and, uh, about 70 billion dollars of assets under management. And happy to be here, Harry.

   4. HSHarry Stebbings1:07

      Amazing. Woody, over to you. 30 seconds, hit me.

   5. WMWoody Marshall1:10

      Yeah, uh, Woody Marshall, um, a general partner at, at, uh, TCV. I joined TCV in the beginning of 2008, so the world was not rip-roaring, uh-

   6. HSHarry Stebbings1:19

      (laughs)

   7. WMWoody Marshall1:20

      ... you know, when I, when I, when I joined. Um, you know, TCV's been around, uh, for almost 29 years. We do two things, growth and, uh, technology, uh, primarily software and consumer and, you know, and fintech. You know, just to give context to, um, if there are lots of different, you know, uh, uh, definitions of growth, about 70% of the, of the businesses that we invest in are at least 50 million of revenues and, you know, about half are profitable. No- n- none... It's not a requirement, it just, that's how it comes out to, you know, you know, in the, uh, when you look at the data. But for us, we're, we're focused on growth assets. There's a bunch of them that just may be profitable because of the, you know, the underlying, um, you know, leverage they have in the business. But that's what we've been doing and that's what I've been doing, you know, for, uh, the better part of, uh, almost 30 years.

   8. HSHarry Stebbings2:15

      And Jason, I think for everyone that loves the round tables, which everyone does, (laughs) they probably know you, but hit us with your 30 seconds anyway.

   9. JLJason Lemkin2:22

      Sure. Uh, Jason Lemkin, uh, I, I run SaaStr, the largest global community for SaaS founders, and I've been investing, seed investing for about 10 years. I'm pretty excited, I've got three or four after 10 years that I'm hoping will IPO at the end of next year. I've had some billion dollar exits, one with Insight, hopefully one with TCV soon, but I'm, I haven't had an IPO yet, so I'm super excited to learn how great it's gonna be at the back half of next year. And we've got some standing bets around this, by the way.

   10. HSHarry Stebbings2:50

       Back half of next year, Jason, it's happening. I've, I heard from experts, it's happening.

   11. JLJason Lemkin2:54

       Okay. (laughs)

   12. WMWoody Marshall2:55

       (laughs)

   13. HSHarry Stebbings2:55

       So stay, stay tuned for that. But I wanna start, Woody and Deven-

   14. JLJason Lemkin2:57

       (laughs)

   15. HSHarry Stebbings2:57

       ... I'm gonna, uh, hand this one onto you, which is,

2. 3:00 – 18:22

   Is Growth Dead?

   1. HSHarry Stebbings3:00

      everyone says that growth is just dead. Is this true? Are new deals getting done?

   2. DPDeven Parekh3:07

      First of all, growth is not dead. L- let's start with underlying growth in actual companies. If you look at Q2 of 2023, you know, Insight has 100, had a 180 portfolio companies that grew north of 50% in, you know, Q2 of 2023 over Q2 of 2022, in, you know, what are, you know, clearly more, a more macro challenged environment than we had maybe a few years ago. So the underlying growth in companies is still there. Now, that's separate from where's the growth market from, as it relates to new investment. And like many people, our pace is down dramatically. Uh, we have done new deals this year, but many fewer than we did in '22, many fewer than we did in '21. The one thing I would just point out is if you look at '21 and '22, there was a lot of series A and series B investments that got done. And when you, when a company gets funded series A, series B, and, you know, Jason can talk about this with more authority than me, you know, you're not typically funding a company for three to five years. You're funding a company for 12 months, 18 months, 24 months, so kind of the net- next proof point. And so as we kinda get to the beginning of '24, you're gonna naturally have companies that are gonna need to raise capital. And some of them are gonna have executed reasonably well, notwithstanding the environment. And what will happen is they'll raise capital, they just might not raise capital at the price they want to raise it at. I don't anticipate the growth market being dead. It's definitely the pace is gonna be dramatically lower in '23. I don't know that we'll see '21 pace anytime soon or if ever. But I, I also think that, and this is one of the things we talk about internally, particularly when we're talking to the team, you know, this market is probably closer to reality than '21 was.

   3. HSHarry Stebbings4:50

      Okay.

   4. DPDeven Parekh4:50

      Um, and, you know, the, the, you know, the pace of actually being able to spend time with companies, build relationships with management teams, take them out to dinner, um, see how they do over the course of six months, is really what this business always used to be, uh, and I think is what this business will go back to being.

   5. HSHarry Stebbings5:08

      Mm-hmm.

   6. DPDeven Parekh5:08

      And so I'm actually, uh, while obviously there's, we'll talk later about what happened in '21, uh, I'm optimistic that we'll get to a reasonable place from a pace standpoint, um, because there, I still think there's a lot of really interesting companies out there that are growing.

   7. HSHarry Stebbings5:21

      Woody, how do you respond to it?

   8. WMWoody Marshall5:23

      Deven's totally right. I mean, volumes are down. There's still a disconnect, you know, kinda between buyers and sellers. So I would say you don't have the opportunistic fundraises that certainly happened in '21 where somebody may have raised money and, and then, uh, you know, another investor got excited about what that opportunity could be and, you know, bid them up-... you know, two X, three X, four X, you know, very quickly. So I, I, I think transactions are happening but for very specific reasons. You know, maybe there's some strategic MNA, you know, there's some specific growth investments that have been, you know, well thought through. By the way, today a company may have taken some debt, which, you know, was, was free (laughs) before and now it's actually (laughs) expensive. So, so I think that there are some real, you know, business reasons that are driving transactions. You know, you're also seeing some secondary. I mean, a lot of people haven't gotten much liquidity, not that, uh, early investors are selling an entire stake, but provide some, you know, uh, uh, partial liquidity. You're seeing these things. I mean, look, we, we just did a deal with, uh, you know, that, um, uh, Devin, Devin's, uh, and, and the guys at Insight were in. You know, it's a, it's a classic, you know, minority software, you know, investment, $100 million plus investment, $100 million plus business growing 50% but losing a little bit of money, but, but very focused on a number of really thoughtful growth initiatives. You know, actually, there's ROI that's behind them, like, you, you know, their, their, the, the team is thoughtfully allocating, you know, incremental capital. So, so they're definitely happening and, and, and to Devin's point, I think you'll, you're seeing companies that are executing well. The issue is, y- you need a reason to, to, to want to raise money today because there is that valuation disconnect, and there's a lot of investors that, you know, that, that they're trying to buy, you know, a dollar for 75 cents. They look at the public market and think that there's a great deal there. I just don't think those transactions are happening. And I agree with Devin that I like the more normalized pace just because, y- you know, investors get to do their work, management teams get to understand the investors that they're getting involved with, and I just think you end up with, uh, you know, better decisions and, and more, um, commonality and kind of shared, um, you know, vision and execution, you know, after the, a transaction gets done.

   9. JLJason Lemkin7:46

      Is that, um ... for, for folks that maybe haven't been in the venture markets before 2020, is that, is six months a reasonable way to think about pacing for a growth round? Do folks, do you guys like to see two quarters and get to know folks? I don't ... and what was it in 2021, how fast did a deal (laughs) get done in 2021?

   10. WMWoody Marshall8:02

       You know, there's an earlier round? I mean, I think it always depends. I mean, sometimes an earlier round can fund a company for, you know, two years.

   11. JLJason Lemkin8:09

       No, to get to know you guys, to get to know you, to go from first meeting to a growth investment.

   12. WMWoody Marshall8:12

       I don't, I don't think there's a magic ... I, I ... by the way, I don't think there's a magic to six months.

   13. JLJason Lemkin8:15

       No, but I thought it was just an interesting anecdote, right?

   14. DPDeven Parekh8:17

       I would say the other interesting thing is like, we have a bunch of companies in our portfolio, companies that, you know, we like, and I think what we have been positively surprised by, we've got one literally that, you know, we just got a term sheet today. I wasn't really even expecting a term sheet, uh, but we got a term sheet from a firm that I've never really seen before, um, that, you know, showed up with a pretty attractive term sheet, and we're gonna participate in the round. Uh, company's actually doing well. So I think that companies that are executing well, that have reasonable expectations of value, are really able to raise, uh, capital today. The one other thing I'd just point out is there is another driver of why, you know, companies are not, rounds are not happening, which is that companies were smart, that when the cost of capital was low and valuations were very high, many of them went out and raised a lot of money, right? Um, you know, we have multiple companies in our portfolio, uh, that have between three and $500 million of cash on their balance sheet. Um, and-

   15. JLJason Lemkin9:13

       (laughs)

   16. DPDeven Parekh9:13

       ... their, their last round could not replicate today, and they actually kinda know that. The, the, the news flash is, they don't need to replicate it, um, because they took advantage of that, the, the, that time and raised a lot of capital. And so the other reason is, and I think, um, Woody touched on this, is that's not a deal where you're gonna get an easy clearing price, uh, because the company has no motivation or need to raise that capital.

   17. HSHarry Stebbings9:39

       Devin, are you not worried that they're gonna have such a valuation to scale into? I, I, I have some companies, not quite with three to 500, but with, say, 100 million, but to get that 100, they did it at 100 XARR, and I'm sitting there going, "God, that is a big valuation to scale into." Do you share that worry, and how do you think about it?

   18. DPDeven Parekh9:58

       Look, I think there's two different, uh, constituencies that, that, you know, I worry about in that case. I, I, I have to say I worry about it myself (laughs) like, 'cause I-

   19. HSHarry Stebbings10:07

       (laughs)

   20. DPDeven Parekh10:07

       ... I might have written a check. Um-

   21. HSHarry Stebbings10:09

       Or two. (laughs)

   22. DPDeven Parekh10:10

       But, but, but, but probably m- more importantly, I actually worry about making sure that the team is incented, right? Um, and so I think there's gonna be a lot of those cases where companies, with our support, you know, we're gonna significantly reduce the valuation of the option and equity incentives going forward. Part of a lot of those rounds obviously is investors are sitting in preferred stock. Uh, not in all cases, but in, in, in most cases. Um, and so they have downside protection that the employees don't have, and I think, uh, what is gonna be important is because these companies are really not worth much if you don't have a team that's motivated. And so, I think that there will have to be a realignment, Harry, around how we create equity incentives for the team in these companies. But for investors, it's gonna take longer, so a deal that you might have thought might take three or four years might take five, six, or seven years, and maybe at five or six years, you might only get your money back. And it might be that in a place where I get my money back or a late stage investor gets their money back, employees still really need to earn money, right? Because there's still a lot of value creation that needs to happen to get there. I think there's multiple constituencies and we just have to be sensitive to all of them.

   23. HSHarry Stebbings11:20

       Are a load of teams just gonna get wiped out, though, on the pref stack side?

   24. DPDeven Parekh11:24

       I'll let Woody answer that one.

   25. WMWoody Marshall11:25

       The only thing that's gonna determine ultimate valuation for, for any of these situations is the performance of a company and, and Devin's 100% right, like, companies don't run themselves. There's always these discussions about so-and-so raised a, a, you know, a lower priced round or a 409A, to what Devin was talking about. 409A is so much lower, and it's, and it's written about in the press as, like, this-... bad thing and, like, look at this stupid company, and to me, I have the totally opposite view, which is here's a company that is ... By the way, if you're a public company, there's no argument, right? Like, your stock was trading at 100 and now it's trading at 25. Like, there is nothing to argue about. On a private company, the smart companies are-

   26. JLJason Lemkin12:09

       Yep.

   27. WMWoody Marshall12:10

       ... you know, resetting the deck, they're ripping the Band-Aid off, because the problem with companies that hold onto some of those valuations is they're going to make decisions that are suboptimal when you think about how to build the business over the long term. And as an investor, by the way, we take that risk, and Devin's right. Like, if you look at the things we invested in, in '21, we, we like those companies a lot. It may take, it's gonna take us longer to get our returns. It just is. Because, because multiples have come down. But if you don't have a company that level sets to where they are, A, you're not gonna have motivated em- employees, and you may make decisions that are not the right decisions for the, you know, the organization. Shoot the moon, you know? By the way, the only way we're gonna be worth anything is we have to literally put everything in. Like, I'm all in on black, as opposed to thinking about how, how should you most efficiently allocate capital given the environment that you're in today?

   28. DPDeven Parekh13:05

       The one, th- the one thing I'd add, which you didn't ask, so you didn't ask the question but I'm gonna answer the question you didn't ask, uh, uh, which is where you have companies where they're trying to hold on to that last valuation, forget now from an employee standpoint, but because they think it's better to go to their employees and say, "Our valuation's flat," when everybody including the employees know it's not, and then they go out and try to raise some heavily structured security, uh, in order to try to kind of preserve value. And I actually think that's the most dangerous thing the company can do, because then you do create a, a challenge, because you create an artificially high valuation that's not consistent with where current values are. Makes it harder to actually strike the 409A valuations where they probably should be struck, and you're also not just being intellectually honest. Like, in a public company, you know, when Facebook's stock goes down, they take action, the stock goes up. You just don't get to do that in a public company. But when you start thinking that your company's worth something, uh, like look, Instacart's an example. That valuation came down a lot, the pub- uh, you know, the, the 409A valuation came down a lot. Now it's a public company and it'll end up trading over the next few years based on its underlying operating performance.

   29. JLJason Lemkin14:13

       Can I ask a question about that? About structured terms? Everyone on the internet talks about how toxic structured terms are, right? Are they so bad? I ima- imagine Harry and I are running a startup together. We're at 50 million in ARR. Okay, we're growing 80%, pretty good, right? And we raised the last round at a billion, okay? Not at five billion or 50 billion. And we got someone that'll do the, they'll do a round extension at a billion, but they want to g- a guaranteed 2X return. Okay, I get that it's debt-like, I get, but, but Harry and I want the money. We get it, and Harry and I are in it for 10 years. We're gonna IPO. We're gonna get to three, four, five billion. Why is a little structure (laughs) , Box had it when it IPO'd, other had it, why is a little structure so bad? I'm not sure it, bridging the difference is the end of the world, is it?

   30. DPDeven Parekh14:55

       You know, it's, it's great when the outcome works, right? Like if you, you-
3. 18:22 – 29:37

   The Reset of Valuations

   1. HSHarry Stebbings18:22

      and, uh, like, incentive alignment. If we did that across portfolios, venture investors would be resetting, in some cases, 50% down or marking down portfolios really across the board, 50 to 60% in some cases, if we wanna be direct. That's not in their interests often, with LPs who they wanna go and fundraise from in the next quarter or two quarters or three quarters, and we've seen delays in VCs marking down their books. Is there an incentive misalignment in the resetting of valuations in that respect?

   2. WMWoody Marshall18:52

      Yeah, y- I mean, that is, that is an issue, right? That is an issue. And if you talk to, uh, LPs, there are many of them that are, that are waiting. You can have many different investors in the, in the same company, you know, holding, holding a particular-

   3. JLJason Lemkin19:06

      (laughs)

   4. WMWoody Marshall19:06

      ... security or a, a particular company at different, different prices. Y- it's definitely an issue. I mean, th- but, but fundamentally, again, you want everybody (laughs) try to get to, you know, the, the point of this is a fair price because, you know, th- the decision issues that De- Devin talked about, until you're all on the same side of the table, somebody may be, be, be, uh, fighting for something that is not the, the right optimal outcome, but it's the right thing for them in an, in the short term, and that's a bad thing over the, over the long term. So I think LPs are trying to get smarter. I think anybody, you know, I mean, if you're a firm as big as mine or as Devin's, there, there's a very, uh, (laughs) sophisticated process that gets reviewed by auditors, which is a little different than, you know, with a lot of the early stage guys. So th- it's hard for us to, to play around with valuation.

   5. JLJason Lemkin20:01

      Right.

   6. WMWoody Marshall20:01

      And I just think that needs to flow through to, you know, everybody in the, you know, in the investor community, or you have all of these different, uh, opinions that have different motivations, um, you know, given your valuation discrepancies.

   7. HSHarry Stebbings20:15

      Totally gay. Can I ask, Jason's hypothetical example mentioned, you know, the 50 million ARR company. There's a large group of SaaS companies that 100 million, even 200 million ARR with, with decent-ish growth. Will PE activity pick up here and what happens to that?

   8. DPDeven Parekh20:32

      I think you're gonna see, and we've done a bunch of these deals, others will have done some of these deals, I mean, those are gonna be companies that they're not all perfect public candidates, but some of them are not necessarily perfect strategic candidates either, meaning there's not a, a logical strategic who wants to own the asset for whatever set of reasons. And I think you're gonna see, uh, firms buy... Th- those firms can get bought by, uh, sponsors, uh, or firms like us. And I think there will be a market for those types of assets, and I think the challenge is gonna be, in my view, is those assets that are not growing that fast and the lower left quadrant is crappy growth, high burn.

   9. JLJason Lemkin21:14

      (laughs)

   10. DPDeven Parekh21:15

       Okay? Like, if you've got a crappy growth, high burn, like, that's the mark.

   11. JLJason Lemkin21:19

       No need to email. (laughs) .

   12. WMWoody Marshall21:20

       Yeah.

   13. DPDeven Parekh21:20

       Yeah, I mean, uh, you know, don't-

   14. HSHarry Stebbings21:23

       ... box you don't wanna be in.

   15. DPDeven Parekh21:24

       Right. I, I, I, I, I would really request you send your pitch to Woody.

   16. HSHarry Stebbings21:28

       (laughs)

   17. DPDeven Parekh21:29

       Uh, but, um, I'm, I'm teasing. But I think that the companies that have... Just like you're seeing in the public markets, what you're seeing in the public markets is a... So if you go back to 2020, the correlation to revenue multiple in the public markets was something like 72% was correlated to revenue growth. Today, it's in the mid 30s. What's the spread? Well, path to profitability or free cash flow. And everyone's kind of reset. Now, I don't... It's not like Woody has to show up at the board meeting and tell his CEO, "Yeah, you really should be more profitable if you wanna go public," y- because all he has to do or she has to do is look at the public comms and look at what the research says. I think that there's gonna be absolutely a market, Harry, for companies of, you know, re- good revenue scale that have got reasonable growth that can kind of build a Rule of 40 company.

   18. JLJason Lemkin22:15

       Are you guys modeling that this efficient market or that correlation for revenue versus profitability, are you modeling that's gonna be true in '25, 2025, 2026? And I haven't done the homework. My gut is that historically that's been a, a minority of years in tech, right? Most years, we've been valued on... And you guys have to at least... You guys don't have to think 20 years out, but are, are you really still val- uh, do you, do you wanna value it the way it is today or where your gut is it's gonna be in 2024, '25, '26?

   19. DPDeven Parekh22:43

       Well, when, when, when we did deals in 2021-

   20. JLJason Lemkin22:46

       Yeah.

   21. DPDeven Parekh22:47

       ... and, and I'm talking now about revenue, revenue growth-driven deals, right, as opposed to buyouts that were y- more EBITDA driven, we do both, we were assuming on average 50% multiple contraction. Now, at the trough, they contracted even more than 50%.

   22. JLJason Lemkin23:01

       Okay.

   23. DPDeven Parekh23:01

       And now they kind of come back to, uh, you know, close to 50%. If you look at long term software multiples, like over 15 years, today's multiples are lower than, like, the 15-year median, but not by f- 40%, right? So-

   24. JLJason Lemkin23:17

       No, maybe 20, 15 to 20%, right?

   25. DPDeven Parekh23:18

       Maybe 15 or 20%, right. So I actually think there's upside, um, personal opinion, but I think there's upside from today's revenue multiples, but I certainly wouldn't think that we're going back to '21's multiples either, right? Um, you know, that, that, that's a different environment.

   26. WMWoody Marshall23:34

       Yeah, and I also think over time, you know, there, there is the, you know, the, you know, as, as businesses grow and they, you know, may, may, may slow and, you know, there's the Rule of 40, uh-... you know, the- these are these rules of thumb. And if you, y- yeah, I- I was talking to some capital markets folks recently that, that were s- talking about, you know, two years ago if you had talked to the public market and- and you asked them the combination of revenue growth plus EBITDA margin is your rule of, um, you know, analysis. And what was, if you wanted to get to rule of 40, that's- that's a spec- special company, what was your, what were the characterizations? What were the- the component parts? It used to be 60 to 70% growth with a negative 20 to negative 30% EBITDA. Today, depending on who you talk to, it's like 30 and 10, 20 and 20. Like, they- they- they wanna see both. Devin's 100% right. If you're, when you're in the growth world, the multiples that you enter in are (laughs) very different than the multiples that you underwrite your- your exit on. And I, and it just, it, that's- that's just the nature of the, you know, the- the deceleration of the business as they scale. The other thing is, revenue multiple may be an output, but it's not, it's not the metric. The metric might be, you know, here's your EBITDA multiple. Take a look. Over time, things will start to trade at EBITDA or they'll trade at, you know, you know, maybe it's gross profit for a little bit, then it goes to EBITDA. And over time, it's gonna get to net income. At the end of the day, like, you know, we were Facebook investors when it was private and the thing was growing like a weed. By the way, it was very profitable, but r- read every Facebook report that comes out. Nobody talks about revenue. Some people may talk about EBITDA, but it's- it's net income. That's the evolution of these businesses and I think you have to figure out in your hold period, five years, where are you? Are you a 20% revenue growth business? Are you still 50? Wherever you are, 'cause that's I think a little bit of where you're gonna be on the valuation continuum, especially with the metric that is most relevant to, you know, to investors.

   27. DPDeven Parekh25:35

       Hey, Jason, when I was in high school, I remember going up to an Ivy League admissions officer my junior year of high school and saying, "Hey, am I better off taking an honors class and getting a B or a regular old class and going, getting an A?" And they looked at me and said, "Well, if you wanna come to our school-"

   28. JLJason Lemkin25:49

       (laughs)

   29. DPDeven Parekh25:49

       "... you gotta take an honors class and get an A."

   30. JLJason Lemkin25:51

       (laughs)
4. 29:37 – 31:34

   The Broken Nature of SaaS Investing

   1. HSHarry Stebbings29:37

      spoken about revenue multiples quite a lot. I- I do have to ask, Jason said to me before about how he kind of bl- bluntly believes in the broken nature of kind of SaaS venture investing, and I'm probably butchering this, Jason, so do correct me if I'm wrong. But if we assume that, you know, uh, 6X ARR is kind of the trading price for public SaaS companies today, Jason thought that maybe, is that really high enough to sustain a true growth market?

   2. How do we feel about that, if 6X is the new normal and not just an adverse time?

   3. DPDeven Parekh30:07

      I mean, look, I think Klaviyo is trading at eight times forward, you know, growing at 50%, um, with, you know, I think profitable, um, Shopify concentration, maybe that's an offset. But look, if, if 50% growth with great economics are eight times forward, there's a lot of companies that have less good e- economics.

   4. HSHarry Stebbings30:26

      (laughs) A lot.

   5. DPDeven Parekh30:26

      So, uh, I think the, you know, I don't know that, uh, Harry, that it's, it's an easy answer to the question. What... I would say this. I would say, and I, I think Woody would agree with this, but I, I think the least active part of the growth stage market is late-stage growth. And, uh, I'm defining late-stage growth as what used to be called pre-IPO or, you know, however you wanna define it, right? Um, going public within a year. Because I think, frankly, it's, it's the least clear of how you underwrite your return, right? Because those companies are looking for valuations that, in some cases, are north of the public comps. Now, it's very different when you're investing in a $20 million revenue company or a $15 million revenue company. You're making a different bet. You're making a bet that's four or five years out. Your revenue multiple assumption is, is more based on how fast can you kind of grow over that period of time. Totally different for Harry, what, Harry, you do and what Jason does. Like, that doesn't really matter, in my view, where Klaviyo's trading. So, I think the market that's the most stuck right now is that late-stage growth, and it's probably where you see the least amount of deals announced. Databricks would be the one exception of a, you know, of a big late-stage deal that's gotten done recently.

5. 31:34 – 35:10

   When will the IPO market rebound?

   1. DPDeven Parekh31:34

   2. HSHarry Stebbings31:34

      Okay, so if there's the least activity there, Devin, I'm, I'm proving a, a bet to Jason here, so I've got a lot of money on the table. But if the least active area is that late-stage growth, does that not mean that we're gonna see a further delayed IPO window opening? Jason thinks it's H2 2024. I'm saying with the, as you said, kind of frozen nature of late-stage growth, it's gonna be H2 '25.

   3. DPDeven Parekh31:59

      No, I'm, I'm, I'm, I, I would probably... Well, who knows? Let me start by saying, since the chairman of the Fed can't predict the economy, I'm certainly not gonna try. But, uh, I'm, I'm probably a little bit more optimistic. I'm probably closer to Jason, kind of back half of '24. I don't think the activity in the late-stage market is necessarily a driver. You pointed out correctly earlier that there's tons of software companies with $100 or $200 million of revenues. Um, some subset of those are potential public companies. You know, we have some of those. Um, and there's no need for them to do a late-stage round to go public. You know, it used to be that people would do these rounds just to kind of get a third-party validation of value. Let's take Instacart as an example. What would have been the value for them to do a late-stage round before they went public just so that they could tell their employees, "Yes, let us definitively tell you that we're worth less than our last round." No. The public market became the late-stage round and so I think that that's really what you're gonna see. I think you're gonna see companies that have a good economic model, um, that have the predictability, uh, that the public markets crave, that have got the balance between revenue and path to profitability or profitability. Um, and the public market's gonna determine what they are willing to pay for that. And over a three-to-five-year period, they'll trade based on the underlying economic value that they can drive, uh, which is kind of the way markets should work. So, I don't really see a relationship between a slowdown in the late-stage market and the IPO market. I think they're kind of, right now, disconnected.

   4. WMWoody Marshall33:26

      Yeah, I, I, I look at it as th- th- that's gonna be up to the companies. If you look at the three IPOs that happened, I, I believe they all sold less than 10%, right? So that's, that's, that's a small percentage. What they were doing was, you know, we refer to it as putting the puck on the ice.

   5. DPDeven Parekh33:42

      Yep.

   6. WMWoody Marshall33:42

      The only thing that's gonna determine ultimate valuation is your execution. So, you know what? L- I, I know that the, the press loves to write about, like, IPO price compared to last price and everything. It doesn't matter. It d- it literally doesn't matter. And by the way, it matters less when you sell 6 or 8% of your company versus something else. Put the ball in play, you give your shareholders if... You know, our shareholders need to get some liquidity, great. Put the ball in play, reasonable price over time, the, the, the long-term, um, you know, public managers will find the best position businesses, will build positions over time. I think there's... It's, it's only goodness, and you're betting on yourself in the sense that you're like, "Uh, hey, I know I can execute, you know, I can grow my business at 20%, you know, a year for the next five years," or, um, you know, "Maybe my, my profits will grow faster," and, you know, that's one of the things that the markets are interested in. And there's benefits for me being public. Maybe I wanna do some M&A. You know, it, it provides liquidity for shareholders and, and, you know, and employees. So, to me, I actually think the, the markets are open, but people have to... You, you, you have to rip the Band-Aid off and not be wed to, you know, "Oh, but in 2021 I was valued at X." That doesn't matter. If you're a public company today, that's, that's in the rear-view mirror. The public companies that, that do that same analysis, rip the Band-Aid off, they can go public if they want to today.

6. 35:10 – 46:12

   The Klaviyo IPO

   1. WMWoody Marshall35:10

   2. HSHarry Stebbings35:10

      Can I ask a related question, just curious? You guys, neither of you did the last round. I mean, I'm a super fan of Klaviyo for many years, right? And Andrew's great. Did you... Neither of you did the last round, right?

   3. WMWoody Marshall35:19

      We're not in it. We're not in it.

   4. HSHarry Stebbings35:20

      So, the last round, I think, was at nine and a half billion. I didn't look up the S-1.

   5. DPDeven Parekh35:23

      Yeah.

   6. HSHarry Stebbings35:23

      But let's assume it's trading slightly down for, for purposes.

   7. DPDeven Parekh35:27

      Yeah. Yeah.

   8. HSHarry Stebbings35:27

      Behind the scenes, behind the scenes at the late-stage investors, what are they talking about? Have they already adjusted it? Is there stress around it being slightly down? Just tell us, 'cause I just don't have that visibility about what those conversations happen, uh, behind closed doors at the late stage.

   9. WMWoody Marshall35:43

      Th- there shouldn't be.

   10. DPDeven Parekh35:44

       Yeah.

   11. WMWoody Marshall35:44

       I mean, it's not a surprise. Like, like-

   12. HSHarry Stebbings35:46

       It's not a surprise, right? But, but-

   13. WMWoody Marshall35:47

       Take a look at, take a look at the public market since, since Q4 of 2021.

   14. DPDeven Parekh35:51

       Yeah. What I'd say, Jason, is that I think, uh, uh... Unfortunately, off the top of my head, I don't remember who the late-stage investors are in Klaviyo, but let me make a slightly different point, but I think-

   15. HSHarry Stebbings35:59

       Yeah, I think some had did the one before and, and gone, like, 40%.

   16. DPDeven Parekh36:01

       No, some had made, some had made-

   17. HSHarry Stebbings36:02

       I think they did okay, right?

   18. DPDeven Parekh36:03

       Some had made... Some had made, like, seven times their money, so they're, they're just fine.

   19. HSHarry Stebbings36:06

       (laughs)

   20. DPDeven Parekh36:06

       But I think that if you look at... We have, like, say, two companies right now.... um, that I know of, uh, that are looking at doing kind of a late stage round sometime at the end of this year. And, but here's why they're looking at doing it. They're looking at doing it because in both cases, um, you've, companies have executed unbelievably over a very long period of time. They are both have a very clear path to real margins, that neither management team has really ever taken any meaningful liquidity at all over a very long period of time, and they're kind of looking to do a round to provide some liquidity pre an IPO because I think they wanna... It, we're also in a market where investors or management teams selling into an IPO is a challenge, right? Uh, it's not what people wanna see. The most likely investors that are already talking to them are the same people who are gonna buy stock if the companies go public, uh, in the, uh, in the public markets, meaning s- some of the mutual funds, as an example. Why is that? Well, uh, Woody made the point about these offerings are getting very small. So if you are a growth manager, uh, you actually need growth product over time, right? Like, you're not a value manager, you're a growth manager. You need to find, uh, growth stocks to buy. And when these comp- once there's so little inventory and the amount they're selling is so small and the size of the Fidelity or Vanguard or, or, or Wellington fund is so big, their ability to buy a position in the public market is actually not that... They can't get much allocation.

   21. JLJason Lemkin37:40

       Yeah.

   22. DPDeven Parekh37:40

       So these actually even become ways for them to build a position in a company that they wanna h- probably hold for five or 10 years. Now, that might be separate from the hedge fund that might want, might wanna flip it in, you know, in a week.

   23. JLJason Lemkin37:53

       Yeah.

   24. DPDeven Parekh37:53

       That's probably not who you want in your late stage round either, right? So, uh, again, I don't know the specific answer on Klaviyo 'cause I don't know who it, who it is, but I think the people who are, who are looking at these right now are, are looking at these in a, in a, in a, in a rational way. They're not expecting to make a massive return to IPO. They're kind of building a position in a company they're probably gonna stick-

   25. JLJason Lemkin38:15

       Is there angst for... And, again, may- if it was either of you, then, then censor me, but if you did the Instacart round at 38 or 39, whatever it was, right, what happens behind the scenes? Have you already marked it down so long ago that no one cares? Do you just fire the, the partner that worked on the deal?

   26. DPDeven Parekh38:31

       (laughs)

   27. JLJason Lemkin38:31

       I mean, you think I'm kidding, but in my limited experience in venture, I've seen folks kind of get, get shown the, the door on deals, right? What, what, what happens behind the... I mean, it's a wildly successful company, Instacart, right?

   28. DPDeven Parekh38:42

       Yeah, I don't know about the physical.

   29. JLJason Lemkin38:42

       But it was worth a lot less than 38 or whatever it was.

   30. DPDeven Parekh38:44

       I mean, thankfully, I don't think either Woody or I are in either one of the deals you're talking about.
7. 46:12 – 48:35

   Frothy AI Deals

   1. HSHarry Stebbings46:12

      is late stage market's pretty frothy for AI deals. How do you think about the late stage frothy market for AI deals?

   2. JLJason Lemkin46:21

      (laughs)

   3. WMWoody Marshall46:22

      (laughs) Well, if you step back, th- this is a remarkably fundamental trend that's going to have significant, significant impacts. We have not made any, um, AI specific investments, although I would say 100% of our companies are leveraging AI in lots of different ways, whether it's, you know, how you touch the end customer or how you make some of your processes more efficient. This is the, the positives and negatives of the business that we're in. There are gonna be, you know, we, we can say it's a frothy market and this is crazy. People are gonna lose their money. There are gonna be some of the bets that are made today that, you know, we'll all look back on and say, "God, we should have known that it was, you know, it was... AI was, you know, at the beginning. Why didn't we put, put our money in there? We could have made, you know, X return." That's not an area that we have, um, made any direct investments in. It is a good reminder that the reason that people get excited about technology is it can have remarkably fundamental impacts on consumers and businesses alike.

   4. HSHarry Stebbings47:22

      Devin, how do you think about it?

   5. DPDeven Parekh47:24

      So I mean, we, we have been active in AI, but ironic- so if you look at Fund 12, our most recent fund, like, uh, I think about 7 or 8% of it is invested in AI companies. Ironically, almost zero of it was invested in 2023. Almost all of it was invested in 2021 in more AI infrastructure companies as opposed to the LLMs. And it might be the one category where pricing in '21 was better than the pricing in '23.

   6. JLJason Lemkin47:50

      (laughs)

   7. DPDeven Parekh47:50

      Uh, it might be the only category where that's true.

   8. JLJason Lemkin47:51

      That's a good quote. (laughs)

   9. DPDeven Parekh47:53

      Um, so I think that, and like Woody, uh, you know, almo- every portfolio company is implementing it within their portfolio. Uh, look, we think right now in '23, the valuation, we're in a hype cycle. The valuations are way ahead of-... where companies are. You're seeing companies who've raised money as recently as six or nine months ago were already being impacted by something developed six months later. While we're spending a ton of time on it, and we're getting smart on the space, we're being cautious this year, um, just given where our valuation is.

   10. HSHarry Stebbings48:25

       Jason, do you have any final questions before we do a bet?

   11. JLJason Lemkin48:28

       A final question. Can I, can I ask a real, a real-life example for fun? Do we have a minute? Kind of a grounded in the state of the growth, and I know,

8. 48:35 – 50:42

   Jason Needs Advice Valuating His Growth Investment

   1. JLJason Lemkin48:35

      I know Devin's like, "I want..." Uh, you can't give me specific answers on specifics, but I literally had a board meeting this week. Here's a question about efficiency day. SaaS startup, um, SMB, over 100% NRR from, from SMB, so pretty good. 50-50-0. 50 million ARR, 50% growth, no burn. Okay? But not 100% growth, not 90.

   2. DPDeven Parekh48:56

      Yeah. Yeah.

   3. JLJason Lemkin48:56

      Not... Is that growth fundable? What's it worth? Can you, can you give us... I know you don't want to, but can you tell us, is it fundable for growth?

   4. DPDeven Parekh49:04

      Yes. It's fundable.

   5. JLJason Lemkin49:04

      And what's, what, what's the most it would be worth if it's not AI? (laughs) What's a 50-50-0 worth in today's world?

   6. WMWoody Marshall49:11

      You know, again, I go back to what Devin said before, that, you know, the, the numbers are one thing. The specifics around, you know, what the market, uh, a company's in, what the, what the end customer's-

   7. JLJason Lemkin49:21

      Assume you like the company, though, for the sake of the, the, the... It's g- Assume you like it. The e- There's some macro impacts. You could argue it could be 50-80-0, right?

   8. DPDeven Parekh49:28

      It's cer- it's certainly probably worth the Klaviyo multiple, right?

   9. JLJason Lemkin49:32

      That's a good in- that's an interesting insight. Yeah.

   10. DPDeven Parekh49:34

       So, certainly worth the Klaviyo multiple. Um, uh, a- and again, I'm... Now, you're gonna send me to company and say, "Where's the term sheet?" But, you know-

   11. JLJason Lemkin49:42

       No, no, no, no, no. Well, they have 10 years of runways, but, but maybe. But ma- maybe.

   12. DPDeven Parekh49:45

       Yeah, but I'm answering it... So I'm kinda answering it in kind of a pretty macro way.

   13. JLJason Lemkin49:49

       (laughs) It's a good answer.

   14. DPDeven Parekh49:50

       Which is like, if you have those net retention characteristics in a big TAM, like, you know, there's a lot of ifs, which I don't know the answers to. What I would say is that deals will get done at even north of that multiple for a high-quality company that has a lot of runway and a big market. I don't think investors are gonna assume that everything's gonna trade for six times revenue till the end of time. Um, now, I don't think people are gonna also assume they're gonna trade at 17 times revenue anymore, right? So, you have to have some rationality to what you can assume from a exit standpoint. But at some point, the real, eh, question, Jason, is how long is the 50% growth compounding for? And if you're comfortable-

   15. JLJason Lemkin50:27

       Yeah, for sure.

   16. DPDeven Parekh50:27

       ... that it's compound... Because my guess is I don't know the Klaviyo business, I, and so I can't tell you what they're f... But in year five, is it compounding at 50 or is it compounding at 20? If it is compounding at 20, then maybe eight is not a crazy multiple. If it's compounding at 50, it's really undervalued.

   17. JLJason Lemkin50:40

       Hmm.

   18. DPDeven Parekh50:40

       I don't know the answer. I haven't studied it.

9. 50:42 – 54:54

   VCs Predict Klaviyo’s Stock Price

   1. DPDeven Parekh50:42

   2. JLJason Lemkin50:42

      That's a good, good answer.

   3. HSHarry Stebbings50:43

      Okay, we're gonna do a bet. Me and Jason love a bet. And now w- that's... Jason, if you, if you have a bet suggestion, then I'm happy to take it. The two that I'm kind of interested in is, like, over and under, and we can choose the company on ARM or Klaviyo. None of us are ambassadors there in any, so we're good.

   4. DPDeven Parekh51:00

      Yeah, is the question wha- which one am I gonna own? I don't Klaviyo.

   5. JLJason Lemkin51:03

      (laughs)

   6. HSHarry Stebbings51:03

      N- no, the question is, Klaviyo, in a year, will it be over 15 billion market cap or under?

   7. DPDeven Parekh51:12

      Oh, 15.

   8. JLJason Lemkin51:12

      From nine to... Well, let's do stock price, just 'cause market cap can be... There's like 88 calculations for market caps, aren't there? Enterprise value with the... You guys, the l- the growth guys know better, but it's 36 today, so you're asking me, will it be plus 50% in a year? Is that the bet?

   9. HSHarry Stebbings51:25

      Yeah, that's p- that's it. So, it's gonna be... What is that? That's 51?

   10. DPDeven Parekh51:29

       Yeah, but like, see, uh, uh, uh, like the underlying un- so... Like the question to me is, what should be the underlying return in growth, right? Like, that's really the question. The company's public. In theory, their growth rate, unless the market really inefficiently priced them, should kind of compound it kind of where the market, where the market compounds. And I don't have differentiated knowledge to say it should compound less or more, 'cause I haven't studied it, just to be, just to be honest. But I'm probably not going into any company assuming that I have a 50% IRR. Like, I'm just not gonna... Like, I, I would have to really know something specific that would make me feel like there's a... Something I know the market doesn't know, that would make me have conviction that something was gonna have a 50% IRR. I don't know anything. That doesn't mean it won't, but since I don't know anything, I'm gonna assume that it won't have a 50% return, 'cause I am not gonna assume the public market is gonna have a 50% return.

   11. HSHarry Stebbings52:20

       Woody?

   12. WMWoody Marshall52:21

       I'm not a stock market, you know, picker.

   13. DPDeven Parekh52:24

       (laughing) Uh, none, nor am I (laughs) .

   14. WMWoody Marshall52:25

       The way that I would think about it is, if the companies execute, like, I, I think there's probably more upside in some of the multiples than downside. That, that would be, that would be one of the ways that I would, that I would think about it. I- it's gonna be about execution, but I don't necessarily look at the, you know, s- some of the multiples in, you know... Certainly with some of the newly public guys, I don't think they're, you know, remarkably over, overheated.

   15. JLJason Lemkin52:50

       Okay, here's my bet. Uh, let me simplify it. Maybe there aren't any takers. I'll bet 10 grand to anyone that takes it, that Klaviyo, 12 months from when this episode goes out or today, whatever Harry says, trades at 20% or higher from where it is today. I'll bet 10 grand it's 20% or higher. I'm gonna take Devin's point about ma... I, I can't inv- figure out everything.

   16. DPDeven Parekh53:08

       W- I, I would, I wouldn't bet against that.

   17. JLJason Lemkin53:10

       You won't take that bet?

   18. DPDeven Parekh53:10

       I wouldn't bet against that either.

   19. JLJason Lemkin53:11

       10 grand?

   20. DPDeven Parekh53:12

       Yeah.

   21. HSHarry Stebbings53:12

       I'll bet 10 grand that it'll trade 40% more.

   22. JLJason Lemkin53:16

       40 per... Oh. (laughs) Oh, you're pretty bullish, Harry.

   23. DPDeven Parekh53:18

       My, my, my investment committee and personal-

   24. JLJason Lemkin53:20

       We're not on the same side of this bet is the problem (laughs) .

   25. DPDeven Parekh53:22

       My, my investment committee on personal bets is my wife, and she would not allow me to take any such $10,000 bets, so I'm not gonna take a bet. Uh, but-

   26. JLJason Lemkin53:29

       (laughs)

   27. DPDeven Parekh53:29

       ... uh, I, you know, I'm certainly comfortable with a 20% assumption, not 40, I don't think.

   28. JLJason Lemkin53:34

       Okay, we're all betting... W- how about, how about a gr- how about, how about a grand for charity? We could do... We're, we're all betting. Who's gonna pay the other side? We're all betting-

   29. DPDeven Parekh53:41

       (laughs)

   30. JLJason Lemkin53:41

       We're all betting, we're all betting Klaviyo is gonna be 20% or higher. We're all hoping, we're all optimistic 20% or higher in 12 months, right?

Episode duration: 54:54