Doug Pepper, GP at Iconiq + Jason Lemkin of SaaStr: "Where Venture Is Right Now"

Hey, Saastr. I'm here with Doug Pepper, general partner and more at Iconiq. And boy, there is just so much— I don't know if you guys are on Twitter or the social media, there is so much chatter, especially the last couple of weeks from VCs. The sky has fallen. And the stock market for SaaS stocks has been dropping since January. But something happened the last couple of weeks. I think we lost confidence. We lost confidence that things would come back. We lost confidence that the easy times of the post-COVID era would come back. And I want to do a deep dive, and I wanted to pick someone that could give us a holistic view of what's happening in venture, in the public markets, and I reached out to Doug Pepper. Doug, thanks for joining us.

Jason, great to be here. Thanks for having me.

And I reached out to Doug for a couple of reasons, but mainly because he's been doing SaaS investing since almost the early days. Doug has been at 3 different leading venture firms as a partner, doing every type of investment from seed stage. He was the first investment in Marketo, right, and the largest investor. One of the first of my generation SaaS IPOs, first for a big IPO, first for big exit. He's gone on and done multi-stage, and now he's at Iconiq, which is one of the leading later-stage investors, where, boy, he's kind of hit— uh, he's, he's invested in a So many of the hits of SaaS— Canva, Braze, which just IPO'd. I think he's invested in two different firms. Calendly, we've heard of that one. Loom, Airtable, BetterUp, Lattice, Captivate HQ, a bunch. So Doug's touched everything, right, from seed. And also importantly, and we're going to touch on this a minute, Doug's been through a few downturns that we've had in SaaS, not only global ones, but even ones people forgot about, like 2016, which we'll chat about in a minute, and others. And I think the other thing about Doug is I think people trust Doug, people believe in Doug. Doug would be a good choice for any founders watching or listening. And I think just some honest opinions without a lot of chest beating, a lot of games, and there's just every VC has such a biased perspective. I couldn't think of someone that could help us more than Doug. So again, Doug, thanks for joining us so much.

Jason, you're too kind. That was a wonderful introduction and I really appreciate it.

So I want to dig into the markets, but let's just step back a minute and frame this discussion on a seeming paradox. Paradox. Okay. We write this series on SaaS called Five Interesting Learnings, where we look at the top public companies. You know them all as a late-stage investor now. We open up Datadog, we open up Bill.com, our jaws drop. I think Bill.com grew 169% last quarter to SMBs, and its stock falls 15%. So Snowflake, Datadog, these are companies that are growing at rates literally we've never seen in our careers, have we? Nothing ever grew this fast, right? And yet the markets have fallen 50% or more since their peaks. Isn't this inconsistent? How do you see— this seems to be more of a paradox than in other downturns.

Yeah, yeah, I think it's a fair question. And in many ways it does feel that way. I think good news is you're right. Businesses are performing incredibly well in our sectors. And, you know, I think that's because a lot of what you and I and so many others have been saying for 5 years, 10 years, 15 years, you know, really turned out to be more true than we even thought. Uh, the demand for technology, transition to the cloud, digital transformation, new applications, and then actually big businesses and small realizing that they needed to seek innovation from startups as opposed to big companies, that was all more true than we thought. And so the growth rates of the markets are bigger than we thought, and the companies are performing incredibly well. And you said it, and we're involved with a lot of them. They're beating their quarters, they're beating the Street estimates, they're raising their guidance every quarter, and then the next day they drop 5%.

Yeah.

And I think what that tells you is that The performance of the companies is often disconnected from the valuations. And so what we're seeing today is not a judgment on the performance of the companies or their quality or the opportunity ahead. It's simply a referendum on their valuations, which I think in retrospect now we can all agree got well ahead of themselves. And we can talk about why and what happens from here. But simply, we're seeing these companies be revalued first by public market investors and increasingly by private.

And is there any special insights that Iconiq has from— maybe it's got an army of economists or others— that how you're seeing the macro environment as it might help founders? Because you've been investing— Iconiq's been investing consistently the last decade, right, in SaaS and cloud. So any Any unique insights or any strong positions that ICONIQ has based on its data?

Yeah, I'll tell you, Jason, to be honest with you, we at ICONIQ Growth are not macroeconomists. We think about it, we care about it, but we do the same thing that you do, which is seek every day to find the very best entrepreneurs and the best products and partner with them and help them. And we do that when valuations are low, Obviously, in the last couple of years, we did it a lot when valuations were high. So the answer is, I don't think that we have a crystal ball or any particular insights into the macroeconomy other than to say that our bet is that over the long term, 3 to 5+ years, we're going to look back at today and see very good entry points for certain companies.

[Speaker:TREY_LOCKERBIE] Yeah. And what do you say— I feel this way myself, but when you see founders criticize VCs for saying the sky is falling from their advice when just 4 or 5 months ago they were investing at multi-billion dollar valuations. Like, how can you even trust VCs? Like, now they're telling you to cinch the belt and tighten it when they are investing at 100x ARR deals single-digit months ago. Like, how can you take that sort of back and forth feedback from VCs as a founder? What do you do with it? It seems, I mean, which year were we brilliant as investors?

[Speaker:JASON M. LEMKIN] I think it's a very good point. And I can see that whipsaw effect feeling on the part of entrepreneurs, and we try to avoid that. I do think consistency is important in the venture business, and we all got away from this, by the way. Consistency of investing over years for time-based diversification is a good thing, but also consistency of advice. And the truth is that we're not giving all companies the same advice. And I think it would be incorrect for a VC to go to every one of their portfolio companies and say, "Cinch the belt." Right? There's going to be some that are market leaders that are performing really well, that have 3 years of capital, that you say, "Let's hit the gas and separate from competitors." There might be others that are having a tougher time, that don't have 2 years of cash, where you're saying, "Hey, let's be mindful of this." let's cinch the belt and live to fight another day. And so I think one size does not fit all right now, but I agree with entrepreneurs that would say, hey, it feels like things have changed. And the reality is they've changed for all of us very quickly. So it stands to reason that some of the advice would change too.

All right, I wanna talk about the present, but because I have you, help me go back in time a little bit. As long as I've been doing SaaS, I counted on SaaS there are 5 material downturns. Okay. But I didn't really realize until the other day that I think 2016 was the most interesting to me. 2016, we're coming up to the SaaStr Annual, things are good. I'm new to investing, I'm pretty liquid, I'm not even paying attention to everything, but public stocks fall 50% in like 60 days in 2016. And all the VCs at SaaStr Annual in February 2016, I remember they're freaked out. They're freaked out. I have a panel of these new CEOs. I have this company called Intercom, this company called DigitalOcean, this company called Talkdesk, and us. We did a panel together with Mark Suster and a few others. The VCs were panicked, and the CEOs are like, "We think we're going to do fine." These companies IPO'd, and they're decacorns. But 2016, it seemed, although the numbers were smaller, it was brutal, and yet we bounced back. Not overnight, but we bounced back fast and went on this run. But it was bleak back then, wasn't it? LinkedIn sold for 7x revenue. Even Marketo sold, right? I think that was the window where Marketo sold to Vista for what seemed like a lot of money, $1 point something billion. But I think Phil and Reid sold because they were— we were all freaked out. It seemed like maybe like times were tough, but they weren't. So are there parallels here? Are we over-freaking out maybe like we did in 2016?

Yeah, yeah, I think all good points and happy to share some thoughts because I was on the board of Marketo at that time.

Yeah.

It was scary. I remember the day. Marketo, Tableau, LinkedIn, they all dropped.

Tableau plummeted, right? And ended up being sold to Salesforce for almost $20 billion, right?

They all plummeted and it was scary. And I was in the front row of SaaStr that year. And I think we were all certainly concerned. Listen, I have been fortunately or unfortunately here for many of the downturns, 2000, 2008, 2016, 2020. 2020, and today, they're all different. And I actually think it's impossible to draw exact parallels to any specific moment in the past. And you could find a smart investor today who thinks it's the bottom and another one who thinks that we have a long way to go down. 2016, I think, was different in the sense that those companies dropped because their guidance was weak. The business—

Yeah.

—for that specific moment in time were underperforming relative to expectations, just for a moment. And they went down by 50%. Maybe the markets aren't as big as we thought, who knows?

We were spooked SaaS might not be huge. We were spooked it might not get that big, right?

And we sold Marketo for $1.8 billion, phenomenally great outcome. And then Vista sells it 2 years later for $4.5 billion. Yeah. And we felt like we left a lot of money on the table. It was actually kind of painful despite being a great outcome. So your question is, is this 2016 where we're going to see a bit of a V recovery, or is there more downside? And I can tell you, both of us could come up with both cases. Yeah. Here's the bear case, Jason. We're down 50% to 80%. In many of these names today. But as you know as well as I do, we're only now at median pre-COVID trading multiples. So by no means are stocks cheap today. And I just look at the magnitudes of these companies. Look at a Marketta, look at a Hashi, look at a Toast that are down massively, and they're all just sub-$10 billion companies.

Iconic companies, no pun intended, iconic companies.

Even still, their early investors, these are still at today's level, still the biggest wins they've ever had in their career and way beyond probably the most aggressive exit assumptions they had in their investment memos. And so in other words, it's really not that painful yet. And a bear would say, that we need to experience real pain before we reach the bottom. And the multiples would suggest that we're not cheap yet. The bull case, I think, is what you would say, which is these markets are bigger than we thought, they're growing faster than we thought, so we shouldn't end up at the median multiples pre-COVID. It should be higher than that, and therefore there's upside to that. I happen to be one of the bulls, and I'm not calling the bottom, That's not our job to pick the bottom, but my guess is that we do settle out at multiples higher than today over the next 24 months. Yep. And we get back to that being normal as opposed to normal being the median from 2015 to 2020.

So let's talk about that. But before we leave the past, you were at the front row of SASTR in 2016. Really, the percentage drop was very similar to today, and it was actually faster. And it was about panic about growth rates. Today, everyone's crushing— not everyone, but almost everyone's crushing their numbers. But it was a panic. I'd forgotten about that, and I wasn't taking investing as seriously today because I was new to it, but the panic feels similar. I think it was bigger in 2016. I think it was because we didn't have the confidence level, but is there too much panic in the market? And how does that panic compare to the past? We forget. No one's writing on Twitter about 2016, But people, the markets froze in their own way for a little while, didn't they? They sure did.

And I think we all wish we could go back to that moment and invest. Invest, invest, invest. And God, how many times I said, I wish I could go back to Q1 '09 and just do more. And so, quite frankly, I'm not sensing a lot of panic, at least from the good, experienced investors that I know. The times were so good the last 2 years that in some ways, I think we're all just feeling fortunate that we had those years and gearing up to invest in this environment. So I'm not feeling the panic. I think if you go on Twitter, you see a lot of comments, but I'm not sensing panic. And I don't think that it's really time for panic again, especially since valuations are actually relatively fair right now. And so I'm not sure I necessarily see what you're seeing, at least not inside our four walls.

[Speaker:DAVID_SHERMAN] Well, I think there's maybe— and I want to talk about the president. I do think there's panic. I think there's panic in folks with short runways and high valuations. There's inherently some math there, right? And I think the folks with lower quality revenues have some panic. But that's a good insight that there isn't panic at iconic because you're multistage. And anyone that's multistage is going to have a few iconic logos there that possibly are underwater based on today's valuations. So if there's no panic, if I invested at Canva at $40 billion, this is an iconic company, Canva. I mean, no question. But it is possible it could be worth less than the public markets today. We don't know. But you're not seeing that. But what is— let's talk about what's frozen. Are there, with multiple compressions, and for folks listening where they don't know what that means, just everything's worth less. Those Toast, those HashiCorp, these are companies that are no longer decacorns, that really should be decacorns, but in some cases they're not. And it doesn't leave a lot of room for you to raise it a billion, If someone much more successful and he was trading at 3 to 4, there's just not a lot of room for— it seemed like everyone could be a unicorn in 2021. Now there's not a lot of room. So what is frozen? What's just tougher, or where are the tough rounds today, and what's still going to get done?

Yeah, uh, first of all, I would say the big mistake that the growth stage investors made over the last couple of years, pivoting off of what you just said, was not that we thought everything could be a unicorn It's that we thought everything could be a decacorn. Yeah, I think that this environment is proving just how hard and just how rare it is to be a sustainable decacorn. I'll just say that first because you were mentioning that. In terms of frozen, I would say there is some truth to the, to the idea that the kind of Series B and beyond markets are, are frozen right now. I wouldn't have said that in Q1. I think in general, the market's pace relative to Q4 was down about 24% in Q1. Yeah, I think you're going to see a very different dynamic in Q2 because just in the last 2 or 3 weeks, pipelines have really frozen. And I think you're going to see, at least at the growth stage, pace slow dramatically. And why is that? It's pretty obvious. And it's the reason, by the way, that we aren't panicking and we worry a little bit less about being involved with great companies that are overvalued. It's because they have so much capital, right? Yeah. Good companies. And we feel fortunate that we're in a lot of those. They raised 2 times, sometimes 3 times in the last 12 to 18 months. In my career, I have never seen so many private companies —100, 200, 400 million on the balance sheet, like literally years of runway. And so why is the pace of growth slowing? It's because all those CEOs of the very best companies are saying, I'm heads down, I'm growing, I'm going to grow into my valuation, and they're not accessing the capital markets anymore. And so that's really slowed down a lot. Now, sub-a-billion valuation, things are happening still quite aggressively, both in terms of velocity and also price. And you'd ask, why is that? Yeah, well, one, there's a lot of capital, but two, in my opinion, it's actually the growth stage marks that inform the earlier stage on what's the new benchmark. And since there aren't any transactions happening at the growth stage, The early stage doesn't really have any new basis to think about what the new valuations should be and what they will be the next time they raise capital.

So let me make sure I understand that. There's a whole bunch of interesting things you said. First of all, before we get to that, this is why I don't think— I think there's too much drama on Twitter. I don't think there's going to be very many layoffs or issues in B2B companies because they're very well funded. Some of them raised Yeah, some of them got the timing off and they were going to raise in May, and that's happened. It happens. It sucks. But so many raised more than they ever could have imagined. And if you just don't spend it all— I mean, I got an investor report from a company I invested in at a $300 million valuation saying he had 52 years of runway. So maybe he can't raise it a billion next week, but it doesn't matter existentially, does it? That's the point you're making. I think there's more stories there than these Cameo and other stories that we see on Twitter. Just not as many of them, especially at least in B2B, right?

So no, yeah, yeah, I think you're going to see very few layoffs. Now I think you're going to see probably slightly less hiring, slightly slower hiring than you might have otherwise seen. But I agree, most of, again, the good companies, uh, that are well-funded market leaders, I don't think you're going to see layoffs.

They'll just chill from a fundraising perspective, right? So the second point you made, I got a little bit confused on, but it could be me. That below a billion, the growth market's still active, but it's also slowed down. I'm a little bit— No, no, no.

Below a billion, or certainly below $500 million, which to you would feel really late stage, but to us is earlier stage. Yes. Earlier stage deal velocity and valuations are still happening and high.

Yeah. And where does it slow down? Pick a number, pick a valuation. Over a billion.

Over a billion.

Okay. But you're still seeing at Iconiq, and in general, you're still seeing rounds at $200, $300, $400, $500 million. For the good ones, they'll happen quickly. Absolutely.

And apparently, I was speaking with a friend at the seed stage who said, I've never been busier. And so the earlier stage you get, the more vibrant the marketplace still is. Got it.

But, and then there's a logical inconsistency here. Let's— if there's no slowdown in seed, they still have to raise As. Yeah.

You remember the The Series A, Series B gap?

Yeah, I think it's everything but seed is what I think. I think there's a gap, some sort of gap everywhere, because the logic falls apart. Uh, I understand what you're saying.

Um, yeah, so seed is certainly vibrant. My understanding, we've been doing less of it of late, is that there's still lots of transactions happening at the Series A stage. Yeah, uh, I think it's a Series B and beyond gap. That I think is going to trickle down to Series A pretty quickly.

And if the market's still flowing under $1 billion, $500 million, is— and this is always interesting— is our value— people like to talk about resets and valuation resets, but again, the best founders don't have to take money. Sometimes they need money, they got to fill up the tank. What's really happening? I don't think startup markets really can fall as far as the public markets in many cases, because founders just won't raise. So how does that— or maybe I'm wrong— how does that back and forth or ebb and flow play out in practice today? I think it takes time.

I think it's going to take 2, 3, 4 quarters for those companies that raised in early or mid-2021 to need to come back. And there will come a time where they need capital and the pendulum will swing from purely power on the part of founders and companies more towards the middle where there's a balance of power between entrepreneurs and investors. And I think that valuations will actually come down. Now, the truth is there's a lot of capital out there for a long time. And as we all know, it only takes one investor to believe, to drive a valuation up. So it may take time. But my prediction is over time, the private markets trickle down into the growth markets, that then trickles down into the earlier stages and you start to see moderating valuations across the spectrum.

Are deals going to take longer too? Are people doing more diligence than it seemed like we did for a little while there where deals seem to happen in a couple of days no matter what the price was?

Yeah. So you asked, you know, what else are we seeing? Yeah. You know, this is part of what we're seeing. We're seeing companies now out there testing the waters. When was the last time you heard about testing the waters, right? It used to be the message was last year, we've got so much inbound interest that we're raising now, and it meant term sheets in 2 days. Yeah. And now I'm getting calls and on calls with great entrepreneurs that are saying, first meetings this week, we're going to do second meetings next week and the following week, and then we're going to think about term sheets the week after that. When was the last time you heard about a real process? We're hearing that over and over, which yes, will give us more time for diligence. And quite frankly, I think relationship building, which is good for entrepreneurs too. Um, I felt bad during those years that entrepreneurs were picking their investors after 2 days. Yeah. So in some ways I think that's a good thing. We're not seeing down rounds yet. One of the things that we're seeing right now, which I think is sort of funny, is a lot of second attempts at secondaries. Where early investors and employees are looking to see if they can sell at the 2021 valuations. And sometimes, by the way, we're doing that in the very best companies, and other times it's just clearly that doesn't make sense.

Sometimes your buyers, as someone with a big pocketbook at Iconiq, your buyers now? Oh, sure. Yeah. You mean at last year's valuation? If the company grew enough, Yeah. Everyone became a holder last year. That's right. Right? Everyone became— I mean, I remember the old— I'm still— it'll take me too long to learn, but the old USV Fred Wilson deal was, any unicorn we sell a bit at, right? He wrote this iconic post. We don't sell it all, but we'll sell 10% or 20% as early-stage investors at a unicorn. And I remember last year when Algolia raised at $2 billion, it was my second investment. I'm like, this is so cheap. I would never sell the shares. And the company has almost doubled since then, and now I think it's market.

Yeah, no, it's true. You know, for the last year or two, there was a saying in venture that anything you sold, you regret it, because everything just went up and up and up.

Everything. Yeah, even as a pre-seed investor, you were a fool to sell early, right?

And I think the moment you feel that way, that you regret every sale and believe that you should just hold everything forever, is maybe a good signal that we're nearing the top.

Let me step back for a minute on a niche question, and then let's talk about some larger stuff. But when you're growth at Iconiq, what's the goal for a bell-shaped distribution? Like, it's hard to get a 1,000x outcome, right? Is 10x really good? Is 3x the average? Like, just help founders think when they're going into pitch, What is Doug thinking about? What's that, what's that bell-shaped distribution of growth? What are they looking to achieve?

Yeah, yeah. I mean, obviously for us being a multi-stage firm, uh, it really does depend, right? We're investing in companies at $2 or $3 million ARR, and we're investing in companies at $50 to $100 million ARR. So it does depend on the stage. I'd say for traditional growth, call it, you know, $20 million ARR or beyond, you know, we're underwriting and we have— we have very significant investment memos where we go through pretty in-depth underwriting models. Um, you know, we've always underwritten to an exit multiple dramatically at a discount to today's multiples. And at—

so what does that mean? Walk us through what that means.

We're investing today at a 30x multiple of revenue, and we're assuming in 5 years from now when we exit that we're going to exit at a 10x multiple. Okay, so we always factored this compression into our models even before this happened, and we would model 3x, 5x depending on the stage, but always with a goal, even at growth, that we could achieve 10x or more. And, you know, one of the amazing things about growth is that, that we've enjoyed, at least in the last few years, is very little risk relative to early stage But if we select right and partner with the best companies, seeing returns of 10, 20, 30 times.

Got it. Yeah. So a message to founders, because I'm shocked how few founders do this. When you start to raise these rounds in the 9 figures, even today, valuation, wherever it is, whatever in the 9s, come prepared with the 10x outcome. Right? What does that mean? And just think through what that means. Just make sure you've thought through it from your— oh, you may think, Great. $500 million is twice my last round, right? But okay, that's $6 billion with dilution, right? To achieve 10x, you've got to have a $6— and then go look at the cloud index and see who's trading between $6 and $7 billion, what their ARR and growth rate is, and come up with an honest model, an honest model about how at $21 million in ARR, you will grow as fast as GitLab, right? Which is probably what you're asking, right? You're probably saying, I'm going to be as good as GitLab or better. And take— I see almost no founders take that seriously until like the mezzanine stage, but I think they should today if they want to. If they want this to work, right?

Yeah, so we don't underwrite to 10x, but we underwrite to 3 to 5x minimum. But we always want to understand and believe in that.

How could it be 10x, right? And that's, that's a guide for founders to think about, right? You're underwriting the 3 to 5x, but you need a case for the 10x to pull the trigger on the deal, right?

And back to a comment that you made earlier in the conversation, what's happened to the very best public companies— and make no mistake, these are the best companies that are operated the best, the highest growth rates, if they're trading at $5 billion, that makes it awfully hard for you to raise at $2 billion if you're a quarter of their size, because the upside feels capped today. [Speaker:TREY_LOCKERBIE] And how you—

when you meet a company where you love everything about it today, you love the founders, you love the market, you love the disruption, but the comps sitting at $3 to $4 billion today, Right? Do you grit your teeth and do the deal anyway? Or how do you get past that? Right? How do you deal with that situation? It's a great question.

Historically, and I think going forward, especially here at Iconiq, we do what it takes to get involved with those companies. And so, we don't set the price, the market normally does. And if we love it as much as you just described, we'll do what it takes to, to get into that company. And I suspect we'll have a belief, if it's that good— and we're doing this right now in a couple of situations— that it can be worth more than that $3.5 billion company.

Yeah, it's just tough when there's some of them are like HashiCorp or GitLab because they're such good companies. That's fair. They're just so good. That's, that's the— that I think is the kicker, uh, the kicker at the moment. Um, One, let's go do one detail, then let's maybe we can end on a couple higher-level stuff. But an adjacent question, let's talk about private equity markets, the Vistas, all the Thoma Bravos, who I think were just gifts to founders. Okay, they did great deals. And in my investments, you know, Salesloft sold on December 31st to Vista. Pipedrive had a great outcome there too. I mean, really, really great. And And more than that, everyone got offers. Everyone I knew, every founder that hit $15, $20 million ARR, even if they're growing like 40% or 50%, like I'm not talking about triple, triple, quadruple, double, double, double. I'm talking about they would get it, they would get a 10x ARR offer sometimes. Right. I'm at $25 million. I'm growing 40%. Doug's not going to fund me, but holy cow, PE comes in and will give me $250 to blend them together with their company. Is this still going to happen? Is this still a decent exit for founders? Is this turned off? Like what's going on with the PE side of things?

Yeah, yeah, I think they're going to be incredibly active. Um, incredibly active. We, we, you know, we know these, these firms. We've talked to a lot of bankers that are talking to these firms all the time, as recently as a couple of days ago. Yeah, they are. They have massive funds, as you know, many of them just raised, uh, and they're incredibly active as we speak, uh, both in the public and private markets. Yeah, um, you saw SailPoint was acquired by Thoma Bravo. Just in April, 13 times revenue, uh, which is a very healthy multiple, especially in today's market. And we're hearing about some very large deals, uh, that are being contemplated, again, both public and private. And so I think you look to these firms in some ways as bellwethers, just like Vista bought Marketo. Yeah, in 2016, we thought that—

we thought that was crazy, but they were— it was sad, smart as a wolf, or whatever it was called, right?

And, and I think when you start to see these firms move in, yeah, and I think they will, I think that's a good indicator that at least they're seeing a good entry point. And I think I would view that as a signal to watch very carefully.

Got it. So you don't think— so derivative of that, from a founder's perspective, you don't think they're going to get so cheap in the current market that it will be an unappealing option to founders? You don't think that's going to happen? Because the nice thing— like, there's downsides to selling to PE. We could chat about it, right? It's a weird world. Sometimes it's not. It has pros and cons comparing to— sometimes you can keep half your stock in IPO, but they did pay fair prices for the last 5 or 6 years. They were good prices, right? And they were cash. They're like a used car. They're cash on the hood of the car. Like, you want $1 billion and you want it in a week, and you want no escrow, and you want no penalties, and you want to go work on your vineyard? No one would give a deal like that, right? And the valuations got pretty good, right? And yet the IRRs were amazing for some of these funds, right?

I think they've done incredibly well, and I don't think that they are monolithic. They're different firms that have different strategies, and their strategies have evolved. A company acquired by Vista 10 years ago has had a very different experience than one acquired recently, and you and I both know founders that are in Vista right now that are loving it, that have the upside where they feel like it's being operated well. And so I do think it's a viable outcome and where founders can do well. Now, are there multiples that they're willing to pay likely to go down in the last 8, 12 weeks? Certainly. But I don't think it's going to be valuations from 10 years ago. I think they can still be quite attractive.

I just think if PE goes in and they cut the price in half, good founders are just going to say no. They're just going to say no. So the question is, is that market going to be frozen? But you're saying no, they're smart, they see the future, they can model it out, and they can double or triple their money in 3 to 4 years like clockwork. That's the model, right? Is just double or triple your money like clockwork. Yeah.

I always, obviously Marketo was a public company, but you'd love to have been able to roll over on that deal and continue participating along. It's interesting that they don't let you, isn't it? You can't do it if it's a public company, but as a private company, uh, certainly you can roll over. And I think sometimes a lot of us would choose to roll over with Vista and participate in that upside.

Okay, two more, um, just two more industry questions and then we, we can wrap up, unless you want to add something. Um, and the first one, I think you actually said some interesting things around it already. This idea that there's so much dry powder, that there's so many funds, right? You can see there's so many multibillion-dollar funds that have been raised since January, right? And all the ones raised last year. Does that— is that benefit founders? Is all that money still got to be deployed in 24 months? Is this a good overhang for founders, or what's going to happen with all this money we raised?

Yeah, there's a lot of capital that's been raised in the last 12, 24 months. Uh, by the way, we've been saying that for 20 years. Yeah, I know. Yeah, there's always too much capital, uh, chasing too few deals.

Probably the funds got real— the funds got real big the last few years though, didn't they? Funds have gotten bigger, got real big. That's the thing.

Yeah. And then— but the market's a lot bigger. So I think there's always too much capital, but there's a lot of capital now. And absolutely, uh, that's great for founders. I think this is still going to be an incredible time to fundraise and build companies. The difference is going to be in the last 2 or 3 fund cycles, we were investing each of those funds in 1 year. I think you're going to see fund cycles normalize back to a 2 or 3-year fund cycle. Yeah. But ultimately, our job is to deploy capital, and as a collective, we will. And so I think founders should feel like there's a lot of capital for them. If they tell a good story and build good products, they're going to be able to do really well in accessing capital.

Yeah, I asked David Sacks this question, I think yesterday on Twitter, and he said at Kraft, it's the same 2-year cycle for the current plan for deployment for the fund. For Iconiq, are you saying maybe it's gone from a crazy 1 to a 2, which would still be fine? And if so, would that feel slower to founders? Would it feel slower?

Because 1 was crazy, right? Yeah, my guess is, my guess is that it does extend out to a longer fund cycle. I don't know whether it'll be 2 years or 1.5 or 3. Yep. But it will lengthen. But we're also raising subsequently larger funds. So I think to the entrepreneur, to the founder, they actually won't see any difference in terms of our behavior or how aggressively we're going to market. In fact, we're going to market as aggressively as ever before. We've had more meetings in Q1 and so far in April as we did in Q4. So that's interesting. There's no slowdown whatsoever.

Yeah. Okay, last super inside baseball one, just folks are curious. LPs, the limited partners that give VCs money. I feel like if nothing else, there's some indigestion and hangover here. If, if for no other reason And you have a much larger base and much, much broader lens than I do. But folks came back to market so fast, they raised so many funds. And in some cases, LPs rode their markups last year to insane numbers. A whole bunch of universities had IRRs north of 90% on their venture portfolios last year. And I think they thought they were too brilliant. I think LPs, who are always skeptical of paper markups, bought into it, and, and now they're down, right? It's, it's much— it's not as fun to be down as it is. It's much worse to be down than up, isn't it? So where— what are you hearing and learning from LPs, and, and how will that impact VCs, like, at different stages?

Yeah, it's like the, uh, average Robinhood trader. It's, it's a lot less fun to gamble when you're losing money, right? Yeah, you know, it's true. I was actually thinking about that article. I think it came out in October of last year Talking about MIT and Duke up 56% and all these other endowments were up amazingly, mainly through private equity and venture capital. Those marks are going to be tough in the next couple of quarters. So yes, I think like all of us, LPs are reassessing the environment, trying to figure out what to do. And my guess is that they'll do what many others are doing, which is retrench a bit. and my guess is they allocate less capital to venture as they normally do. They do that by focusing less on new names and focusing more on the re-ups of their best managers. Yeah. And so I think that will happen. But listen, I think all of us in all of these asset classes, early stage, late stage, public, LPs, the reality is this, We always invest the most when we should be investing the least, and we invest the least when we should invest the most. Yeah. And I think smart LPs, like smart investors, know that. And probably the best fund vintages are going to be 2022, 2023, as opposed to 2021. So the irony is, despite— yes, those amazing IRRs going down, probably the best time to invest is 2022, 2023, as opposed to, to last year. And I think the smartest LPs know that for sure.

Well, Doug, I want to wrap up some things I learned, but anything you wanted to get out that we didn't get out on this great discussion?

No, just, you know, something that's on my mind is around, you know, obviously I've been in venture for 20-plus years, 22, 23 years.

You started at 16, right?

I wish that were the case. But what I worry about right now is young people in the venture business who have been learning bad lessons for the last 2 years. I know a lot—

Everyone has a 10x $18 million fund. Everyone has a 10x $18 million fund.

We all felt like it was too easy. And it felt that way, right? Quick markups, on every deal. I was talking to a seed investor who said out of his 60 companies in the last 7 years, he's only had one bankruptcy. Yeah. Right. And so a lot of young people got used to this business being really easy. And the reality, and you know this better than I do, is that it's really hard because you've been a builder and it's incredibly hard to work with founders that are building companies to pick the right ones, and then to help them. And I saw countless careers that were ended by '98, '99 by learning the wrong lessons. Yeah. And I think we have an entire generation of investors and some founders that need to learn new lessons about how hard it is to actually play this startup ecosystem and venture game. And so, it's something we think about a lot and trying to motivate young people to dig in and really learn those tough lessons, because it's not as fun when you're not getting markups every 6 months, but that's the reality.

[Speaker:TREY_LOCKERBIE] Yeah, I think so many folks that were new to venture the last 3 years only learned the momentum playbook, and it worked on paper. [Speaker:DAVID_SHERMAN] That's right. [Speaker:TREY_LOCKERBIE] But momentum and really finding and picking are not related. Convincing Doug to let me throw in $1 million into his hottest deal, that was a great, and still is a good strategy. But that could even work for a small fund. If it's a decacorn, even a small percentage ownership of a $20 billion outcome is huge. But that playbook for the moment's out the window. And now you've got to go hunt, find, get real ownership, and have some losers rather than just have a little small stake of momentum plays, and no criticism, but That was a playbook that I never caught my breath on. I never grew up in the Amendham playbook, but I watched so many folks execute it seemingly to perfection. Just hop into a hot deal for a small stake, because there's always— any great manager will allocate 10% or 20% of a deal to allies that will help the portfolio. And that became productized the last 2 years.

Well, listen, I learned the venture business from 2000 to 2004. Which I can promise you is— was way worse than anything that we're about to experience. Yeah, way worse, right? From 2000 to 2004, we couldn't sell software to anyone, and it was really a tough time. But I'll add one more thing about the reality of the business is picking well and not focusing on momentum, but the other key aspect, which is truly partnering with companies and helping them and being there when things are tough. And the thing that I think we've gotten away from a little bit the last few years with this momentum investing is the idea that you could just be a picker. And when I hear about some of these crossover investors moving earlier, it really scares me. I think some of them have done an amazing job innovating at growth, and I respect them for that. But I think the dangers to the ecosystem of those same investors going earlier that don't have the capacity or the focus or the resources to really help early-stage companies, I think is damaging to the ecosystem.

Yeah, going early, it— I don't think de-risks things, and I don't help— I don't think it helps founders. I don't think growth— trying to— growth investors trying to become like pickers, it's, it's a different skill set, right? It's just, it's a, it's fall— it's a false flight to safety that probably isn't real, right? Absolutely. And it's not good for founders. Well, Doug, this was great. Let me just thank you so much for joining us. I, I learned a lot from this. And I think— but some big take— some really big takeaways versus Twitter. One is that a reminder that ICONIQ's feeling pretty good despite the market because so many of their founders are so well funded. So many founders have years and years of capital. Maybe spend a little less, maybe extend your runway another 6 to 12 months. That's my general advice to folks. If you raised a lot, just make it last a little longer. And you can tune everything out. And there's some zen there at ICONIQ, and I find that heartening to hear. And the second one, and I want to get more folks' opinions, but ICONIQ's a great one, is that yes, there are crunches, but the market is not frozen below a billion, right? Marking up your decacorn is going to be tough today, but ICONIQ is as active now as Q4 in looking at deals and is on a decent deployment pace. So if you've got, if you're at $10, $20, $30, $40 million, you're not frozen out of the market, right? If you've got top decile metrics, go do the meetings and you're going to get funded, right? As a takeaway. Absolutely. Right? Because I don't think everyone believes that or sees it, but we're hearing it. How much does ICONIQ manage and how many investments over its history? Do you have a rough sense? A lot.

We've got well over, well, we've got over 100 portfolio companies. Yeah. But many of those are public now. Probably 20% of those are public. Yeah.

So this is real data. This is from a leader in growth investing that at least below a billion for the best companies, the taps are open. So let's raise a little more, stretch your capital out longer, and if you've got the metrics, go raise that round now below a billion, right? Absolutely. Still a great time to build. Thanks, Jason. This was super helpful. Really enjoyed it.

Take care.