20VC SaaStr's Jason Lemkin on The 3 Things You Want From Your LPs, Why Most VCs Do Not Add Value & Why The Best VCs Know How To Package Startups For The Next Round



In this episode of "20 Minutes VC," host Harry Stebbings interviews Jason Lemkin, founder of SaaStr, discussing the evolution of venture capital and the concept of platformification, as detailed on Stebbings' blog mojitovc.com. Lemkin shares his journey from SaaS founder to VC, emphasizing the importance of community, market pull, and the challenges of product-market fit. He explains his investment strategy, focusing on late seed stage companies with some revenue and early signs of product-market fit, and his commitment to helping portfolio companies scale by building management teams and preparing them for subsequent funding rounds. The conversation also touches on the value of LPs and VCs in the fundraising process and the role of trust and alignment in long-term relationships. Additionally, Lemkin introduces the co-selling space, a collaborative environment for growing SaaS companies, and highlights his first fund investment in Automile, praising the CEO's transparency and growth trajectory.

Summary Notes

Introduction to 20VC and Jason Lemkin

  • Harry Stebbings introduces the podcast, "20 minutes VC," and his platform "mojitovc.com."
  • Jason Lemkin is introduced as a mentor and advisor to Harry, and founder of SaaStr with a $70 million fund.
  • Jason's previous experience includes co-founding EchoSign and its acquisition by Adobe.
  • Harry promotes X.AI and Workable as innovative tools for scheduling and recruiting.

"With me, your host, Harry Stebbings on at h stebbings on Snapchat, or writing some of my many learnings from interviewing some of the world's best investors on mojitovc.com."

This quote serves as an introduction to the host and his platform where he shares insights from venture capital.

"I'm also so delighted then to be joined by Jason Lemkin, founder at SaaStr."

Harry expresses his gratitude and excitement for having Jason Lemkin on the show.

"Jason was the co-founder at EchoSign, leading to the very successful acquisition by Adobe, where he oversaw the growth of Adobe document services ARR from $50 million in 2012 to a staggering $100 million in 2013."

The quote highlights Jason's successful entrepreneurial background and his role in growing Adobe's document services.

Jason Lemkin's Path to Founding SaaStr

  • Jason started blogging and answering questions about his experiences as a founder post-acquisition of EchoSign by Adobe.
  • SaaStr's content gained significant traction, leading to a large annual event and the establishment of a $70 million fund.

"A little more than four years ago, I started blogging and answering questions about all the mistakes I made as a founder after my last company, EchoSign, was acquired by Adobe."

Jason explains how sharing his experiences led to the creation of SaaStr.

Realization of SaaStr as a Valuable Platform

  • Jason spent a year investing at a previous firm to understand VC terminology and concepts.
  • He initially considered investing outside of SaaS but realized the value of focusing on the SaaStr community.
  • Meetings with non-SaaStr founders were unproductive, reinforcing the importance of the SaaStr platform.

"But when I started to invest as a VC, I had no idea what any of these things meant."

Jason reflects on his initial unfamiliarity with VC jargon and the learning curve he experienced.

"Any meeting I took that wasn't a founder from the SaaStr community...ultimately was a waste of my time."

This quote emphasizes the strategic advantage of focusing on the SaaStr community for investments.

Comparing Previous Fund Experience to SaaStr Fund

  • Running his own fund is significantly more stressful and economically challenging in the short term for Jason.
  • The concept of "return the fund" requires a strong belief in every investment's potential to reach a $700 million valuation.

"It's 50 times more stressful having your own fund."

Jason expresses the increased stress of managing his own fund compared to working with a previous fund.

"Every deal, return the fund means that every deal, you have to have conviction that every deal will return the fund."

This quote highlights the high standard and conviction required for each investment decision in his fund.

Rigor and Examination in Solo Investing

  • As a solo general partner (GP), Jason finds he is more conservative and critical in his investment decisions.
  • Personal capital commitment as a solo GP increases the weight of each investment decision.

"I think it's actually easier to be more critical when it's just you on the line."

Jason argues that being the sole decision-maker leads to more rigorous scrutiny of potential investments.

Importance of Check Size in VC Investments

  • Jason prefers investing at the late seed stage, where early product-market fit is evident.
  • The ideal investor for a startup at this stage should have material skin in the game.
  • A check that represents 1% or more of a fund indicates significant interest and commitment to the startup.

"What you want, ideally, is an investor that's aligned with that stage and that has material skin in the game."

This quote underlines the need for an investor's commitment to match the startup's stage of growth.

VC Investment Concerns

  • Awareness over concern for small investment percentages.
  • The importance of taking an offer when it's the only one available.

I think you shouldn't be concerned, but you should be aware of it.

This quote emphasizes that while concern may not be necessary, awareness of investment details is important.

First Startup Funding Experience

  • Jason Lemkin's experience with his first startup and suboptimal fundraising terms.
  • The context of raising money during a difficult time (2003-2004).
  • The dilemma of accepting unfavorable terms or shutting down the company.

But at the end of the day, I got the world's worst term sheet with the world's worst terms.

Jason Lemkin shares his personal experience with receiving an unfavorable term sheet, highlighting the challenges of early-stage fundraising.

The Nature of Money in VC

  • The concept that "all money is green," suggesting that the source of funding is less important than obtaining the funding itself.
  • The potential lack of engagement from investors making minimal contributions.

But all money is green.

Jason Lemkin reflects on the idea that the color of the money is less important than the fact that it is available when needed.

Micro VC Definition and Dynamics

  • Confusion surrounding the term "micro VC."
  • The lack of a clear distinction between micro VCs and larger VC firms in terms of investment strategies.

This micro VC term, I think is confusing.

Jason Lemkin discusses the ambiguous nature of the term "micro VC" and how it relates to investment strategies and fund sizes.

Fund Allocation in VC Firms

  • The process of allocating funds within VC firms.
  • The strategic advantage of pooling reserves for follow-on investments.

Well, no, but an advantage.

Jason Lemkin explains that while fund allocation to separate partners is not common, there are advantages to the way funds are structured within VC firms.

Fundraising Environment for Micro VCs

  • The rapid growth of micro VC funds and the challenges of raising one.
  • The importance of social proof and support from initial investors and founders for successful fundraising.

It's actually maybe in some ways harder to raise one than a couple years ago.

Jason Lemkin reflects on the increased difficulty of raising a micro VC fund despite the proliferation of such funds.

LP Base and Fundraising

  • The specificity of LP interest in venture and smaller funds.
  • The challenge of being selected by LPs due to their infrequent addition of new managers.

The average LP will add one new manager every two to three years.

Jason Lemkin highlights the competitive nature of attracting LPs, given their limited frequency of adding new managers to their portfolios.

Value of LP Dollars

  • The differences in value between LP investments.
  • The criteria for desirable LPs: willingness for multi-fund commitments, trust, and vision alignment.

All money is green, but multifund commitments, folks you trust and folks you have alignment on are much better than random money.

Jason Lemkin discusses the qualitative differences in LP investments and what makes certain LP dollars more valuable than others.

Packaging Portfolio Companies for Next Rounds

  • The role of venture capitalists in preparing portfolio companies for future fundraising.
  • The importance of having leading VCs interested in following earlier-stage investors.

Investors at each stage have multiple leading VCs at the next stage that want to follow them.

Jason Lemkin talks about the importance of having reputable VCs interested in companies that are at an earlier stage, as it provides social proof and can aid in future fundraising efforts.

Risk Management in Venture Capital

  • Venture capitalists like Jason consider follow-on funding from top SaaS VCs as a risk mitigator for future rounds.
  • Jason’s track record shows that almost all his deals receive significant follow-on investments, allowing him to take on more initial risk.

"All but one of my deals so far has been followed with an eight figure check from a top SaaS VC."

This quote indicates Jason's success in securing substantial follow-on funding for his investments, which reduces his risk in future funding rounds.

Fund Reserves Strategy

  • Jason is still learning about the optimal strategy for fund reserves in venture capital.
  • There is a desire among seed and early-stage investors to own more equity in successful companies.
  • Seed funds growing to lead investments face the challenge of managing higher reserves due to increased responsibilities.

"And the burden on them is much higher. So therefore your reserves are much higher."

The quote highlights the increased financial burden on seed funds that transition into leading investment rounds, necessitating larger reserves.

Seed Stage Investment Philosophy

  • Jason agrees with Charlie O'Donnell's assessment that many seed stage investors are actually late-stage investors with early capital.
  • Jason takes on various risks but avoids product-market risk, focusing instead on risks associated with first-time founders and crowded markets.

"I don't take product market risk. I take first time founder risk. I take management team risk."

Jason's quote clarifies his investment strategy, which avoids the uncertainties of product-market fit but embraces other types of entrepreneurial risks.

Market Influence on Investment Outcomes

  • Jason concurs with Rory O'Driscoll's view that markets and product become more influential as companies grow.
  • The importance of market pull and product varies with the stage of investment, and early-stage investors must seek other indicators of market demand.

"Once you hit four or 5 million in ARR, it becomes a numbers game."

This quote reflects Jason's agreement with the idea that market dynamics and product viability become clearer and more critical as a company reaches significant revenue milestones.

Venture Capital Value Addition

  • Jason believes that while most VCs do not add significant value, a select few do, including himself.
  • The key to a successful VC-founder relationship is trust and selecting an investor who can provide the most value at each stage of the company's growth.

"Pick the investor that can provide the most value to you, the most help."

Jason emphasizes the importance of choosing an investor not just for their capital but for the additional support and value they can bring to the company.

Jason's Value Add as a VC

  • Jason offers a three-point package of value to the companies he invests in, focusing on recruiting management teams, making introductions, and providing strategic guidance.

"I try to provide you with as much help recruiting the management team as you can."

This quote encapsulates Jason's approach to adding value to his portfolio companies, particularly through assistance in building strong leadership teams.

Value Addition by Investors

  • Jason Lemkin discusses his hands-on approach to adding value to his investments.
  • He emphasizes the importance of building a strong management team quickly.
  • Lemkin sees promoting the company and preparing it for future funding rounds as part of his investor responsibility.
  • He aims to be the best advisor and helper to the CEO until the company grows beyond his expertise.

"I was able to help put in the entire first management team within 60 days. And this was when Tiago was the only us employee. So that's value add."

This quote illustrates Lemkin's active role in establishing a foundational team for a company shortly after investment, highlighting his hands-on approach.

"You can hit the growth number and I can help you build the team, and we can promote the company in twelve months. You should be a very attractive series A candidate for an eight-figure check."

Lemkin outlines his strategy to support a company's growth and readiness for significant funding, emphasizing his commitment to the company's success.

"I want to be your best advisor, your best helper, your best sounding board, until at least you're at 10 million in revenue and I'm obsolete because I have done it."

This quote conveys Lemkin's desire to provide unparalleled guidance and support to CEOs until the company's growth renders his advice less critical.

Podcast and Community Impact

  • Jason Lemkin expresses admiration for Harry Stebbings' success with the Saasra podcast.
  • He acknowledges the significant growth of his own SaaS community and its role in his deal flow.
  • Lemkin discusses the importance of continuous growth and expansion within the SaaS industry.

"I think what you've done with the Saasra podcast is amazing. You've gone from nothing to 50,000 plus listeners a week and become the dominant force in this industry."

Lemkin applauds Stebbings' achievement with the Saasra podcast, highlighting its impressive growth and influence in the industry.

"I've learned that the blog and the Saster community is all of my deal flow. It's 100% of it, but it's ten times bigger than it was two and a half years ago."

The quote indicates that Lemkin's blog and community have become the sole source of his deal flow, which has significantly increased in recent years.

Time Management and Delegation

  • Jason Lemkin credits his success in managing various initiatives to recruiting the best people.
  • He advises focusing on tasks that add unique value and delegating the rest.
  • Lemkin believes in the importance of building a strong team to manage different aspects of the business.

"The key is to recruit the best people that you possibly can. Gretchen's our CEO. She runs the SAS granule. She runs content, she runs sponsorships, she runs all that."

Lemkin attributes the effective management of his initiatives to the capable individuals he has recruited, specifically praising his CEO, Gretchen.

"I want to only do the things that I add unique value in, and that's the key."

He emphasizes the importance of concentrating on tasks where he can provide unique value, suggesting that this is a critical strategy for CEOs.

Co-Selling Space Concept

  • Jason Lemkin introduces the co-selling space as a collaborative working environment for SaaS founders.
  • The space is designed for companies that have started generating revenue but are not yet large enough for their own office space.
  • Lemkin believes in the value of founders learning from each other and sharing experiences.

"What if instead of working in some horrible coworking space or terrible place in the mission, you could actually work in a delightful space with other founders that are as good as you, or better."

This quote describes the vision behind the co-selling space, which is to provide a superior working environment for SaaS founders to collaborate and learn from one another.

Investment in Automile

  • Jason Lemkin discusses his investment in Automile and the CEO's transparency with company metrics.
  • He describes Automile's market as crowded and seemingly undifferentiated, which can confuse investors.
  • Lemkin values a committed founder and a strong team, which he believes are indicators of a company's potential success.

"Automile is fun for many reasons, but the CEO is hyper transparent. He tweets out all his revenue, all his numbers, so I can share everything."

Lemkin appreciates the CEO's transparency with Automile's financials, which is not common in the industry and provides clear insights into the company's growth.

"Like a lot of my best investments, like talk desk and Algoli and others at the time, to an outsider, it seemed very undifferentiated. But you have a founder that's much better than me, that's insanely committed."

He explains that, similar to his previous successful investments, Automile's potential may not be immediately apparent to outsiders, but is evident in the quality and commitment of the founder.

Gratitude and Community Contribution

  • Harry Stebbings expresses gratitude towards Jason Lemkin for his mentorship and advice.
  • Stebbings highlights Lemkin's contributions to the community and his personal growth.
  • Both speakers share a mutual appreciation for each other's work and impact on the SaaS community.

"He really has been the best friend, mentor and advisor I could ask for and I'm so grateful for that."

Stebbings conveys heartfelt thanks to Lemkin for the invaluable guidance and support he has received, emphasizing Lemkin's role in his personal and professional development.

"Harry, you're the best and thanks for everything you do for the community."

Lemkin reciprocates the appreciation, acknowledging Stebbings' contributions to the broader community.

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