20VC: Why Seed is Systemically Broken | Why Pricing is Worse Than Ever and There is More Funding Than Ever | Benchmarks for Churn, Retention and Growth Rates - Good vs Great | Why Last Vintage for Private Equity Will Suck with Jason Lemkin

Jason Lemkin
Seed investing is systemically broken. Today. There's just as much capital chasing fewer and fewer folks that can grow at triple digit rates. The best investments go one to 10 million in five quarters or less. The very best ones.

You can't ipo unless you triple, triple, double, double. As you approach 10% market share in your core ICP, your core market, you gotta expand. If the churn is anything more than three or 4% a month, it's not even software anymore. This is 20 vc with me, Harry stabbings, and it's a new style of show. Today we're calling it the review.

Harry Stebbings
The review is where we sit down with an investor and we go through their three best and three worst deals, the financials on each and the biggest lessons and takeaways that they took from each. And who better to kick it off than Jason Lemkin? Jason is one of the OG SaaS investors, with all of his first five investments turning into unicorns, including the likes of Pipedrive, Algolia, Torque desk, salesloft and revenue cat, all in his portfolio. Let me know what you think of this style of show and you can watch the full show on YouTube by searching for 20 vc. I always love to hear your feedback, but before we dive into the show, stay.

We're all trying to grow our businesses here, so let's be real for a second. We all know that your website shouldn't be this static asset. It should be a dynamic part of your strategy that really drives conversions. That's marketing 101. But here's a number for you.

54% of leaders say web updates take too long. That's over half of you listening right now. And that's where Webflow comes in. Their visual first platform allows you to build, launch and manage web experiences fast. That means you can set and ambitious marketing goals and your site can rise to the challenge.

Plus, Webflow allows your marketing team to scale without relying on engineering, freeing your dev team to focus on more fulfilling work. Learn why teams like Dropbox, Ideo and orange Theory trust Webflow to achieve their most ambitious goals Today@webflow.com. and speaking of incredible products that allows your team to do more, we need to talk about secure frame. Secure frame provides incredible levels of trust to your customers through automation. Secure frame empowers businesses to build trust with customers by simplifying information security and compliance.

Through AI and automation, thousands of fast growing businesses, including Nasdaq, Angellist, Doodle and Coder trust Secure frame to expedite their compliance journey for global security and privacy standards such as SoC two, ISO, 2701, HIPAA, GDPR, and more. Backed by top tier investors and corporations such as Google, Kleiner Perkins. The company is among the Forbes list of top 100 startup employers for 2023 and business insiders list of the 34 most promising AI startups of 2023. Learn more today@secureframe.com. dot it really is a must.

And finally, a company is nothing without its people. And that's why you need remote.com dot Remote is the best choice for companies expanding their global footprint where they don't already have legal entities. So you can effortlessly hire, manage and pay employees from around the world, all from one easy to use self serve platform. Plus, you can streamline global employee management and cut hr costs with Remote's free Hris. And hey, even if you are not looking for full time employees, Remote has you covered with contractor management, ensuring compliant contracts and on time payments for global contractors.

There's a reason companies like GitLab and DoorDash Trust remote to handle their employees worldwide. Go to remote.com now to get started and use the promo code 20 Vc to get 20% off during your first year. Remote opportunity is wherever you are, you have now arrived at your destination. Jason, I always love our jazz. This is such a joy to do, and our shows always do so well.

I always get notes from founders being like, whenever Jason's on, I literally get pen and paper out and these are the ones that I have to listen to. So I'm so glad to have you back, man. Very exciting. Harry. So, so great to be here and so proud of everything that's happened to 20 vc empire.

Jason Lemkin
It's great to have been, been there on the sidelines since being guest number 50. Dude, I remember when I was at university and you were like, should we do the Saster podcast? And I was like, yeah, this is great. I remember you had that, I don't know if you still have it, but you had that, like, picture of you. Was it in a helicopter with the.

Like, oh, yeah, that one. Yes, that one. I thought that was so cool as an 18 year old. But I want, I want to dive in. This is a new type of show, so I'm calling it 20 vc, the review, analyzing the best and maybe the less well performing deals or worse, in other words, and then highlighting, hey, lessons and the story behind them.

Harry Stebbings
If we start on the best, Jason, what is the best deal that you've done, and what did you learn? I made two best lists for you. One was the best by cash back, which we all thought was no big deal in 2021. But the last couple of years, cash has looked scarce. Two ipos in b, two b in two and a half years.

Jason Lemkin
And by Nav, which is what we report to our lp's on paper, what are the best three? And so far for me, I'm ten years in. I had a little bit of a break for a year. Right. Um, maybe I should have invested faster, but interesting is, and I'll answer your question, my best buy cash and best by nav are not.

There's no overlap yet, but the best three for cash, I've done. And the number one was sales loft, which was the last big deal of the 2021 era. It closed, I think, December 23, 2021. Hashicorp was the last ipo, and sales off sold for two and a half billion of cash and about 100 million in array. The second one was pipedrive, which I don't know what that one would be worth today.

That was a billion and a half in cash as well. And the third one, ironically, was smaller, Harry, which was a company that got sold logical for 300 million. But I learned a lot from being multiple times the largest investor. Right, because we all brag on Twitter and x how much, how we were early and this and that. But if you own a 10th of a percent in a fund, it's not going to get you that far, is it?

Harry Stebbings
How much did you earn of logical when it was bought? I mean, all the entities own 20 some odd percent, and it's cash, so that gets you a good. You know, it's a distant number three on the list, but for me, at this career, it still gets you a material return, right? Yeah, totally. That's a good 60 million and dilution.

Jason Lemkin
It's taken me a decade to understand what folks have been doing it a little bit longer. Say, about dilution. It also helped that they stopped fundraising. Would you have predicted those companies would be the three top cash returners? No.

No, I didn't. The nav ones, I predicted two out of the three. You know, VC's, they say some variant of, like, you know, you got to go long, you don't know how they'll perform, you know, at the end of their later in life. I don't really believe that, but when I put this list together, I realized it's true. I didn't think any of these things would happen.

Sales off with Kyle. You know, he was one of the most determined founders I ever met in the early days, right. And it was a fun one for me because I co led the seed, but then I brought in immersions and insight and so almost the whole cap table I was able to kind of assemble, which is harder to do today, but it was fun then, right? There's certain founders, they can't lose, but sometimes you just don't know where the hell it's going to go. And Kyle never quit, but you know, right after we invested, they had an $8 million product they dumped.

So it went from eight to almost zero million in revenue. And it was a totally the right idea. Like, no, today in my career, actually it would startle me more than it did back then. Back then I was, it was early. I'm like, that's cool man.

Like, okay, if that's the right decision, but to go through so many things, to expand the platform, to go more enterprise, now it's very common, but back then, you know, they and outreach were so competitive, I didn't think both could win, I didn't think both could even survive. That wasn't my life experience in SaaS, like, it was more like only one could capture that 60% to 80% market share VC's always talk about. I didn't think you could have two folks with 40% market share. I didn't think it was possible. So what did you learn from that investment?

Harry Stebbings
What are the takeaways? The number one thing, when I look at my three worst ones, this is going to be the theme of the three worst ones. It's not enough, Harry, but that ultra insane commitment to success is so important. And then having a binary team, sales off's chief product officer, this guy, Rob Foreman, they were the pair. But if you have a binary pair that is 110% committed and they can build pretty decent software and sell, that's rare to have both.

Jason Lemkin
And so those the magic. The other thing though, that is things are so move so much faster today. So in the old days, so I met Kyle, who's the CEO of sales, very early, but then I started hanging around the offices of a lot of startups and their first product, like every sales team was using their first product. Like you used to get to spend a couple of months watching something in the field, making a decision, now you gotta make, now you gotta pay 25 pre at demo day in 1 hour. What I will never sacrifice again is two great co founders.

Two great co founders. Numbers are great, but insane level commitment, like commitment better than me, you're even more committed than me, I think, Harry, and I'm a pretty committed guy, so anything less than that, Harry, as an investor, this takes too long. Now we're like 14 years to IPO people are quitting left and right. They're quitting left and right, or they're quiet quitting, or they're settling in for 5% growth. It's just not worth it as a.

You can't make any money in VC, can you? It's impossible. Can I ask, given the changing times, how does that impact how you invest. Today if you have less time to get to know people? It's.

It's harder to catch the cynics, it's harder to catch the bullshit artists. But the main thing I just do is I almost immediately do another zoom with the CTO. That's actually the way it's changed. In the old days, I would do it late in the process. I would.

I would get to know the CEO and talk to the customers. Right? I would go deep, and then at the very end I'd be like, okay, I got to talk to your CTO, Harry, to make sure that this is real. Now, I immediately skip everything else. The second call I want to have is with the CTO.

Harry Stebbings
What do you want to dig in on with the CTO? You've done a lot already here in your career. That I have. But I have built software that's done hundreds of millions in revenue. One thing I do know is the difference between great and good software.

Jason Lemkin
Okay? And I know the best ctos. I know, and I know someone that is better than the best CTO. So I want to know, are they a ten or five on our old logarithm say, are they amazing? Can they build software faster than anyone else in their competitive industry?

Better software more quickly. And it's so easy when you talk to the best ctos to hear it and learn it. It takes seven minutes. What do those great ctos show you in those seven minutes to distinguish them as world class versus the five or sixes out of tens? Well, first, I do give them an hour, not seven minutes.

Right? But what do I do first, I ask them to do their own demo. Even if the CEO did the demo, I want to see how they think about their product and what they're excited about. I want to see surprise and delight. I want to see them show me the things they love.

Listen, this is this badass thing I just did with AI OpenAI. Can't even do this. Let me show you, Harry, like, these guys at anthropic, they don't even know how to do this right. This is so cool. Let me show you something.

I know how to do that. The rest of the world doesn't even know how to do yet. That's magical. Do you say, show me your surprise and delight moment? How do you.

No, I don't even have to do that. The best ones are so proud of their product, their code, their work. They'll show you in the demo. They can't help themselves. I'm just like, okay, show them.

What's your favorite feature? What are you most excited about and what frustrates you? What frustrates you the most in the product? And if they can show you why they're bothered and why, you know, I can't afford it. And the, and the Openapi AI API is too expensive, or this is broken, or the stripe API doesn't do what I want, and you just want to hear this magical insight.

And they'll show you what they're proud of. The best ones, they'll show you what's badass. And the really good ones, just like the best business, the best CEO's, asking them about competition is so telling. Asking the CTO what they, what frustrates them in their product is very telling. The great ctos answer in 60 seconds.

I'm just super frustrated that I can't get this next level, this next thing out on the API or this next workflow out. I'm really frustrated that we're behind on our webhook platform. Whatever it is, they'll tell you instantly. And the mediocre ctos will be like, it's pretty good. Let me, let me straighten my tie.

And I'm off to another meetup. Do you find that they do reveal their frustrations, given the fact you're an investor and you could be writing them a large check. I have never met a great CTO that isn't at the edge of hyper transparent. If I did, I would run for the door. The best ctos, that's the environment they're in.

They're challenging everybody. They surround themselves with people better than them, engineers better than them, and they're going to hide some secrets, right? Don't get me wrong, there's two or three secrets a CTO might hide, but they're so technical, I can't understand them. They're not going to hide anything that someone can't figure out. Playing with your product for 2 hours, why would you hide something that your competition can figure out?

Because your competition's using your product, aren't they? They sure better be. So. And your competition can actually pretty much expose anything that you can see in the browser. There's only so much you can hide, right?

You can find out your stack, anything you can expose in the browser and what the product does. So you've got to be a pretty weak CTO to hide that stuff, right? I used to do the CTO, like, two or three weeks into an investment. Now it's literally, can I talk to Jane tomorrow? I don't even need to do all the rest.

I need this binary pair. Okay. What percent of the time is the CEO? Great. And the CTO, and what do you do in that situation?

Overall, I would say 80% of the time, the CEO is better than the CTO, especially at the seed or early seed stage, because there's different ways to, like, get up ten customers and 20 customers. And the real reason is, at least in b, two b. Almost every startup that gets to, like, a million, like we're talking about, they have what I call a ten X feature. There's something they do better than everybody else. Like, most of the product sucks because they've only been around 18 months and they haven't been doing it for ten years, but they do something that the leader doesn't do well or at all.

The fact that it's a ten X feature sometimes can mask the fact that the software is not that good, especially if you get into more vertical SaaS or areas with more bounded competition. Those ones tend to get swamped as you scale growth decelerates at ten or 20 million as like a cool ten X feature, but not the ability to iterate faster than the competition. The competition swamps you three to four years down the road, up until a million or 2 million, a ten X feature plus a CEO can win. And sometimes that CTO is okay, or not that committed, or might quit or whatever, and that ten X feature never becomes a ten X platform. But will you still invest if this.

No. No. Because, listen, this takes us a while to figure out, Harry. Like, you know, we can't even make money on a billion dollar exit unless you own 20 something million. Like, logical.

Like, dilution's so high as a seed investor, let's put aside an opportunity fund or spvs or other things. Let's take a traditional seed fund, okay? Really? In today's world, you're going to suffer 50% dilution on the way to IPO. That core seed fund that you struggled to get 12% of, you know, it could be six.

By the IPO, 6% of a billion dollar M and A is only 60 million. You know, it's funny. I'm coming around. After eleven years of investing, Harry, I'm coming around. When I started, I didn't believe you could make money in venture.

Even though my first five investments, all worth a billion or more. For real, real billions, I didn't believe it. I believe that they could each do five x. Okay. Which I thought was enough, but I didn't believe the funds could make money.

Then we go into 2018, 2010, and I start to believe, hey, these funds can make money. And then 2021, I'm like, this is easy now. I'm kind of in a mode now where I'm like, I got some decent investments, but it's hard to make money in venture again. Right? So you got to have two $3 billion exits, especially if you've had some success in this world, if you want to make a little bit of money and drive a, you know, whatever, a mercedes with your fees and enjoy the high life.

Yeah, yeah. There's a lot of ways to make money in venture, but if you want to make 100 million or more, there's only a handful of ways to do it. I do just want to go back to this process because I'm loving this. Okay. So we have those CTO, you know, interviews as part of the process.

Harry Stebbings
Do you meet other parts of the exec team? We spend time with the head of sales, head of CS. I used to. I remember the very, very first investment I ever wanted to make. I had known the founder from the old days, right?

Jason Lemkin
And it was one of these ones that when you start investing, you want to do. They were like, even though I was doing seed, they were like, at 3 million, growing pretty quickly, not burning a lot. It seemed like low risk kind of investment. Sometimes when you start, you want to do it. And I go up to San Francisco to the office, and the first time I sit down with the VP of sales, I'm like, how are sales going?

He's like, actually, this is my first time I've ever done sales. I've traditionally done product. I'm new to sales. The last two sales folks quit. Okay.

That's a good sign. He's like, how's the pipeline? He's like, terrible. So I quickly learned to interview the whole management team. Having said that, fast forward to, you know, a few more investments in.

Even though I want to do late seed, which I think is what you would prefer, that's maybe where the overlap of our investment styles these days, they don't have a management team. So I don't care anymore. I don't care anymore. I just care about the CEO and the CTO and me. The CTO is great, and the CEO is great.

I really don't care if the one sales guy they have is good or if the marketer they have that just does clips is great. I used to care from that story, but if I'm invested in someone with ten employees or less, I don't care anymore what the management is. The CTO is the one I care about. That's my changes over time. I'd love to just get as granular and specific as possible.

Harry Stebbings
When you're meeting the CTO, what questions should I be asking to really understand the quality of the CTO in front of me? Just ask Columbo style questions. Just ask open ended questions. I mean, you're good at, you know, you've done 1384 podcasts, so you're pretty good at the open ended questions. You know, show me a demo.

Jason Lemkin
You know, what do you love? And then the other great question, what are the top feature gaps? Is the next question asked, what are the top few feature gaps? You have just asked, what are the feature gaps? Well, if they tell you none, you got a pretty crummy CTO.

If they're like, you know, toast has this and whoever has this, and we got to do this, and our, our pos is terrible, and I've got to integrate this. You just want to hear that you'll, you'll see the same magic you see in any executive once you've done 15 or 20. And you'll see, you'll see it tomorrow to start. You'll see it tomorrow. Just don't lower the bar.

That's the mistake so many founders make when they go out to interview a functional area they've never done before. I've never hired a VP of Andrew or sales or marketing. They get excited that they worked somewhere great, that they worked at Datadog. Throw it out and just, just listen. You've interviewed almost 2000 folks, Harry, when you talk to the best of anything, that's great.

The best plastic bag manufacturer, the best mug manufacturer, they're the best. And it's the same is going to be true with the CTO. Just let them delight you. You just want your jaw to drop. Ten minutes in, you're like, wow, this took me a while to figure out, even though it's obviously true.

Is, yes. Even by demo days, certainly by a million in revenue. The best ctos have built great software. I'm looking for signs of crappiness. I'm looking for corners cut.

I'm looking for software that's too slow at a million in revenue. If the dashboards take 20 seconds to resolve at a million revenue. What's going to happen when you have 10,000 times more customers? If it breaks during the demo, if things don't work, anything, people kind of light me up or, and I actually kind of got hazed on hacker news the other day for this on the business side. But when I see these signs that the software isn't good at a million, it rarely gets better.

At ten, it gets worse, the load goes up, the workflows go up. I'm not expecting this to be draw dropping, but I'm looking for one little bit of beauty. And if that's broken or has tons of issues, I'm just out. Right? I'm definitely out for slow.

Harry Stebbings
Final one on Salesloft. But you mentioned that outreach as well. I'm just really interested. You also mentioned Opus before when we were chatting. I hate investing in competitive markets.

Really hate it. Yes. How do you feel about investing in competitive markets given those two, which are intensely competitive markets? Yeah, you know, I hate it too, for the reasons I think you hate it. But two things.

Jason Lemkin
First of all, I believe, and I know probably 90% of investors either don't believe this or say differently, I believe the best opportunities find you. At the end of day, it's not that you don't find them, but they also find you. By the same token, and if you're going to pass on an amazing binary set of founders, an amazing CEO CTO, just because they're in a competitive space, you're going to lose. You're going to lose the ripplings and the gustos and the deals. You're going to lose Datadog because you're going to say, you know, new relic owns the market, you're going to lose these deals even though there's some logic to it.

Right? So that's my first thing. Yes, at the margin, I'm out. Okay. And we just talked about a sales productivity tool you invested in with jaw dropping numbers.

Okay, I'm out on that whole category because there's 200 vendors, but it's probably an error. You invested in a great company. See, so I'm with you. I don't even want to take those meetings because there's too many vendors, but you just got to take them where you find them. That's one.

And secondly, and this is just annoying vc math, but it's true, you know, big markets often, not always, but often have more competitors. So if you get too obsessed with having one competitor, you can end up investing in something that's just a small market. It's not always the case for sure, right? But you gotta be careful you don't take that too far. And then the last point is this took me a few years to see, even though I knew this was true from the beginning of investing.

For hyper agile teams, if you have the best engineering product team in the industry, having a lot of competitors is a positive because they help grow a large market. And you keep. Each quarter you pull away, each quarter you pull away and it becomes a net positive that everyone's investing so much money to educate the market, to grow the market. But if four years down the road your product is 40 times better than theirs are, you pull away. So there.

And it's complicated, right? But I don't think it's as simple as running from competition. When I've done that, I kind of regret it, right? I kind of regret it a little bit. And the other thing that happens if you run from competition, especially sometimes in vertical SaaS, because you can find a lot of categories in vertical SaaS where the competition is SAP or excel or paper or like some DOS application from the fifties or something like that.

There's plenty of good ones there today, but sometimes those hide a mediocre ctO, or sometimes there isn't even a CTO at all. And I don't want to do those investments. I've done a few deals where the competition was SAP or excel and they get to millions in revenue, but they got there with a product that was clever but, you know, did three things, and four years later it does six things. I want four years later doing 3000 things. I want this exponential compounding of software functionality.

Harry Stebbings
Okay, so with number two, we have Pipedrive. Pipedrive sold for 1.5 billion in cash. Yeah. To Vista. Fucking get out of it.

What was the revenue when it sold? They're also doing about 100 million. 100 million also. Okay, how much did you earn on Pipe drive? Almost 10%.

Jason Lemkin
Five co founders is too many. Is one learning? Now you can have twelve, but I think five making decisions is too many. The other interesting thing was, you know, they did, they had a lot of changes and there was a lot of co changes and a lot of cap table changes. That one today, you know, it's tough.

I mean, they owned a segment that now HubSpot has just taken over. And this is what happens if you get extreme product market fit. Pipe Drive was my first investment ever in 2013. And even in 2013, I remember going on I don't know what website, there were 20 SMB CRMs that all looked the same as Pipe drive they were all Trello clones with Kanban cards and they all looked the same now pipedrive was slicker, it was faster, it was slicker, it worked but most importantly, even though it was at a million when I invested it was already breaking away it was a double digit growth, it was growing more than 100% so it wasn't that complicated an investment at the time. The product market fit remained insane but I don't think the product has changed much in eleven years.

And then HubSpot comes in. I met the HubSpot founders early because they wanted to get into CRM and they knew I had invested in Pipedrive so that's actually how I met Dharmesh at first was talking about Pipedrive and were there synergies with HubSpot back in the day and all that? And they decided to build themselves and a clone and you know, for two years it was free, right? Their product wasn't even that great and now it is the biggest source of growth at HubSpot, right? CRM is at 700 million I think and it's growing faster than marketing automation.

So they won this thing but they weren't able to get to that next level and it is very interesting that HubSpot won that market in the end, right? They won that market in the end, not that Pipedrive Vista won't make some money off of it. So there's some timing stuff in these best buy cache, right? There's timing and that's what makes ventures stressful, right? We all want to hold forever but one lesson from this one is maybe don't hold forever if the founders are gone.

And this is the other thing I believe Harry and I know many, most VC's disagree with me, but when the founders leave I'm pretty much out. It's not that I'm not a fan. I'm a fan. I'm going to be there but I would like to sell when the founders leave. I would like to sell always, always.

Because I know everyone thinks Frank Slupin was so great but he left. He left when times got tougher, didn't he? You know what happened when growth finally slowed at Snowflake? He stepped down. But a founder wouldn't have stepped down.

The founders never leave. You're a founder forever. So I know a lot of people like the bring in professional CEO's and believe in this and some companies need that. You need it, right? And maybe if you bring in a professional CEO and the founders are still running the company that you have that DNA.

But what I learned from Pipedrive is when the founders are not there, you lose this competitive agility when it's being run with knobs and dials. Right. So that's the venture learning, which is, for now for me, right or wrong, if the founders leave, I will liquidate my position as soon as it's significant. Right. There's no point in selling early.

Right. It's another life lesson. Right, I've got a question for you. I don't think these PE guys are going to make money on pipe drive. Fuck.

Harry Stebbings
I think it's hard that HubSpot are cannibalizing the shit out of them. Zendesk, or the buy price that Zendesk was. You think you're going to make money. Yeah. On that growth rate and that decay rate and churn rate of customers?

I don't think you're going to make fucking money. You're not innovating at all. Are they going to lose that money? Given today's multiples in today's world? Yeah, I think they'll lose money on these deals.

Jason Lemkin
Right. Well, there's a micro question and a macro question. The micro question is, just like LP's are coming around to giving VC's mulligans for their 2021 funds, are they going to give P funds a partial mulligan? Right. Are they going to give P funds an okay if they do a one x on some of these deals, right.

If he gets a Mulligan for these bubble deals, right, then it doesn't really matter, right. If they, if they have to sell all these deals for 50% of what they paid, but the LP's have moved on, we'll all kind of quietly, quietly forget about it, because that's what's happening in venture. Everyone's getting a Mulligan, everyone is getting. The LP's have decided they just. There's no point of being a critic for your 100 X deals in 2021.

We're going to more be a critic for your 100 X AI deals in 2024. But the 2021 deals are, are behind us. So I don't know if they're held to the same standard. It's going to be brutal. And it also shows there was that thing that Bill Gurley said about how important timing is for exits and how important 2021 was for exits and slack selling for 27 billion at a billion in revenue.

What would slack be worth today at $2 billion in revenue? Maybe it would be worth 12 billion at twice the revenue. And so there's timing here. And when you hold on to your Nvidia shares, for 37 years. These are interesting questions.

Now they're all competitors. Yeah, but gong are like trading it not far off that on secondary markets. Yeah, they raised at 7 billion their last round. I know, this is my point there, which is like, God, what a great exit for sales. Soft.

You know, the, you know what the other learning from that one is? What? This is a vcism that it turns out is true. If the founders say to sell, sell. So Kyle was sure there was actually, this was 2.5 billion at the end of 2021.

You know, that was an early investment. I wasn't on the board at this point or anything, but I was on the sidelines. It was mixed. Whether folks wanted to sell or not, it was mixed. The goal in 2021 was to play another card, wasn't it?

Why sell at two and a half when 5 billion seemed easy? That's where you make money in venture is that last card. That's where you get the big multiple in your fund. Right? So Kyle had to push it through.

He had to push the sale through. He's the kindest founder I've ever invested in, and it's a reminder that you can be kind and win. But he pushed it through. He said, listen, there is no argument that this is not the right thing to do for the company to get here post dilution, post ipo, post everything, this is the thing to do. And so when founders say that, just like when the founders leave, I like to quietly exit my positions.

When the founders say to sell, I'm no longer going to talk them out of it or even play devil's advocate. I'm just going to tell them. I'm sure you're right. What is HubSpot's Pipedrive competitor product at 700 million? CRM.

Harry Stebbings
Yeah, but what does that teach you? When you look at them getting to 700 million and pipedrive being an amazing but much smaller 100 or 150, what does that teach you? Distribution is everything brand. It's not even distribution helped them. But it's very interesting.

Jason Lemkin
If you listen to Dharmesh and Brian, they had some distribution. But remember back in the day, it was a single product company selling to marketers. The distribution to sales professionals was very adjacent. It was attenuated at best. Right?

And I had a long conversation with them just on this point. I remember at Sastre annual when they came together and they're like, yeah, like people thought it was crazy. Like, it's not the same buyer, it's not the same ICP, but here's a bunch of learnings. One of it, and this is how I met them early. Like, if you have a founder led company and a bigger company is going to do this, like, this is a top, this was their top priority beyond marketing was to do CRM.

It might have, might have been a dumb idea because it was a different buyer, it was a different time, but they were willing to invest multi years in a free version, a decade in doing this because they knew it was the right decision. If its founder led. Be wary, be wary. That's what Olivier has done. A datadog of decimated multiple categories, because it's a founder led company, and he comes in and says, we're going to own these categories, we're going to keep owning a product after a product, then they don't win in everything.

But that's why, you know, a huge percent of data dog company customers buy eight products now. Those are the ones to be wary of in the competition. You think that the big companies are slow and agile, I mean, and disagile, but it's not always true, especially if they're founder led. It's not, it's not always true, you. Say about founders expanding their product lines there and kind of moving away from core focus and adding to it.

Harry Stebbings
So often founders want to do that and boards and investors say, no, no, no, don't, don't. We need to focus and we need to make sure that we nail the core market. Sometimes they're right, sometimes they're wrong. How do you think about when's the right time to nail the core market versus when's the right time to have the founder aspiration and expand product? Yeah, I've thought about this a lot.

Jason Lemkin
I think it's actually fairly straightforward. As you approach 10% market share in your core ICP, your core market, you got to expand. You have to expand because at some level, growth slows as you cross 10% market share. Like you can't get to 200% market share. Here's the disagreement.

Now, going from ten to 20 may happen relatively quickly. You only see it in some of the metrics, deals taking longer to close because you already got all the easy ones right. But I always see something, as folks cost 10% in their core ICB, I always see something getting harder. And you have enough time at ten to be implementing your second act calmly. And founders don't see this.

This is a tiny way I try to help them. When I see this happening, I'm like, okay, let's break it down. Who's your core buyer? Well, it's restaurants in the south coast of France, between two and four tables outside. Okay, great.

I get why you got that. How many of them are there? 3000. Okay. How many customers do you have?

250. Okay. Okay, guys, we actually have a risk that our growth slows in 24 months because we own this market. What are we doing? There's the Parker Conrad's that solved this problem on day zero, albeit with hundreds of millions.

But I find more founders these days. It sneaks up on them. They're so focused on the minutiae and scaling and building that management team that they skate. They don't have that second act as they cross 10% market share. Now, it doesn't always have to be a second product.

It's at the early days. It could just be growing your ICP much broader. It could be going more enterprise, might quadruple your market size right there. Going to another country, going to the US. So it's not always second product, but you need another act as you get to 10% market share.

Harry Stebbings
Before we discuss a winner in Nav. Yeah. Can we talk about one that didn't work and a miss? And what are the big lessons from that? My worst loss is 5 million.

Jason Lemkin
Then I have another one where I'm going to lose 3 million. My worstest loss, I realized, was a company where I made five x that sold for 100 million. Right. When lockdown happened. Why did they sell at 100 million?

Well, he was making a mistake that I see so many unicorns made the last 24 months is he got himself into a pickle. He hired a terrible CEO who hired 25 terrible sales reps. We went from five reps and a VP of sales who he immediately fired the CEO and brought in 20 people plus himself. And they did half the sales of the VP of sales plus five. Okay.

And not only did sales go down, but what happened to the cap, the burn rate? It obviously went way up. And so rather than deal with it, he let it go for four quarters, five quarters, six quarters, because he'd raised a bunch of money. And then you're just in this pickle. How do you get out of this pickle, this high burn rate pickle, and sold the company, but it was not much smaller than a competitor, which has since IPO'd.

And today is worth. They were really pretty close for a while. And today is worth 20 billion. So you look at those ones where you were winning in the market, where you had competition. You're like, from a venture.

What's the lesson learned? And so I don't know if that's the worst, because you made money. But I wish the founder had not been so stubborn. And I see this a lot, even with, and this is a very. I see this a lot with smart founders that are too stubborn, though, is they just stick to these bad executives and bad decisions for too long.

They just stick to them for too long. Nice try, but not really like a bad one. Jason, when you sell five x, your money, did you say you lost 5 million on one? Yes. Talk to me about that one.

Harry Stebbings
What did you get wrong? Well, okay, here's a really interesting. I reflected a lot on it. This is a mistake I think a lot of us, a lot of folks are quietly making, even now. I lost it on the third check.

Jason Lemkin
What actually happened? This was my one where the signal was that the CEO misrepresented some, some of the financials. Not Sam Brinkman flea level or theranos level, but just enough that it crossed the bullshit line. Just enough that it crossed the bullshit line. I ended up still writing a third check into the company.

The first check was small. The second check was a supporting check. And the third check, they just started to grow like a weed in 2021, like everybody did. Right? It exploded.

But there are a lot of issues with the company, even as it, you know, started growing double digits each month. And from a venture perspective, the right thing to do is just not have written the third check. We were all geniuses in 2021, and we all had extra money to invest, and it all made sense to allocate a certain amount of capital per investment. But I should have lost a million and a half and not written that third check, or 2 million instead of 5 million. And so for this 5 million, you doubled down when you shouldn't have doubled down correctly.

Yeah. Or possibly triple down, depending how you look at it. That was the mistake. Yeah, I did it intentionally, but I did it reflexively. I probably made a lot of mistakes, but I think the mistake a lot of folks I've seen adventure in my own portfolio is there's zero diligence for these checks, none for these follow on checks.

Right. As long as the top line looks good. No one ever checks anything below the top line. There's no diligence, no customer calls, no nothing. Right.

That's the conundrum with the follow on checks, is if you treat them as seriously as the initial checks, then I think that's the right way to do it. Right. But VC's don't. Okay, let's just unpack that a little bit in terms of the diligence process then that you have today. We mentioned that spending time with, obviously, the CEO and the CTO.

Harry Stebbings
What else do we do? Do we do customer references? How many? How do we document them? Just walk me through the diligence process.

Jason Lemkin
My third one is the bank account. I used to do all these customer references before when I had three months, I used to leisurely get on the phone and do. I just saw you said you did 15 in one day. I'm proud of you, Harry, but I can't do 15 in a day. And it takes me a while to do customer diligence the way I do it.

So I've resequenced it in order. Right. Now, I assume the diligence will be tolerable. Right. And I'm upfront in the timing.

Right. And now I'm quickly after my losses. Now, instead of doing financial diligence at the very end, you know, just to check the box before I wire the buddy. Now, I do it in the beginning because I want to just make sure there's no shenanigans. I want my accounting firm, the auditing firm I've worked with for over a decade, to make sure that the financials and the bank statements are close enough to accurate.

I want about 80, 90% accurate. I'm not expecting you to have a CFO or a CPA or CFA or. I'm fine if it's wrong. But what I'm looking for is bullshit. If I look at the investments I'm most stressed about and frustrated with, it's where there's any bullshit in them.

I don't think the best founders bullshit. I think you can build a unicorn bullshitting, but I don't think the best founder is bullshit. Do you think you have any frauds in your portfolio today? I don't think I have heavy fraud. Right?

But I think this $5 million loss, when you. When you take twelve months of revenue and you recognize it all in one month, that's at the edge of fraud, isn't it? That's why I like this. This quick bank statement check. Like, okay, go through it and just make sure that the expenses and everything matter.

It sounds silly because it doesn't really matter when you're making a seed investment, whether there's 200k in the bank or a million, it doesn't. But what does matter, I find, is when we're investing faster, Harry, and we're investing broader, I just don't want any shenanigans. I just don't want it. Life is too short. I don't want any manipulated metrics and the problem with these bullshit artists, Harry, is they're bullshit artists.

For years it'd be one thing, it was one and done if they just bullshit you in the financing. But then every investor updates bullshit and every board meeting is bullshit. It's just an endless stream of bullshit and you can't make, it's not worth it. What about customer references? Some people feel guilty about asking for them too early, but then you kind of need them in some elements to help you with the diligence process.

Harry Stebbings
How do you think about when's the right time to do customer references? I feel guilty too early about asking for customer references if I'm not 90% sure I want to invest. I still feel guilty about that. I still feel guilty about burning VC's don't care, but I feel, I felt uncomfortable. As a founder, I only raised a couple times burning those.

Jason Lemkin
Oh, you want to talk to Dell and Comcast and LinkedIn again. The third guy that then doesn't invest, it's just like. So I try to actually do things that are quick and then I view those customer calls as a real ask as a favor and for real. And so I'm hoping they mostly confirm what I believe to be true. I'm not looking for a customer call to turn a frown upside down.

I'm not looking it to take a marginal investment. This is, I think what VC's used to do in the old days is they'd hope. I'm looking only for confirmation with customers. If you're at a million growing 10% a month and your churn is low, I'm going to assume your customers are mostly happy and they're going to gripe about a bunch of things too. Okay, so we're at a million.

Harry Stebbings
What monthly growth rate is good enough to really peak your interest and what monthly churn rate is like, acceptable? When I've let the growth bar go down just a little bit, I always regretted it. Now what is that? Is that from 50? It's gotta be.

Jason Lemkin
At the end of the day, the best investments still, and this is a brutal, the best investments go one to 10 million in five quarters or less. The very best ones, you can't ipo unless you triple, triple, double, double. You know, when I started investing, I remember putting on the whiteboard, tried to figure this out, and I invested in pipedrive, and I'm like, okay, they're investing. They're growing 8% a month at just over a million in revenue. I'm like, and I was asking the other VC's I was working with like, is this good enough?

I actually didn't, this is a long time ago in SAS. I didn't know. No one actually knew. But I'm like, I'm like, okay, 8% is my new bar at a million. It's got to be 8% a month, because I just, one, that I was growing 6%, so I'm like, okay, it'll be better than me.

And two, I don't see how they'll ever get to 100 million before I'm in a retirement home. If we're not hitting this numbers and that 8%, ultimately, you know, we really want ten, which is what I, where you fall out of your chair is when you see that double digit growth at single digit millions, right? That's when you fall out of your chair. But this basic vc math of triple, triple, double double is annoying as much as it annoys founders. And they say, well, it's harder now, and how could I do triple, triple, triple, Harry?

I only raised 6 million, or I can't raise a series G or series Q. The IPL markets don't care. They actually don't care whether you raise nothing right in primary like Atlassian, or whether you raised a crapload like rubric, or whether you raised almost nothing like klaviyo and then a bunch. The IPL markets don't care. They care if you're efficient.

The week Uipo like the two quarters, they don't care about the past, do they? Has expectation on revenue trajectory changed in the wake of deal scaling to a monstrous five or 600 million error where they are today, in the wake of whiz being monstrous, whatever they are today, half a billion they are, has what we expected in terms of revenue scaling. Changed for a venture. I think people are full of s, I think everyone wants a whizz. Now, we know it's possible, but the truth is, if you're in the zone today, if your growth is good enough, what has happened is like there was, you know, in 2021, if we had a pyramid, this many folks could all get funded, right?

For, I don't know, half the pyramid could get funded because everyone was growing to triple digit rates. Right now, it's a much smaller segment of the startup community growing at triple digits. So actually what I'm seeing is they're flooded with even more capital. They're flooded with even more capital, the outliers, because there aren't enough of them. There's just as much capital chasing fewer and fewer folks that can grow at triple digit rates.

The way I'm seeing in my personal portfolio is, and this is so different than 2020 is talking about pro rata, anyone in my portfolio that is growing quickly, the insiders flood it with capital. Flood it with capital in a way I've never seen in my whole career. Everyone used to be risk averse, and then they wanted Tiger to do it and they wanted SoftBank to do it. Now, the big funds, the $10 billion fund, they just, they don't want to share to leave the cap table. In any cases, did it turn out for the better for the company to.

All take all this insider money? Yeah. To get flooded with cash? No, it's a. It's a complete negative.

It's a. Because they do less work and they have a different bar. Right. Because if you're managing 10 billion and you've got a $5 million stake or $10 million, and that company is just. It's just in the top destis of your portfolio.

It's not whiz, but it's in your top decile. What are you going to do with the other 9 billion you haven't deployed? You're going to put it into that company and as you see that other people want to do it, you're going to get. Your elbows are going to get sharper and then you're going to realize, you got to do it with secondary. And then you realize, you know what, the deal is only worth 200.

But if I offer 300, like, I wouldn't do it for a new investment at 300, Harry, but I already invested at 20, so what's the difference on a blended basis? Like, it's like I'm going to make money, aren't I? Because this is a billion dollar company. This is going to be a $3 billion company. And so it inflates valuations.

Companies are getting over funded at inflated valuations by insiders. Today, I see it left and right. I agree with you. I also see people doing structured rounds as a way of preventing the world from knowing how bad a company is, or flat rounds, just to prevent the world from knowing how bad a company is or from realistically marking it differently in their books. So many companies had a bridge round, right?

A true bridge round. Like, you just get it wrong. I had one. As a founder, I needed an extra 500k. But taking a company that's struggling and putting tons of money in through safes or debt or whatever, how many of these have turned around and been $10 billion companies?

How many of, how many of the leaders in cloud had, like a year and a half or two years of 8% growth. Then investors put another 60 million with safes and they turned it around and people made money. I mean, I feel like they should be written off. What happens to these kind of zombie public companies, Jason? It sounds awful, so I'm going to just get in so much trouble for this.

Harry Stebbings
But like your Dropbox, your box, your twilios with low growth, unexciting road maps, kind of single digit, single digit market caps, what happens to them? And they kind of like zombie public companies? I don't think so. I would have thought that if you asked me 18 months ago or even twelve months ago. Two things.

Jason Lemkin
First of all, I'll take a very recent example, like Model N, which was growing like nothing, okay? It's a public company in revenue optimization for pharma. Okay? It had, the problem is it never expanded its niche. It's kind of like contract revenue management for pharma.

And it grew pretty nicely. And now it's not growing at all. It just got bought out by this. Our friends at Vista, again, for 1.25 billion. Is that like a great outcome or something?

I don't know. But like, first of all, all of these companies, as things swing back even a little bit, they're all targets for PE. They're all target. Whether it's Zendesk before a 10 billion or Model N, this is a good price for Model N. What does PE expect to do?

Harry Stebbings
Do they expect to just like margin, efficiency, the shit out of it, cut all excess and then reinvigorate growth? I mean, if they're the ones to reinvigorate growth, they must be pretty optimistic. I don't know. Certainly you can see like we started the conversation with salesloft. I mean, Vista combined them with drift, right?

Jason Lemkin
So I don't know what drift was doing. It was doing 100 million when they got acquired. Even if they're struggled a bit, let's assume you bolt on another 100 million. I know we make fun of these bolt on combination things, but maybe they work. It doesn't have to be perfect.

Maybe there's a lot of financial engineering. I don't know for sure. You could talk to them. I just don't. I don't think there's any dummies here, so I don't know the answer.

The other point, I will say, you know, you talk about zombies, but some of these zombies are approaching 40% operating margins. I don't think it's fun to be running Dropbox today. Okay. I don't. I don't think it's fun I don't think it's anything like when Drew started, but they're approaching 40% margins.

If they decide they want to run this as a cash engine for a while and then slowly reignite growth, it's so profitable at scale. I don't know. I don't know. I mean, squarespace just went private at 7.5 billion, right? At 20% growth, it was in the middle.

Will they come back out of 15? I don't know. I don't know. It's easy to be cynical about this stuff. Going to our early conversation, like, I didn't believe you could make venture in 20 money in 2013.

I'm starting to get nervous again in 2024. But I think there's logic to this. And it doesn't take multiple expansion in the public markets. It doesn't take much growth reflation for these deals all of a sudden to be great deals. If multiples go from six x to eight x.

If you look at what Yamini said from HubSpot just a couple weeks ago for this quarter, she said it is not any easier, even though they're growing 23% at 2.5 billion. She said, listen, it was briefly easier in December. Q one was brutal. It is as hard as it's ever been. Like, we sell the small businesses and we got to sell to the CFO and do demos.

We didn't used staff to do demos. Like, it's hard out there, even at their rate. But when it does turn, like, all these deals may be decent deals, like, they may be 20%, that's what you got to do is 20% net IrR. Right. Is the goal here, right.

They may be decent deals. And I just remember, I know I've done it a while, but when things were really crappy in the 2016 downturn, I might be getting my timing off. And LinkedIn panicked and sold to Microsoft cheap, right? And then Marketo sold to Vista for 1 billion. And everyone said they never could make money, right?

And they ended up selling for four and a half billion. And all of that. It took some market reflation. If you're in a segment of SaaS that's in a downturn, we're going into the third year. 2016 was one year.

This is three years. So it's tough. If you make the right bets and things just go up 20%, you can make a lot. That's a lot of leverage. That's a lot of leverage.

Of multiples go up 20% and growth grows up 20% more, it's gonna make a lot of money. There are two other elements there which I want to discuss. Number one was churn rate. What is an acceptable versus unacceptable level of churn rate for a million dollar ARR company? And how does that differ between SMB and enterprise?

It's tough. Well, look, let's break it up into two for enterprise. I think if your NRR isn't north of 110% by that point, don't invest. Don't invest. You have to have triple digit NRR.

It's just the way it works. It's even harder to break into the enterprise than the SMB in some ways, just because sales cycles are longer and it's more complicated. If you've somehow gotten to a million in revenue, you've solved a niche. But big problem in the enterprise. They're going to buy more of it from you if you solve more of their problems.

I've never not seen triple digit NRR at that scale. I've never not seen it, never in my career. My own experience as a founder or any company I've invested, it's always triple digits in the enterprise. Just something's fundamentally broken. If it's not triple digits at a million now, SMB is the tougher one.

Sometimes when Dharmesh and Brian talk about HubSpot in the early days, they're a little. And Dharmesh is, I hear, a little bit of confusion on what the monthly churn was. Was it three or 4% or 7%? Three or 4% is what we see with a lot of very small businesses. Will churn three or 4%.

Credit cards expire, they go out of business, they change things. If HubSpot really was seven to 8% and then got to 100% NRR, that's 110% at the peak. That's mighty impressive. But if the churn is anything more than a three or 4% a month, it's not even software anymore. It's some sort of consumer like thing that does not have recurring revenue.

There's a fundamental question, Harry, which is, do we even have recurring revenue here for companies? Right. And at the end of the day, you've got to get to 100%. Right? Dharmesh and Brian agree.

Everyone agrees you've got to get to 100. The question for SMBs is, can you tolerate three to 4% a month churn, which is endemic for small businesses for a couple of years? That's the venture question, and I've passed 100%. If you want to tie it together, I have no regrets here. I have passed on every single company that had for their segment abnormally high churn, 100%.

I've gone back to so many founders that were at a million with seven to 8% churn. I'm like, you have something, but it ain't SaaS. It's not SaaS, right. It may be something that maybe consumer, maybe that works in a bento box to your house company. Our whole fundamental model in software, it all breaks.

If you don't have a hundred percent retention, it all breaks. I'm looking at this growth model for this company now. 2.6% churn rate in August. That's what I would expect. It's SMB, and then in December it's a 5.6.

That's what I would expect, and that's the risk. How do we think about that when there's a variation that is doubling or halving, but it's highly volatile? It's not really got any form of predictability where I can hang my hat on and go, well, it's three. Well, I do think a couple of things. First of all, I do think that even for startups, an l four M model is great.

Take the last four months and average almost any metric, even as you're approaching a million. I find it highly predictive. I find if you take the last four months of growth and average it, that's going to be your growth the next eight to nine months. I find if you take the churn, that's going to be. Just take the last four months and average it.

I find it incredibly predictive. And burn, burn, churn and growth. It's highly predictive. And that's why, you know, when I started investing, I do love their model. I would take their historicals and I would just build my own.

Doing an l four M model was always right. It's always been right doing an l four M model. So that churn is high that you're describing. And there is a difference between small businesses and very small businesses. Very small businesses do churn three to 4% a month.

They do. And you've got two choices in that environment. You can either do what like Ben Chestnut did at Mailchimp and just be hyper efficient and say, it is what it is. If you're profitable, if your CAC is zero, you can survive a 4% a month churn. If your CAC is zero, it is unsustainable.

In a sales led model, that's the line. And so can you bet that a mark Roberge will come in like a HubSpot and help you go mid mark, mid SMB and figure it out. The best founders will figure it out, Harry. They will figure it out. But anyone but the best gets stuck in this three to four to 5% churn, right?

And they never dig themselves out. And even worse, sometimes they obscure it with capital. Here's where VC's can make it worse. They obscure it with capital. The other thing that happened with SMBs is actually you can grow faster in the early days in enterprise because you acquire the customers in a week or a day instead of in a year.

So sometimes the growth, top line growth rate is faster with SMB in the early days, and it can obscure that churn. That's the ones I think you either have to pass on or truly believe. The founders have a strategy to getting. To that 100% NRR audio lessons from. That observation the deals I regret are the worst deals, the one that was only five x for 100 million.

We also never fully solved the SMB turn there. We brute forced it with capital, right? It was very SMB, and it had like 2% churn a month. And when the team was efficient and we were burning one hundred k a month, it was no big deal. Like it really, at some level, there's always time, right, to go up market.

The question is, is there enough time and is there a plan? And it was tough at HubSpot, and it was very tough at toast. If you read toast, it was brutal for them to get to 100% NRR. Here's the other truth, Harry, is one. In some ways, you probably have to be better at SMB than enterprise because the margin for error is lower.

You sign an enterprise three year deal and they don't even deploy for a year because there's business process change. You get like a whole nother year to fix it, and then you can work on the renewal in year three. These SMBs, the smallest ones, are brutal. Like, they'll look at their credit card statement and they'll cancel everything. The day that the 15th or the 30th of the month, it doesn't make the money, they'll cancel everything.

It's brutal. And for the best founders, it makes you even better. And that's actually why I think the best software in the world are the canvas and the squarespaces. Maybe canva has better metrics and squarespace, but they have to be great, or I'm just going to churn tomorrow. It's almost impossible to churn out of most enterprise products.

So SMB software has to be better, it has to be self serve, it has to be PlG. It's not a choice. Its a requirement. And do you believe theyll get to 100%? Whats their strategy?

And if they dont? If the burn is low, I would take the risk. If the burn is high, I would assume the burn will increase linearly with that churn because its going to suck up more and more capital. Whats high burn as a percent of revenue. If youre looking at a company thats a million naira thats doing largely SMB, what would be an acceptable burn?

Theres the burn ratio that David Sachs popularized. Ive watched different companies. I dont know how often you get in your investor updates. I probably get half my investor updates. Get the burn ratio.

Then I started to see its flaw. The burn ratio. The David Sachs is basically one or less is really efficient, right. If you burn less than your revenue, your bookings, it's super efficient. That's great.

If you're clear, the next round is coming in and you have like 120% nr and 80% margins. If you're not clear, the next round is coming in, your nr is SMB, so it's 60% or 70%. And maybe your gross margins are lower. If you have a hardware component or other cogs, your burn ratio may need to be much shorter because when you look at our friends in b two C, they talk about going profitable on a customer in 60 days, 90 days, 30 days. We had Jacob from revenue cat do our.

You should do it sometimes. We had them do our little workshop Wednesday, and they have 10,000 consumer SaaS companies on their platform, right. They have a 60% annual churn rate. He's like, our customers have to go profitable in like 40 days. That's the b two C world that you and I are less familiar with.

But if you're going to do very small business SaaS, you start to overlap b two c a little bit, don't you? There's an overlap here. The last point I'll make is the big danger you can make. And this is why that company ended up having a mediocre outcome. You can't put enterprise or mid market people into these s and p models.

Just the toolkit, the type of people they hire, the way they spend in marketing, the customer lifetime, none of their metrics. It just doesn't work. It doesn't work if you come out of service now, where the average customer lasts 118 years and GRR is 99% at service now the GRR is 99. They keep 99% of their customers over three years. Forget about the other issue.

You just can't put that person into an SMB environment. They don't even know what to do. We were speaking about revenues. I just want two questions on revenue. One, do you ever have it where they're not actually presenting ambitious enough revenues?

I think it's almost certainly a pass. But here's where you have to check yourself. Everyone in life has to pass a 20 minutes test by minute 20 of the meeting. Do you think this founder is so great that you have to invest if they pass a 20 minutes test, but they have a crazy metric. Just share it with them.

Just say, listen, Harry, I love everything I've heard today. I just want to let you like 8 million. We're at six today, so 8 million 2025 seems a little modest, and maybe he'll laugh and be like, okay, I've never raised money before, Eric. I want to do 60, but I thought if I put 60 in, I read this thing on Reddit, it said, don't do that every once in a while with a first time founder, everyone gets bad advice. So if you love them, give them a chance to self correct on that mistake.

Right. Okay, second question on the revenue and kind of growth assumptions in a lot of AI tools today, especially the PLG AI tools we mentioned some of the sales rep productivity AI tools you mentioned opusclip. The revenue growth is just like. And my question to you is, how do you think about that? And how do we know experimental budgets versus sustainable budgets, and what you think is real revenue versus AI hype cycle revenue?

I don't think we know. I think it's fine not to know. I think that's called venture. I think we invest in things that are exploding. And so I think if we're trying to overanalyze some of these AI explosions, we're missing the fact that we can make 20 investments per fund.

I think the bigger issue is when the burn rates are vast. That's a bet that, it's just a crazy bet. It's one thing if you go from one to twelve in a year and you're cash flow positive, like opus, that's okay. If you go from one to twelve in a year and you're burning 50 million of some big funds, money, that might be a great, I mean, you know, great investment, like an open API. But that's a kind of bet I don't know how to make.

It needs so much capital. Do you just throw a chip in and walk out the door and tell them, let me know if you need a tweet or to be on the podcast. I'm not sure. What you do if they're going to burn. The way we invest, we haven't seen these types of burn rates either.

Even when we've seen some that burned a lot, like a rippling or something. It was very intentional. It was like, here, Parker, here's why. It was decentralized and it's really high. But, you know, if they're coming up on 400 million and there's a very specific reason why, and there's a plan, and it's pretty consistent with the plan, that makes sense.

If the founders are great and they have an answer, you got to make some of. You got to make the bet. If they're great, you got to make the bet. I do think the deal has to be right. You can have a great founder, but if, like, you hate a lot about it and it's 150 million price, there is a line where, like a great founder but a bad deal, you don't do the deal.

Harry Stebbings
I think. I think the other hubris that a whole generation of folks on 20 VC and otherwise, we're all going to slowly regret over the next decade. And this tough one to solve is just these low ownership stakes. Who was it? Was it Silver Lake that just said they regret every deal they did in 2021?

Jason Lemkin
That was small? Like we're only going to make any money on our big positions. We regret everything. And the problem isn't that this AI deals at 150 million pre in the seed round. I mean, that sucks.

But if you have a $50 million seed, even $100 million seed fund, how much can you put into it without creating systemic risk in your fund? Founders don't get this. Nor should they. But this is why I actually, Harry, believe that a lot of seed investing is systemically broken today. Let's just do the math.

When I started a typical, I did pipe drive at 16, at a million in revenue. So now your typical YC deal is at 25. Right. And you can't buy much, right. So, like.

So you got to do a three or $4 million seed check and you have a $50 million fund. How does the math work? You either have to take systemic risk, right, and do like six investments or eight investments, or you have to buy tiny stakes, or you have to find pre, pre seed stuff, right. Or you have $100 million funds and. You write even 100 is barely enough at a $25 million to own a true 10%.

A true 10% or 12%, because you're going to get diluted. So you need to write a $3 million check pre revenue at ten k mrr. Two k. Mrr. And I think everyone that complains about YC is missing the point that it's not for them.

YC doesn't owe it to anybody to create rounds that make certain vc funds happy. I mean, we would. It's. It's okay. How many folks are there per batch at YC now?

It's 150. Right. So Gary and team's job is to get 140 of them funded as quickly and as possible. And the next week, they're on to the next batch. Okay.

This is not getting just one or two funded because even if it's stripe, you don't know for sure. Right. So the most efficient way with their brand is to have everyone sell up these really slices, create a lot of FOMO and get it done. And it doesn't make sense to accommodate different structures of seed funds. It's a bad business model for them to make folks like you and me happy.

It only works for them. It doesn't work for anybody else. It doesn't even work for EF or certainly anybody else. It only works for them. So you've got revenue cat, and you have talk desk.

Harry Stebbings
We only have time for one more. Which one do you have more learnings from? And what are the biggest learnings from them? Revenue cat's a fun one. I'm usually not the first investor, like, literally the first dollar in the door.

Jason Lemkin
I'm usually the first institutional, but this is the first time I've been the first investor at like $30 a month in revenue. I confuse their, their basically their GMV with their ARR. I got it wrong. So I thought they were doing like $10,000 a month in MRR, but they were doing managing $10,000 a month in subscriptions and making like $30. So I took a little more risk than I usually did.

That was an easy risk to take because the co founders already knew the space cold. What was the price and what check did you do? The first check was for about 10%, and it was pre YC. So I think it was seven or 8 million pre. But that would be 25 today.

Right. That was in 2018. That's a tough structural issue. Right. And it was before demo day and all that kind of stuff.

And they did only have $30 a month in revenue. So maybe it was a good price, but today they would just wait and get 25. So what are the big lessons from that? When you have founders that are truly committed to a multi decade journey at NOAA space cold, maybe that's the most important thing of all right, so revenue Cat is on 30% of all mobile us mobile devices, managing subscriptions. And so that they've crushed.

Developers love them. The product is great. Have they been too slow to develop the sales led side of the business? Yes. I think Jacob and Miguel would admit that they're a little slow to go.

They lean too much onto the PLG, too much on the brand. But it's okay. They're at many tens of millions of revenue. They can do more there today. They've just closed their first million dollar deal.

Maybe they could have done it a year earlier, but it doesn't really matter at some level. And so there are times. What's fun about a company like revenue Cat is there are times when a company, or sometimes an executive comes into their own right. Not everyone can see it, and now everyone can see that this is like the right team for the right problem at the right time and just back them. I never had 1 second of lack of as you probably, we've chatted just for a few times about this coming of yours for fun.

I've never had 1 second where I doubted the team. Right. I questioned them a few times on different things, never 1 second because they understood a problem and were committed to it for 20 years. Right. And DOn't want to get acquired and have a plan to ipo and for all the right reasons.

And maybe that's a rambly answer to the question, but those are the investments where I just don't think you can lose. And when I've my losses to tie this all into the theme, my losses are when the founders weren't that way, this $5 million loss I had, they were woe as me. They're like, I tried really hard. This company started the same time AS revenue CAT. For a while, they were growing just as quickly.

And then they're like, oh, it got so hard and I had churn and I lost my customers and, and then this $5 million company, one day they came into work and they fired their entire sales and marketing team with $15 million in the bank. They fired everyone, just like Elon. But Elon's a better founder, fired a supercharger team. He CAME and told noBody. And because growth got harder, they fired every single person in sales and marketing.

So my mistake of 2021, when everything was gray following somebody else, it was, I don't, it was a waste. It was just a waste of energy. The slightly second lesson, which you probably agree with, is like, there's no good deals. If a deal seems good, don't do it. I agree with you.

Harry Stebbings
I've definitely made the mistake before. It's like a good deal does not make a great investment. And the funny thing is, and also, that was the last deal of that fund. Right? So there's also some micro learnings about managing the end of the fund because, you know, I've never thought I was that good investor, but everyone was kind of a genius in 2020.

Jason Lemkin
And I'm like, well, you can't lose money, so might as well make some extra money in the fund because we'll be so far into carry every extra dollar is just profit. It's like, it's kind of like recycling, right? If you can recycle just right. And this is the classic argument for recycling. Hey, maybe you'll only make three x on your recycled investment, but if you can invest another 10 million out of your fund and three exit, that's 20 extra million to the lp's and four to six extra million to the gps, you can't lose.

So this was an end of fund thinking, and I will never approach an end of fund investment treating it any differently than a start to fund investment. I will never do that again. Any other lessons you mentioned? The micro learnings on end of fund investments. Any others there?

The only lesson that's actionable is we talked about the company where we exited at 100 million during lockdown. I should have recycled all that money instead of distribute it. It was impactful to a seed fund, right, because it was a significant return. But it was so it was early in the lifecycle of the fund, and now I wish I had those tens of millions to put into the portfolio. I think I will learn how recycling really works just after I retire from investing.

I don't think I'll truly understand it how, I mean, I get it, but like, there's so much you have to manage, so many funds, so much money to get it, right. But just recycle. Recycle everything. I think it's the learning, right. I just wish I had that, those extra $20 million to put into that portfolio today, because that's another way to get an extra x out of the fund.

Harry Stebbings
Your investors say you don't invest fast enough. Yes, they're correct. Do you worry about that? I do worry about it. I do worry about it.

Jason Lemkin
There are downsides to not working for other people, right. Like you and I aren't. There are downsides to it. It's a great question. I do worry about it.

I do think I need to invest more quickly. I feel like I've made enough investments that the financial returns from the existing portfolio will be good enough. I think I will achieve my investing goals from the investments I've made in ten years. But I would like to play two more cards. I'd like to do two more funds.

I'd like to have six more big winners. That would be enough. But I'd like to have six more fund returners. Okay, we're going to do a quick firearm, my friends. That sound okay?

Harry Stebbings
Who's the most underrated SaaS CEO today? When we talked about SMBs, I think when service Titan does IPO soon, I think we're going to see that Arrow is one of the most underrated folks coming out of Pasadena, doing it his own way, selling to plumbers and folks always committed to this mission. I think him and Andrew from Klaviyo were just missed because they're out of the circle. Klaviyo was missed because it didn't really raise or do other things. They're neck and neck.

Jason Lemkin
I mean, if you're in, if you're outside of the Shopify ecosystem, you're like, what the heck's Klaviyo? They ipo'd. If you're in the Shopify, like, if you have any investments in it, Andrew and Klaviyo are like, God level, God level. Coming up on a billion. Dominating this thing kicked mailchimp out of Shopify on a billionaire revenue.

They will be soon be doing more marketing revenue than HubSpot. They will cross. They will be doing more SaaS revenue than Shopify in a couple of years. This is a force of nature. And there's been a little bit of grumblings when they raise prices this year.

But I would say until recently, I couldn't even meet anyone on the planet Earth that didn't love this product. That is next level stuff, isn't it? Market cap today is six and a half billion. And I think he started at 23 or something like that, too. It's 24 today.

That's one of the reasons I have some, some malaise and worry in venture. It should be ten, 1112. In my mind, there's not much better than Klaviyo out there. You could give it a discount for having a platform risk, but based on what? I follow the company pretty closely because of gorgeous, I don't think anyone gives it a discount for platform risk.

This is why. This is why almost every SaaS company is overpriced in the venture markets because of Klaviyo. If Klaviyo was worth 20 billion then all these deals we're doing make sense. What do you think is the most overvalued company today? I'm hopeful that almost everything in SaaS is undervalued.

There are folks where sometimes I wonder why Aclavio is trading at. What are we coming up on? A billion? So we're trading at basically six x ARR. Sometimes I wonder why an Atlassian, which is an iconic company, could never say anything but positive about Atlassian.

Sometimes I wonder why it's trading at twice the revenue. Why is that? A twelve x company, it's growing 20%, which is great. It's not 40%. It has great cash flow.

Some of these mark these just multiple dislocations. I just, I'm not, I'm not a smart enough public guy to get. But the Klaviyo to Atlassian gap in multiples is. Remains a mystery to me. Tell me what happens to Anaplan?

Harry Stebbings
Like, respectfully, terrible product, getting eaten alive by pigment, bought by pee fuck all innovation. What happens there? I don't. Going back. I don't know.

Jason Lemkin
What happens to these PE companies that invest less after they do? I don't. I don't know. I mean, our little team at Sastre, we are accidentally stuck on Marketo. We would be on HubSpot if we could be.

We have huge data issues for migration, but we're stuck on Marketo, and so. But it's kind of fun as a case study. I mean, literally, I don't think they've launched a feature in six years or whatever even. I mean, I guess it's under Adobe PE and then Adobe nothing. It's the same, same clunky app.

A lot of people still swear by it because it is powerful in the enterprise. Right. What happens when companies stop innovating? I don't know. I guess the meta question is, can they grow in the teens?

This is the Dropbox question. Can you grow in the teens? Right. And sure. Pigment, maybe pigments on fire, but again, I can't segment the market.

Maybe Anaplan is stronger in the true enterprise, for example. Or maybe they have, maybe they're impossible to rip out. I think if you can grow in the teens, you're still going to hit the rule of 40. I think if we look at our public companies, you still have a lot of enterprise value. If you hit the rule of 40, doesn't get, there's no point in venture, but in the public markets, there's still a point.

So maybe that's the bullish version, is that these companies have even though we can be critical because we're so focused on the upstarts, they may have a decade to run. If the growth is in the teens, even 15% growth over a decade. That plus maybe 35% margins, those compound to a lot. 15% a year is better than most VC funds make. What was the biggest thing about the world of LP's that you wish you'd known when you started?

I basically have two anchors, and they've been the same my whole career. I have Horsley and transpose together with their affiliates and friends. People would say it's a bad idea. I think they're 80% of all the funds I've done. People would say that's a bad idea, it's too concentrated.

But everything I've asked for direct indirect follow on whatever, they've done it one way or the other. So for me, for my gig, it's worked out pretty well. So what's my learning from that may be radically different than like 99% of people. If you can find a couple LP's, ideally four or five, that truly believe in you, and you don't put up too many mulligans, and you deliver with some regularity, it's a gift, because you can kind of do your thing. Even if you're a little criticized for investing slowly, like we talked about, you can kind of do your thing.

And I've worked in environments where it was very transactional with LP's, right? And I've worked in environments where you're more supportive. It is better to be more supportive, and maybe it's better to not be aggro. Maybe it's better to leave a few nickels on the table. Maybe it's better to go the extra yard.

I don't have the answers. Let me put it differently. I've been able to work with my LP's like I worked with my VC's, which is a good framework for me, rather than to work with them, which maybe, you know, maybe another kind of mistake. Rather than work like everyone's just a number on a sheet, right? Final one for you.

Harry Stebbings
You can invest in a seed fund, a series, a fund and a growth fund. Which one do you put money into for each? Well, first, my advice to everyone out there that, like, emails me, hey, can I invest in Saster fund? Don't put money into any of them, is my advice to individuals. Everyone's full of shit.

Jason Lemkin
If you do a seed x, a seed fund and you make three x net after 16 years as an individual, put the money into S and P 500, put it into VTI, it's not worth the extra gains for the illiquidity. And people don't put enough, they don't write a large enough check into funds as individuals. Right. If you put half your net worth into it, I would get it. But if you're putting 100 grand or 50 grand, and that triples to 150 grand after 16 years, and it's illiquid, it ain't worth it.

Harry Stebbings
If I said to you, here's a pension fund. You are the CIO. Go put money in the seed fund, a series, a fundamental, and a growth fund. And this is absolute returns focused. I want money back the little bit.

Jason Lemkin
I know I've been doing this just long enough that I see all these funds decaying, I see partners leaving, I see old playbooks not working. I see folks struggling. I even see pretty good investors investing more slowly. You see folks quietly stepping back, or they're not investing themselves. Their teams are doing all the investments now.

So I have the same issue that I think is the existential challenge for LP's is you're looking backwards. And a lot of these funds that we all look up to, a lot of those managers aren't even active anymore, or they're not fully active, and a lot of folks returns, you have access to a thousand times more data. A lot of it is not as impressive as you might think. Not that you need me, but the handful of times I've been able to help you, I've recommended you. I'm saying I can't predict the future perfectly, but here's someone that has the right drive that has enough of a track record together.

I think you got to make the Harry Stebbins type bets, because I don't know how to make the rest look at, like, open view, right? Made so much money on Datadog, they owned almost 20% of Datadog. Three, 4 billion. And then you're done. And then one guy owns the whole fund.

Right. My general assumption in all these situations is the most logical thing happened, which is, look, you know, if you have one guy getting owning the management company, and, like, 50 or 80% of the carry, and you have a Datadog exit, and then it gets harder. Everything gets harder. Why would you keep doing it? You gotta love it.

I mean, you gotta really love it. So, like, if they made four or 5 billion off a couple hundred million dollar fund, let's have some fun for the audience. We should do the math better. But let's say they made 3 billion in carry, okay, and let's say it was just 20%. So that's 600 million of the partners.

But the one guy owned got 60%. So let's say he made 300, 5400 million. And now you're in your new fund. And it's hard, Harry, we're sitting at one x. I got a hustle and my valuations suck.

Datadog. Every investor that got into Datadog until the late one got in cheap. I mean, we did a fun one together with I ventures and others. I think they invested like four or 5 million in Datadog in the early days. Right?

Open view, I think did it in the teens. Right now they're like the next data dogs at 400. Pre, you're running the fund, you're like, okay, listen, I got to sign up for 14 years and I'm going to make like nothing in carry or a couple million. I made 300 million off Datadog. What would you do if you didn't see 3 billion coming?

Like you'd hang up your hat. I'm assuming that's the answer. I could be wrong. No offense to anybody, but I just think my limited understanding is they made so much. They have some good investments, but there's no way they're going to make 400 million.

As GPS off calendly is great. I mean, it's such an iconic company, but owning 8% of calendly at a 3 billion entry price is not the same as owning 20% of datadog at 16 million entry price, is it? Calendly? We all love calendar. Let's say IPO is at 6 billion and they invested 60 million.

Probably doesn't return the fund, does it? We blow your brains out, right? You ask why I invest more slowly. There's a lot of reasons, but one is, listen, I don't want smaller ownership stakes. I don't want single digit ownership stakes.

I don't want anything that doesn't return the fund for real, not for fake, not to raise the next fund. Right. You realize, like, there are, there's a lot of fake bravado on Twitter and a lot of folks making personally very little money on very high profile investments, right? So that's my. May not be what happened in openvue, but when you have one of these outlier events, right, even the guys at emergence who I love, you know, they had a gentle transition when they made.

So they made so much money in emergence between Bill, Viva, they own 30% of Viva and they held it. Right. So let's have some fun. I'm not going to look it up, but what Viva's worth what, 35 billion today? Yep.

I know. They kept it at the fund level until eight figures. So let's say they had 25% carry and distributed at 20 billion. So the partners, let's say they had, say, 6 billion. The partners had a billion to divide up between themselves and that fund.

Plus they had yammer, plus they had bill. This was an epic fund. This fund. They had little old echo sign, didn't even get above the line. And so how would you keep going?

I mean, Gordon's still there. It's a great fund, right? But, you know, when you have those moments in timing, it's so, so much money. I was on a board with John doar when I started investing and I asked him why he kept doing it. The only thing I saw was he still had the sparkle in his eye.

You know, back then, this was 2014, we sold the Sparkle. But if you've made that much money and the sparkle's gone, dealing with this bullshit is not worth it. Listen, Jason, I've loved doing this. Thank you so much. As always, this has been fantastic.

Harry Stebbings
And you are my hero. My man. I look forward to London. It's going to be fun. It'll be good.

I have to say that show, in terms of the format, the review, the review of the three best and three worst deals, it was an experiment. So I want to hear your thoughts. I love doing it. Personally, I think there's so much to learn from the biggest successes and biggest failures. Again, you can find it on YouTube by searching for 20 vc, but let me know what you think on Twitter aristebbings.

But before we leave you today, we're all trying to grow our businesses here. So let's be real for a second. We all know that your website shouldn't be this steady, static asset. It should be a dynamic part of your strategy that really drives conversions. That's marketing 101.

But here's a number for you. 54% of leaders say web updates take too long. That's over half of you listening right now. And that's where Webflow comes in. Their visual first platform allows you to build, launch and manage web experiences fast.

That means you can set ambitious marketing goals and your site can rise to the challenge. Plus, Webflow allows your marketing team to scale without relying on engineering, freeing your dev team to focus on more fulfilling work. Learn why teams like Dropbox, Ideo and orange Theory trust webflow to achieve their most ambitious goals Today@webflow.com. and speaking of incredible products that allows your team to do more. We need to talk about Secureframe Secureframe provides incredible levels of trust to to your customers through automation.

Secure frame empowers businesses to build trust with customers by simplifying information security and compliance. Through AI and automation. Thousands of fast growing businesses including Nasdaq, Angellist, Doodle and Coder trust Secure frame to expedite their compliance journey for global security and privacy standards such as SoC two, ISO 2701, HIPAA, GDPR and more. Backed by top tier investors and corporations such as Google, Kleiner Perkins, the company is among the Forbes list of top 100 startup employers for 2023 and Business insiders list of the 34 most promising AI startups of 2023. Learn more today@secureframe.com.

it really is a must. And finally, a company is nothing without its people. And that's why you need Remote.com. dot Remote is the best choice for companies expanding their global footprint where they don't already have legal entities. So you can effortlessly hire, manage and pay employees from around the world, all from one easy to use self serve platform.

Plus, you can streamline global employee management and cut HR costs with Remote's free HRI s. And hey, even if you are not looking for full time employees, remote has you covered with contractor management, ensuring compliant contracts and on time payments for global contractors. There's a reason companies like GitLab and Doordash Trust remote to handle their employees worldwide. Go to remote.com now to get started and use the promo code 20 Vc to get 20% off during your 1st 1st year remote opportunity is wherever you are. As always, I so appreciate all your support and stay tuned for an incredible episode coming this Wednesday.

20VC: Why Seed is Systemically Broken | Why Pricing is Worse Than Ever and There is More Funding Than Ever | Benchmarks for Churn, Retention and Growth Rates - Good vs Great | Why Last Vintage for Private Equity Will Suck with Jason Lemkin

Primary Topic

Episode Summary

Main Takeaways

Episode Chapters

1: Introduction to the Systemic Issues in Seed Investing

2: Deep Dive into Benchmarks for SaaS Success

3: Discussion on the Last Vintage of Private Equity

Actionable Advice

About This Episode

People

Companies

Books

Guest Name(s):

Content Warnings:

Transcript