20VC Did Figma Kill M&A Markets in 2024, The Three Biggest Mistakes Made in Growth Investing, The Three Requirements Companies Need to Go Public in 2024 with Ed Sim and Jamin Ball

Summary Notes


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.

Summary Notes

Regulation and M&A Challenges

  • Current regulations make large-scale mergers and acquisitions (M&A) difficult.
  • Speaker A notes the complexity of seeing any large-scale M&A in the present regulatory environment.

"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.

Public Company Expectations

  • Companies aiming to go public should be cash flow breakeven and exhibit significant growth.
  • Speaker B outlines the financial benchmarks for companies considering an IPO, including cash flow breakeven and growth rates above 30%.
  • Patience and strategic investment are crucial during challenging times in the market.

"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.

Venture Capital Insights

  • Harry Stebbings introduces the topic of late-stage investors preferring liquidity over holding investments.
  • Discussion on the current venture capital landscape, focusing on liquidity, IPOs, M&A, fundraising, and the state of venture capital.
  • Mention of AI tools, accounting solutions, and innovative travel and expense management platforms that streamline business operations.

"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.

Introduction to Guests

  • Guests provide background on their experience and roles in the venture world.
  • Speaker A and Speaker B introduce themselves and describe their focus areas in venture capital.

"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.

  • Speaker A presents data on funding trends, showing a significant drop in later-stage funding.
  • The discussion reflects on how the investment landscape has changed back to pre-2021 levels after a period of inflated funding.
  • The implications of the 2021 investment frenzy are considered, with many companies now overvalued and underperforming.

"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.

Seed Stage Investment Dynamics

  • Speaker B discusses the trend of increased valuations at the seed stage and the motivations behind late-stage investors entering early-stage funding.
  • The conversation highlights the competitive nature of seed funding and the potential for a valuation bubble at the inception stage.

"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.

Company Longevity and Runway

  • The panel debates whether 2024 will be a critical year for companies facing financial challenges.
  • Speakers discuss the importance of extending the runway and the need for honest boardroom conversations about company viability and growth prospects.

"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.

Hard Conversations and Founder Conviction

  • The importance of assessing a founder's conviction and energy to continue is highlighted.
  • Speaker B suggests that sometimes founders may welcome the opportunity to exit, as it can be a relief from the pressure of inflated valuations.
  • Honest conversations about the future of the company are essential, even if they may initially lead to resistance from founders.

"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.

Board Dynamics and Exit Strategies

  • The panel discusses the complexities of aligning different stakeholders when considering an exit strategy.
  • Speaker A emphasizes the importance of considering the size of the preferred stock (prep stack) when contemplating acquisitions.
  • True founder friendliness involves having difficult conversations, not avoiding them.

"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.

Incentives and Board Conversations

  • The differing incentives of founders, early investors, and late investors can influence the direction of boardroom discussions.
  • The conversation explores how these varying interests can affect decisions about the company's future and the willingness to consider exits or returns of capital.

"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.

Power Law Outcomes in Investing

  • Discusses the concept of power law outcomes in venture capital, where only a few investments generate the majority of returns.
  • Highlights the importance of massive returns (100x) versus modest ones (1x, 2x) to achieve success in venture investing.
  • Late-stage investors may adjust expectations due to market changes.

"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.

Realization Among Late-Stage Investors

  • Late-stage investors may have come to terms with the fact that achieving even a 1x return is acceptable given the wild market conditions of 2021.
  • This mindset shift could be due to the challenging environment for achieving high returns.

"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.

The Math of 100x ARR Rounds

  • Explains the math behind raising capital at 100x ARR (Annual Recurring Revenue) and the challenges associated with it.
  • Discusses the historical trading multiples for public software companies.
  • Highlights the difficulty of growing into the valuation given at the time of investment.
  • Suggests that many companies may not justify their valuations in the public market.

"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.

The Loom Example

  • Provides a real-world example of a company (Loom) that was valued at $1.5 billion but sold for less than that amount.
  • Discusses the implications for late-stage investors and the potential for accepting a 1x return as a positive outcome under certain circumstances.

"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.

AI Market Valuations

  • Discusses the current high valuations in the AI sector, reminiscent of the 2021 pricing environment.
  • Advises founders to be cautious about accepting high valuations that could become a risk to their business.

"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.

The Importance of Realistic Fundraising

  • Emphasizes the strategy of raising smaller, milestone-based rounds of funding.
  • Discusses the shift from a transaction-driven to a relationship-driven world in venture capital.
  • Highlights the importance of founders knowing their board members and the support they will provide.

"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.

The Venture Capital Deployment Game

  • Discusses the pressure on large funds to deploy capital due to fundraising cycles and investor expectations.
  • Suggests that top-tier funds may not feel the impact of market cycles due to their ability to continue raising capital from large institutional 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.

Reflection on Past Investment Strategies

  • Reflects on the investment strategies used during the zero-interest-rate period and the need to adapt to current market conditions.
  • Discusses the potential need for exits that do not necessarily result in "mega exits" and the implications for late-stage investments.

"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.

The Rarity of Special Markets and Companies

  • Discusses the scarcity of truly special markets and companies capable of sustained growth at high revenue levels.
  • Emphasizes that not many companies will grow into the valuations given during funding rounds, particularly large ones.

"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.

Reasons Companies Fail to Scale

  • Explores reasons why companies fail to grow beyond certain revenue milestones.
  • Discusses the importance of breaking into the enterprise market and achieving scale with unit economics.
  • Suggests that a great founder is key to building a successful go-to-market strategy and transitioning from a point solution to a platform.

"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.

The Role of Bridge Rounds and Recycling Capital

  • Discusses the role of bridge rounds in providing liquidity for investors and the strategy of recycling capital into new opportunities.
  • Emphasizes the importance of not giving up on underperforming funds and working to improve their outcomes.

"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.

Reflections on Investment Mistakes

  • Reflects on common mistakes made by investors, including wrong company selection, forecasting errors, and incorrect assumptions about exit multiples.
  • Acknowledges the impact of the 2021 period on investment strategies and the need to learn from these experiences.

"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.

Mistakes in Business Forecasting

  • Reflecting on past mistakes, the speaker identifies incorrect forecasting as a major error.
  • Misjudging the growth and durability of a business can lead to significant challenges, especially when investing at higher valuations.
  • External macro factors and the need for a business to evolve from a point solution to a platform are crucial in sustaining growth.
  • A point solution must have enough "strategic real estate" to become a platform, or it risks being absorbed into another platform.

"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.

Valuation and Growth Expectations

  • Discusses the difficulty in justifying high valuations and the expectations for a company's future growth.
  • Highlights the impact of COVID-19 on businesses and the challenge in distinguishing true product-market fit from temporary market demand.
  • Emphasizes the importance of understanding both the product and market sides of product-market fit.

"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.

The Journey from Start-Up to Platform

  • The conversation shifts to the journey of start-ups and the importance of focusing on the end user.
  • Founders are encouraged to have a narrow focus with a broader vision, allowing for potential expansion into new areas.
  • The discussion includes the unique case of a founder who had previous success and substantial initial funding.

"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.

Mergers and Acquisitions (M&A) Market Outlook

  • The current regulatory environment is challenging for large-scale M&A, leading companies to reconsider engaging in such processes.
  • Smaller-scale acquisitions and acqui-hires are more likely, with strategic product additions being a key driver.
  • The speaker discusses the importance of early dialogue with potential acquirers and the limited number of companies that can be absorbed by larger entities.

"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.

Acquisition Strategies and Outcomes

  • Discusses the various types of acquisitions, including aqua-hires and strategic product additions.
  • Emphasizes the importance of being one of the few chosen for acquisition in a crowded market.
  • The conversation touches on the role of private-to-private acquisitions and the strategic reasons behind them.

"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.

Public Offerings and Market Realities

  • The speakers discuss the reality of going public in a down market and the implications for company valuations.
  • An IPO can serve as a reset for a company, allowing for a fresh start in the public markets.
  • The conversation addresses the challenges of managing employee expectations when valuations decrease.

"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.

Evaluating the Gap Between Valuation and Reality

  • The speakers consider the difficulty of bridging the gap between high private valuations and lower public market valuations.
  • They discuss the potential for companies to go public despite significant valuation discrepancies from previous funding rounds.
  • The conversation touches on the structural and managerial challenges of adjusting to new market valuations.

"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.

Preparing for an IPO and Board Decisions

  • The speakers debate the timing and readiness of companies for an IPO, considering the preparatory work required.
  • They discuss the role of the board in approving acquisitions and the strategic benefits of going public.
  • The conversation concludes with thoughts on the conditions necessary for a successful public offering.

"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.

High Growth and the Rule of 40/50

  • Companies should aim for high growth, moving towards the rule of 40 or 50.
  • The rule should be slanted more towards growth than cash flow break-even.

"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.

Public Market Scrutiny as a Forcing Function

  • Public market scrutiny forces companies to focus on fitness and sustainability.
  • This scrutiny is compared to the pressure faced by athletes moving from college to professional sports.
  • The scrutiny encourages companies to consider their long-term business endurance.

"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.

Extended Private Market Window

  • Some firms extend the private window, compared to delaying going to the gym.
  • This can prevent companies from facing public market challenges and growing up.

"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.

Venture Capital Market Expansion

  • Venture capital markets have expanded dramatically in the last decade.
  • Large funds with mandates to invest in private companies can keep companies private longer.
  • Going public too late can result in lower valuations if growth slows and profitability is lacking.

"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.

Public Market Timing and Down Rounds

  • Timing public offerings is crucial; going public too late can affect company valuations negatively.
  • Companies should consider going public earlier and be open to down rounds, similar to how layoffs became normalized in 2022.

"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.

SaaS Market Saturation and Growth

  • Despite slowed growth, there is no saturation in software spending.
  • AI is not yet a standard budget line item for CFOs.
  • Creative destruction will lead to reinvention in the tech industry every 10-15 years.
  • There's a belief in the continuous creation of new products and companies.

"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.

Investment Advice and Venture Capital

  • Investment advice includes being patient, challenging successful portfolio companies, and supporting struggling ones.
  • Reality trumps coolness in venture investments; solving tangible problems is crucial.

"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.

AI's Role in Future Markets

  • AI security is an emerging market with significant potential.
  • AI will be infused into most software where it adds economic value.
  • New markets in cyber and AI security are unpredictable and driven by innovative founders.

"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.

LP Investment Strategies

  • Venture capital investment should focus on selecting and sticking with managers across vintages rather than timing the market.
  • The current period is seen as an optimal time for investing due to valuation adjustments and the beginning of a technology shift.

"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.

Optimism for Israeli Founders and Infrastructure Companies

  • Israeli founders are resilient and continue to build startups despite challenges.
  • There is optimism for Israeli infrastructure companies, particularly in security.

"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.

Final Thoughts and Notion Promotion

  • The speakers conclude with an optimistic outlook for companies built the right way during a technology shift.
  • The discussion ends with a promotion for Notion, an AI tool that simplifies workflows.

"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.

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