20VC Unscripted Pricing is Crazy, PreEmptive Rounds are Normal, Pricing at 200x Revenue Multiple is Common, There is More Cash Than Ever. What Happens Next; Market Analysis with Ryan Denehy, Founder and CEO @ Electric

In an insightful conversation on the 20 VC podcast, host Harry Stebbings and Electric founder Ryan Dennehy discuss the current state of venture capital and startup funding. Dennehy, a three-time entrepreneur with successful exits, including acquisitions by USA TODAY Sports and Groupon, shares his experience raising over $188 million for Electric from prominent investors like GGV and Bessemer. They delve into the impact of inflated valuations on talent acquisition and the dangers of minimal due diligence in investment processes. Dennehy emphasizes the importance of founders actively engaging in sales to truly understand product-market fit and warns against excessive fundraising that distracts from business operations. He also touches on the personal side of being a founder, including the dynamics of being married to another founder, and his vision for Electric's future as a public company.

• This episode of 20 VC is the first without a pre-planned schedule or topic list.
• The conversation began informally with a discussion on the market and pricing.
• The spontaneity of the episode is highlighted as a unique approach to the podcast format.

"This is the first time I've ever done a show where we didn't even start with a schedule of what we were going to discuss in this episode."

The quote emphasizes the lack of a predetermined structure for the episode, which is unusual for the podcast.

• Ryan Denehy is the founder of Electric and has raised over $188 million.
• Electric has notable investors including GGV, Bessemer, Slack Fund, and 01 Advisors.
• Ryan is a three-time entrepreneur with previous companies acquired by USA TODAY Sports and Groupon.

"I'm thrilled to welcome a dear friend, Ryan Denehy. Ryan is the founder at Electric."

This quote introduces Ryan Denehy and his credentials, setting the stage for the conversation.

• Carter is mentioned as a platform that simplifies issuing equity to employees.
• Secureframe is introduced as a solution for streamlining SOC 2 and ISO 27001 compliance.
• Cooley is highlighted as a law firm experienced in working with startups and venture capital.

"Carter makes it as easy to issue equity to your employees as it is to issue payroll."

The quote explains Carter's value proposition, emphasizing its ease of use for equity distribution.

• Ryan Denehy describes himself as "unemployable since a teenager" due to his entrepreneurial spirit.
• His first business, an online ad network, was acquired while he was in college.
• His second business, a retail analytics startup, was acquired by Groupon in 2014.
• Electric was founded out of frustration with IT support in his previous companies and operates as a managed IT support SaaS for small businesses.

"I've essentially been unemployable since a teenager."

This quote reflects Ryan's early start in entrepreneurship and his continuous journey in the field.

• Electric raised $90 million in a recent round led by GGV.
• All other insiders participated in the funding round, demonstrating continued support.

"Raised 90 million led by GGV and all of our other insiders came in and got the round done."

The quote provides details on Electric's latest funding round and the key investors involved.

• Ryan recalls extensive due diligence for a Series A round in 2012-2013, contrasting it with today's quicker processes.
• He expresses concern over the current trend of minimal due diligence by investors.
• Ryan emphasizes the importance of thorough due diligence for successful investor-founder relationships.

"Term sheet in two days, no diligence. Right? Just like, maybe send us a board deck."

The quote highlights the current trend of rapid investment decisions with limited due diligence.

• Ryan advises founders to conduct thorough diligence on potential investors.
• He compares hiring an executive to bringing on an investor, noting the difficulty of "firing" an investor.
• Ryan shares a personal experience of conducting backchannel references on investors.

"If I bring on an investor and they suck. Can't only fire someone who owns 10% of your company."

This quote underscores the permanence and significance of choosing the right investors for a company.

• Ryan suggests founders seek out references from a variety of the investor's portfolio companies, not just the ones suggested by the investor.
• He recommends talking to founders of companies that have not worked out to understand how investors behave in challenging times.

"I already talked to four of your founders."

The quote reveals Ryan's proactive approach to due diligence, gathering information from multiple sources.

• Discussion on the current state of market pricing and high revenue multiples.
• Ryan questions the sustainability of high valuations for early-stage companies with minimal revenue.
• He stresses the importance of considering the long-term implications of accepting high valuations.

"You're a company that's got sub a million in ARR, raising it 300 million, 400 million, you got to play the whole thing forward and go like, eventually I have to exit."

The quote addresses the potential risks and pressures associated with raising funds at high valuations relative to revenue.## Valuation Sustainability

• Harry Stebbings expresses concern over the sustainability of high valuations in the tech industry.
• Ryan Denehy agrees, noting the mathematical impossibility of continuously doubling valuations for successful outcomes.
• Denehy emphasizes the importance of not getting caught up in competitor valuations, especially in SaaS markets.

"You can't keep doubling that valuation and get to a place where you have a successful outcome. It's like not complicated. It's literally like a math problem." "But for B two B SaaS businesses, these markets are enormous and they're much bigger than most people thought."

• The quotes highlight the unrealistic nature of perpetually doubling valuations and the need to focus on the vast potential of SaaS markets rather than competitors' valuations.

• Ryan Denehy discusses Electric's approach to raising capital, aiming for aggressive growth over 18 to 24 months with a specific amount in mind.
• He explains the rationale behind the $80 million raised and the 10% dilution for their Series D, considering market comps and future public market strategies.
• Denehy also touches on the pitfalls of companies raising at extremely high valuations without a clear path to public offering.

"What is an amount of money that will allow us to go absolutely full gas for 24 months... and then we looked at that and said, okay, look at comps in the market." "You got to think about the price you want to enter the markets at and what you want to exit at and leave a little bit of room for error, all that."

• The first quote outlines the calculated approach to raising capital for growth, while the second emphasizes the importance of planning for future valuation in the context of going public.

• Harry Stebbings expresses concern about the distortion of execution plans due to excessive capital raised by companies without a solid business foundation.
• Ryan Denehy shares this concern and reflects on his previous experiences with more modest funding, suggesting that overfunding can exacerbate problems for startups without product-market fit.
• Denehy and Jeff Richards from GGV discuss the physical limits of hiring, indicating that more capital does not necessarily equate to faster or better growth.

"I'm worried that it's distorting execution plans." "Capital is only sort of going to make the car wreck worse."

• The first quote demonstrates Stebbings' concern about the negative effects of excessive capital on company operations, while the second quote from Denehy agrees and provides a metaphor for the potential exacerbation of problems due to overfunding.

• Harry Stebbings notes the unprecedented cost of talent and inquires about the effects of the financing market on hiring.
• Ryan Denehy discusses the challenges in recruiting senior executives, particularly in light of inflated company valuations that set high expectations for future growth and equity value.

"Talent is more expensive than I've ever, ever seen it." "I have to believe that this company is going to be worth 10 billion or more for it to be worth my time."

• Stebbings' quote points out the inflated cost of hiring talent, while Denehy's quote reflects the mindset of senior executives considering the potential value of their equity in highly valued companies.

• Harry Stebbings shares his concern about preemptive funding rounds with little company development and the surplus of cash in the market.
• Ryan Denehy believes the decision to take preemptive rounds is situational and dependent on the CEO's tolerance for capital and valuation.
• Denehy recounts a cautionary tale from Dick Costolo about the illusion of value creation and the dangers of overemphasis on valuation.

"Preemptive rounds where there's very little company development, but there's just such surplus of cash waiting on the side." "Nothing we did in the last two weeks created $4 billion in enterprise value."

• Stebbings' quote addresses the issue of companies raising funds too quickly without substantial development, while Denehy's quote, referring to a story from Costolo, emphasizes the disconnect between company activities and market valuation.

• Ryan Denehy advises founders to minimize time spent on fundraising and to concentrate on operating their business.
• He warns against the allure of raising capital for first-time founders, stressing the importance of building enterprise value over capital accumulation.

"Don't waste time raising money." "We're here to operate companies and build enterprise value."

• The first quote advises founders to prioritize business operations over continuous fundraising, while the second quote reinforces the primary purpose of a founder, which is to grow their company's value rather than constantly seeking investment.## Valuation and Public Market Realities

• Ryan Denehy emphasizes that the current influx of billion-dollar valuations is unsustainable.

• The public markets cannot absorb the high number of companies with inflated valuations.

• Many companies with high valuations would not pass the scrutiny required for an IPO.

• Ryan predicts a future where companies will struggle to raise funds at higher valuations and face challenges going public.

"If 1000 billion dollar plus valuation companies were created in the last two years, what we all know to be true is that in two to five years, the public markets will not be able to ingest 1000, maybe 2000 of these businesses, far from it."

This quote indicates the unsustainable nature of the current startup valuation boom and the inevitable reckoning with public market realities.

• Ryan Denehy notes a decrease in the rate of small cap acquisitions.
• He shares his personal experience with successful exits through acquisition, which were more common in the past.
• High valuations and excessive capital raise can limit a startup's exit options.
• Ryan cites an example from New York City where a company raised modest funds, achieved fast growth, and had a successful exit, which is now less common.

"My first company, we raised a million dollars and realized that it didn't make sense to keep raising. We sold for many times what we raised, but it was only possible because like, we hadn't raised a lot of money, so we had a lot of optionality."

This quote provides a personal anecdote illustrating how past startups could achieve successful exits without excessive fundraising, which provided more flexibility in exit strategies.

• Big tech companies are facing antitrust challenges, reducing their rate of acquisitions.
• Ryan Denehy points out that not every startup will be a candidate for the public market.
• Raising funds at "nosebleed valuations" diminishes the likelihood of a successful exit.
• Ryan argues that the current market conditions have made it difficult for companies with minimal commercial activity to find acquirers.

"If you're doing a million in revenue, you raise at like 30 or 40 or 50, and then maybe you do a few more million in revenue, but realize, like, hey, the business isn't materializing the way we thought. There's a successful exit that you can go figure out. But doing a million in revenue you raise at 500, I don't know a corp dev department on the planet that's going to buy that company at 500 million."

Ryan's quote highlights the unrealistic expectations of startups that raise funds at high valuations relative to their revenue, which can hinder potential acquisition opportunities.

• Ryan Denehy and the host discuss the rarity of startup failures in the current climate due to abundant capital.
• The host suggests that the trend of founder secondaries is happening earlier in funding rounds.
• Ryan expresses concern about the prudence of allowing young founders to take significant sums off the table early on without substantial business progress.

"I think you're going to see a lot more zero."

This quote from Ryan suggests that despite the current lack of startup failures, the market will eventually correct, and there will be more instances of companies not succeeding.

• Ryan Denehy shares how angel investing has made him a better operator by providing a broader perspective.
• He discusses the benefits of learning from early-stage companies and staying updated with innovation.
• Angel investing offers insights into efficient product development and unique market strategies.

"One of the most important things as a founder of the CEO is the ability to have a 30,000 foot view and level of awareness over how your business is actually running, what you could be doing better, what you could be doing differently."

This quote explains the value of having a high-level perspective on business operations, which Ryan gains through his experience with angel investing.

• Ryan Denehy argues that scaling a company does get easier over time.
• He mentions the advantages of understanding the customer, business model, and having less capital constraint.
• Ryan highlights the leverage gained when senior executives manage their departments effectively.

"It definitely gets easier. I just had this conversation with my wife last night... it actually does get easier. Trust me, it does get easier, because as you scale, a bunch of things happen that make it easier."

Ryan's quote reflects his belief that company growth becomes more manageable as the business matures and key management positions are filled with experienced executives.

• Ryan Denehy discusses the delicate balance of giving employees freedom while maintaining control to prevent significant harm to the business.
• The conversation touches on the challenges of setting boundaries and accountability at different stages of a company's growth.

"Look, that's the job, whether it's a CEO or an executive or frankly, any manager, which is you got to give the people who work for you, you got to give them freedom, but you can't let them sink the ship."

This quote encapsulates the leadership challenge of empowering employees while ensuring the company's stability and success.## Leadership and Experimentation

• Leadership teams at a certain scale understand the importance of balancing core business objectives with experimentation.
• Core business targets like ARR (Annual Recurring Revenue), margins, and net dollar retention are critical and must not be missed.
• Experimentation is allowed as long as it does not negatively impact the main business OKRs (Objectives and Key Results).
• For smaller companies, the impact of events like a top salesperson being absent or a bad hire is significantly more pronounced.

"As long as the stuff in that experimental bucket doesn't drag down or otherwise negatively impact the okrs of the business that we're aiming for for next year, do what you want."

This quote emphasizes the allowance for experimentation within a company, provided it does not interfere with the primary business goals and OKRs.

"If your top sales guys out for a week, you just don't close any business or you make a bad hire and all of a sudden the viability of the whole business is in question."

This quote highlights the fragility of small businesses where individual events can have a disproportionate effect on the company's success.

• The sales playbook is crucial for B2B businesses and is closely tied to product-market fit.
• Founders must be involved in sales to understand customer needs and refine the sales process.
• Early sales efforts are foundational in shaping the product and its features.

"You can say you have product market fit, but particularly for a b to b business, the product market fit is really validated by an ability to take it to market and commercialize it."

Ryan Denehy emphasizes the interconnection between product-market fit and the ability to successfully sell the product in a B2B context.

"I think it's essential, particularly for a b, two b company like you as a founder, have to be getting out there talking to customers day in and day out because so much of that early sales motion directly impacts what you're building."

The importance of the founder's role in crafting the sales playbook and engaging with customers is underlined here, as it significantly influences the product development process.

• A small percentage of VCs truly add value beyond capital.
• Founders value investors who follow through on their promises, whether in operational support, recruiting, or boardroom presence.
• The venture capital model can improve in how it supports founders beyond just financial investment.

"The number one thing I care about with my investors is that they do what they say they're going to do."

Ryan Denehy stresses the importance of investors keeping their commitments as the primary way they can add value to a founder.

"Founders, we need help. I need more than just a wire transfer for a few million bucks and a water bottle with firm's logo on it."

This quote calls for a deeper level of engagement and support from venture capitalists to truly aid founders in growing their businesses.

• Being in a relationship with another founder can offer mutual understanding and support due to shared passions.
• The downside can include the inability to disengage from work, leading to a feeling of perpetual work life.
• Maintaining a balance between seeking support and strategizing is key.

"When that person also shares the same passion that you do it's just a whole different dimension of the relationship."

Ryan Denehy discusses the benefits of being in a relationship with someone who understands the entrepreneurial lifestyle.

"There are days where you come home and it's like, am I still at work?"

This quote reflects the challenge of separating work from personal life when both partners are deeply involved in the world of startups.

• Leaders often worry about not thinking far enough ahead and being blindsided by unforeseen challenges.
• Reflecting on past experiences can help identify areas for improvement and prevent repeat issues.
• Comfort can lead to complacency, so it's important to stay vigilant and proactive.

"What am I not thinking about? What stone do I need to turn over still so I don't wind up in a situation where a year from now I'm like, man, I didn't know that."

Ryan Denehy reveals his insecurity as a leader, which is the fear of overlooking critical factors that could impact the business negatively.

• Electric aims to become a successful public company within the next five years.
• On a personal level, family planning is on the horizon for Ryan Denehy and his spouse.

"Electric's a public company and a very successful one. Definitely within the next five years, that's a huge priority."

This quote outlines the ambitious goal for Electric to go public and achieve significant success in the coming years.

"And then I would imagine that Liz and I would start to have children in the next five years."

Ryan Denehy shares his personal plans, indicating a balance between professional ambitions and personal life goals.