20VC Roundtable NEW FORMAT Why the Seed Investing Model is Broken, How to Make Money at Seed Moving Forward; Who Wins and Who Loses, Why Venture Value Add Platforms are BS and Failed and Why There Will be an IPO per Week in H2 2024

In a dynamic roundtable discussion on "20 VC," host Harry Stebbing convenes with venture capitalists Sam Lessin of Slow Ventures, Jason Lemkin of SaaStr, and Frank Rotman of QED to dissect the evolving landscape of seed investing. The conversation delves into the end of the "factory model" of predictable startup success and the implications for seed funds, which now face a return to bespoke, high-risk, high-reward strategies. The group debates the future of venture capital, emphasizing the need for startups to be capital-efficient and profitable early on, rather than relying on subsequent funding rounds. They also touch on the role of accelerators like Y Combinator, the impact of rich tech executives in seed rounds, and the prospect of upcoming IPOs in a shifting market. The consensus suggests a critical reevaluation of the venture model, with a focus on sustainable business growth and a potential reduction in the number of high-value public offerings.

• Seed deals that have a significant impact are usually the most difficult to package.
• The most successful seed investments tend to be those that deviate from the norm and are not easily passed along a production line.
• The idea of a factory model of seed investing is now considered over.

"The seed deals that have mattered have always been the ones that were hardest to package. They were not on the factory line."

This quote emphasizes that the most impactful seed deals are those that defy standard packaging and don't fit neatly into a predefined investment process. These deals are unique and don't follow a cookie-cutter approach.

• The previous era of seed funding operated like a factory production line, leading startups to predictable valuations.
• This model is no longer viable, as it was based on conditions that no longer exist, such as zero interest rate policies and the predictable success of certain types of companies.
• The factory model of seed investing is being replaced by a more bespoke approach that relies on pattern recognition and a power law distribution of outcomes.

"My view when I say that seed is dead is that I think the factory model of seed, which supported massive scaling of it, is dead."

Sam Lessin suggests that the systematic approach to seed investing, which allowed for scaling and predictability, is no longer effective. The seed industry is returning to a more individualized and uncertain model.

• The period from 2017 to 2021 was marked by an abundance of funding rounds (A, B, C, etc.) without systematically de-risking businesses.
• The reset button concept involves returning to a more efficient process of de-risking businesses across four stages: seed, A, B, and private equity.
• The current market requires startups to make significant progress quickly, or they risk not finding further funding.

"2017 to 2021 era was the era of Alphabet soup, right? So you had an a round, a b round, a c round, a d round, an erround, an f round, like extensions."

Frank Rotman describes the recent period in venture capital where startups went through numerous funding rounds without proper de-risking at each stage.

• Seed funds historically have been about finding unique, off-trend opportunities with the potential for huge returns.
• The previous decade's model of seed investing, which resembled investment banking, is being questioned as it may not be sustainable.
• Venture capital is about identifying and investing in unconventional ideas rather than following a standardized playbook.

"The seed deals that have mattered have always been the ones that were hardest to package. They were not on the factory line."

Sam Lessin reiterates that the most successful seed investments are those that are not easily standardized or packaged, highlighting the bespoke nature of successful venture capital.

• The venture ecosystem's flaw in recent years was the pursuit of "obvious" deals, which led to overpaying and poor risk-return trade-offs.
• Pricing in the venture market is beginning to correct, starting from the public markets and moving backwards through the stages of funding.
• Seed stage pricing correction is necessary for a healthy progression of funding rounds.

"One of your partners will, who I spend a lot of time with, he said one of the flaws of the past few years is that everyone was trying to earn the right to do the obvious, trying to earn the right to win these deals that everybody thought were good deals."

Frank Rotman shares insights from Sam Lessin's partner, highlighting the past trend of chasing deals that were perceived as "obvious" wins but resulted in overvaluation.

• If seed stage pricing does not correct, it may lead to a lack of bids in Series A rounds due to companies not progressing enough to justify increased valuations.
• Venture capitalists may prefer to give no bid rather than suggest a flat or down round, which can limit the opportunities for startups to advance to further funding stages.
• Founders need to understand the importance of earning their valuations through progress, as overvaluation at the seed stage can hinder future funding opportunities.

"If pricing doesn't correct at the earliest stage, you're going to have a lot of no bids at the series A because they wouldn't have gone far enough fast enough for a series a investor to come in and say they've earned their way into a significant increase in valuation."

Frank Rotman explains the consequences of seed stage overvaluation and its negative impact on the ability of startups to secure Series A funding.

• Overfunding at an incorrect valuation can be detrimental.
• Founders often do not heed advice on valuation moderation.
• Seed investments are attractive due to potential high returns.
• High seed valuations can be problematic for subsequent funding rounds.
• Seed stage is not treated as a fully efficient market by investors.
• Investors may no longer support companies without clear asymmetrical return potential.

"Capital if you've overfunded yourself at the wrong valuation early on, for sure."

This quote highlights the risk of overfunding at an incorrect valuation, which can lead to difficulties in raising future capital.

"I don't think any founders are listening to these terrific insights on Twitter. I don't think that they are ratcheting back their valuation expectations."

Jason Lemkin expresses skepticism about founders' willingness to moderate their valuation expectations despite advice available on platforms like Twitter.

"We'll basically no bid lots of stuff where we don't see the huge asymmetry at this point."

Sam Lessin indicates a shift in investment strategy where investors are more selective, only engaging in opportunities with clear asymmetrical return potential.

• TAM is critical in determining the potential for outsized returns.
• Not all companies operate in markets with unlimited TAM.
• Investors should focus on companies that can make money at low levels of scale.
• The venture industry may need to recalibrate its approach to TAM and profitability.

"The fundamental flaw in the discipline is that those thousand x return companies only exist in areas where TAM probably is unlimited, or TAM probably is extraordinarily large."

Frank Rotman identifies a misconception in the venture industry, where it's assumed all companies have the potential for unlimited market growth, which is not the case.

"Companies need to learn to make money at low levels of scale."

Frank Rotman emphasizes the importance of companies being able to generate profit without massive scale, especially in markets with limited TAM.

• Seed funding should be about starting real, profitable businesses.
• Some successful companies have been built with minimal or no VC funding.
• The focus is shifting from solely derisking to creating profitable businesses with seed capital.
• There is a growing interest in businesses that can scale with revenue and quality.
• The venture model may evolve to accommodate lower exit valuations.

"My wife started a business that does tons of millions in top line with $0 of outside investment."

Sam Lessin shares a personal example of a successful business that did not rely on venture capital, emphasizing that not all businesses require significant funding to grow.

"The key here is, and I think it's something that needs to be relearned in the venture industry. Companies need to learn to make money at low levels of scale."

Frank Rotman reiterates the need for the venture industry to focus on companies that can be profitable without requiring large amounts of capital or scale.

• The venture industry has been inefficient with capital allocation.
• Successful investments often derisk businesses with minimal capital.
• The venture model is moving away from using seed funding as a mere experiment.
• Investors should focus on businesses that show promise of profitability early on.

"The operative question is how much can you learn for how much money, how quickly?"

Frank Rotman discusses the importance of efficiently gaining knowledge about a business's potential with minimal investment.

"Seed investing is about derisking the one two key bets, which then unlock a series A."

Sam Lessin explains that seed investing traditionally aimed to validate key assumptions, paving the way for larger investments, but this approach may change.

• Seed investments can yield significant returns when executed well.
• Large fund sizes may dilute the impact of successful seed investments.
• There is debate over the optimal fund size for seed investing.
• Investors need to be skilled in selecting the right companies.

"I made 1000 x on our Salana seed."

Sam Lessin shares a personal success story, highlighting the potential for high returns from seed investments.

"You only get so many bullets in the gun."

Sam Lessin metaphorically describes the limited opportunities investors have to make successful seed investments, emphasizing the importance of careful selection.

• VCs may need to adjust expectations for exit valuations.
• Founders may not prioritize capital efficiency or respect for investor capital.
• There is a tension between building a solid business and chasing outsized returns.

"Does building a 100, 200, 300 million dollar company really give up the option value of building the ten or 20 or $50 billion company?"

Sam Lessin questions the trade-off between building a moderately successful company and aiming for a much larger one, suggesting that starting with a solid foundation does not preclude larger success.

"I don't think great companies are just manufactured. Great companies are built on top of good companies."

Frank Rotman asserts that successful companies are developed through stages, starting with a good business before achieving greatness.

• Publicly known tech companies are often not genuine tech exits and are seen as a waste of capital.
• There is a perception that too much money is being funneled into companies that do not warrant it.

"shockingly, there's a lot of nominally or even some known public companies that are tech exits. They're not even close to that."

The quote expresses surprise at the number of companies that are considered tech exits despite not truly being so, implying a misallocation of capital.

• The 'farmification' of startups has changed founders' mentalities, possibly eroding respect for capital.
• There's a suggestion that founders are less concerned with sustainable growth and more with rapid scaling, even if it's inefficient.

"I don't think there's respect for capital."

This quote reflects a belief that the current generation of founders may not value or utilize capital as judiciously as previous ones.

• Entrepreneurs are increasingly considering ownership and control over high valuations with significant VC involvement.
• There's optimism that more entrepreneurs will choose to own a larger share of smaller businesses rather than a smaller share of larger, VC-controlled companies.

"I actually am very optimistic that there's going to be a whole generation of people like, oh, shit, it is a much better life to own 80% of a business that has 50 million top line than own 10% of a business that does 500."

The quote conveys the speaker's belief that entrepreneurs will start to prefer having greater ownership in smaller companies over less ownership in larger ones.

• There's debate on whether SaaS is still a viable investment sector.
• Some argue that SaaS companies without venture capital may fall behind competitively.
• Others question the overall attractiveness of the SaaS market for investors.

"Is SaaS a good place to be investing anymore?"

This question challenges the current investment viability of the SaaS sector, suggesting that it may no longer be as promising as it once was.

• Capital should be used as an accelerant in businesses that are showing positive momentum, not as a crutch for struggling ones.
• Recent investment strategies focused too heavily on top-line growth without considering the sustainability of that growth.

"So if you're generating proof, that's a good time to examine whether capital actually would be an accelerant."

The quote suggests that capital should be invested in businesses that are already demonstrating success, rather than trying to force growth in less promising ventures.

• There's skepticism about the effectiveness of traditional venture capital playbooks and accelerators like Y Combinator.
• There's concern that these programs create a homogeneous group of startups without distinct competitive advantages.

"The YC thing in particular was, if we're talking about venture capital, the factory that was like ground zero for the construction of the factory."

This quote criticizes Y Combinator and similar accelerators for producing startups that may lack individuality and are too formulaic.

• There's a tension between the appeal of having numerous small investments from wealthy tech executives and the desire for more meaningful, strategic capital.
• Some investors prefer investing in unique opportunities with high conviction founders over participating in crowded funding rounds.

"But I think that's more about the capital side in my mind than it is the factory part."

The speaker is distinguishing between the process of raising capital and the systematic approach of accelerators, suggesting that the former is more important to them.

• There's a debate over whether venture capital firms can truly add value beyond funding, especially in areas like recruiting top talent.
• Some believe that venture capital firms should focus more on providing tangible support, such as recruitment, to their portfolio companies.

"I think that all venture firms have failed with their talent arms."

The quote criticizes venture capital firms for not effectively supporting their portfolio companies in critical areas like talent acquisition.

• Sales hiring in startups is extremely challenging.
• Successful early-stage salespeople are rare and possess a unique set of skills and motivations.
• Startups require salespeople who are not only good at selling but also willing to join early-stage ventures.
• Sales professionals typically prefer established companies with clear playbooks and high earning potential.

"I've never successfully hired sales. I think sales is incredibly hard to hire at startups specifically because the whole nature of sales is like, the people who want to go early are anti correlated with the good people."

This quote highlights the difficulty of hiring effective salespeople for startups due to the contrasting nature of typical sales motivations and the conditions present in early-stage companies.

• There is a disagreement regarding the frequency of IPOs in the future.
• Jason Lemkin predicts a surge of IPOs in the second half of 2024, with one IPO per week.
• Others are skeptical of this prediction, citing various reasons.

"Jason bet me that he thought there would be an IPO a week. I think it was from the back half of next year. So 2024 H2."

Harry Stebbings summarizes the bet made by Jason Lemkin about the frequency of IPOs in the latter half of 2024.

• Public market performance and efficiency have improved, potentially leading to more IPOs.
• Larger, more efficient companies are considered ready for IPO when market conditions are favorable.
• There is a belief that good companies have grown significantly during recent market fluctuations.

"Public markets are up 30%. Every public company is more efficient, even me. I have five investments I've made, north of 200 million in revenue growing 30% or faster that are now efficient."

Jason Lemkin expresses optimism about the current state of public markets and the readiness of certain companies for IPOs.

• There is a shift in investment focus towards larger, more established companies.
• Some believe that smaller companies with $200 million in revenue are less appealing to investors.
• The trend may indicate a preference for investing in mega-corporations or PE roll-ups.

"No one gives a shit about a company that does 200 million in top line and grows at 30% margins. No one cares."

Sam Lessin provides a provocative stance on the perceived value of smaller companies in the eyes of investors, suggesting a lack of interest compared to larger entities.

• LPs (Limited Partners) are reassessing their investments and becoming more selective.
• The venture capital industry is experiencing a realignment with fund sizes being cut and combined.
• There is a focus on efficiency and profitability among companies seeking venture capital.

"There is absolutely an LP pullback, and it's very real and material."

Sam Lessin discusses the current trend of LPs becoming more cautious and strategic in their venture capital investments.

• The timing and volume of future IPOs are uncertain and debated among investors.
• The venture capital landscape may change if IPOs increase and capital flows back into the ecosystem.
• Mid-tier venture funds may struggle to raise capital in the current environment.

"If Jason is right with the IPOs, then money will flow back into the LP ecosystem once the IPO window opens up, and that might reverse course."

Frank Rotman suggests that a resurgence of IPOs could revitalize venture capital funding, affecting LPs' investment strategies.

• There is an emerging trend of capital efficiency and profitability at lower scales.
• Narrative-driven funding may decline beyond the seed stage, with results becoming the focus.
• Investors are seeking opportunities in unorthodox and potentially profitable ventures.

"I think narrative is going to stop at the seed when it used to flow through to the series A and even into the series B."

Frank Rotman predicts a shift in venture funding where compelling stories will no longer suffice beyond early-stage investments.

• Investors have varying strategies and beliefs about the venture world.
• Some prefer to invest in unconventional startups with high profitability potential.
• The desire for significant ownership stakes in seed-stage companies is a common theme.

"I am very excited to fund a bunch of companies at five and under in weird things that are coming to you because no one else will give them money."

Sam Lessin shares his enthusiasm for funding unique startups that may be overlooked by other investors, emphasizing profitability and strategic value.

• Investors wish for changes that would allow for more control and significant stakes in startups.
• Concentration rounds and the ability to invest in promising seed companies are desired improvements.

"I would like to be able to magically buy at least 10% of any seed company I meet that I want to invest in."

Jason Lemkin expresses a wish to secure larger ownership percentages in seed-stage companies, which he believes is critical for successful investing.