20VC Predictions for 2024 What Happens to Early Stage VC Funding, Do a Load of Venture Funds Die, What do LPs Do in 2024, Does Figma Kill the M&A Market, Will IPOs Comeback & What Does a Trump Administration do for Startups with Jason Lemkin @ SaaStr

In this episode of 20 VC, host Harry Stebbings discusses the state of SaaS and venture capital in 2024 with Jason Lemkin, founder of SaaStr and a seasoned SaaS investor. They reflect on the challenges facing public SaaS companies, noting slowed growth and concerns about market saturation. Lemkin predicts that 2024 will be a pivotal year for SaaS companies to consider going public, regardless of market multiples. The conversation also touches on the role of venture capital, with Lemkin emphasizing the need for investors to focus on exceptional founders and the potential for AI to influence growth strategies. Additionally, they delve into the dynamics of M&A activity, the impact of fundraising cycles on venture capital, and the strategic importance of being a 'nudge' in deal-making. Lemkin shares insights on his own investment approach and the evolution of SaaStr, aiming for an accelerated investment pace and leveraging the community to potentially scale revenue significantly.

• Jason Lemkin expresses concern over the SaaS industry's deceleration, fearing some slowdown may be permanent.
• He believes 2024 will be a pivotal year for SaaS companies, suggesting it may be an opportune time to go public.

"I've been doing SaaS since 2005 and this is the first year I'm worried... I think 2024 is the year of you might as well go public."

The quote indicates Jason's apprehension about the SaaS industry's growth, which has slowed down significantly, and his suggestion that 2024 could be a critical year for SaaS companies to consider going public due to these circumstances.

• Harry introduces the episode's focus on reviewing 2023's venture capital and startup landscape, and predicting trends for 2024.
• Jason is introduced as a seasoned SaaS investor and founder of SaaStr, a large community for SaaS founders.

"And then I wanted to spend the other half predicting funding markets for startups for funds, the LP landscape M and a IPO Windows."

Harry's quote sets the stage for the podcast episode, outlining the intention to review the past year and make predictions for the upcoming year in the context of venture capital, startups, and related financial activities.

• Arising Ventures is highlighted as an innovative venture that assists struggling tech startups.
• Carter and Intercom are mentioned as game-changing products in the venture capital and customer service industries.

"They're a holding company that acquires tech startups facing difficulties and they help them reach their true potential."

The quote explains the role of Arising Ventures as a company that specializes in acquiring and revitalizing tech startups that are experiencing challenges.

• Jason reflects on the high number of new unicorns in 2023, with 1800 being added.
• OpenAI's rapid growth and unique business model are discussed, including its valuation fluctuations and unconventional structure.
• HubSpot's evolution from a blogging company to a CRM powerhouse is highlighted as a significant achievement.

"Happy new year, especially after just a banner year for unicorns and startups. That was 2023, right?"

Jason's quote celebrates the success of unicorns and startups in 2023, indicating a year of significant achievements in the tech industry.

• The conversation touches on the importance of founders not needing venture capital and the paradox that venture capitalists face when investing in such companies.
• Jason and Harry discuss the different motivations and implications of wealth in the context of venture capital investment decisions.

"VC is a tool, but it's great if you never need it."

The quote from Jason underscores the idea that while venture capital is useful, the best scenario for a company is to be able to operate and grow without relying on external funding.

• Nvidia's CEO is praised for his leadership and the company's achievement of a trillion-dollar market cap.
• Brian Armstrong of Coinbase is mentioned as a standout leader despite Jason's skepticism about certain crypto business practices.

"I mean, how could it not be? The CEO of Nvidia after all these years, gotten to a trillion dollar market cap..."

Jason's quote highlights the CEO of Nvidia as a remarkable founder, acknowledging the significant milestone of reaching a trillion-dollar market cap.

• Jason observes a decline in sales and marketing efficiency within the SaaS industry in 2023.
• Despite slow growth, public SaaS companies saw an increase in stock prices due to efficiency gains from cost-cutting measures.
• The conversation shifts to the challenge of returning to growth in 2024 after achieving efficiency and cash flow positivity.

"The average public SaaS company was up 41% last year... But what happened was all that growth came from the base, it all came from price increases..."

Jason's quote analyzes the paradoxical situation where SaaS companies' stock prices increased despite low growth rates, attributing the growth to internal efficiency improvements and price increases rather than new customer acquisition.

• Harry and Jason discuss the challenges of making venture capital work as a business, considering high entry prices and reduced exit multiples.
• They reflect on the cyclical nature of venture capital profitability and the difficulty of achieving high returns in the current climate.

"I get intimidated by the raw math of what it takes to turn a billions dollars fund into three x."

The quote from Jason expresses his concern about the daunting task of achieving a high return on large venture capital funds, highlighting the challenges faced by investors in the industry.

• Jason Lemkin expresses regret over past advice given to founders regarding when to sell their companies.
• He acknowledges that his advice was influenced by his own experiences and the belief that high growth and low burn should lead to holding on to a company.
• Lemkin now sees that some founders missed opportunities to sell during the 2020-2021 boom and may not see such valuations again for a long time.
• He suggests that in bullish times, it may be wise to accept a good offer, as it could be a decade before another boom.

"I think some of the worst advice I've given to founders is when to sell their company." "If you have something good, if growth is high, if burn is low and NRR is high, never sell, because you keep adding value, right?" "But now I see so many founders that said no to offers in the 2020 to 2021 period that will never get back there and will have to work a decade to get to lower exit values."

The quotes reflect Lemkin's introspection on his historical advice to founders about holding onto their companies for longer periods, and his current realization that this may not always be the best approach.

• Jason Lemkin names Y Combinator as the best early stage fund of 2023, highlighting Gary Tan’s return and his impact on the organization.
• Lemkin admires Gary Tan's ability to garner trust and support from founders he has invested in.
• He also discusses Initialized Capital's success and Gary Tan's decision to leave a top fund to lead Y Combinator.
• Harry mentions Kleiner's success under Mamoon Hamid and the team's ability to build an exciting early stage portfolio.

"Look, it has to be Y Combinator." "Gary Tan coming back to Y Combinator... Talk about right person, right time, energy, rebuilding the entire city of San Francisco." "Initialized one's like 50 x, tiny fund, maybe 100 x, and initialized two, I bet is ten x net for a big fund to leave that."

Lemkin's quotes illustrate his view that Y Combinator, under Gary Tan's leadership, is the standout early stage fund of 2023, and he discusses the significant achievements and transitions within the venture capital industry.

• Jason Lemkin sees Mamoon Hamid as a top traditional investor, focusing on high-quality deals and not compromising standards.
• He appreciates Mamoon's consistency and discipline in investment decisions, even if it means missing out on some deals.
• Lemkin notes the pressure in the venture industry to diversify and grow, but acknowledges the value of staying focused to achieve returns.

"Mamoon goes in and it's like, it's going to be slack. It's going to be Figma, it's going to be whatever. It's going to be rippling." "He's a heat seeking missile." "The OD thing in venture is if you stay in your lane, it's the best way to achieve returns for your lps and everything, but there are a lot of pressures to not stay in your lane."

Lemkin discusses Mamoon Hamid's investment approach, emphasizing his ability to identify and invest in high-potential companies while maintaining a disciplined investment strategy.

• Jason Lemkin observes that few deals were done at valuations over $200 million in 2023.
• He notes that public SaaS companies trading at around $2 billion made investors cautious about achieving high returns.
• Lemkin did not see enough investor greed in the market to name a best later stage fund for the year.

"I think in 2023, very few deals got done north of 200 million valuations." "I just didn't see a lot of outside growth investors rushing to do deals north of 200 unless it was a bargain." "I didn't see enough greed in the markets in 2023. I didn't see greed return."

These quotes reflect Lemkin’s perspective on the cautious investment climate in 2023, particularly for later-stage funding rounds with higher valuations.

• Jason Lemkin expresses surprise at the lack of support from large funds in uprounds for good companies.
• He notes a shift from the past where big funds would typically follow on if a company was performing well.
• Lemkin suggests that this conservatism may be driven by fear of not being able to raise another fund or having overextended in bridge rounds.

"I was very surprised that huge funds were not supporting their companies in uprounds." "I never saw a big fund not do this." "That is a level of conservatism that doesn't make sense to me, right? On a bunch of levels."

Lemkin's quotes reveal his astonishment at the conservative behavior of large funds during uprounds, which deviates from historical patterns of investment.

• Jason Lemkin discusses the importance of having a catalyst investor who believes in the company and is willing to lead the funding round.
• He advises founders to identify and engage with the investor who is truly supportive and can mobilize others.
• Lemkin believes that having such a catalyst can help overcome hesitation from other investors and secure necessary funding.

"There's usually only one investor that will stand up for you." "If one person is a catalyst, generally folks that are humming and hind and that are waiting, the catalyst can force them to shit or get off the can."

These quotes emphasize the critical role of a catalyst investor in rallying support from other investors during fundraising efforts, especially in challenging times.

• Jason Lemkin critiques the behavior of founders during the 2021 boom, labeling it as entitled and arrogant towards venture capitalists.
• He compares the negative behaviors of founders and VCs during different market conditions, suggesting that both sides can react poorly.
• Lemkin specifically calls out the Hoppin story as an example of unethical behavior, where the founder prioritized personal gain over the company's needs.

"Founders became very arrogant toward VCs, used them as fungible, put them on irresponsible schedules, didn't share proper diligence, abused the system." "That's why what Hoppin did was unethical. It damaged the company." "Anytime I see an employee, a founder, put themselves above... by all means, oversubscribed round, whatever, take care of yourself. But when you're above, above those 0% chance, it's going to be a success."

Lemkin's quotes provide a critical perspective on founder behavior, particularly during the peak of the market boom, and the ethical considerations involved in decision-making.

• Jason Lemkin expresses concern about the future of the SaaS market, noting the slowest growth pace ever for public SaaS companies.
• He questions whether the saturation of SaaS and software spending may have reached a point where growth cannot continue to outpace GDP indefinitely.
• Lemkin suggests that the industry may have reached maturity, which could impact investment strategies moving forward.

"I've been doing SaaS since 2005 and this is the first year I'm worried." "We are saturated with SaaS and software at some point." "Software cannot keep growing faster than GDP forever."

These quotes reflect Lemkin's apprehension about the potential plateau in the growth of the SaaS market and its implications for the industry.

• IT budgets have inflated and then deflated in recent years.
• AI budgets are often nonexistent as a separate line item.
• Functional groups may have their own budgets that include AI spending.
• Concerns about where additional funding for AI will come from.
• The economy is strong, but SaaS growth has hit a "train wreck."

"the CIO's budget in the enterprise, the it budget, it inflated so much the last couple of years and then it deflated last year."

This quote emphasizes the fluctuation in IT budgets within enterprises, highlighting a recent deflation after a period of inflation.

• There will always be opportunities for innovation and growth at the seed stage.
• The challenge is whether there will be enough companies that can achieve significant revenue growth.
• The "terminal state" of SaaS is reaching a billion in revenue with real growth.
• Seed stage vibrancy is expected to persist due to interest from investors and LPs.

"I don't think it's going to impact early stage much."

Jason Lemkin suggests that the early stage SaaS market will continue to thrive despite broader market concerns.

• The late-stage market is challenging due to a shift in venture capital focus.
• Investors are now hunting for "decacorns" (companies valued over $10 billion) rather than unicorns.
• There is skepticism about how many companies can actually reach decacorn status.

"I think it's very, very tough."

Jason Lemkin expresses the difficulties facing the late-stage SaaS market, indicating a tough environment for growth.

• 2024 may be a year where companies decide to go public regardless of market conditions.
• Companies like Stripe and Databricks are potential candidates for IPO.
• The decision to go public may be influenced by the duration of market downturns and the performance of other public companies.

"So I think people will give up on waiting for the markets to change and just do it."

This quote suggests that companies might proceed with IPOs in 2024 despite not ideal market conditions, indicating a shift in strategy.

• M&A is seen as a strategy to combat slowed growth.
• Companies may opt to acquire other products or services rather than develop new ones.
• The M&A market is expected to be active, especially in the $100 to $400 million range.
• Political changes could influence the M&A landscape.

"There's a huge appetite for M and A."

Jason Lemkin states that there is a strong interest in mergers and acquisitions as a growth strategy among companies.

• Venture capital deployment is dependent on LPs' willingness to invest.
• The diversity of LPs, including those with different levels of liquidity concerns, affects venture funding.
• New LPs, especially from Asia and Europe, are entering the venture space.
• Venture capital can provide an attractive return compared to traditional investments.

"Vcs will deploy as much capital is the lps will give them."

This quote indicates that venture capital funds' investment activity is directly tied to the amount of capital they receive from limited partners.

• Successful venture fundraising is influenced by demonstrated returns (DPi) and differentiation.
• Having standout investments in the past can help secure future LP commitments.
• The venture industry is affected by LPs' past experiences and expectations for future performance.

"DPI is great, but at the end of the day, DPi is in the past."

Jason Lemkin points out that while past returns are important, LPs are also heavily focused on future potential when investing in venture funds.

• Venture funds are expected to outperform mediocre returns from large pools of capital.
• The aim is not necessarily to achieve extraordinary multiples but to beat average returns.
• Venture capital is seen as a way to improve overall investment performance.

"The point is to beat the crummy returns."

The quote clarifies that the goal of venture funds is to provide better returns than other large, underperforming capital pools.

• Jason Lemkin has concluded that only exceptional founders can produce good venture returns.
• He has decided to only invest in founders who are significantly better than average.
• The importance of founder quality has been reinforced by recent experiences.

"I will only invest in founders that are much better than me."

This quote highlights Jason Lemkin's revised investment strategy, focusing solely on investing in top-tier founders.

• Venture capital firms are not permitted to mark up valuations between funding rounds.
• Limited Partners (LPs) have moved past inflated valuations and focus on business performance.
• General Partners (GPs) may choose not to markdown a deal, and LPs do not seem overly concerned.

"We're not allowed to mark up between rounds. [...] Lps have gotten over the Sony baloney valuations and it's just show me the business, and if a GP doesn't mark down a given deal, they just don't."

This quote explains the restrictions on venture capital firms regarding valuation adjustments between funding rounds and the shift in LPs' focus towards actual business performance over inflated valuations.

• The best investment advice received includes avoiding shortcuts and investing more in winners.
• If there's uncertainty about an investment, it's advisable to refrain from it.
• The ability to quickly assess the potential of a founder is crucial.
• The investment landscape is challenging, and 2021 was a year where the difficulty was underestimated.

"There's no shortcuts. Just say no if you're not sure. [...] If you don't know in 20 minutes, don't do it."

This quote summarizes the investment philosophy of being decisive and focusing on clear winners, as well as the importance of trusting one's quick judgment of a founder's potential.

• Founders need a sense of urgency that is evident in their demeanor.
• Repeat founders sometimes lack the urgency of first-time founders.
• The level of urgency can be a critical factor in determining the potential success of a venture.

"You got to smell the urgency out of their pores. [...] If you don't smell that urgency out of the pores [...] it wasn't there."

The quote highlights the importance of perceiving an intense level of urgency in founders, which can be indicative of their commitment and drive.

• Being a "nudge" can be an effective strategy for investors to secure deals.
• Some investors, like those from Sequoia, are known for their persistent tactics.
• Not being persistent enough is seen as a mistake and a missed opportunity for better investments.

"The best investors are nudges. [...] I think about a couple really good deals where I didn't nudge my way into the deal like people do."

This quote reflects on the speaker's self-assessment that not being more persistent, or a "nudge," has led to missed investment opportunities.

• The speaker feels they have become a worse investor over time due to being slower and taking things personally.
• Taking things personally is seen as a negative trait in the investment world.

"No, I'm worse because I'm slower and I'm worse because I take some things personally."

This quote reveals the speaker's candid self-reflection on their investment performance and the personal challenges they face in the role.

• Venture capital is not a charity and requires performance.
• Markups and interim numbers are important for demonstrating success.
• There is an expectation that venture capitalists must deliver results or face job loss.

"Venture is both rewarding and brutal. You got to put up the numbers, and that's why markups matter and interim numbers matter, because you got to put up the numbers."

The quote emphasizes the performance-driven nature of venture capital and the importance of delivering measurable results.

• Venture capital is focused on investing in outliers, not just good companies.
• Founders often do not understand the necessity for their startups to be exceptional to attract venture capital.

"What founders don't get about venture when they fundraise is they really don't understand what it means. That venture is a business of outliers."

This quote explains the core principle of venture capital being the pursuit of outlier companies that can deliver exceptional returns.

• The speaker aims for a prolific investment pace in 2024.
• There is a desire to capitalize on the current market conditions for investments.
• The Sasta media business relies heavily on big tech sponsorship, and there's a goal for marketing budgets to increase.
• Sasta aims to become a marketplace where buyers and sellers of software can connect.

"If I could, 2024 would be my fastest investment pace since 2014. [...] It would be great if marketing budgets reflated in later 2024."

This quote outlines the speaker's ambitions for Sasta in 2024, focusing on increasing the pace of investments and expanding the media business through increased marketing budgets.

• Growth should be measured relative to competitors, not just in absolute terms.
• The speaker reflects on the performance of Sasta compared to similar businesses.

"You got to judge your growth not just on an absolute basis, but compared to your competitors."

The quote encourages a comparative approach to evaluating growth, suggesting that one should consider how they are doing relative to their competitors to get an accurate assessment of success.