Accel, Iconiq & Salesforce Ventures: "Where Venture Is Right Now: Gritty & Much Harder" at G2 Reach

Hi everybody, I am Jason M. Lemkin. I am a founder of SaaStr, which is the world's largest community for B2B founders. I've also invested $100-something million of my own in venture-backed startups. And today we have literally one of the most epic panels to discuss just what's happening, not only in venture capital today, but at the intersection of venture capital and venture buying. I'm here at re:Invent in Vegas where Godard just was, and it's off the charts. The crowds are crazy. VCs are having cocktail parties left and right, yet it's doom and gloom on Twitter. It's doom and gloom from the venture capitalists on Twitter. So we're gonna find out with this epic panel. We've got Alex Kyle from Salesforce Ventures. Alex has been, Salesforce must have the biggest portfolio of cloud investments on the planet. So if anyone's got the pulse of really what's happening, I think it's Alex. Would that be fair to say? How many venture investments has Salesforce Ventures done? Overall?

Yeah, yeah, we've been actually investing since 2009 and we've got about 250 companies now. So pretty large scale.

Okay, that's pretty good. We've got Arun Mathew from Accel, and not only is Accel one of the all-time great venture capital firms, but very early on SaaS, right? Doing really iconic investments in Atlassian and Qualtrics as the first big investor, writing big checks and so many winners. And so we're going to hear about swinging from the fences at all stages. What's really going on here, right? And Arun, how many cloud investments has Accel done over the last 2 years or so? You want a ballpark?

You know, including seed investments, probably 75.

Yeah, give yourself the most generous statistic. What's—

probably 75 to 80 over the last couple years.

75 to 80. Okay, good. And then we've got Doug Pepper, who is one of the OG SaaS investors now at Iconic Growth. So doing late stage and Calendly and Braze and all these great names, but he's also done A, B, C, D, E, F, G, Seed. He was the very first investor in Marketo back in the day when we were first figuring out the next generation of SaaS companies. So I love talking with Doug because I always get the straight scoop from someone that's done all stacks of everything and the school of good knocks and hard knocks. So Doug, thanks for joining us.

It's great to be here. Thanks, Jason.

Yeah. And just to give folks a sense of Iconiq, roughly, like how many, I mean, there's so many great names in the Iconiq portfolio. How many, How many SaaS and cloud investments has the firm made?

Yeah, we have about 115 public and private SaaS portfolio companies right now.

That's pretty good, pretty good. Okay, so I wanna do, I don't usually do this, but I want from each of you, and then we'll dig in, I wanna do a 1 to 10. And the reason I wanna do 1 to 10 is I think the world is weird today, and I wanna hear from each of you starting with Arun, 1 to 10, just how is SaaS doing? Look at public companies, look at the earnings for Okta and Salesforce and ZoomInfo and your own portfolio. How's SaaS doing 1 to 10? And then how is SaaS investing 1 to 10? Like, where are you on the 1 to 10s?

I think if you look at some of the— and we might have some debate about this, but if you look at some of the recent company earnings and just looking at our portfolio, I'd say SaaS companies are doing probably about a 5 to 6, but the trend line, especially over the last quarter or two, and what we can see over the next quarter or two, is mixed to down. Uh, we have been super conservative on investing, and so we've made one growth investment this year.

And so one this year—

wow, this year— and that's down from about 20 from last year. And so, uh, our investing pace has slowed significantly from the start of the year. And so I think our investing probably preceded some of the results that are coming out. And so, you know, from an investing perspective, I'd probably put it at a 2 to 3 right now.

Interesting. I want to come back to that, but, uh, Alex, what are you seeing? I know you're a public company, so you may have to put put some quotes around it, but what were you on these two 1 to 10s?

You know, it's interesting. I actually have a more positive outlook than Arun, you know, maybe because of just like the long-term sort of view. I mean, I guess I'd say on the overall industry, you know, I'd probably give it a 7 or an 8 in the sense that, you know, I think what we've seen is, you know, I think the big question right now is can these companies all continue to be mission critical as they have been the last 5 to 10 years? I think if you look at how many SaaS companies exist today versus 15 years ago, we just have a huge, much larger data set of companies that have gone public. And certainly in the pandemic, what we saw is all these companies were sort of keeping the lights on for industries and companies of all shapes and sizes. And so what you're seeing now, I think, is there's been a real refocusing of, hey, what are the most mission-critical companies that we need to support in terms of budget? And that's, I think, the defining factor that we're gonna see the next 3 or 4 quarters is we'll get a real sense of what's mission-critical versus not. Our view is that obviously, you know, a lot of what we've seen in SaaS is with the beauty of the model and customer success at the forefront is if you're delivering value to customers, we really think you will still see continued growth. You know, I was just looking ahead of this conversation at Salesforce's growth in 2009, you know, in what was the doom and gloom era, as we can all remember, of, you know, the world felt you know, sort of financial markets were about to collapse and Salesforce still grew north of 20% in that period, you know, from sort of a lot of caution and concern. So I'm more optimistic. I think a lot of these companies have really healthy balance sheets, huge TAMs. In many ways, I think cloud is still just getting started. And I think more than anything, it's a valuation reset as opposed to fundamental company reset.

Got it. So 7 to 8, I think you said, for the business side. What about for venture side? You guys have been so active.

You know, I think so, yeah, you know, we, we've continued our pace. I mean, I think to Arun's point, the growth market has really slowed down, um, you know, in large part I think is the best SaaS companies over the last couple years have probably raised one extra round that they needed, uh, and so in our, in our portfolio, the best companies just aren't really in the market, uh, and a lot of companies got funded in the last 12, 18 months, and so I think there are fewer growth deals to be had, but we're seeing a lot of excitement for stuff on the ground floor. You know, I think the types of entrepreneurs that are gonna go start companies today, they're a great kind of crazy, you know, 'cause you really, you know, in this environment to go start a company, you sort of have to sort of really be mission-driven. And so we invest across the stages. So I'd probably give it a blended score that's higher on the early stage side right now, just given all the momentum we're still seeing in sort of seed and Series A. But I certainly think the growth market has slowed down a lot.

Got it. And Doug, what are you seeing from the Iconiq perspective? How are you guys thinking? Doug and I talked right when things were starting to get tight. We did one of the first interviews that things were somewhat bullish, right? I think you were— anything sub-500 was still a good valuation X months ago. Is that where we're at today? Where are we on both 1 to 10s?

Yeah, I think it's tough. I agree with Alex. Long-term, I'm still very bullish, but I think you're asking about today. And I think it's really tough. I mean, it's hard to be bullish when the very best companies, the very best in the public markets are down 60 to 80%. That's painful, but I think you're asking more about how are the companies actually doing? And in that respect, I'd still go closer to Arun with a 5 or a 6 because of how it's deteriorating. We look at all the data and we have data on lots of companies. 2021 was like the best year ever in my career. Almost every company hit 100% of their plan for net new ARR. Those numbers are deteriorating fast. Q1, the median was 99% hit their plan of net new ARR. Q2, 87%. Q3, median 69%. And so companies are starting to really miss their plans, both public and private. You're seeing much fewer public companies raise their guidance now, dramatically down Q1, Q2. We don't know all of the Q3s, but there's very few raises in the public market for full-year guidance now, which is a huge change from before. And those companies, as you know, have significant buffer built. And so we are seeing in the private and public a significant deterioration in their attainment versus plan. You want to talk about growth rates? The median growth rate was about 83% last year across a very wide range of companies that we track. This year, that's degrading all the way to 48%. So growth rates are—

that's, that's, that, that is more than I would have expected given the quality of the names.

These are very high-quality companies. And so what is happening is real out there. Now, those are all growth rates versus very aggressive plans. And so what happened was everybody drew a straight line from the growth rates of '20 and 2021, right? You thought that was going to continue. The reality is these companies are actually still growing really well. They're just not doubling its scale. They're just not tripling the way we thought. And that's okay, except for they built their expense plans to that higher growth. And that's why you're seeing a lot of layoffs right now. And as an investor, I'd say the environment is a 2 because we're still in that messy middle of readjusting to those new slower growth rates. We don't know how fast companies are really growing because they're changing those numbers every quarter right now. And at the same time, as Alex said, companies have insane balance sheets, which is great, by the way, uh, and still pretty high expectations in terms of valuations. Uh, so when you put that all together, as a B+ investor, you know, Series B and beyond, uh, it's a very tough time to invest right now.

Are you guys just following those— those metrics are so interesting. Um, they're all versus plan, right, is what we're seeing, right?

The growth rates are just raw growth rates.

A raw growth— sorry, reiterate that one just really quick. It was 80-something to 40-something.

Last year was 80s, this year 40, you know, 50.

Okay, just a question to everybody then.

Um, just to add on to that, please, um, the percentage of companies that— the figures that Doug mentioned, we're seeing even worse results across our portfolio. So I would say less than half of our companies are hitting original 2020 22 plans. And I think by the end of the year, you know, it'll probably be closer to 25 to 30% that we're seeing across a very large sample size. And these are, you know, in many cases, these are out of companies' control. You know, it is, it is a spike in attrition. It is a spike. It is a decrease in net expansion. It is, it are, you know, it's fundamental things that are related to the market that we're seeing. Across a broad cross-section that leads me to believe it's about the environment and market. Also company execution as well mixed in. But this market, I think, is a really challenging time in general for a lot of our SaaS companies.

Are you seeing, and this with the data, are you seeing, investing is a business of outliers, right? And maybe in a business of outliers of outliers. Are your top decile investments seeing deceleration like this? Um, how does the— how's the distribution? Like, is it— are the very best ones still hitting their plans or exceeding their plans? And if so, is it okay, right? Shouldn't there be some winnowing in a sense?

Uh, yeah, I mean, I— if we look at the data, I would say it's not decile. It's probably the top 5% are still—

that's tight.

Out of a portfolio of 100, I'm making up numbers, but roughly my guess is less than 10, maybe 5 have raised their plan for this year and are beating that raised plan. It's a very small number, but there are some. To your point, there still are outliers that are doing tremendously well. There are also companies that were outliers last year that were doing tremendously well, that it felt like they were going to be super resilient, and even those are having challenges.

Yeah, I think that ratio is about right. I'd say two things. One, the forecast of these companies, if you look ahead over the next 2, 4, 6 quarters, take CrowdStrike as an example, maybe one of the best SaaS companies out there, the best cyber company out there, uh, big investors in them, believers in what they're doing. I mean, their forecast for the next year is south of what anyone expected. And I think it's just the storm clouds that are brewing on the horizon, I think, are pretty consistent across even the top decile of companies. I will say the best companies are probably close to or hitting plan, but I think the majority of those are spiking in terms of free cash flow or margin. And so, you know, the better companies that we are seeing are able to drive leverage in their business model. And so they're maybe not seeing the top line growth rate that they expected, but they're making up for it in the bottom line. And I think that's a really healthy balance. You know, Alex mentioned Salesforce, you know, in 2009. I think that's a really great example because they dropped from— I don't know exact numbers, but 45% to 20% or so. But they drove margin. And I do think the best companies in this environment are going to make a trade for growth rate for margin as growth and profitability come into focus together versus just an emphasis on growth, which is what we've had basically for the last 2 or 3 years.

Yeah, Arun, I completely agree with that. And actually, I'm really excited to see how proactive I think a lot of our CEOs have been. You know, I think SaaS, even though it's relatively new, I think we have enough data now in the last 10 years where a lot of CEOs are sort of being very proactive. And I think, you know, of course it's disappointing when companies are missing plan, but we're sort of a result of what happens in public markets. I think private market investors really look at what's happening in public, you know, in the public markets to sort of assess how we price deals and give advice to a lot of our companies. And obviously there's been a huge shift, to Ruth's point. We are still encouraging our companies to grow. I think growth is still a fundamental driver of value creation long-term. And one of the benefits of being private is you don't have the sort of same scorecard every single quarter of being a public company, and you're able to make some of those longer-term investments. And so the advice that we're giving a lot of our portfolio companies is, of course, focus on efficiency, You know, that should always be there. You know, that's one of the beauties of SaaS is just how you can recruit your sales and marketing so well if you have a good engine humming. And growth can sort of sometimes hide a lot of those inefficiencies. And so now is the time to sort of get back to the core, focus on those fundamentals, but don't ignore growth. You know, I was talking to one of our portfolio companies, they went from 2 to 5 of ARR. The plan was 2 to 10. Yeah. And we could argue whether 2 to 10 was sort of too ambitious. Or just ambitious enough. But I said, you know, look, you went from 2 to 5. That is a great day for the company, you know, and in this environment, that is no bad thing. And so of course, like, we, we should compare it also against what they sort of were planning at the beginning of the year. But I also think a lot of these markets are still there and we're still, you know, budgets I think are under scrutinized right now. But in our experience, they have definitely not disappeared. And I think that's what entrepreneurs need to hang their hat on, that if they can build a really important product, solve a really big problem, You know, it will take longer, no doubt. All these cycles are elongating. You know, reps are taking longer to ramp up. Decisions take longer in this environment, but I don't think it goes away.

That's what I'm struggling with. I think it's such— is like, did we just get drunk a lot in 2021? Because when I— let's take CrowdStrike, going to Arun's point, right? Yes, growth is not what we— what maybe everyone had hoped, but these are crazy growth rates. What's CrowdStrike at? $2 billion, $3 billion ARR. Salesforce is at $30 billion. I mean, you know, Henry Scheck was just on from ZoomInfo, one of my favorite CEOs. Yeah, their growth's a little bit lower at $1.2 billion a year, but it's still like 48%. I mean, how bad can things be when all the leaders are still growing at rates that honestly, when I met Alex or Doug, I didn't even think these growth rates were possible. Or as a SaaS founder, I didn't think we could grow at these rates north of a billion. Right. And so I wonder if it's so bad or our expectations and our worldviews got warped for 2 years.

Right.

Gone for too long, the good times.

Yeah, I do think we were drunk last year, um, and I think that the hangover is going to be real. But you're right, there are those incredible public billion-dollar revenue companies that are growing well. You know, they've proven that they are standards, they are platforms, uh, they're kind of like IBM was back in the '80s. You don't get fired for buying IBM. And, and clearly they've proven they have insane product market fit and ROI. So it stands to reason that they might be the ones that continue growing the fastest. What I think all of us on this call are worried about are the thousands of companies that were funded in the last 3 to 5 years, uh, that aren't those companies. And, and I think that group is the one where there's going to be real differentiation, like Alex said, between the must-have, the nice-to-have, the core products that deliver real ROI. And that's where the rubber meets the road and not everybody's gonna win. I think the drunkenness last year was we made two fundamental errors, I think. One, we thought everything would work. Every company looked like it was gonna work. And by the way, for a while in a free money economy with no focus on budgets, almost anything could sell. And I think those days are over. The must-have, nice-to-have line is very bright now. And it's probably moved up. I think the other thing that we learned is that it's really hard to be a decacorn. I think certainly in the growth area of venture, we started to make assumptions in order to drive just a basic venture return that a company needed to be worth $10 billion. Turns out that's really hard, and there aren't that many of those left. And I think it's going to fundamentally change how people think about entry points, because no longer can you assume, you know, $10 billion to generate a venture return in most cases.

What is the number? What is the number?

Oh, I mean, I think—

I want to hear your point, but what is a decacorn of 2021? Is that a $2 billion outcome today? How do you guys think about it?

Everything's down 60 to 80%, so yeah, you know, you do the math, maybe.

I think the big— I, I totally agree with that. For me, like, going back to CrowdStrike, and not to harp on it, you know, it's a $2 billion ARR company growing 56% year over year with 30% cash flow margin. So it's a rule of 85 company at that scale, which is unheard of. So there's no dispute, there are a set of companies that are just incredible companies out there. But you look at what CrowdStrike is valued at, it's valued on current ARR at 12 times, and you look at a forward number, that's 9.5 times. So I think the challenge and the takeaway is if you see a smaller company that's in maybe a less important market as endpoint security, what is that worth? And I think there's just a delta between what those companies were valued over the last 2 or 3 years versus what that company is worth today. And that's not to mention what the future prospects look like in a harder macroeconomic environment where it is tougher to grow. And so I think that that valuation— on one hand, we're talking about company performance, and to some degree, some of that is coming down. But I think that's a really healthy thing. We're going to see the best companies separated out from the, the need-to-have versus the nice-to-have, the wheat from the chaff. I think that's healthy. And you can build, you can get real signal in downmarket about whether your product is a need to have. And so I'm encouraging all of our companies to focus on that, the ground truth of what your customers are telling you, and that will ultimately lead to building a more durable business. So that's one. I'm not worried about that. I think the shift that we have to and why this environment is so difficult from an investing standpoint is the best companies are trading at a certain value. And a lot of other companies and founders and CEOs have expectations about value for their businesses that are totally out of whack. And we are going through that messy middle of realigning expectations. And my expectation is that's going to come to bear over the next year or two as many of these companies go back out to market. There's been a ton of money that's gone into the ecosystem. Many companies haven't had to raise. That's great. Don't raise if you don't have to. But I think that's going to change over the next year or two, and I think it's just going to be a very stark reality for a lot of companies about what your company is actually worth if the best companies are trading at the current levels today.

What percent, if you had to spitball, of folks that raised at a healthy valuation in 2021 are almost structurally unfundable today because of what they're sitting on? What's your guess?

It depends when you're talking about. Today, they're not vulnerable.

I asked this for founders, right? You raised a great round last year. I don't think founders have all the reality of the markets have really set in, which we could chat for a minute about. It's getting there, right? But for example, I literally was at a meeting with a company that did 100x ARR round, right? And they had a 22-year-old COO who said in a couple months they're going to raise a big B.

I said, where are your comps?

Where's your big— I mean, you're doing great. But the big— I don't know all these big— we could talk about the big bees next. Tell me someone in your portfolio. But, but do— how much of a reality check are 80% of folks that raise in 2021 just gonna— because there are no down rounds, right? Down rounds don't happen. They're just no rounds, right? You guys just passed. Uh, Excel did one growth round. You don't do— you don't say, hey, I'll do the next round at $200 instead of $400. You just say, thank you, next, right? That's, that's the truth, isn't it? There are no down rounds.

Yeah, I think that's right. I mean, I think if you're, if you're saying at the same price as that 2021 valuation, I think it's close to 100%, uh, right?

That's a lot.

That evaluation, I think most of them are very, very fundable if, if there was a, you know, an accurate price. And then I think over time, given their large balance sheets, most of those companies should be able to grow into their valuation over time. And so I think over time, actually, they should be okay. It's going to be close. I think Arun's right. Over the next year or two, those huge balance sheets will go down to the point where they need to test the markets. And depending on their growth rate and their ability to extend that runway, it'll be very close to see whether they can raise up rounds versus flat rounds. By the way, I've counseled companies to not be— easy for me to say, but even our own companies to not be so scared of a down round. Down round isn't the end of the world. Look at our public companies, they're all down and they're surviving. And it's not ideal, but you can celebrate having raised a prior round at a really low cost of capital. And if you have to do a down round to move forward, it's okay. We saw that a lot in the early 2000s and some great companies got through it.

Yeah, I think to Doug's point, one of the most important things right now I think for founders is the mindset they're in of, hey, like, does that number, you know, do we anchor that not? And is that the most important thing? And I think, you know, we certainly had some situations the last few years where the only thing that mattered, um, you know, in the fundraise was the sort of headline valuation, and that became, you know, sort of the KPI, especially with, you know, what was sort of quoted in the press, um, and the ability to hire talent. And so there was this rush to sort of raise the valuation, but I think some founders sort of didn't want to raise it unrealistic expectations. You know, they sort of knew what they were getting themselves into. And one of the things that happens of course, is the higher price you raise also in terms of like liquidity and an exit, you also keep raising the bar for what's expected in terms of the investors and what's expected as a company for you to achieve. And so I think there is a balance of founders to strike where ultimately you want a fair valuation for your business, but you also wanna be in it long-term. And I think, you know, in many ways, like it goes back a little bit to sort of the proactiveness point, you know, it's no founder wanted to lay off any of their team members. In the last 12 months. But the ones that have done it are sort of taking the, realizing that to be a healthy company and to sustain the environment, we have to do the tough decision. And sometimes that involves sort of taking, understanding the current market reality and making those hard adjustments.

Arun, going to the one growth investment, what was it, 1 versus 35? Did I get that a little bit wrong? I wasn't totally right.

1 versus 20.

20. So I get that there's a lot of folks that raised at unicorn valuations last year that are tough to, tough to write up at the growth fund, right? But aren't there a couple more Atlassians out there that have raised nothing? Aren't there a few gems that bootstrapped for 15 years and got big that, that aren't asking for 50x ARR? Aren't there? What happened to those gems? Are they still there?

I mean, we love those companies, uh, you know, of course, you know, ICONIQ and Accel invested in 1Password, which had been bootstrapped for 15 years before they ended.

That's one right there, right?

Before they ended up raising capital, you know, they raised a $600 million round over the last couple years. So I think the reality is, whether you're bootstrapped or not bootstrapped, there's— there was just such a flood of capital over the last 2 or 3 years that even the most capital-efficient businesses ended up taking some capital. If you— it was a good environment, they're gone. The ones that were sucked up by the market, I think there are some of those that are out there, but they're really hard to find. And I think by and large, our companies are sitting on record balance sheets. And most companies, whether you're bootstrapped or not, whether you're capital efficient or not, you've sort of filled up the gas tank over the last couple years. So I think that That is hard. But I think, I, I, you know, I think for all those companies, the reason why— this is a little bit of a tangent— but the reason why we like those companies is their DNA is to be capital efficient. And so it's really easy for those companies in this environment to switch back to a little bit of a bootstrap-ish mentality of, hey, every dollar that I'm spending, I gotta see real ROI for it. And I go back to You know, for me, it is less about the down round. It actually is very refreshing if I get a candid, honest take from one of my portfolio company CEOs that says, look, this is the reality of the market. We need to do this to sort of execute on our plans. We're going to do a fair valuation and it's probably going to be below the last round. I think that's realistic and I think it's refreshing. And I think founders, as soon as they get to that conclusion, the better. I do think the thing that precedes that is, have you taken the tough decisions to lay off people, kill initiatives that aren't showing positive ROI? Like, really get your cost structure in line so that you're, you're, you're, you're a disciplined, well-functioning organization ahead of that. And then you can assess how much money you need for the next 3 to 4 years, and then you can back into what that amount is and what the proper amount of dilution for that is. So that's what I think about that.

To add to Arun's point, one of the benefits of the environment we're in is all of a sudden CEOs are asking like, hey, what's the sort of number one ROI investment or project I need to undertake? You know, whereas before, a year ago, maybe the top 10 were getting funded in a company. Now it's okay, give me the 1 or 2 highest value things you can go be doing. And the sort of the constraint on cost, the constraint on capital, drives that focus in a way where I think it really will, you know, it will separate the strong, you know, by the ability to sort of pick and choose what are the things that we do want to invest in. Because the reality is it's hard for everyone. It's not like certain companies don't have this sort of reality that they're facing. You know, this— everything we just talked about, regardless of geography, stage, you know, these are realities that are affecting all SaaS companies in the market today. And so I think there is a real opportunity for founders to figure out, okay, well, How are we going to sort of survive and thrive in this environment? What are the sort of 1 or 2 things that we need to do as a business to really get out of this and get stronger? A huge focus for us has been on culture and values. You know, in these times when things are, when things are going well, it's sort of easy to celebrate culture. But I think when, you know, you're in your moment of more difficult crisis, that's where culture and values really rise to the top. And we've seen a lot of founders, whether it's how they sort of have to do these difficult decisions, how they communicate with their employees or shareholders, us as a board. This stuff really matters. So it's a really testing time, but I'm really optimistic that, you know, taking a step back again, I love this stat. You all maybe have seen this. When Salesforce went public in our S-1, our TAM listed was $6 billion in 2004. That was what we said the TAM was for Salesforce. You know, Jason called it out. It's now a $30 billion revenue company. You look at the TAM, you know, over $300 billion. So of course right now is a challenging time and it's a very uncertain environment, but I think the best founders have this ability to sort of really manage this uncertainty in this kind of crisis environment that we might be in, but in, in parallel think about long term and how we're going to drive a really legacy sort of sustaining business here.

We've got a couple questions about what areas are still hot or of high interest. But maybe if you guys have an example, is there someone in your portfolio in the last 60 days that's raised a big round, $50 million or more? And what, why were they able to do it today?

Yeah.

Is there a learning for us from a recent round?

Yeah, we have a couple and it, and it, I think really relates to something Alex said, which is despite the need and the requirement for increased efficiency and increasing runway, you know, for better or worse, we're investing in startups that are often trying to attack, uh, big markets, and therefore growth rates are, are number one. They're paramount still. Um, and so, you know, we've just had a company that's, that's inked around, uh, that is a very significant round at a high valuation, uh, but a company that this year is able to raise their plan and then beat that plan and grow roughly 10 to 30 in this environment. And a company that's able to grow 10 to 30 in this environment, environment, be the clear leader in their category in one of those core categories around data infrastructure, uh, there's a lot of, a lot of, um, interest in those companies still. And so it's, it's rare to still have that growth rate, but when you do this year and you're relatively efficient or showing the signs of being efficient, uh, you can raise an attractive round. We have another one that's smaller, that's kind of $2 to $10 million this year. Again, one of the very few that has beat and raised their plan. Uh, those companies are still pretty darn interesting to investors, but given what we talked about, uh, about the kind of attainment challenges relative to plan, uh, they're pretty rare this year.

Yeah, and then another slice of that that I would add is I think it's companies that can really clearly articulate to a buyer, an economic buyer, what's the ROI. I think there's sort of, you know, Doug's point of like growth continues to matter, but there's also, you sort of see it with some companies where the go-to-market engine is still relatively nascent. They're really trying to figure out who they sell to and sort of what problem they're solving. And you sort of boil down the ROI question and it's still a little unclear. We have other companies that are in our portfolio where that just screams, you know, sort of 5, 6x ROI on the spend. And I think those are the ones right now that are getting the most interest because, you know, budgets haven't disappeared. If you take a step back, we're probably anywhere from 15 to 20% of IT spend is in the cloud. That's, that's got to go up, right? Every CIO we survey and we talk to are saying, hey, our investments in cloud are going up.

Still going up.

Still going up.

Still going up. Yeah, exactly. And so I think it's, it's more about Can you prove the ROI and can you drive the customer success? Another huge focus, by the way, right now is selling to your existing customers. I think it's a lot easier for portfolio companies to actually drive upsell when they have an existing relationship with a business as opposed to sort of land in that new account out of the gate. And so that's another area we've seen our portfolio double down on is, hey, are there additional parts of the business? You know, let's say we're selling to a large enterprise in North America. Can we transfer the European office? Can we go to APAC? Where else can we sort of grow given these are really global opportunities for a lot of these companies?

I just want to build on that last point because I think, you know, if there's one takeaway or a couple takeaways for me from this environment, I just think retention in this moment matters so much. Gross retention, net retention. And it tells you so much about your business. The ability to upsell to existing customers. I totally agree with Alex. I think that is a huge opportunity. And it's way more efficient and leverageable and leads to a better long-term business. In terms of gross retention, we're seeing varying degrees of success of gross retention across different customer segments, meaning SMB in this environment is more challenged than enterprise. And our companies that are exposed to SMB in particular are having a harder time both in gross retention and net retention. And so the companies that we have seen in our portfolio that have gotten funded don't really have as big of a retention issue and are seeing uplift in certain segments. And I would tie the growth rate to that specifically, as well as a good market and good execution, but really around retention. And for the ones that are struggling, I just think this moment is really important to take a hard look at your business over the next 12 to 18 months. How can you improve the gross retention and net retention? Because I think raising a successful round is going to be very dependent on you identifying, isolating, and improving those two things, gross retention, net retention.

Do you think just out of, you know, when I reposted some old data from '08-'09 when I was running Adobe Sign, EchoSign, and when you have two-year deals in the enterprise, you're going to come, you're going to come out the other side of any downturn. But with the SMBs, you can churn in a week, right? Are those, is that, are those GRRs real? Right. In a sense, are they real? Or maybe they are real because upturns always last longer than downturns. Right. We do know that the downturns never last longer than upturns.

Right.

I mean, there are structural and tactical things that you can do to improve retention. I mean, changing your customer contracts. We know SMBs, we know companies that are exposed to the SMB segment that have wildly different gross retention rates based on tactical things. So one simple thing is SMB customers that are on week-to-week or month-to-month basis, if you cancel, you immediately get a, you know, you can immediately cancel versus ones that have a little bit of friction in the process to try and understand why customers are canceling. Signing up for a year contract versus month-to-month makes a huge difference in terms of retention. So I do think these retention rates are real, even if there are just tactical things built into the contracts to prevent as much churn, I guess. Now you have to balance customer value and making sure you're not signing customers up to really long-term, like, contracts that are, you know, infeasible. But, um, I do think it's important.

We— there's a couple questions in the Q&A that tie to a question I hear a lot, and Doug, you kind of hit it with this last deal you did, which is, in so-called tougher times— I'm still not convinced we're in tougher times, I just think that they're less great than they were last year— but in these days Is it okay to grow more slowly? Hey, I'm more capital efficient, right? I've cut my burn, but is it really okay or do I at least get a pass for a year? Is it because you talked about 10% to 30% growth in a top category is good enough today. So do I get a pass? Is it okay if my growth is not what it could be if my burn rate is very low? Is that good enough in venture today?

Yeah.

Yeah.

By the way, I want to be clear. I agree with you. I don't think the sky is falling in SaaS. I think, I mean, we're all doing this because we believe in the long-term prospects. Budgets are still there and companies are still gonna grow through this. It's a phenomenal place to be both as an investor and as an operator. I think the issue right now is just the here and now of matching those growth rates with the significant change in valuation that's happened in the public markets. And we're just going through a bit of a reset. And I think it's fine. To your question, very similarly, yes, I think it's completely fine. For growth rates to decelerate, uh, during this time, uh, to get your business in order. As Arun mentioned, I think this is just a great time for founders and operators to get a better handle on their business, to build better businesses by making them more efficient. And that's what the public markets are going to want anyway when they get public. So it's great for them to start doing that now. And the trick will be, if you're— if you decelerate Can you have a P&L that looks attractive? And if you actually need to fundraise during that time, are you going to be realistic about what that growth rate entails in terms of your valuation? And I think all of those things are going to happen really next year, maybe not in the first half, but over the course of next year. I think some of that reality will be there. But, but no, I don't think that that SaaS is going away or that this is some This is not crypto, which is going through an internet-like bubble from '99 and 2000 because it's not real. These businesses are all absolutely fundamentally real and needed. Uh, there's just a bit of a reset happening, and I think it's completely fine, and most of the companies will get through it.

Okay, well, maybe one last question. Sorry, go ahead, we got minutes. Go ahead, Alex.

Sorry, I'm just going to say, I think there is like I think, you know, for founders who are trying to— the million-dollar question, it's such an important one, like, how fast should I grow in this environment? That's what they're asking, right?

How does that change? How fast do I need to grow today?

I think it does depend a little bit on the scale of the business, obviously. You know, clearly growth decelerates over time. I do think, though, as venture investors, you know, when you sort of see growth rates that are sort of sub-50% in the early days, it does make it harder to sort of like you know, really sort of a lot. There's plenty of ways to build a great business, and Jason, you know this better than anyone else. Like, do you even really need to raise venture capital and sort of, you know, to build a really huge successful business? But I think if you are raising venture funding, you sort of still want to see a path to sort of 50-60% plus growth. You know, I think if a company had, you know, a bit of a sort of was loss-making but was able to drive 70-80% growth, and we can see a path to profitability, we would get more excited about that than a company that was growing kind of 20 or 30%, you know, let's say at sub-$10 million ARR. And both of those are great businesses, they're just very different investor sets, I think, for who get, you know, how to sort of align long-term with the founder. So I still think in this environment, if you're sort of sub-$10 ARR, like a lot of entrepreneurs are, you still wanna sort of try to figure out, is there a way to grow at least 50+ percent?

I think that's a great insight. I would say, Jason, below 10, we're still looking for companies that are maybe not tripling but close. And the old saying is the reason that Neeraj came up with triple, triple, double, double is if you're not tripling at single digits, it's awfully hard to believe that you're going to be growing fast when you get to scale. And I think that's still true in these giant markets.

Yeah, to be honest, I'm kind of mean to companies under 10 million, to Alex's point. Because you have such small market share, right? And it's so hard to break into any market. We are— all the vendors we have are already great. Salesforce is great. CrowdStrike is great. Calendly. We don't need any new software, right? So if you somehow have created something magical that solves a niche, you need— this is startups. You need a certain amount of market pull, good times or bad, or you'll never reach escape velocity, right? So I don't give any startups less than $10 million. I know it's mean. I don't give them any slack. I don't give them any kudos. I don't give it— it's the job, right? It, it's scale. It's a different thing, but it's, it's the job, right?

And, uh, I mean, if you're growing slowly at that rate, at that, you'll never get there. The big companies are adding net new ARR every month that you're adding in a year. You'll never catch them.

Or the math gets even worse, right? I mean, let's— CrowdStrike's at $2 billion growing 50%. They're adding a billion. Even if it's down, they're adding a billion of new bookings. You can't add 10 or 5. I mean, I know it's mean, but CrowdStrike won't even know you exist if you add 10 million of bookings. Well, they won't even know. You won't even be on their 100 vendors on their competitive map. Yeah. Everyone likes to—

and by the way, I think everyone likes to talk about the rule of 40. The rule of 40 is a measurement for public company scale businesses.

Yeah.

And if you're at orders of magnitude below that at 10 to 15 in ARR, It's a different rule. You know, you'll never get to scale and have that sort of profitability margin at scale unless you're growing fast. And for me, that's just a question of if you're not growing that fast, then maybe the market is not that interesting.

Or maybe you just should raise venture funding. I think there's some entrepreneurs that can build great sort of $50 to $100 million companies that just don't require venture dollars.

And I think they are, but it's hard if you're growing 30% at $2 million, right? It will take you— your grandkids will have to get you to $100 million, right? That's the thing, right? All right, last question, because we're almost out. Just to wrap up from the first one, Q4 '23, right? Whatever. December 1st, 2023. That's 12 months from now, isn't it? December 1st, 2023. Better or worse than we are today?

In what measure?

Better.

Venture. Let's call it just venture. But you can answer any metric you want. But venture. Venture. Yeah. Better.

I can take the first stab at it. Yeah. Look, I think we'll be in a situation where inflation rates are more known in terms of what they ought to be. And I think right now what's driving a lot of the volatility in public markets is no one really knows knows to what extent, you know, what the final inflation number has to be before interest rates keep going up. And I think as soon as we sort of, you know, public market investors can wrap their hands around that, all of a sudden you'll see that in terms of stability. And so I, I would say better because of that.

Yeah, I agree. I think, I think the public market, I think it's a great time to buy a lot of these names in the public markets. That's not investment advice, but given that, I think we're gonna be in a much better place next year. And then in terms of our activity levels, I think dramatically higher venture investing activities by that time next year?

I, I would say better as well, although I would caution us all that, you know, a big outlier this year and a driver of a lot of volatility and uncertainty was what happened geopolitically with Ukraine, and we didn't see that a full year ago. And so there's always the risk of a black swan event over the next year, but current course and speed I agree, it should— we should be in a better place just because we have a little bit more clarity and predictability about the macro environment and inflation slash interest rates.

All right, well, this was great. Arun, Doug, Alex, thank you. This was— I think this was A+. Thanks for everyone for tuning in. We made 44 and a half minutes. Perfect, gentlemen. And thanks to G2 for having us. And talk to everybody soon.

Take care.

Thanks.