Is the VC Model Broken? Jason Lemkin, Mike Maples, Eric Paley & Harry Stebbings Debate | E1062

If you're coming into a company as a senior executive and you have a CEO who's bragging to you about how big their last round was in dollars and how big the post-money was, ask to see the financials and compare those financials to what they're claiming in the vanity of financings. When you see that massive disconnect, you're in a pretty tough place. That is a place that is probably not gonna play out the way you want it to. (instrumental music)

Tim, I am so excited for this. We were all just saying that if we have this conversation, there's no better group of people to have around the table. So I want to start, and I want to kick off with it's a new world of seed. And I've been speaking to a lot of LPs, particularly investing in seed funds. And when we look at 30 million posts for YC rounds, the- the simple question that I think is just important to start with, and anyone can take this baton, but is the classic seed model dead for the traditionalist, boutiquey seed fund given these pricing environments?

Who wants to go first?

I don't think it's dead. I think there is a very small class of companies that will price themselves in a way that a large group of investors won't find very palatable. Um, and some of the YC class will end up not getting those types of numbers and others will get investors they're not as excited about, and others will actually get the investors they want. But that's a subset. I will say the rest of the industry, um, as, at least as we see it more on the East Coast, although we do invest a lot on the West Coast, is sort of- sort of rationalizing back toward normal. I wouldn't say they got- they're all the way back at what we've seen, you know, in the 2015 ra- time ra- range. But, um, I think prices have come down. And I actually, all of that could sound lousy to the entrepreneur for a bunch of reasons, but I actually think being overpriced at seed is actually a bigger problem than most entrepreneurs realize, particularly as the market's adjusting, right? It's a very hard time to raise series A in general, and it's a harder time if you're already priced where somebody might want to price your series A. You kind of become uninteresting to investors. And I think this is a multi-round game, and you have to be very aware of that.

Do you think prices are coming down, Jason and Mike? Am I- am- am I seeing something different?

I- I tend to resist, after doing this a while, I tend to resist making too many macro statements, right? Like, I kind of look at it like every startup is its own snowflake. Is the average valuation higher than what I've seen before relative to where they should be? Probably. But I still think that there are lots of ways to make money in seed. And I- and I actually think they're surprisingly similar to how they've always been, which is you have to be non-consensus and right, investing in an entrepreneur who's non-consensus and right. And you know, a lot of people say, "Well, that's changed. Look how big these exits are." But then when I look at those big exits, they all had low prices. Pinterest, Airbnb, uh, Dropbox, uh, Uber, Lyft, you know, Anne, Anne invested $750,000 at 5.5 post in Lyft. And I think the same will be true. I think, here's what people don't understand, in my opinion. When a seed round is priced at 20 posts, 30 posts, it's not non-consensus. It's priced to perfection, and it's priced in a way that everybody believes it's gonna succeed, that it's a hot deal. And that's bad for two reasons. It's bad for the investor, because even if the investor's right, they're probably not gonna make much money. And what Sam Leson said on your show a few weeks ago is exactly right. He's had billion dollar exits where he didn't make much money. Uh, but it's a problem for the entrepreneur too, because if everybody is chasing their deal and bidding up the price, they should be self-reflective about, "Do I really have a non-consensus idea, or do I have an idea that plays well with what's popular?" Which I haven't had as good luck with. So, you know, Coinbase, when it was funded by Garry Tan, it wasn't popular to fund a- a crypto exchange yet. And you know, ride sharing, we weren't sure if it was gonna be illegal or not. An air bed and breakfast is what it was called at the time. People were afraid you'd get murdered in somebody's house staying in one. And so a lot of these seed rounds that end up being really good, the fact that they're not popular is a feature and not a bug. And that's reflected in a rational price. And the more irrational the price gets, the more I think it's a lose-lose for everybody in the game, to be honest.