20VC Jason Lemkin on Why Founders Do Not Care About Their VCs Anymore, Why Zoom Made Us All Worse Investors, Why 8090% IRR Should Have Been Warning Signs and the Algolia Journey From Seed to $2.25BN Valuation

Summary Notes


In this episode of 20vc, Harry Stebbings interviews Jason Lemkin, the influential founder of SaaStr and an early investor in SaaS companies like Algolia. They delve into Jason's investment philosophy, his focus on inbound investment opportunities, and the importance of investing in founders who are "better than you." Jason shares his experience with Algolia, including his conviction despite others' doubts, and how the company's early hyper-growth indicated a larger TAM than initially perceived. They also touch on the changing LP landscape, the enduring power of brand in venture, and Jason's reflections on his investment approach during the recent boom. The conversation highlights Jason's insights on building trust with founders, the impact of not meeting founders in person due to COVID-19, and the need to maintain hunger and adaptability in the ever-evolving world of venture capital.

Summary Notes

Introduction to 20vc and Algolia

  • "20vc the memo" is a monthly episode featuring investors from breakout companies.
  • The focus is on Algolia, a unicorn search and discovery platform.
  • Jason Lemkin is the featured guest, known for his influence in the SaaS community.
  • Jason has led investment rounds in companies like Talkdesk, Pipedrive, and Algolia.
  • He founded Sasta and Echo Sign, which was acquired by Adobe for $100 million.

You are listening to 20 vc the memo with me, Harry Stebings. Now, the memo is our monthly episode where we sit down with an investor who led a round in one of the breakout companies of the last decade. Now the show's day is focused on Algolia, the unicorn search and discovery platform. That said, the show is with a very old friend of mine.

The quote introduces the podcast and its focus on the search and discovery platform Algolia, with guest Jason Lemkin.

Harry Stebings' Connection to Jason Lemkin

  • Harry Stebings shares a personal connection with Jason Lemkin, who believed in him during his university days.
  • They have maintained a friendship over the years.

To ever believe in me seven years ago, way back when I was at university, if you can believe it. We've been friends ever since.

The quote highlights the longstanding friendship between Harry Stebings and Jason Lemkin.

Sponsorship Segment

  • PolicyGenius offers life insurance comparison and easy purchase.
  • Gainsight provides customer, product, and community-led growth strategies, with a new offering called Gainsight Essentials.

PolicyGenius was built to modernize the life insurance industry. Their technology makes it easy to compare life insurance quotes from top companies like AIG and Prudential in just a few clicks to find your lowest price.

The quote explains the services provided by PolicyGenius, a sponsor of the podcast.

Jason Lemkin's Investment Strategy

  • Jason Lemkin invests exclusively in inbound SaaS companies.
  • He believes in the power of high-velocity inbound emails from companies seeking investment.
  • Each investment he has made has been a result of inbound interest.

But I only invest from inbound Saster superfans. Every deal I've tried to go out and get, I've failed. I do nothing outbound.

The quote outlines Jason Lemkin's successful investment strategy, which relies on inbound interest from SaaS companies.

Recognizing High-Quality Inbounds

  • Jason looks for traction, team quality, and commonalities in high-quality inbound emails.
  • Great founders are excellent communicators and can convey their message effectively through email.

If you can write an incredible cold email, an incredible inbound email, you can judge a human being in a company just from that email.

The quote emphasizes the importance of communication skills in founders seeking investment.

Jason Lemkin's Investment in Algolia

  • Algolia was Jason Lemkin's second venture investment.
  • The founders of Algolia were fans of Sasta and reached out after Y Combinator's demo day.
  • Jason was passionate about solving search-related problems, which Algolia addressed.

Algolia does search as a service. It's an API to automate search. And when I was a founder, this was one of my top five headaches.

The quote reveals Jason Lemkin's personal connection to the problem Algolia solves, which influenced his investment decision.

Investment Amounts and Valuation Sensitivity

  • Jason initially invested $500k in Algolia at a $12 million pre-money valuation.
  • He reflects on the decision to invest less at a lower valuation, acknowledging it was a learning experience.

I did only 500k in the first round and I bought up in the next. I did three and a half million in the a, so I did 500k in the seed at twelve pre.

The quote details Jason Lemkin's initial investment in Algolia and his approach to valuation.

Learning to Accept Losses in Venture Capital

  • Jason discusses the process of becoming comfortable with the possibility of losing money in investments.
  • He emphasizes the importance of taking risks to achieve significant returns.

I had to get up almost ten x on my initial investments to realize that losing a one x doesn't matter.

The quote explains Jason Lemkin's mindset shift regarding the acceptance of potential losses in venture capital.

The Importance of Ownership Percentage

  • Jason now targets a minimum of 10% ownership in his investments.
  • He aims for at least one investment per batch where he owns 20% or more.

Anything under 10%, it's hard to take seriously. If you're a seed investor and you own 20% of something worth a couple of billion dollars, that's, I think, what the game of venture is about.

The quote highlights Jason Lemkin's current investment strategy focused on significant ownership stakes.

Adverse Selection in Investments

  • Jason is not concerned about adverse selection, believing that the best founders will have multiple options.
  • He trusts that there is a valid reason when founders choose him as an investor.

The best founders always have multiple options. If you're lucky enough that they pick you and you play the adverse selection game, you're playing weird psycho drama in your head.

The quote addresses the concern of adverse selection and Jason's confidence in his investment approach.

Betting on Familiar Problems

  • Jason advises new investors to focus on problems they understand deeply.
  • He shares his own experience investing in solutions to problems he faced as a CEO.

Just don't do what a lot of vcs say, which is wait a year. Slow it down. Take it easy. No, I'm like, invest in five companies your first year that are your top problems.

The quote encourages new investors to act quickly and invest in areas where they have personal expertise and understanding.

Investment Insights from CEO to VC Transition

  • Transitioning from CEO to VC comes with a two-year window of deep understanding of industry pain points.
  • After two years, VCs may understand problems but not necessarily the next generation solutions.
  • VCs must maintain a curious mind to stay relevant and potentially build a team close to the problem.

"You got about two years before you'll understand the problem, but not necessarily what's next generation."

This quote emphasizes the limited timeframe in which former CEOs turned VCs have an edge in understanding industry-specific challenges before their insights become outdated.

Retaining Industry Plasticity as a VC

  • VCs face a permanent decay in understanding the frontline pain points of SaaS CEOs over time.
  • Retaining a curious mind is essential, but may not fully compensate for the loss of firsthand experience.
  • Building a team or running operating businesses alongside investing can help maintain relevance.

"I think it is permanent decay for VCs. I don't think you can retain it."

Jason Lemkin notes the inevitable decline in a VC's ability to stay intimately connected with the evolving challenges faced by SaaS CEOs due to the lack of direct experience.

Advice for Operators Turned VCs

  • Operators should invest aggressively in their first year to build a track record.
  • Large funds have different incentives, aiming for one big win, while new VCs should aim for multiple potential unicorns.
  • The rule of investing in CEOs better than oneself is critical for success.

"So invested in as many as you can. Even if the ownership is suboptimal."

Jason Lemkin advises new VCs to actively invest in numerous ventures to maximize their chances of finding successful startups.

Understanding and Presenting Competition

  • Founders need to know their competition intimately and present it effectively to investors.
  • Two-by-two matrices are often throwaway slides and should be avoided unless they provide real insight.
  • Founders should honestly assess where their product excels and where it doesn't, respecting the competition.

"The best know their competition cold and they respect it."

Jason Lemkin stresses the importance of founders having a deep respect and understanding of their competition, which should be reflected in how they present their competitive landscape to investors.

Views on Commoditization Products

  • Commoditization products are often seen as less desirable due to the race to the bottom.
  • VC isms, or conventional wisdom, can lead to missed opportunities, as seen with Stripe's success despite concerns over commoditization.
  • Elegance and functionality can distinguish a product in a commoditized market.

"I do not believe stripe is a commodity whatsoever."

Jason Lemkin challenges the notion that commoditized products are inherently unattractive investments, using Stripe as an example of a company that defied this VC ism.

Common VC Mistakes

  • VCs often underestimate the potential of startups due to concerns about competition from large incumbents.
  • The "why wouldn't big company do this" ism is lazy and can be addressed by asking founders thoughtfully why incumbents haven't solved the problem they're tackling.

"The worst ism is why didn't somebody do it?"

Jason Lemkin criticizes the common VC mistake of dismissing startups because they assume larger companies will enter and dominate the market.

Product Iteration and Speed

  • Rapid iteration and speed are crucial, especially pre-product market fit.
  • The ability to ship quality updates quickly compounds over time, leading to a competitive advantage.
  • Founders must balance the need for speed with the risk of launching too early.

"It really is the folks that can iterate more rapidly that win."

Jason Lemkin discusses the significance of speed and iteration in a startup's success, emphasizing that the ability to develop and improve products quickly is a major factor in outpacing competition.

Concerns about Overfunded Startups

  • Startups that raise large amounts of funding pre-product market fit may struggle due to a lack of urgency and becoming "zombies."
  • VCs may ignore these companies temporarily as they deal with more pressing issues.
  • The concept of returning capital to investors in exchange for a graceful exit is discussed.

"I don't see any way any of them succeed. I'm very concerned, however you define this term, zombie."

Jason Lemkin expresses skepticism about the success of startups that have raised excessive funds without achieving product market fit, coining them as "zombies" due to their lack of progress and urgency.

TAM Analysis Simplification

  • TAM (Total Addressable Market) analysis can be simplified when dealing with large, evident categories of software.
  • Pipedrive is identified as a leader in the next generation of SMB CRM with significant traction.
  • Algolia's situation showcased a TAM that seemed small ($2 million in revenue) but was actually much larger due to its rapid growth.

"Who's in the next generation of SMB? CRM? Who seems to have the most traction? That's this one, Pipedrive. Okay, that's the end of your tam analysis."

This quote emphasizes the ease of TAM analysis when a clear market leader, such as Pipedrive in SMB CRM, is present.

"But literally the TAM was 2 million. And I was deeply challenged on this."

Despite initial skepticism about Algolia's TAM, the speaker recognized the potential for growth beyond the apparent small market size.

Early Hypergrowth as a TAM Indicator

  • Hypergrowth in the early stages of a company is a strong indicator of a large TAM.
  • The speaker uses "dumb guy math" to argue that rapid growth disproves a small TAM.
  • Historical examples like the e-signature market show how technology can expand categories and TAM over time.

"It is impossible for the TAM to be 2 million. They will approach 100% market share way too rapidly."

The speaker explains that Algolia's rapid growth rate contradicts the notion of a small TAM.

"Hypergrowth in the early days can decay for a variety of reasons, but it does prove you have a large tam."

This quote suggests that while hypergrowth may not be sustainable, it is a clear signal of a significant market opportunity.

Causes of Growth Plateau

  • All companies, even unicorns, experience a plateau in growth at some point.
  • The main reason for plateauing is not refreshing the management team at the right time.
  • Delay in building a strong management team can prevent companies from expanding their TAM and adapting to market demands.

"It's really always not rebooting the management team. That's the real answer."

The speaker identifies the failure to update the management team as the primary cause of growth plateau.

"The underlying issue is often not expanding your tam enough, not expanding your surface area, not going enterprise enough, not building a second product."

This quote highlights the strategic missteps that can lead to a plateau if the management team does not address them in time.

Founder vs. Professional CEO in Growth Companies

  • Most successful companies in the speaker's portfolio still have founders as CEOs.
  • Pipedrive is an exception where the CEO was replaced, which the speaker admits was a mistake in his first investment.
  • The speaker reflects on his initial approach as a VC, which he later corrected.

"All but Algolia that we're talking about, Nicholas did step down as they were approaching 100 million and Bernadette took over and it's been fascinating learning for me because it's only one."

The speaker notes that in most cases, the original founders continue to lead their companies, with Algolia being a notable exception.

"Pipedrive. There are a lot of ceos."

This quote refers to the turnover in leadership at Pipedrive, which the speaker views as a learning experience.

Role of VCs in Guiding Companies

  • VCs should provide strategic advice but ultimately respect that it is the founders' company to run.
  • The speaker regrets some of his early VC behaviors, such as being overly prescriptive and not fitting into the VC "outfit."
  • Tough conversations and "arse kicking advice" are sometimes necessary but can damage relationships with founders.

"You got to give the best advice you can, timed the way you can, and once every two years you have to give some arse kicking advice."

The speaker believes that while VCs should support founders, they must also deliver hard truths when necessary.

"I still had that, a bit of the abused founder in me by being abused by a couple of generations of vcs where I acted a little bit like that."

Reflecting on his past experiences with VCs, the speaker acknowledges the negative impact of certain VC behaviors on founders.

The Importance of Feedback and Tough Conversations

  • Founders' ability to receive feedback is crucial for their leadership and company growth.
  • The speaker discusses the difficulty of delivering tough feedback and the potential for permanent damage to relationships.
  • The board member-CEO relationship is nuanced, and delivering feedback effectively is a challenge.

"You don't have to make a change this week. You have water. But if you don't make a change in the next 30 days, you will fail."

This quote captures the speaker's direct approach to delivering urgent and critical feedback to a company facing issues.

"I'm going to pass. I'm going to take a pass on this discussion."

The speaker expresses reluctance to share harsh feedback, knowing its potential impact on the relationship with the founders.

VC Investment Decision-Making

  • The speaker discusses the dynamics of VC investment partnerships and decision-making processes.
  • Conviction is important in investment decisions, especially when not all partners share the same perspective.
  • The speaker expresses regret for not finding a co-founder or partner in his VC endeavors.

"I was 100% sure this investment was going to be successful. I had lived the problem."

The speaker's personal conviction about Algolia's success was based on his own experiences with the problem the company solved.

"I consider it a failing not finding a co-founder, because the best co-founders are mega accretive."

The speaker acknowledges the added value a co-founder or partner could have brought to his investment decisions.

LP Market Dynamics

  • The speaker anticipates that LP churn will affect venture capital managers rather than institutional commitment to the asset class.
  • Established LPs with a long history in venture capital are likely to remain committed despite market stress.
  • The speaker discusses the challenges and potential shifts in LP markets in the coming months.

"I don't think so. The lps I have are pretty well established institutions that have been investing in venture for decades and decades."

The speaker shares his perspective that established LPs will continue to invest in venture capital despite market fluctuations.

"So many are going to get dropped. In the old days, people would drop excel and they would drop everything but sequoia, and then you would think, oh, my God, I dropped out of excel after the Facebook fund."

This quote predicts that even well-known VC firms may lose LPs due to market stress, but the speaker believes in the resilience of the asset class.

Venture Capital Fund Size and Performance

  • Discusses the skepticism around the ability of new funds to achieve a 10x return.
  • Emphasizes the importance of fund performance over detailed strategies and presentations.
  • Highlights the trend where limited partners (LPs) prioritize returns over the specifics of a fund's strategy.
  • Mentions the shift in LP interest from emerging managers to established firms due to market dynamics.

"I don't think most of these folks could even do the math." "We came with an 80 page spiral bound notebook of all the strategy and the thesis and all the best. And they just turned to the very end, the last page of the returns, studied it for about 90 seconds, looked up and said, so are you guys it or biotech?"

The quotes emphasize that despite extensive preparation and strategy, ultimately, the LPs are primarily interested in the fund's performance and categorization (IT or biotech), indicating a focus on financial returns over strategic details.

The Nature of Venture Investment

  • Venture capital is seen as a product by LPs.
  • There has been a surge and potential decline in interest for emerging managers.
  • The allocation of LP budgets may shift towards established brands.
  • Describes the changing landscape of venture capital investment and its impact on LPs and VC firms.

"We're just a product." "That may well end the appetite to go hunt the next saster or 20 VC or homebrew or cowboy or whatever it is."

The quotes reveal a perspective where venture funds are viewed as products to be evaluated based on financial metrics, and there is speculation about a potential decline in LP interest in emerging VC managers.

Personal Reflections on Fund Management

  • The speaker acknowledges past mistakes made during boom times, such as cutting corners.
  • The importance of maintaining integrity and thoroughness in investment practices is emphasized.
  • Reflects on the personal growth and learning from past experiences in fund management.

"I cut corners during the boom. All the corners I cut, they're masked by decent fund returns." "I will never cut a corner again."

These quotes express regret for previous shortcuts taken in the investment process, highlighting the speaker's commitment to avoiding such practices in the future and the importance of diligence in venture capital.

The Importance of In-Person Meetings

  • Discusses the challenges of investing without face-to-face interactions.
  • The speaker expresses concern over the transactional nature of remote investing.
  • Emphasizes the value of building trust and relationships through in-person meetings.
  • Reflects on the changes in the venture capital landscape due to remote work and the pandemic.

"I'm a worse investor for it, and I don't have all the answer." "It builds trust. It's not that I'm such a great judge of character."

The quotes highlight the speaker's belief that in-person interactions are crucial for building trust and that remote investing has made it more challenging to establish strong relationships with founders.

Venture Brand Relevance and Evolution

  • Discusses the importance of brand in venture capital.
  • Reflects on the need for venture capitalists to adapt to changing platforms and maintain their brands.
  • Describes how established brands can provide sustained deal flow and opportunities.
  • Considers the long-term value of nurturing a brand in the venture industry.

"Brands matter. The thing about brands that I've learned, and we all got brand wrong in SaaS, but brands last a long time if you nurture them." "The game in venture is to establish a brand and not let it decay."

The quotes stress the significance of building and maintaining a brand in venture capital, as well as the enduring nature of a well-nurtured brand, which can continue to attract deals and opportunities over time.

Self-Reflection and Hunger in Venture Capital

  • The speaker reflects on their own motivation and drive in the venture capital space.
  • There is a discussion about the balance between aggression and hunger for success versus the pressure to perform.
  • Considers how personal drive and fear of failure can influence investment strategies and outcomes.

"I actually worry every day about my lps and returns and stuff like that. But I don't feel that same pressure to prove myself as when I started." "I think it creates the most fertile period of investing when you have the maximum hunger."

The quotes convey a personal introspection on the speaker's evolving motivations in venture capital, suggesting that the initial hunger and fear of failure were key drivers of success, but over time, the pressure to prove oneself may diminish.

Algolia Investment Insights

  • The speaker shares their experience and insights from investing in Algolia.
  • Discusses the perceived value and potential outcomes for the investment.
  • Reflects on the challenges faced by the company and the role of investors in supporting growth.
  • Envisions the future of Algolia and the importance of agile leadership in adapting to market changes.

"The only way B two B startup dies is when the founders kill it." "I have no idea other than that the two largest verticals for Algolia are ecommerce and SaaS."

The quotes offer a perspective on the resilience of B2B startups and the uncertainty of predicting future trajectories, while acknowledging the strong market verticals that Algolia operates in.

Personal Appreciation and Gratitude

  • The speaker expresses gratitude for the support and belief shown by others in their journey.
  • Highlights the importance of relationships and mentorship in the venture capital ecosystem.
  • Conveys a sense of camaraderie and mutual respect among venture capitalists.

"It's heartwarming to see it's great, but." "Thanks for making the extra time."

These quotes reflect the speaker's appreciation for the support and encouragement received from colleagues and friends in the industry, emphasizing the value of personal connections and gratitude.

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