How to Scale for Profitability with OMERS Growth Equity (Workshop Wednesday)

to see you today. While you are tuning in and we have people joining, feel free to type where you are joining in from. It is so fun to see how global this community is. All right, welcome everyone. We'll just give it a minute or so for people tuning in. Again, feel free to utilize the chat. Let us know where you are tuning in from. We got some Bay Area, Toronto, Philly, Salt Lake City, Chicago. Awesome. All right. Great to see you all, and welcome to another Workshop Wednesday. Every Wednesday, 10:00 AM Pacific, we will be here, rain or shine, to share content with you. This week, we have another SAS expert we are so excited to introduce. And get your questions ready because you will have the opportunity to interact, ask questions, and make this time the most valuable for you. All right, so this week, we will hear from Mark Schulgen. He is managing director and head of growth equity at Omar's Growth Equity. We will be discussing Focus on the Fundamentals: How to Scale for Profitability with Omar's Growth Equity. Again, get your questions ready, drop them in the chat. Feel free to comment as much as possible. We love to keep these interactive and make this time important and valuable to you. And with that, Mark, welcome.

Thank you, Caitlin. Delighted to be here.

Yeah, so great to have you. So let's start with a few warm-up questions so we can get to know you a little bit better before we dive into this content. So what is one of your favorite investments you made in 2022 at The Firm?

Oh boy, in 2022, I think we made 3 investments. 2 of them were follow-ons into existing portfolio companies, and I'll highlight one of the new ones, which is a company called Fairmark. Fairmarket is a Boston-based company that focuses on software for tail spend. So it's procurement software, you know, has some similarities to Coupa, but they're focusing on the lower end of the market. So for products that companies are acquiring that are less than $1 million, there was really no good software procurement solution. On average, they can reduce the number of headcount within a procurement department by about half. Because of the automation that they introduced with their software. And we're excited to lead their Series C investment. GGV and Insight had led the prior two rounds. And we just think that there's a massive TAM, and they have demonstrated some really strong early wins with customers like BP and Amazon, and think that they've got a really long runway of growth. So we're, we're very excited about that investment. We closed that in May of last year.

Great. I spent 6 years in Boston, so love Boston, shout out.

Great.

Next question. What has most surprised you about venture capital this past year?

I think, you know, probably how quickly people pulled back. You know, I think I was surprised at just how quickly the tap seemed to turn off. We closed that investment that I mentioned back in May. We really didn't do anything for the remainder of the year. We've got one investment that we're about to close on in the next day or two, But it seemed like we went through this period where things were just— we were in a state of paralysis almost as we adjusted to the new reality that we came into. And I was surprised at how quickly that happened. It was just like the taps turned off and the market was closed.

I think we'll have some questions on that in the chat later as well. So moving on to our last question before I let you take it away. Who is one of your favorite co-investors?

Ah, you know, we've got a lot of firms that we work with on an ongoing basis, so hard to pick a favorite child. But, you know, I think one of the investors that we've been most impressed by is ICONIQ. We've got a couple of co-investments with them and always find that they're, you know, a great and value-added board member. You know, a16z is another that we've invested alongside of that we have a lot of respect for, but There are plenty of others. I think it's hard to call out one or two. And we enjoy a lot of the partners that we're invested alongside.

Great. Yes, we love to play favorites over here. All right. With that, I'll let you take it away.

Okay, awesome. Well, listen, I'm delighted to be here. The first time I did this presentation was in sunny California at the actual live SaaStr conference. And today I'm coming to you from our headquarters within Toronto. It is a gray and rainy day outside. It's been like that for the last few weeks. So I hope you guys are all in warmer areas. I did see somebody was in Salt Lake City, and I'm excited to be heading out there on Sunday for a bit of a ski trip, work-related ski trip. So hopefully we'll have more snow out there than we do here in Toronto, because it's just kind of gray and miserable outside these days. So as Caitlin mentioned, I'm Mark Shulgin. I head up the growth equity team here at Omers. And over the next 15, 20 minutes or so, I'm going to give you a bit of a lens, or at least part of my lens on why I think fundamentals are so important. I've been investing growth capital now for more than 20 years. So in the early 2000s, I would make high-risk or mezzanine loans into telcos and cable companies. Then I went to work at a hedge fund out in New York called Fortress. And then after doing that for a while, after the financial crisis, I went to the Canada Pension Plan. Which is the largest pension plan in Canada and has about $600 billion in AUM. There, I helped start a couple of their direct investing teams. I was there for 10 years. The first part of my career was focused on a company called Relation— or a group called Relationship Investments. We would do large minority equity investments into public companies. So think billion-dollar-plus type investments. And we would take a board seat as part of that. It was often to support growth like M&A. And then after doing that for a few years, I started the growth equity team at Omers, or at CPP. Initially, we called it thematic investing. And the idea was that we'd have this really long time horizon that we can look out over and try and identify what we thought was going to be disruptive. We landed on software as being the most exciting sector for us to be investing in. We built a cloud portfolio going back to 2012 and Um, it turned out pretty well. Uh, after being at, uh, CPP and scaling that into a $5 billion portfolio, uh, I left to join Omers around 4 years ago. Um, Omers has for a long time had a venture investing team that was started in the 2000s, um, and they wanted to start a growth equity team as a complement to that. So I came over, uh, and I've now built out a team of around 20 investment professionals here. Um, we've invested more than $1 billion in 18 companies. And it's split somewhere around, call it two-thirds software, and then the balance invested in tech-enabled healthcare, edtech, and fintech. Over my career, I've been able to live through a few cycles. So the dot-com crash when I was a young investment banker, the financial crisis, and then whatever we're currently experiencing. I don't know if anybody's got a great name for it yet, but I'm sure it will have a name at some point. It's been quite quite dramatic to see the reversion in valuations, but I think one that is rightly justified. And I think throughout my career, I think I've found it really important to focus on fundamentals and ultimately profitability. Left us a little bit inactive or not as active in 2020 and 2021. We were quite selective. We were writing much smaller investments to try and get the benefits of diversification. And ultimately, I think what I've found over my 20 years in growth equity is that ultimately it's profitability and cash that is going to have long-term value. I define fundamentals as being the basic qualitative and quantitative characteristics of a company that ultimately contribute to its valuation. Now, over the last 3 years, I think we really had an anomalous period when looking back over the history of financial investing. There was only one thing that really mattered, And that was growth, revenue growth. And every investment banker was pitching us in the boardroom, one, to IPO companies. You know, once they crossed even $150 million in ARR, they were there telling us we were ready to go public. And the only thing that mattered was revenue growth. I'm going to show you over the course of this presentation that, you know, we've now moved away from, I think, a high correlation of valuations and revenue growth into one that's more balanced and focused on profitability. Okay, we are on slide 2, which is good. So, you know, just providing a little bit of context about OMERS. We are about $100 billion US in terms of AUM now. That leaves us as being kind of one of the mid-sized Canadian pensions. There are a number that are over $300 billion. And OMERS is an acronym for the Ontario Municipal Employees Retirement System. The people who we're investing on behalf of are municipal employees across Ontario. So these are firefighters, paramedics, and police officers. So we take a lot of pride investing on behalf of these hardworking people. And then what's unique about OMERS is that unlike a lot of the other pension funds, we're not an investor in other funds. So we made the decision going back over a decade ago that we were gonna create direct investing programs where we would sidestep the funds. So when you, you think about OMERS, and private equity and our ventures teams, think of us as being a more traditional GP rather than what you might think of as a pension fund. We typically take board seats, we typically lead deals, and we do all of our own sourcing activity, just like a traditional GP would. Across private equity overall, so including ventures, growth equity, and more traditional buyouts, we've got about $20 billion invested. It's invested primarily within Europe and North America. And our portfolio is within the growth equity program is primarily North America, with the vast majority of companies based in the Bay Area. Some of the investments that our ventures team have made that you might be familiar with as a pre-IPO investor were Shopify and Hopper. And then the growth equity team has made investments in pre-IPO investments in GitLab, Dialpad and PandaDoc amongst others. Okay, let's flip over to slide 3, Katelyn. Great. So this more specific to Omer's Growth Equity, we traditionally will invest anywhere from $15 million up to $150 million. We typically don't dip below $15 million. We try to own between 10% and 30% of the companies that we invest in. I've talked to you about the areas that we're focused on. And then most frequently, our capital is used to be able to drive growth. The companies that we're investing in are generally doing $30 million of revenue or more. We're generally Series C and beyond. And, you know, we just find that that's traditionally kind of the area where you can really clearly identify that a company has found product-market fit. Onto slide 4, please. Okay, I'm gonna do a little bit of Finance 101. I think many of you will be familiar with the intrinsic value calculation that supports the value of a company. And it's broken down into 3 parts. So ultimately, the value of a company is comprised of its future cash flows. The further out that cash flow is until being realized, the more sensitive a company is going to be to the denominator. So this is a company's discount rate, less its long-term sustainable growth rate. Now, the discount rate in this context is a company's weighted average cost of capital. To calculate the equity component of that equation includes considering beta or market volatility. And the growth rate used in this equation is a company's long-term growth rate. So what we'll often see, very high rates of growth in the early years of the company. Traditionally, as a software company begins to mature, we're going to begin to see it going from rates of north of 40% down below 20%. And so it can be a little bit of an exercise in estimation forecasting to try and figure out what that long-term growth rate is. Now, admittedly, this calculation starts to break down when you're looking at many of the software companies who have delivered high growth over a really long period of time. And I'm using this equation now to try and help demonstrate that over the last year, we've realized a perfect storm that's resulted in valuations for many software companies getting cut in half or more. Free cash flows are down because the increased competition that we're experiencing with markets. Oftentimes this is indirect competition for companies that are starting to sell into adjacencies. So once you've built that very valuable and expensive to acquire installed base, it's not uncommon to see a lot of software companies adding adjacent products to try and leverage that installed base. And I think we're beginning to see that happening a lot more frequently. So while the core product might not be in direct competition, the adjacencies start to chip away at the edges. It's like Microsoft introducing Teams to compete with Slack. Or Zoom. So costs have now inflated as well because of wages and other inputs. The discount rate has increased because of higher interest rates and volatility, and all of this ultimately drives up your cost of equity. And then growth rates have begun to decelerate, in part because we pulled forward a lot of growth during the pandemic, and there's more competition and inflation. Onto slide 5, please. Okay. Now in these charts, we've tried to bring that equation into life. So over the last year, we've seen interest rates have increased over the last year by more than 200 basis points, which is more than 2 times. Over the last year, equity volatility has increased by more than 10 percentage points. So we went from 15 to above 25, now down around 22. And then over the last 5 years, if we were to look at mature software companies as a proxy, Revenue growth has decelerated by almost 20%, going from around 25% down to 20%. And then I should also add, I think many people on this call are familiar with how inflation has spiked. When it's highest, from 1.3% in August of 2020 to 8.3% in August of 2022. Now it's abated a bit. Hopefully we're starting to see some sort of stabilization because that will be the first thing that needs to occur for us to ultimately get into a more normalized environment, but we don't know yet. So the cumulative impact of all of these changes resulted in software valuations falling by 40% or so from up around 10 times to now closer to 6 times. And I think, you know, with all of those changes that I've discussed, this is, this is a justified correction within the market. Onto slide 6, please. Now, I'm sure many of you in this room are familiar with the rule of 40. So the rule of 40 is the combination of revenue growth and profitability, typically measured by some sort of EBITDA or free cash flow margin. And I think it's really noticeable or notable that if you look at this, and this was, you know, as I said at the beginning of this presentation, every investment banker who was pitching an IPO was showing charts that demonstrated a higher correlation to revenue growth So the typical slide would be the one that you are looking at now, where you would say on the one hand, there's, if you look at valuation relative to only its revenue growth, the R-squares of the correlations were much higher. And if you looked at it on a balanced profitability basis in 2021, you would've found that the R-square was lower. Now, if you look back historically, so you can see that illustrated if you look at the 2021 on the left-hand side of your screen, the correlation obviously for growth rates was much higher than the combination of growth rates and EBITDA margin. But if you looked back to 2018 and what you're seeing in the current market is a higher R-squared being applied to profitability, so the combination of revenue growth and profitability. So I think this is, if you looked at 2021, it would really stand out as being an anomaly. And the reality is that profitability does matter over the long run, and hence an important reason why you should be focused on fundamentals. Yeah. This is Jonathan with Repsure AI. How are you doing? Good. You? Fantastic. Great content so far. So this probably is more aligned to your last slide, but how do you factor in forward earnings into that equation with inflation being really high? Interest rates being really high, and obviously that's chipping away at those deferred revenues. Yeah, I mean, I think it has a huge, huge impact. I think it's a major factor, obviously, when you're considering how you should be calculating ultimately your free cash flow. And I think it's something that we've been working on more recently, is trying to understand the relationship between Both the rule of 40. So we've been running to try and figure out what we think longer-term exit multiples are going to be. We've been running multivariable regressions to be able to look at the 10-year yield and the rule of 40 to try and inform where we're going. We've actually found that the correlation between valuations is highly sensitive, obviously, to interest rates, particularly given how long-dated cash flows are. But no, look, I think the reality is that we're moving into an era where we're going to see a big deceleration within revenue growth. So it's obviously still going to be positive, but because of the factors that you mentioned, Jonathan, we're going to see it slow even more than we have over the last 5 years. Awesome. Thanks for that insight. Appreciate it. Yeah, no problem. Okay. So yeah, I think the other thing to call out here is just the dramatic change in valuation. So if you looked at a Rule of 40 company in 2018 that traded at 7 times, by the time we got to 2021, the same rule of 40 had doubled to 15 times. So I think it just tells you how dramatic it was in part. And our math doesn't fully support the change in valuations, but if you looked at how quickly interest rates had declined over that period and how dramatic it was when you're thinking of going from a 2% interest rate down to 1%, you know, having a significant 50%-ish decline, it did have a dramatic impact on valuations. But I think there was also just a lot of, a lot of pent-up demand and capital that was driving those higher valuations. Okay. Onto slide 7, please, Caitlin. Okay. So on this slide, we've provided some detail from a database that we keep on both public and private companies. And then we've created cohorts or buckets for different size companies to try and understand how they typically scale revenue and profitability. So not surprising to, to, I'm sure all of you, younger companies, so those with lower revenue scale a lot more quickly. We plotted out the median revenue for each cohort, and you can see that the youngest companies will typically grow revenue more than 40% over a 5-year period compared to the more mature buckets that will typically grow closer to 25%. When looking at EBITDA margins, so the chart at right, you can see that the larger, more mature companies will typically scale to break even within 5 years. And the levers that you can pull to get there, you know, I think of as including really kind of 3 primary areas that you can focus on. So one is a focus on your installed base. Once you've acquired that customer set, you should really try and grow the product offering, try and grow your pricing as much as you can. And try and identify what your existing customers need and what sort of product adjacencies you can add, because it's going to significantly lower your cost of acquisition and drive more efficient growth. Another area that we spend a lot of time on is engineering productivity. So it's important to balance the demands of adding new features with those of just product maintenance, which tends to be a lot less revenue generative. And, you know, I think just a warning around M&A is that, you know, you take on a lot of technical debt, It can be very expensive and costly in terms of trying to merge that into your existing product. And I think a lot of times companies underestimate how difficult it can be to bring on new acquisitions and integrate them into your existing platform and code. And then the last piece I would say is operational efficiencies. I mean, what we've seen a lot of over the last couple of years is companies doubling their employee base, you know, every year or so. And when you do that and you're not as critical in terms of looking at the roles that you're hiring for, you can end up with a lot of duplication and inefficiency. So we think it's just critically important that you go through an exercise of clarifying roles and eliminating duplication, and ultimately that will help drive more efficiency and profitability. Okay, slide 8, please. Okay, so one of the most important metrics that we focus on while scaling up is the magic number. So it's the change in year-over-year revenue growth divided by sales and marketing spend. You can see that companies here in the 75th percentile tend to be able to deliver consistently at varying scales, a magic number that's close to 1. And then we think it's also important to pay really close attention to your unit economics, like your, the lifetime value of your customer to its acquisition cost. Or LTV to CAC, as it's more commonly known. If you see any of these numbers begin to decay when you're scaling, that's a sign that you need to stop and just reconsider how you're allocating your capital. We're big fans of advising, and we often will advise our portfolio companies to test and learn. So don't go out and push or allocate too much capital to any one experiment before learning how it's going to impact your magic number and your efficiency metrics. And so by monitoring these metrics really closely, you can have a good idea of how efficiently you're using your cache and scaling. Okay, on to slide 9, which is the, the last slide, and then we can open it up for some Q&A. So here we've, we've taken the cost structures and magic numbers of scaling companies to more mature companies. And to me, the main takeaway is that when you compare the revenue growth of these buckets, with growing companies, so those in the $25 to $75 million revenue bucket, compared to the more mature companies, those with between, call it, $1.25 and $1.75 billion of revenue, there are a few areas where most of the cost is extracted from. So you gain marginal economies of scale on gross margin and some from R&D, but the most dramatic improvements are delivered on sales and marketing, which delivers a 15% improvement from growing to mature companies. And then the next bucket would be G&A, which, you know, tends not to scale nearly as quickly, which delivers a 7% improvement. So, you know, I think a lot of this comes out of sales and marketing. And a lot of that efficiency comes from pricing increases, increases, and then upsells to your existing installed base, you know, trying to reduce churn and just keep your installed base consistent. And selling into that installed base has, as I said before, a much lower cost of acquisition. And you can see that the magic number doesn't really change all that much. It's the rule of 40 trades growth for profitability is how the equation ultimately works out. So with that, I'll call it a day and invite you to ask any questions.

All right. Thank you so much. That was so fun for me. I felt like Vanna White doing those slides.

Thank you, Caitlin.

All right, thank you. To start things off, um, what is one thing that would make a startup stand out when trying to attract funding?

You know, we're, we're always most interested— I mean, there have been some studies that have been done on this, but, um, you know, we love seeing companies that have bootstrapped, that have, you know, grown very efficiently. I'll call it PandaDoc as being a good example of that, where We led their Series C investment. They were a company that had scaled to more than $40 million in ARR and they'd raised $20 million of capital. So we look very carefully at the capital efficiency ratio. And what we have found is that if you look at various studies that have been done, you can see that companies pretty consistently, if you start off as being efficient in terms of capital efficiency, then generally you have a discipline where you remain capital efficient over time. Um, and then some of the other efficiency metrics that we look at, like sales and marketing, uh, we, we think are the magic number, is critically important to look at as well.

Great. Um, next question. This one's fun. Um, what is one thing not to say during a VC pitch?

What is one thing not to say? Man, there's so many things that you shouldn't say. Look, I think we always try to go into situations where we're finding alignment with the founders. Look, we're Canadian by background, so we tend not to be too adversarial or conflict-driven in those discussions. But yeah, I mean, I think you need to just be careful. You never want to be inciting the wrath of a founder who's very passionate about their company. So I think even if you don't believe some of the metrics that you're seeing or you don't see what's going on, I think it's best just to kind of pull back. And I mean, look, we will not make an investment unless we have confidence in the metrics that we're being shown. But I would just avoid— we generally try to avoid conflict. I'll leave it as that.

Yeah, like insulting someone's child is like questioning their metrics. Got you. Okay. We do have a question in the chat from Alexandra. Would you like to unmute yourself and ask?

Yeah, nice to meet you. I'm also another Canadian from Vancouver in the healthcare space. And I was just curious about your trends and numbers, whether you differentiate between healthcare versus non-healthcare. And then within that, B2B versus B2C, the path of growth of revenue and everything is different. [Speaker:JASON M. LEMKIN] Yeah, absolutely. So when we look at healthcare businesses, we think of them very differently than the software businesses that we're investing in. Obviously, the recurring revenue that comes along with a software business is different than the recurring revenue or reoccurring revenue that might come along with a healthcare business. So we don't always apply the same metrics when we're looking at those businesses. And I think, yeah, you have to be tuned into the business model. We historically have not spent a lot of time on the consumer space. I find it tends to be a lot more difficult, a lot less predictable than what we find in the enterprise space. We have over-indexed to SMBs, so software companies that are focused on small and medium-sized businesses. And I think the key thing that you need to be aware of when you're looking at the difference between those two things And it's relevant SMB to consumers, also relevant is just your churn rates are generally going to be a lot higher. Your cohort analysis is going to look a lot different. You know, you're going to see, we're typically looking when we're looking at SMB and B2C is that kind of stabilization where your churn starts to level off. But it's, it's going to be a lot higher than what you'd see in the enterprise space and your net dollar retention will be lower as well. Thanks.

Okay, I'm gonna pass it over to Trip for our next question.

Great, thanks. Hey, Trip Kucera from Canvas AI. Thanks for the content, really insightful. Quick question, timely, obviously, we're in our planning phase for the beginning of the year. Are there some metrics that you look at for AE productivity, particularly in kind of early stage, kind of sub-$25 million ARR? Companies? Yeah, you know, I would say it's— what I always find interesting, Trip, is how, you know, we have 18 portfolio companies, everybody does it differently. You know, and quota attainments are always going to be a little bit different for every company as well. And I think, you know, what we look for is just the alignment, the incentive alignment. We've had experiences with some of our portfolio companies where, you know, ACV does not always equate ARR. And by that I mean, you know, they'll, they'll go out and they'll sell a product. And then, you know, you'll have a headline number that you're going to post as being the ACV that you've got. And they're getting paid a commission on ACV. And then there's a discount. And then there are some other things that happen kind of behind the scenes that chip away at the value of that ACV. So I think you just have to be really careful about what you're— how you're aligning values on that. And then I also think, you know, in I think this is lost on a lot of companies. We think it's really important that typically within the sales function, you see a ramp, you should overhire and overfire. There's only this core people who are really, really good at selling. And I think we generally try to give an 18-month timeline to try and see whether or not somebody can come up. We try to be quantitatively driven about the way that we do that. I would encourage you to be kind of ruthless around the sales force and identify the outperformers and try to unload the underperformers as quickly as you can because they typically don't learn as quickly as you might like them to. Thank you.

Our next question, I'm going to ask, but hop in if you have any follow-up. Growth is clearly, clearly slowing in many sectors, but does that really mean the top startups should see slower growth? Especially if they are disrupting a larger space?

Yeah, no, I think the answer is no. I mean, we, we've got, you know, a handful of companies in our portfolio that I would describe as market leaders, um, or, you know, emerging market leaders. And by that, I mean, they've got a product that is truly differentiated, that's starting to chip away at the large incumbents within their space. The advice that we've been giving to those portfolio companies is keep on spending. If your win rates are increasing, if your product is demonstrating strength, you know, while everybody else is facing turmoil, then keep on growing. And so we've been supporting those portfolio companies and giving them more capital. And we think that the environment that we're in, the uncertain environment that we're in, can create an opportunity that if you've, you know, if you've truly got a better product, then you can win a lot more share in this type of environment.

I think that's a nice message of hope to a lot of people on this call. Thank you. Um, what's changed in founder secondary liquid liquidity at growth stage, if anything?

Yeah, I mean, you know, one of the kind of interesting phenomenon that we've been seeing, um, over, you know, 2019 through '21 was that, you know, we'd be coming in in the most recent round and we'd have at least a 1x liquidation preference, so we'd be senior within the stack. Um, and we've always, you know, historically you've always seen a big discount between common shares that a founder would have and the later stage, kind of more senior equity that we'd be coming in at, and the discount disappeared. So the common was getting sold at the same price that the later stage, more secure equity was getting sold at. Now we're seeing discounts more like 15 to 20%, in some instances even more, depending on how badly the founder needs the capital. And we've certainly seen the size, you know, we always try to cap founders to not selling more than 10% of their stake because we want the alignment. But we're not finding nearly as many situations where founders are wanting to sell their equity. So you can get liquidity, but it's going to come at a cost.

Great. Our next question, Alexandra, if you want to unmute yourself again.

That'll be great. Thank you for this opportunity to ask all of these questions that you're like, How do I, where do I ask? And so the advice on the blogs is reach out to investors like you early so you can track us. We're not at $30 million in revenue. I would like us to be there soon, but how should we reach out and get introduced so you can get to know us so that it makes it easier to say yes at a later stage? Yeah, I, you know, I think the advice that you're getting on the blogs is exactly right. You know, we like to engage with companies long in advance of a fundraising. I find a lot of the work that we've been doing over the last 3 years in our sourcing initiatives, we try to stay close to the companies that we really like. We try to check in with them on a quarterly basis and see how they're tracking. And so developing those relationships over a longer period of time gives you the ability to be able to try and get a feel for the investor. I mean, this really is a marriage that happens where you're coming together and you want to make sure that you've got really good alignment of values and you've got alignment in terms of vision. And you're going to get the breathing room that you need to be able to execute on that longer-term vision. And I think the more time that you can spend with investors to build that relationship in advance of fundraising is beneficial for both sides. So I'm hearing now is okay. Yeah, absolutely. Absolutely.

Great.

Jonathan here again. Quick question for you. So obviously you have a large portfolio. How are you tracking pipeline health, sales pipeline health. We're starting to see a lot of VCs like Redpoint, A16z start to talk about this, but obviously it's a very hard number to get at within a company, yet alone like an aggregate portfolio level. Yeah. So I mean, I, you know, Jonathan, we, we have spent a lot of time building out our own database on tracking our portfolio companies. We've got a tool that we developed where we have a small team of software developers that are embedded within our fund. They sit in on our investment committee meetings, they sit in on our pipeline meetings. And it's really through that, that we've been tracking the data. And I'm sure the data shows, like you would hear from Redpoint and A16z, sales pipeline growth is slowing. We're seeing a large deceleration that's happening there, which is ultimately going to translate into deceleration. We're already seeing it in Q3 and Q4 of '22 numbers. And so it's something that we're tracking very closely. And, you know, I— hopefully it's just kind of like a bit of a lull within the market. And I think historically we've seen this in periods of uncertainty. You know, people are just kind of pulling back and waiting to see how things stabilize. And, you know, we're not seeing increased demand yet. It's probably going to be a while. But yeah, I mean, we, you know, we track those numbers by logging them in our database. Cool, thank you.

Thanks, Jonathan. Okay, let's say you are at growth stage of $30 million to $50 million ARR. Growth is pretty good but not great, for example, 50%, but burn is very low and no cash reach issues. Would you step on the gas in 2023?

I would pay very close attention to your win rates. And your sales and marketing efficiency. And, you know, if you're able to keep those things stable, keep those metrics stable, or if you see your win rates are increasing, you know, I think to me the magic number is your— so your sales and marketing efficiency is the key one that you need to monitor very, very closely. And if you see it start to decline, you know, it's— if you see it decline dramatically, you know, it's a sign that you're overspending. But if you're out there and you're able to keep that metric pretty consistent with increased spend, then you should really lean into it.

Great, thank you. Oh, we do have another question in the chat. Feel free to keep them coming, guys. I know we're over time, but we have a few more moments if you do have more questions. Victor, would you like to unmute yourself?

Yeah, thank you. Do you see any changes in, like, in any metrics primarily, primarily revenue, uh, of your portfolio companies focusing on SMS? Yeah, you know, I think, uh, Victor, what we've seen is probably a slight uptick in churn. Um, you know, I think just from a structural standpoint that at the smaller end of the market, that those companies typically are not as well capitalized as you would be within enterprise. And so there's a structural component to that market where I think we're just seeing particularly at the small end of the market, more companies are either going bankrupt or just going away. And because of that, we've seen an uptick of— and I don't have the metric at my fingertips, I would estimate by if you had churn of gross retention of, call it, 85%, it's probably now dipping down to more like 82%, 83%. So yeah, we're seeing more of a change in that market than we are in the enterprise. Side.

Great. All right. Do we have any last-minute questions? Yes. Okay, Mike, would you like to unmute yourself and ask?

Sure. Thanks, Mark. Thanks for doing this. And Jason and the speaker. I had a quick question is, do you find— have you noticed any patterns around second or third-time founders doing things worse because you lose rigor because you've got an ease to get capital? Yeah, no, I mean, I think it kind of depends over what period were you a founder, right? So if you lived through the financial crisis as a founder, you probably know a little bit better how to be able to navigate this environment. If you were a founder that was scaling, let's call it like 2012 to 2017, you might find that it's a little more difficult. We've certainly experienced this within our portfolio companies to get away from the idea that growth at all costs is the only way to go. Over that period, over the last 10 years, over the last decade, everything was going up and to the right, and headcount was increasing quite rapidly. So then when it comes time to try and scale back and preserve your capital, I think it's a lot harder for those founders to find the operational efficiencies that they might need to survive and get to a better funding environment. Hey, Mark, it's Jason. Can I ask you one last niche growth question before we go? But I— Yeah. So there's like 1,300 unicorns depending on how you look at it. CB Insight, it's a lot. It's a lot. So they're not all going to be worth $10 billion, right? They're not all going to create— when some of these sell for $200, $300 million down the road, Yeah. What's going to happen with the growth investors? Are they going to tolerate a 1x return after 5 years? Is our cap table going to kind of get rewritten in these deals? Um, because I just don't see a lot of folks after 5 years in unicorns super psyched for a 1x return, right? What's, what's at a practical level, how these unicorns— put differently, some of these unicorns will fail, of course, right? But a lot of them won't, because even 100x ARR rounds are into decent companies, right? But they may— a lot of them might have to get worked out, like maybe even the majority. So how does— how do you work— how do you work one of those tough situations out when you're sold for much less than a billion but real money? Look, I— if we look at, you know, traditional— I think you're, you know, you're absolutely right. I mean, where if you look at traditional industry structures, you know, there's generally 2 or 3 players that are going to dominate a given industry. Um, you know, we've been spending a lot of time around data and analytics. There are thousands of companies that are there. They're, you know, and in the DevOps space, there's, you know, hundreds of companies all focused on different point solutions that are starting to chip away at one another's markets. And so I think competition is going to continue to increase. And I think you're right. I mean, I think, you know, some of the advice that we've been giving our portfolio companies is you don't need to make an acquisition, you know, you need to just be patient and wait, because there's going to be an opportunity to do more of effectively an acquihire at some point in the future. We don't need to pay 6 times or even 5 times revenue for a company. And we've been finding this for some of the market leaders that we do think are going to be the number 1 or 2 within their industry is that if there's a more mature set of— we're finding this for one of our companies that I would describe as being an emerging leader within their market, senior executives from the public companies that now have RSUs that are way underwater, are now knocking on their door and saying, look, if I can load up on options here and you're growing at 50% growth rate and they're growing at a 10% growth rate and have no hope of getting back to that valuation that they IPO'd at, I'm going to go and reload on my options at the company that I think is going to outperform. So I think we're going to see— yeah, I think there are going to be a lot of workouts. I think there are going to be a lot of companies that unfortunately just don't make it. And I think a lot of it, I mean, the advice that we're giving our portfolio companies is don't be afraid to take a down round, take a down round rather than taking structure, which can create a lot of complexity. And yeah, look, I think the next 2 years are going to produce probably the best vintages that we've seen for sure within my career.

Great. All right, well, thank you, Mark, for all your insights. That was a great session. And thank you all for all your questions. Those questions make these sessions what they are. Interactive, um, and exciting. So thank you so much. We will be back next week with not one session but two sessions, so you can choose your own adventure. We will have top 5 tips for managing a sales team during slow times with Stripe and an AMA with HubSpot's head of HubSpot Ventures fundraising and working with strategic VCs. So a lot to look forward to. Next week. But thank you again, Mark. We really appreciate your time.

Excellent. Yeah, thank you all for your participation. Really appreciate it.

All right, bye everyone and see you next week.