20 VC 050 Starting, Building and Selling in SaaS with the King of SaaS, Jason Lemkin, Managing Director @ Storm Ventures



In the 50th episode of 20 minutes VC, host Harry Stebbings interviews Jason Lemkin, MD at Storm Ventures and a prominent figure in the SaaS community. Lemkin shares his journey from founding EchoSign, its acquisition by Adobe, to becoming a VC, emphasizing the importance of a founder's drive to build a billion-dollar business. They discuss SaaS company valuations, growth rates, and Lemkin's investment strategy, which hinges on backing founders with strong unit economics and the potential to scale. Lemkin also touches on the significance of operational playbooks over marketing innovation and his belief that any sector can be lucrative with the right approach, citing his recent investment in enterprise expert training as an example. He recommends resources for SaaS knowledge, including his blog SaaStr, Tom Tunguz's blog, and Sales Hacker.

Summary Notes

Introduction to 20 minutes VC and Jason Lemkin

  • Harry Stebbings celebrates the 50th episode of "20 minutes VC."
  • Jason Lemkin, MD at Storm Ventures, is the guest, recognized for his contributions to the SaaS industry.
  • Jason founded Ecosign, which was acquired by Adobe.
  • The podcast will focus on the SaaS industry.

Welcome to the 20 minutes VC with your host Harry Stebings. And we are celebrating today at the 20 minutes VC as we usher in the 50th episode my, how time flies. And there is no better guest to celebrate such an event than by welcoming Jason Lemkin, MD at Storm Ventures onto the show.

This quote introduces the podcast episode, its significance as the 50th episode, and the guest Jason Lemkin, highlighting his background and the episode's focus on SaaS.

  • Hiring Screen offers a blink algorithm to assist in sorting candidate applications.
  • Employers can build a job by selecting criteria like work experience and skills.
  • Blink scores each candidate and ranks them by relevance to the job.

But before we dive into today's interview, have you ever looked at an inbox full of candidate applications and felt a little overwhelmed? Well, you'll love hiring screen's blink algorithm.

This quote introduces Hiring Screen's blink algorithm as a solution for employers who feel overwhelmed by the volume of candidate applications.

Jason Lemkin's Background and VC Entry

  • Jason Lemkin discusses his journey into the VC world.
  • He was a successful founder of two venture-backed companies.
  • His last startup was invested in by Storm Ventures, who later gave him capital to invest.

I've been a reasonably successful, not a unicorn successful, but reasonably successful, founder of twice and two venture backed companies.

This quote provides insight into Jason Lemkin's background as a founder and his moderate success in the venture-backed business space.

Lemkin's Transition Post-Acquisition

  • Post-acquisition of Ecosign by Adobe, Lemkin became a corporate VP.
  • Adobe's social media policy for VPs required a lengthy approval process.
  • Lemkin utilized Quora to share his knowledge due to Adobe's restrictive social media policy.

After Echo signed, my last company got acquired by Adobe. They made me a corporate vice president, which I actually didn't ask for.

This quote explains Lemkin's unexpected promotion to corporate vice president following the acquisition of his company by Adobe.

The Rise of SaaStr Blog

  • Lemkin started the SaaStr blog by answering questions on Quora.
  • He wrote 100 blog posts about building a SaaS company while at Adobe.
  • SaaStr now receives over 1 million views per month.

And then the day I left Adobe was the day of the first blog post on SaaStr, and I already had 100 in the queue.

This quote marks the beginning of the SaaStr blog, which Lemkin started immediately after leaving Adobe, leveraging the content he had prepared in advance.

SaaStr's Audience and Growth

  • SaaStr had a low volume but high-quality reader base initially.
  • Early readers included notable figures like Aaron Levy.
  • The blog's growth is attributed to consistent effort over four years.

I had a relatively low volume, but high quality reader base. For example, the first favorite I ever got on my first SaaStr blog post was from Aaron Levy.

This quote highlights the initial audience of SaaStr, which included influential readers, and emphasizes the importance of having a high-quality reader base.

Advice for Founders on Selling to Large Companies

  • The landscape for selling to large companies has changed since 2011.
  • Jason reflects on the differences in the market following the Lehman Brothers crisis.

Yes. And the world's changed. Right? I sold in 2011, which in Internet time is like 50 years ago.

This quote suggests that the experience of selling a company to a large corporation like Adobe in 2011 may differ significantly from current market conditions.

Decision to Sell a Company

  • Jason Lemkin discusses reasons for and against selling a company.
  • Emphasizes that gut feeling is important in the decision-making process.
  • Highlights a particular stage in a SaaS company's growth, referred to as "initial scale," as a critical point for decision-making.
  • Initial scale is defined as reaching around a million a month in recurring revenue or 10 million a year.
  • Lemkin advises against selling at initial scale unless the offer is exceptionally high.
  • The rationale is that once a company reaches initial scale, it is difficult to kill and has great potential for growth.

"There's many reasons to sell and many reasons not to sell, and you'll know in your gut whether it makes sense."

This quote encapsulates the complexity of the decision to sell a company and suggests that intuition plays a significant role in such a decision.

"Once you hit what I call initial scale, it's usually around a million a month in recurring revenue, or maybe 10 million a year. Eight hundred k a month of recurring revenue. Once you hit that, you can't be killed in SaaS, you cannot die, you cannot be stopped."

Lemkin defines the concept of "initial scale" in SaaS and asserts the resilience and potential of a company that reaches this milestone.

"So never sell at that point, unless it's twice the maximum amount of money you would ever want, then do it, because there's different times when it gets good."

He advises founders to hold off on selling at initial scale unless the offer is extraordinarily lucrative, emphasizing the importance of timing in such decisions.

Personal Experience with Selling

  • Jason Lemkin reflects on his personal experience with selling his company.
  • Mentions market conditions and venture financing terms as factors in his decision.
  • Acknowledges the uncertainty in market conditions and the potential for rapid changes.
  • Describes the environment post-Lehman Brothers collapse as a factor in his decision-making process.

"The markets were smaller. The terms for raising the next venture financing were expensive."

Lemkin provides context for the market conditions that influenced his decision to sell his company.

"One year out of Lehman Brothers disaster, when the world was going to end, it seemed like the right call and things changed."

He reflects on the impact of the financial crisis on his decision and acknowledges the unpredictability of market conditions.

SaaS Valuations and Growth

  • Jason Lemkin discusses the valuation of SaaS companies and the recent increase in multiples.
  • Identifies a significant increase in SaaS company valuations over the past 24 months.
  • Points out that the growth rates of certain SaaS companies justify the high valuations.
  • Examples given include Slack and Zenefits, which have shown exceptional growth rates.
  • Lemkin argues for paying a premium for top-performing companies, especially when they grow at unprecedented rates.

"SaaS multiples for companies that are hot and we can define what hot is next. Those have probably quadrupled in the last 24 months."

Lemkin notes the dramatic increase in SaaS company valuations, indicating a trend of high multiples for "hot" companies.

"Slack just hit a 24 million run rate basically one year after monetizing."

He provides an example of Slack's impressive growth rate to illustrate why high valuations may be justified.

"I think you always have to pay that. We always paid a premium for the best. And when the best grows faster than ever, we should pay the highest premium of all time."

Lemkin argues that premium prices are warranted for top-performing companies, especially those with rapid growth.

Neglected Sectors and Market Size

  • Jason Lemkin speaks about potentially neglected sectors within the SaaS industry.
  • Suggests that every part of the global economy is being serviced by SaaS, making it challenging to identify neglected areas.
  • Provides examples of niche markets that may not seem obvious but have significant growth potential.
  • Lemkin's key insight is that market size (total addressable market, or TAM) is determined by how it is approached and developed.
  • He uses Slack as an example of a company that redefined its market size by its growth and not by past standards.

"I believe that market size, the tam, is what you make of it."

Lemkin emphasizes the idea that market size is not fixed and can be expanded based on a company's performance and approach.

"Slack is going to be bigger than hip chat or its entire competitive landscape in six months."

He illustrates the concept of market size with Slack's rapid growth surpassing its competitors.

"You can't define a lot of these markets by the way they looked in the past. That's a sucker bet."

Lemkin advises against using past market conditions to judge current opportunities, suggesting that this approach can lead to missed investments.

Revenue Milestone and Growth Rate

  • Jason Lemkin discusses the importance of reaching a revenue milestone and maintaining a high growth rate.
  • He emphasizes that if a company can hit $1 million in revenue and grow at 15% month over month, it has the potential to reach hundreds of millions in ARR (Annual Recurring Revenue).

"If you can hit a million in revenue growing 15% month over month, you're inherently in a nine figure. You can inherently build a company with hundreds of millions in ARR."

The quote explains that a company achieving $1 million in revenue with a consistent growth rate of 15% per month is on a trajectory to reach a valuation in the nine figures and build a substantial ARR.

The 40% Rule in SaaS

  • Jason Lemkin discusses the 40% rule, which suggests that the sum of growth and profits in SaaS businesses should be 40%.
  • He expresses skepticism about the rule, suggesting it may justify various growth rates and burn rates, and states his preference for investing in companies with strong month-over-month growth.

"I think it's fine. But I think it's too clever. I think it's trying to justify slow growth, medium growth, high growth businesses and different burn rates."

Lemkin's quote indicates that while he acknowledges the 40% rule, he believes it overcomplicates matters and prefers a simpler, more growth-focused approach.

Investment Criteria

  • Jason Lemkin reveals his investment criteria, focusing on companies that can demonstrate consistent 15% month-over-month growth after reaching a certain revenue threshold.
  • He expresses a preference for investing in companies with high gross margins, indicating a disregard for financial details beyond top-line revenue.

"I just want a company that once it hits 1 million or a million and a half in revenue or so, can grow 15% month over month repeatedly. That's the company I want to invest in, period."

This quote emphasizes Lemkin's singular focus on consistent growth as his main criterion for investment, highlighting the importance he places on this metric above all else.

Types of Entrepreneurs to Back

  • Jason Lemkin discusses the type of entrepreneur he prefers to back, emphasizing the importance of being better than himself.
  • He shares his investment track record, noting that the one time he invested in a CEO not as good as him resulted in his worst investment.

"Only one of them was the CEO. Not as good as me and it's my worst investment."

The quote conveys Lemkin's experience that investing in entrepreneurs who are not at his level of competence has led to poor investment outcomes.

Founder Strengths and Weaknesses

  • Jason Lemkin reflects on his own strengths and weaknesses as a founder.
  • He compares himself to other successful entrepreneurs and acknowledges the importance of recognizing someone who is better than oneself.

"Peter and David were better than me and they had better outcomes than me, and I didn't get it."

Lemkin's quote illustrates the concept that recognizing superior talent and ability in others can be crucial for understanding and predicting successful outcomes.

Identifying Exceptional Founders

  • Jason Lemkin explains how he can quickly assess whether an entrepreneur has the qualities he is looking for.
  • He states that he can identify founders who are more driven, aggressive, and have a better vision for the future, often within minutes of meeting them.

"I know that they can see the future better than me. I know they're more driven. I know they're more aggressive."

The quote underscores Lemkin's ability to rapidly discern key entrepreneurial traits that indicate a high potential for success.

Pre-Investment Process

  • Jason Lemkin describes his thorough pre-investment process, which includes extensive research and reading all provided materials before meeting with the founder.
  • He conducts only one founder meeting per week and is often already inclined to invest based on his pre-meeting analysis.

"I will read everything. I will do the research. You send me your financial model. That's 78 sheets. I'll read it."

This quote reveals Lemkin's meticulous approach to due diligence before engaging in a meeting with a potential investment, highlighting his dedication to understanding a company's details.

Good vs. Bad Founder Insanity

  • Jason Lemkin differentiates between founders who are 'insanely' driven to build a multibillion-dollar business and those who are not aligned with this goal.
  • He explains that as a venture capitalist, backing founders with this level of ambition is necessary to achieve significant financial returns.

"They just have an insane desire to build a multibillion dollar business, no matter what it takes."

The quote captures the essence of what Lemkin considers 'good' founder insanity—a relentless drive to create a highly valuable business.

SaaS Customer Acquisition Innovation

  • Jason Lemkin discusses the current state of innovation in SaaS companies, particularly in customer acquisition strategies.
  • He observes that while there is a lack of innovation in sales and marketing, there is a growing knowledge of effective playbooks among companies.

"I don't see a lot of innovation on the... I see something different. What I see is that what's evolved over the last three or four years... is that people actually know the playbook."

The quote suggests that SaaS companies are becoming more adept at executing established strategies for customer acquisition rather than innovating new methods.

Investment Thesis Guiding Principle

  • Jason Lemkin emphasizes the importance of an amazing founder, strong unit economics, and market potential in his investment thesis.
  • The quality of the founder is crucial, as mediocre founders have limited potential to scale a company.
  • Strong unit economics are essential, and even a great founder cannot succeed with poor unit economics.
  • Market potential can be indicated by at least one customer with outsized deal sizes, suggesting the possibility for growth.

I would say that an amazing founder, strong unit economics, and a little bit of something can create something amazing.

This quote outlines the three pillars of Jason Lemkin's investment thesis: exceptional founders, solid financial metrics, and market potential, which together can lead to the creation of an extraordinary company.

Preference for SaaS Companies

  • Jason Lemkin prefers investing in SaaS companies with higher value per customer.
  • He looks for companies that can grow into outsized deal sizes and strong unit economics.
  • Lemkin cites an investment in Algolia, noting its potential for growth despite early-stage small customer deal sizes.

Yeah, I probably won't invest if you can't grow into outsized deal sizes and unit economics.

Lemkin stresses the importance of scalability and robust unit economics in his investment decisions, indicating that he seeks companies with the potential for significant customer value.

Bet on Potential Growth

  • He is willing to bet on the potential for growth if there is at least one customer that represents the future market.
  • Lemkin is open to taking risks on companies that others might overlook if they show signs of future success.
  • He emphasizes that having at least one promising customer is a sign of potential that can lead to more significant deals.

If you have one, I'll bet that you can get ten and then 100.

This quote demonstrates Lemkin's strategic approach to investing, where he sees the presence of one significant customer as a predictor of future growth and is willing to invest based on that potential.

Quick Fire Round Responses

  • Jason Lemkin shares his quick opinions on various topics, including Apple Music and exciting SaaS companies.
  • He is skeptical about Apple Music's ability to impact Spotify or Apple's bottom line.
  • Lemkin is bullish on Talkdesk, predicting it will reach unicorn status within twelve months.
  • His recent investment is in a company that offers expert training in the enterprise, chosen for its committed founders and rapid revenue growth.

I think that it's going to be tough to really materially impact Spotify and it's hard to have a material impact on Apple's bottom line. So no matter what, it's amiss.

Lemkin expresses doubt about Apple Music's potential to compete effectively with Spotify or significantly contribute to Apple's financial success.

Goodness. I'm going to play to my favorites if talk desk isn't a unicorn. Within twelve months, then I'll eat my hat.

This quote shows Lemkin's confidence in Talkdesk's potential for rapid growth and success in the SaaS market.

Favorite Book and Its Impact

  • Jason Lemkin's favorite book is "The Lion Who Shot Back" by Shel Silverstein.
  • He finds relevance in the book for founders, relating to finding one's place in the world, being contrarian, and market redefinition.
  • The book symbolizes the changing nature of the world and the ability to redefine oneself and the market.

I think that my favorite book might be Shel Silverstein's last cameo, the Lion Who Shot Back.

Lemkin shares his favorite book, highlighting its thematic relevance to founders and entrepreneurs who are navigating their path and redefining markets.

SaaS Resources Recommendation

  • Recommends reading Tom Tunguz's blog and Mark Suster's sales writings for insights into SaaS and enterprise sales.
  • Suggests following Sales Hacker on Twitter for operational content and tactical sales strategy.
  • Emphasizes the importance of continuous learning and staying informed about the latest in sales strategies.

And then follow on Twitter, follow my friends at sales Hacker, because he's got operationally amazing content from like vp of sales benefits, vps of sales Guidespark, vps of sales from all these companies, and just keep reading and learning what the content sales hacker is putting out both their own content and stuff. He retweets and that's like a master's in tactical sales strategy too.

Lemkin recommends Sales Hacker as a resource for operational content and tactical sales strategies, suggesting it as a valuable learning tool for those interested in SaaS.

Conclusion of the Interview

  • Harry Stebbings thanks Jason Lemkin for the interview and mentions the resources available on his blog.
  • The episode marks the 50th of the podcast, and Harry expresses gratitude to the audience and sponsors, especially Hiring Screen.
  • He invites feedback on the show and looks forward to future episodes.

Yeah, this was terrific. Thanks for the time, Eric.

Jason Lemkin concludes the interview with appreciation, indicating a positive and engaging discussion.

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