In this episode of "20VC," host Harry Stebbings discusses the state of venture capital, IPOs, M&A, and fundraising in 2024 with guests Ed Sim, founder of Boldstart Ventures, and Jamin Ball from Altimeter Capital. They delve into the challenges of late-stage investing, the importance of cash flow breakeven and substantial growth for companies considering going public, and the impact of regulation on large-scale M&A. The conversation also covers the shifting venture landscape, with an emphasis on patient capital deployment and the potential of current investments to become highly valuable in the future. Additionally, they explore the role of AI in enterprise, the significance of having a solid data strategy before implementing AI, and the resilience of Israeli founders in the tech industry. Throughout, the dialogue underscores the importance of honest board conversations about company endurance and the potential need for down-round IPOs to reset overvalued companies.
"From a regulation standpoint, it is really hard to see any large scale m and a right now."
This quote emphasizes the regulatory hurdles that are currently making it challenging for companies to engage in significant M&A activities.
"If you're gonna go public, I think you've got to be cash flow breakeven. You have to have 30% plus growth."
Speaker B is conveying the importance of financial stability and growth for companies that want to go public, highlighting the need for cash flow breakeven status and a minimum of 30% growth.
"These is 20 vc with me, Harry Stebbings. And over the weekend I saw Ed Sim at Boldstart write a tweet about why we are at a time in the cycle where late stage investors would rather get their cash back from investments."
Harry Stebbings sets the stage for the podcast, highlighting the current trend among late-stage investors to seek liquidity from their investments, as observed in Ed Sim's tweet.
"I'm currently at Ultimeter Capital... Our primary focus is partnering with companies right around that product market fit point and then beyond."
Speaker A introduces his role at Ultimeter Capital, emphasizing their strategy of partnering with companies that have achieved or are nearing product-market fit.
"In 2021, in the period of Zerp, everyone was risk on investors across the board... And it basically created this setup where if the world ever shifted, to go, more risk off."
Speaker A explains the shift in investor behavior during 2021, where the emphasis on risk was significantly reduced, leading to a situation where companies could face challenges if the market sentiment changed.
"But Harry, it does matter to us when we have a business model that is predicated on trying to find these great opportunities at attractive prices with founders, right?"
Speaker B expresses concern about the rising valuations at the seed stage and how it affects their investment strategy, which relies on finding valuable opportunities at reasonable prices.
"This is a year that boards and founders should have honest conversations... There's no reason to wait."
Speaker B urges the need for transparent discussions between founders and board members about the future of their companies, emphasizing that delaying these conversations does not benefit anyone.
"First, I think you have to ask yourself very basic sick. Hey, founder, do you have the energy and conviction to keep going?"
Speaker B discusses the need to evaluate a founder's commitment and drive as a precursor to making strategic decisions about the company's future.
"This is why these processes end up taking 1218 months, is because it's not 1218 months of negotiating with an acquirer... It takes a long time to get the early stage investors, the late stage investors, and the founders all on the same page."
Speaker A explains the lengthy process involved in aligning various stakeholders' interests when a company is exploring exit options, underlining the complexity of these decisions.
"So what are the different incentives between, as we said, founders early and late, and how does that determine where the conversation goes?"
Speaker C prompts a discussion on how the different priorities of various stakeholders can shape the outcome of boardroom conversations regarding the company's trajectory.
"In a zero x, a one x, a two x, it's all the same thing, right? It's either it's at 100 x or it's not."
The quote emphasizes the binary nature of venture capital outcomes where investments are either home runs or not significantly impactful to the fund's overall return.
"Do you think late stage investors have come to that realization moment of fuck it, 2021 was a wild time. If we get one x, we've done okay. Has that realization hit?"
This quote reflects on whether late-stage investors have lowered their return expectations due to the extraordinary market conditions of 2021.
"Growing 13 x just to grow into your valuation, that's really hard to do."
This quote illustrates the difficulty for companies that have raised funds at high valuations to grow their revenue sufficiently to justify those valuations.
"That last round valuation was at $1.5 billion, right? That was led in 2021. And they sold for 999 or something. 950."
The quote presents a case where a company's sale price was less than its previous funding round valuation, highlighting the risk of inflated valuations.
"Should founders come back and say, thank you, Jamin, but I don't want your 150,000,000 valuation. I would like it to be 60 million instead."
The quote suggests that founders should consider the long-term implications of accepting high valuations and not let their cap table become a risk.
"Build a business the old fashioned way. Raise smaller amounts of money more frequently that are more milestone based."
This quote advises on a conservative approach to fundraising, focusing on achieving milestones and building solid relationships with investors.
"We need to deploy. We've got billion. Billion, five, 2 billion. And they know they've got more money coming from their lps."
The quote reflects the ongoing pressure on large venture capital funds to deploy substantial amounts of capital, sometimes leading to less disciplined investment decisions.
"We played the game that was on the field until the chair stopped."
This quote acknowledges that investment strategies were based on market conditions at the time, and now there is a need to adapt to the changing environment.
"There really just aren't that many special markets. And in those special markets, there's not that many special companies that exercise the right to be special."
The quote underscores the rarity of companies that can sustain high growth rates and justify large valuations, highlighting the importance of discerning investment decisions.
"The market just wasn't that big. There were some early adopters, maybe in Silicon Valley that were using your product, but the reality is you never really broke into the enterprise."
This quote points out one of the common pitfalls for startups: misjudging the size of their market and failing to expand beyond an initial niche customer base.
"It's through taking investments that maybe didn't get to the exit you hoped for. That three x, maybe you got that one x taking those proceeds and recycling it back into new opportunities."
The quote highlights the practice of recycling capital from modest exits back into new investment opportunities as a way to improve fund performance.
"Did we get the exit multiple wrong? Those three buckets of mistakes, I think were very common."
This quote reflects on the different types of mistakes investors can make, particularly during periods of market euphoria, and the importance of learning from these errors.
"I think the mistakes that I made, when I reflect back, was that middle category, right? It was forecasting wrong." This quote emphasizes the significance of accurate forecasting in business, highlighting that misestimating a company's growth trajectory can be a critical mistake.
"How does one rationalize doing that? If one wants a three x, did one genuinely think that's a $25 billion company?" This quote questions the rationale behind high valuation investments and whether the expected growth to justify such valuations is realistic.
"It's not the tam you start with, it's a tam you exit with." This quote advises founders to concentrate on the addressable market at exit rather than at the start, suggesting that initial market size isn't as critical as where the market can grow.
"It is really hard to see any large scale M a right now in this administration, in this environment." This quote highlights the current difficulties faced by companies considering large-scale mergers and acquisitions due to regulatory challenges.
"There are so many seats out there available for like a Palo Alto to buy a DSPM player or some other kind of player." This quote illustrates the competitive nature of acquisitions, where many companies vie for the attention of a few potential buyers.
"The IPO markets are always open, right? You can always go public." This quote suggests that while the opportunity to go public is always available, the valuation at which a company can do so may vary significantly.
"Is that too big to assail that gap, or is it still. Let's go out." This quote questions whether a significant difference between a company's private valuation and its potential public market valuation is surmountable.
"Given the fact that it takes six to nine months to really get in shape for an IPo, I don't think you're going to see much go out in 2024." This quote indicates skepticism about the number of companies that will be prepared and willing to go public in the near future, given the extensive preparation required.
"And you've got to be moving towards the rule of 40 or 50, in my opinion, with slanted more towards growth than you are cash flow break even, right."
The quote emphasizes the importance of growth in a company's financial strategy, suggesting that growth should take precedence over reaching cash flow break-even.
"That will force companies to get fit. That will force companies to talk about their path to profitability. It will force companies to think about why are we an enduring business over the next ten years."
The quote suggests that public market scrutiny is beneficial for companies as it pushes them to improve their financial health and strategize for long-term success.
"There's a generation of firms that have been created which basically extend that private window."
This quote discusses the trend of firms allowing companies to stay private longer, which can delay the challenges and growth that come from going public.
"It's moved from a high margin cottage industry to a low margin mainstream industry."
The quote reflects on the evolution of the venture capital industry, indicating a shift towards more widespread, lower-margin investments.
"I think kind of down rounds or down round IPOs will be the same thing. They'll be a taboo on them, but they'll be normal."
This quote predicts that down rounds in IPOs will become more accepted, similar to how attitudes toward layoffs have changed.
"I fundamentally believe that with the new platform shift happening with kind of AI...things have been around 15 years and they're going to get reinvented."
The speaker expresses confidence in the ongoing innovation and reinvention within the tech industry, particularly with the rise of AI.
"Cool is the enemy of reality."
The quote advises against investing in ventures based solely on their appeal, emphasizing the importance of addressing real-world problems.
"There's always these new things that we never have thought of because we're not smart enough to think about it."
The speaker acknowledges the unpredictability of emerging markets, especially in AI and cybersecurity, and the role of innovative founders in driving these markets.
"I want to be investing in a period that is the bottom half of the valuation reset with the first half of a massive technology shift."
The quote advises limited partners (LPs) on the strategic timing for venture capital investments, highlighting the potential of the current market conditions.
"The resiliency is off the fucking charts. And as people back away from Israel because they're fearful of kind of what's happening there, I'm still seeing amazing teams there."
The speaker expresses strong confidence in the resilience and potential of Israeli founders and their startups, especially in the context of geopolitical concerns.
"I really enjoy the panel shows. They're much more natural and I think, conversational."
The final quote reflects the host's appreciation for the panel format of the discussion, which allows for a natural and engaging conversation.