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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"I think it's very, very tough."
Jason Lemkin expresses the difficulties facing the late-stage SaaS market, indicating a tough environment for growth.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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 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.
"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.
"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.
"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.