20VC WTF is Going On in VC Are VCs Still Investing How Has What VCs Want in Investments Changed Are LPs Investing in New Funds Why VCs That Invest in Public Markets Are Losers Dec 2023; Will It Be Better Or Worse with Jason Lemkin



In a candid conversation, Jason Lemkin and Harry Stebbings tackle the pressing concerns of founders navigating the uncertain investment landscape post-2021's market highs. Lemkin, a seasoned SaaS investor, advises against waiting for a market rebound and emphasizes the heightened bar for venture funding, suggesting that companies unappealing to VCs now are unlikely to attract future funding. He reflects on the transient boom that saw improbable unicorns emerge, reminding founders that startup success requires perseverance through adversity. They discuss the need for strategic budgeting in sales and marketing to build necessary pipelines, the importance of understanding one's competition, and the reality that even in a recovering market, the extravagant valuations and rapid growth of the recent past are not making a comeback. Lemkin predicts a positive shift in public market multiples by year-end but cautions that the venture landscape has fundamentally changed, necessitating a return to disciplined, no-shortcut investing.

Summary Notes

Market Conditions and Investment Strategies

  • The current market is not expected to return to the conditions of 2021.
  • Investors and founders are adjusting to new realities, including being more selective and risk-averse.
  • The bar for investments has risen, with a focus on capital efficiency and sustainable growth.

"They're not bouncing back to 2021. They're not bouncing back to good times."

This quote emphasizes the change in market conditions, indicating a shift from the previous high-growth, high-risk environment to a more cautious approach.

The Role of VC Investments in Current Market

  • VCs are still investing, but the frequency and criteria have changed.
  • Founders are questioning whether to delay fundraising and how to adjust sales and marketing strategies.
  • The market demands a reset to pre-2021 expectations, particularly in terms of capital efficiency and realistic growth targets.

"I did almost no investing the last twelve months. And boy, the markets changed a lot twelve months, didn't they?"

Jason Lemkin reflects on his own investment activity, suggesting that good deals are harder to find and that the market has undergone significant changes, requiring a reassessment of investment strategies.

The 'Postmates Effect' and Market Realities

  • The 'Postmates Effect' suggested that even non-leading companies in a market could achieve significant valuations.
  • This effect was a temporary phenomenon, influenced by the post-pandemic economic conditions.
  • Founders need to have a clear competitive edge and understand why they will win in their market.

"Postmates, like I used it, but in the US, I think it was number three or number four, and it still sold for almost $3 billion."

Jason Lemkin discusses the 'Postmates Effect', highlighting the temporary nature of inflated valuations for companies that were not market leaders.

Early Stage Investment Criteria

  • SaaS and B2B investments require a clear path to substantial revenue within a decade.
  • Investors are looking for a combination of high growth and capital efficiency, even at early revenue stages.
  • The amount of capital that startups are allowed to spend has decreased, necessitating a return to capital efficiency.

"The key to success in SaaS and B to B investing... hasn't changed that much."

Jason Lemkin asserts that the fundamentals of successful SaaS and B2B investing remain consistent, focusing on growth and capital efficiency.

Changes in Buying Patterns

  • Buying patterns vary across industries, with some sectors experiencing growth while others face challenges.
  • Founders should focus on customer segments that are thriving, such as healthcare or specific areas of e-commerce.
  • The impact of the economic downturn is not uniform, and opportunities still exist in certain markets.

"There is a subset of categories that are doing fine. There is a subset that's deeply troubled and it's a bunch in the middle world."

Jason Lemkin provides insights into the varying effects of the current economic climate on different industries and the importance of targeting resilient customer segments.

Impact on Marketing Spend

  • Marketing budgets are being impacted, with companies reassessing their spending in light of the changing market.
  • There's concern over the reduction in marketing spend and its effect on company growth.

"How are you seeing marketing spends impacted across the board?"

Harry Stebbings inquires about the changes in marketing expenditures, indicating a concern for how these changes might affect overall business performance.## Marketing Myopia

  • Companies are focusing on immediate revenue generation in marketing.
  • CEOs approve marketing expenses that promise quick returns due to pressure.
  • This shortsighted approach neglects other aspects of marketing that don't yield instant results.
  • Funnel assist marketing, which targets nearly ready buyers, is the only type being valued.
  • Excessive cutting in marketing budgets may lead to insufficient sales pipelines later in the year.
  • Jason Lemkin predicts an improvement for startups by the end of the year but cautions about potential pipeline shortages due to current marketing cuts.
  • Mark Benioff's mistake of cutting sales during downturns is being repeated by many companies.

"Marketing is focused on this quarter. What can I spend to get more revenue this quarter? ... The CEO is only approving these marketing expenses that create revenue immediately."

This quote highlights the current trend in marketing where immediate revenue generation is prioritized, often at the expense of long-term strategy and brand building.

"So the CEO is only approving these marketing expenses that create revenue immediately. And they do exist out there. But the problem is, it's such a small part of marketing that it pays off."

Jason Lemkin explains that the focus on immediate revenue generation from marketing is a narrow view, and such opportunities are limited.

"We're cutting too much in marketing. And I'll tell you what I think we should be doing. We're cutting too much and it's going to hurt everybody."

Lemkin warns that excessive cuts in marketing will harm companies in the long run, especially when the market improves.

Sales and Marketing Leadership

  • Companies should trust their sales and marketing leaders with set budgets.
  • Empowering leaders to optimize their budgets can lead to better outcomes than cutting budgets to zero.
  • Layoffs are seen as short-term fixes that do not contribute to growth.
  • Strong operational and financial support is necessary for sales and marketing teams to effectively manage their budgets.

"We can't solve everything. Most of us have to extend Runway. Right now, we have to extend it. But I think we're overcutting in marketing by not empowering people to have budgets."

Lemkin advises that while extending runway is necessary, completely cutting marketing budgets is counterproductive.

"Layoffs don't really solve anything. They're little snacks. They make little incremental changes. But layoffs don't create growth on their own."

He argues that layoffs are not a solution for growth and should not be relied upon as the primary means to reduce expenses.

The Importance of Budgeting and Planning

  • Recent liquidity in the market has led to a lack of focus on budgeting and planning.
  • Experienced executives are adept at executing strategies within their new budget constraints.
  • CAC (Customer Acquisition Cost) is a flawed metric because it oversimplifies the complexity of marketing ROI.
  • Marketing programs are often costly, and a simplistic view can lead to inaction which is detrimental.

"We've had a generation where budgeting and planning has not been a central focus because of the liquidity that we've had in the system."

Harry Stebbings notes that the abundance of capital has led to a neglect of rigorous budgeting and planning in many companies.

"Tell me what my new budget is and I will get you as much leads, as many pipelines, as many opportunities I can with my budget."

Lemkin recalls a seasoned executive's response to budget cuts, emphasizing the importance of clear budget communication and execution.

Target Setting in Volatile Markets

  • CEOs and COOs must be realistic when setting targets in uncertain markets.
  • Companies should base their plans on recent performance, such as growth and burn rates from the last few months.
  • Setting unrealistic targets can demoralize teams and lead to failure.

"You have to look at your trailing velocity, you have to look at your last three to four months, average the growth rate, average the burn rate, and that's who you are."

Lemkin stresses the importance of using recent performance data to set realistic targets for growth and spending.

Sensitivity Analysis and Fundraising

  • Companies often fail to create sensitive enough financial models.
  • Underperforming growth plans can significantly increase burn rates.
  • Founders are advised to assume they are unfundable without concrete term sheets.
  • There's a tendency to underestimate the difficulty of raising later rounds.

"The biggest mistake I've seen...is not enough sensitivities to models...People do not build sensitive enough models."

Lemkin points out that many companies do not adequately prepare for scenarios where they fail to meet growth targets, leading to unexpected financial strain.

"Assume you are unfundable. Go get a term sheet, or just go get someone you trust to tell you, hey Harry, if you hit 10 million growing to these numbers, I will write you a term sheet."

He advises founders to operate under the assumption that they will not be able to raise funds unless they have explicit commitments from investors.

Public Market Investment Strategy

  • Jason Lemkin expresses a preference for focusing on early-stage investments over public markets.
  • He believes that the potential returns from successful startups far outweigh public market investments.
  • Venture capital requires focus and dedication to identify and support the next high-growth startups.

"Anything you do that takes you away from that kibbit scene in the public market, it's not worth it."

Lemkin argues that distractions from the core mission of finding and investing in startups are not worth the potential returns from public market investments.

"Venture is so hard to make money, but if you're privileged enough to be able to write a significant checkbook, you're not going to make as much money as a CEO. But you can make a lot of money."

He emphasizes the difficulty and potential rewards of venture capital, suggesting that the focus should remain on finding exceptional startups.

Equity Value for Startup Employees

  • Employees joining high-valuation companies in 2023 are unlikely to make significant money from equity.
  • The potential for substantial employee wealth creation is greater in startups that achieve $10 billion-plus outcomes.
  • Joining a unicorn startup for equity is not a wise decision in the current market.

"If you join a company with 2023, with a valuation over a billion, as an employee, you're going to make nothing."

Lemkin cautions that joining highly valued companies now offers little chance for employees to gain substantial wealth through equity.

"You will make nothing. So don't worry about your equity when you join a unicorn."

He reinforces the point that for employees, the equity offered by unicorns at their current valuations is unlikely to be lucrative.## Valuation of ARR Companies

  • Discusses the valuation of companies with annual recurring revenue (ARR) in the current market.
  • Highlights the extreme cases where companies were valued at 100x and even 1000x ARR.
  • Questions what happens to these companies with high valuations during market downturns.

"What about the three to $10 million ARR companies last year who were valued at 100 x ARR? I've got one that was 1000 x ARR."

This quote introduces the topic of high valuation multiples for ARR companies and sets the stage for a discussion on the sustainability of such valuations in a changing market environment.

Runway for Startups

  • Addresses how startups with excessive capital can survive current market conditions.
  • Mentions that some startups have enough capital to last a decade without needing to focus on profitability.
  • Suggests that founders' decisions play a crucial role in navigating through market downturns.

"I have two companies I've invested in that are doing okay, that have a decade of Runway."

Jason Lemkin explains that some of the companies he has invested in have secured enough funding to sustain themselves for a long time, which is unprecedented in his experience.

Marking Down Investments

  • Discusses the practice of marking down investments in the portfolio.
  • Differentiates between marking down companies that are not growing versus those that are growing at a decent rate.
  • Suggests that for investors like himself, constant revaluation is not necessary unless growth stalls.

"I've marked down only one, because if you're growing at a decent rate, I don't know that a markdown at the sea level helps a lot if the company is growing."

Jason Lemkin shares his approach to marking down investments, indicating that he only considers markdowns for companies that are not exhibiting growth.

Exit Strategies for Highly Valued Startups

  • Explores the difficulty of finding exit opportunities for startups that raised large amounts of money.
  • Suggests that it is challenging for overfunded startups to achieve a sale at a valuation that is 10x what they raised.
  • Raises the possibility of merging with competitors as a potential solution for such startups.

"But when you raised massive amounts of money early, how are you going to sell for ten x what you raise?"

Jason Lemkin discusses the challenges faced by startups that have raised significant funding in terms of finding a suitable exit that justifies their raised capital.

The Great Resignation and Innovation

  • Questions whether overvalued companies will experience a mass exodus of employees.
  • Speculates on whether this could lead to a new wave of innovation or if employees will prefer the security of their current positions.
  • Reflects on how the perception and reality of working in tech have drastically changed over the years.

"Do you think that everyone that says that this is going to lead to a wave of new innovation, I think there's some truth to it."

Jason Lemkin acknowledges the possibility of a new wave of innovation resulting from employees leaving overvalued companies but also recognizes the changing dynamics of tech employment.

Deterioration of Team Quality

  • Discusses the decline in the quality of team members in tech companies.
  • Suggests that the influx of mainstream workers into tech has diluted the talent pool.
  • Indicates that some industry leaders privately acknowledge this decline in quality.

"The quality plummeted as we hired mainstream, normal people. The quality plummeted."

Jason Lemkin expresses concern about the drop in quality within tech teams as the industry has expanded and become more mainstream.

Importance of Meeting the Team

  • Highlights the importance of investors meeting the key team members of a startup.
  • Emphasizes the significance of the CTO in representing the product aspect of a company.
  • Shares personal anecdotes illustrating the risks of not thoroughly vetting a company's team.

"I don't meet with the whole team because usually there isn't much of a management team."

Jason Lemkin explains his approach to evaluating startups, which includes meeting with the CTO but not necessarily the entire management team, unless investing at a later stage.

Mature vs. Young Founders

  • Compares the responses of mature and young founders to market downturns.
  • Suggests that mature founders are better equipped to handle crises due to their experience.
  • Discusses the concept of "strategic retreat" and its potential pitfalls for startups.

"The seasoned folks, they know what to do."

Jason Lemkin discusses how seasoned founders are more adept at navigating challenges due to their experience, as opposed to younger founders who may struggle with the emotional aspects of downturns.

LP Market Dynamics

  • Explores the behavior of limited partners (LPs) during market downturns.
  • Discusses the reluctance of LPs to add new managers to their portfolios.
  • Shares insights on LPs' annual evaluations and their current sentiments toward venture capital as an asset class.

"No one wants another manager."

Jason Lemkin reveals that LPs are generally not looking to add new fund managers to their portfolios during the current market conditions.

The Future of Micro Funds

  • Predicts that many micro funds will struggle due to a reduction in capital from founders and GPs.
  • Reflects on the recent fundraising success of new managers and the likelihood of this changing in tougher market conditions.

"I think they're going to be decimated. I think they already are decimated and they don't know it."

Jason Lemkin forecasts significant challenges for micro funds, suggesting that the recent fundraising environment was an anomaly and that many will face difficulties moving forward.## Venture Capital Investment Strategy

  • Investing in venture can be highly profitable if done extremely well, but mediocre investments only yield fees.
  • As a new manager, it is crucial not to waste investment opportunities ("shots").
  • Success can come from investing in just one highly successful company, such as Figma or HashiCorp.
  • It is difficult to predict which companies will become unicorns, but operational success is often evident early on.
  • Jason Lemkin had not anticipated the billion-dollar exits of Pipedrive, Algolia, or SalesLoft, except for Talkdesk, which demonstrated significant product-market fit.

"I think we all wasted a few shots the last couple of years. I know I wasted one or two. I wish I could get them back. I didn't waste 20, but times were so good. I wasted shots."

This quote reflects the regret of missed investment opportunities during prosperous times and emphasizes the importance of being selective with investments.

"I had no idea that any of my cash unicorns, the ones that were exited for billion, I didn't think any of them would except for talk desk."

Jason Lemkin acknowledges the unpredictability of venture success, noting that even he couldn't foresee the massive success of certain investments.

Investment Insights and Market Dynamics

  • Early operational success is a good indicator of growth potential.
  • Market fluctuations and stock multiples are beyond an investor's control and change frequently over the typical ten-year span to a billion-dollar exit.
  • Investing post-revenue in SaaS indicates reasonable success and is preferred by Jason Lemkin.
  • Harry Stebbings prefers investing post-product when the founder is still leading sales and there is some customer data.

"Just get into winners and just don't worry about the stock market, don't worry about multiples, because you can't control it."

Jason Lemkin advises focusing on investing in winning companies rather than stressing over uncontrollable market factors.

"You have some customers, you have some data. The founder is probably still leading the sales process. But there's something there. There's that seedling of goodness."

Harry Stebbings highlights the promising signs he looks for when considering an investment in a young company.

The Role of Founders in Investment

  • Founders have a unique advantage in identifying superior founders due to their firsthand experience.
  • Investing pre-revenue in SaaS is risky and less certain compared to post-revenue stages.

"You know who's better than you as a founder, not just an investor."

Jason Lemkin points out the unique perspective founders have in evaluating the potential of other founders.

Fund Management and LP Relationships

  • Successful fund managers are likely to be earmarked for future funds.
  • LPs may change their commitment based on a manager's performance, investment pace, or strategic focus.
  • The budgeting process for LPs is complex and requires careful planning to manage capital calls and manager selection.

"I think that if you have done reasonably well as a manager, you are still earmarked for the next fund."

Jason Lemkin suggests that past success as a fund manager can secure future investment from LPs.

"I think they felt I was investing too slowly and wanted to invest in more in crypto or a hotter manager."

Jason Lemkin shares a reason why an LP might choose not to reinvest, highlighting the importance of aligning with LPs' expectations.

  • Seed investors and founders tend to be optimists.
  • Market downturns, such as the 2016 flash crash, are often followed by recoveries.
  • Current low multiples in the public market are not expected to persist, but they will not return to the highs of 2021.
  • The bar for fundability will remain high, especially for series A and B investments.

"I'm pretty bullish at the end of this year, I'm bullish that multiples will be up somewhere between 20 and 40%."

Jason Lemkin expresses optimism for the market at the end of the year, predicting an increase in multiples.

"If you can't raise any money at all today, like if you're unfundable, I don't think you're going to be fundable at the end of the year."

Jason Lemkin warns that companies struggling to raise funds now will likely continue to face challenges, even if the market improves.

Reflections on the Venture Landscape

  • The past 24 months have been a learning experience, with unexpected companies becoming unicorns.
  • The venture industry is difficult and requires high standards and resilience.
  • The importance of perseverance is underscored by the common narrative of successful founders who nearly ran out of money but ultimately succeeded.

"I've spent the last 24 months relearning the unicorn lessons, relearning that companies I thought would never be unicorns became unicorns."

Jason Lemkin reflects on the surprising success of certain companies and the need to adapt his investment perspective.

"It's meant to be hard. You should have a terrible year. You should almost run out of money."

Jason Lemkin emphasizes the inherent challenges of startups and the venture industry, underscoring the expectation of hardship as part of the journey.

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